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<PAGE> 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-B REGISTRATION OF SECURITIES OF CERTAIN SUCCESSOR ISSUERS FILED PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------ TCI/LIBERTY HOLDING COMPANY --------------------------- (Exact name of registrant as specified in its charter) Delaware 84-1260157 - ------------------------- --------------------- (State of incorporation (I.R.S. Employer or organization) Identification Number) Terrace Tower II, 5619 DTC Parkway, Englewood, Colorado 80111 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $1.00 per share Class B Common Stock, par value $1.00 per share Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share (Title of Class) <PAGE> 2 BACKGROUND ---------- TCI/Liberty Holding Company ("TCI/Liberty" or the "Registrant") is a newly formed Delaware corporation that has not, to date, conducted any significant activities other than (i) those incident to its formation, (ii) its execution of the Agreement and Plan of Merger, dated as of January 27, 1994, as amended (the "Merger Agreement"), by and among Tele-Communications, Inc., a Delaware corporation ("TCI"), Liberty Media Corporation, a Delaware corporation ("Liberty"), TCI/Liberty, TCI Mergerco, Inc., a Delaware corporation and a wholly owned subsidiary of TCI/Liberty ("TCI Mergerco"), and Liberty Mergerco, Inc., a Delaware corporation and a wholly owned subsidiary of TCI/Liberty ("Liberty Mergerco") and (iii) its preparation and filing of a registration statement on Form S-4 (Registration No. 33-54263) (together with all amendments, exhibits, and schedules thereto, the "S-4 Registration Statement") relating to securities to be issued by TCI/Liberty in accordance with the Merger Agreement. Pursuant to the Merger Agreement, TCI Mergerco shall be merged with and into TCI and Liberty Mergerco shall be merged with and into Liberty (collectively, the "Mergers"). As a result of the Mergers, TCI and Liberty will become wholly owned subsidiaries of TCI/Liberty. Accordingly, the business of TCI/Liberty, through its wholly owned subsidiaries TCI and Liberty, will be the business currently conducted by TCI and Liberty. Certain former stockholders of TCI and certain former stockholders of Liberty will become stockholders of TCI/Liberty and certain stock options and convertible securities of TCI and Liberty will become exercisable or convertible into common stock of TCI/Liberty after the Mergers. Contemporaneously with the Mergers, TCI/Liberty will change its name to "Tele-Communications, Inc." and TCI will change its name to TCI Communications, Inc. TCI/Liberty's S-4 Registration Statement was declared effective by the Securities and Exchange Commission on June 28, 1994. A copy of the Proxy Statement/Prospectus, dated June 23, 1994 (the "Proxy/Statement Prospectus") which constitutes part of the S-4 Registration Statement is attached hereto as Exhibit 1. Citations in this Registration Statement are to the caption headings of the Proxy Statement/Prospectus and page references are to the page numbers in the Proxy Statement/Prospectus. ITEM 1. GENERAL INFORMATION. (a) TCI/Liberty is a Delaware corporation that was incorporated on January 24, 1994. (b) TCI/Liberty's fiscal year ends on December 31. ITEM 2. TRANSACTION OF SUCCESSION. (a). TCI/Liberty will be the successor to each of TCI and Liberty. Immediately prior to the time of the succession, both TCI and Liberty will have securities registered 1 <PAGE> 3 pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) For a description of the transaction of succession and the basis upon which securities of TCI/Liberty are to be issued in respect of securities of TCI and Liberty, see the discussion in the Proxy Statement/Prospectus under the headings "SUMMARY - The Mergers - Consideration to be Received by TCI Stockholders" and "- Consideration to be Received by Liberty Stockholders" and "THE MERGER AGREEMENT" (pages 3-4 and 55-63, respectively), which discussion is incorporated herein by reference. ITEM 3. SECURITIES TO BE REGISTERED. Presently, TCI/Liberty (1) is authorized to issue 1,000 shares of Common Stock, par value $1.00 per share ("Common Stock"), (2) has 20 shares of Common Stock issued, and (3) has no issued shares of Common Stock which are held by or for the account of TCI/Liberty. The following classes of securities of TCI/Liberty are being registered by this Registration Statement: (a) Class A Common Stock, par value $1.00 per share ("Class A Common"); (b) Class B Common Stock, par value $1.00 per share ("Class B Common"); and (c) Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share ("Class B Preferred"). (1) Pursuant to the Amended and Restated Certificate of Incorporation of TCI/Liberty, which will be filed with the Secretary of State of the State of Delaware at the Effective Time (as such term is defined in the Proxy Statement/Prospectus) of the Mergers, 1,100,000,000 shares of Class A Common, 150,000,000 shares of Class B Common, and 1,675,096 shares of Class B Preferred will be authorized. (2) At the Effective Time a maximum of 539,941,193 shares of Class A Common, 89,514,039 shares of Class B Common and 1,675,096 shares of Class B Preferred will be outstanding. (3) At the Effective Time, 85,713,881 shares of Class A Common, 3,537,712 shares of Class B Common and 55,070 shares of Class B Preferred will be held by or for the account of the Registrant. ITEM 4. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. For a description of the Registrant's securities to be registered by this Registration Statement, see the discussion in the Proxy Statement/Prospectus under the headings "DESCRIPTION OF TCI/LIBERTY CAPITAL STOCK - TCI/Liberty Common Stock" and "- 2 <PAGE> 4 TCI/Liberty Preferred Stock; Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock" (pages 70 and 72-75, respectively). ITEM 5. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements (unless otherwise indicated, references are to page numbers in this Registration Statement) (1) Registrant (A) The following historical audited financial statements of TCI/Liberty are included in the Proxy Statement/Prospectus annexed hereto as Exhibit 1: Document Page(1) -------- ------- Independent Auditors' Report F-14 Balance Sheet, March 31, 1994 F-15 Note to Balance Sheet, March 31, 1994 F-16 to F-17 (B) The following condensed pro forma combined financial statements of TCI/Liberty are included in the Proxy Statement/Prospectus annexed hereto as Exhibit 1: Document Page(1) -------- ------- Condensed Pro Forma Combined Financial Statements F-18 Condensed Pro Forma Combined Balance Sheet, March 31, 1994 (unaudited) F-19 Condensed Pro Forma Combined Statement of Operations Three months ended March 31, 1994 (unaudited) F-20 Year ended December 31, 1993 (unaudited) F-21 Notes to Condensed Pro Forma Combined Financial F-22 to F-23 Statements (unaudited) (2) Predecessor Companies (A) The following historical financial statements and financial statement schedules of TCI and subsidiaries and Liberty and subsidiaries were incorporated into the Proxy Statement/Prospectus and are incorporated herein by reference to the respective filings of the predecessor companies under the Securities Exchange Act of 1934, as amended, which __________________________________ (1)References are to page numbers for Exhibit 1. 3 <PAGE> 5 filings are identified below. Copies of the pertinent pages of the filings containing such incorporated financial statements and related schedules are included herein at pages F-1 to F-301. (i) TCI --- (a) The following financial statements and financial statement schedules of TCI are incorporated herein by reference to TCI's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as amended (file no. 0-5550). (i)(a)(1) Financial Statements Document Page -------- ---- Independent Auditors' Report F-1 Consolidated Balance Sheets, December 31, 1993 and 1992 F-2 to F-3 Consolidated Statements of Operations, Years ended December 31, 1993, 1992, and 1991 F-4 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1993, 1992, and 1991 F-5 Consolidated Statements of Cash Flows, Years ended December 31, 1993, 1992 and 1991 F-6 to F-7 Notes to Consolidated Financial Statements, December 31, 1993, 1992, and 1991 F-8 to F-35 4 <PAGE> 6 (i)(a)(2) Financial Statement Schedules <TABLE> <CAPTION> Financial Statement Schedules required to be filed: Page --------------------------------------------------- ---- <S> <C> Independent Auditors' Report F-36 Schedule II - Amounts Receivable from Related Parties and Employees Other Than Related Parties, Years ended December 31, 1993, 1992 and 1991 F-37 Schedule III - Condensed Information as to the Financial Position of the Registrant, December 31, 1993 and 1992; Condensed Information as to the Operations and Cash Flows of the Registrant, Years ended December 31, 1993, 1992 and 1991 F-38 to F-40 Schedule V - Property and Equipment, Years ended December 31, 1993, 1992 and 1991 F-41 Schedule VI - Accumulated Depreciation of Property and Equipment, Years ended December 31, 1993, 1992 and 1991 F-42 Schedule VII - Guarantees of Securities of Other issuers, December 31, 1993 F-43 Schedule VIII - Valuation and Qualifying Accounts, Years ended December 31, 1993, 1992 and 1991 F-44 Schedule IX - Short-Term Borrowings, Years ended December 31, 1993, 1992 and 1991 F-45 Schedule X - Supplementary Statement of Operations Information, Years ended December 31, 1993, 1992 and 1991 F-46 </TABLE> All other schedules have been omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 5 <PAGE> 7 (b) The following financial statements of TCI are incorporated herein by reference to TCI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, as amended (file no. 0-5550). Document Page -------- ---- Consolidated Balance Sheets, March 31, 1994 and December 31, 1993 (unaudited) F-47 to F-48 Consolidated Statements of Operations, Three months ended March 31, 1994 and 1993 (unaudited) F-49 Consolidated Statement of Stockholders' Equity, Three months ended March 31, 1994 (unaudited) F-50 Consolidated Statements of Cash Flows, Three months ended March 31, 1994 and 1993 (unaudited) F-51 Notes to Consolidated Financial Statements, March 31, 1994 (unaudited) F-52 to F-61 (ii) Liberty (a) The following financial statements and financial statement schedules of Liberty are incorporated herein by reference to Liberty's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as amended (file no. 0-19036). (ii)(a)(1) Financial Statements Page ---- Independent Auditor' Report F-62 Consolidated Balance Sheets, December 31, 1993 and 1992 F-63 to F-64 Consolidated Statements of Operations, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-65 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-66 to F-67 Consolidated Statements of Cash Flows, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-68 to F-69 Notes to Consolidated Financial Statements, December 31, 1993, 1992 and 1991 F-70 to F-121 6 <PAGE> 8 (ii)(a)(2) Financial Statement Schedules (ii)(a)(2)(A) Financial Statement Schedules required to be filed: <TABLE> <CAPTION> Page ---- <S> <C> Independent Auditors' Report F-122 Schedule I - Marketable Securities - Other Investments, December 31, 1993 F-123 Schedule III - Condensed Information as to the Financial Position of the Registrant, December 31, 1993 and 1992; Condensed Information as to the Operations and Cash Flows of the Registrant, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 F-124 to F-126 Schedule IV - Indebtedness of Related Parties, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-127 Schedule VII - Guarantees of Securities of Other Issuers, December 31, 1993 F-128 Schedule VIII - Valuation and Qualifying Accounts, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-129 Schedule X-Supplementary Statement of Operations Information, Years ended December 31, 1993 and 1992 Nine months ended December 31, 1991 and Three months ended March 31, 1991 F-130 </TABLE> All other schedules have been omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 7 <PAGE> 9 (ii)(a)(2)(B) Separate financial statements and related schedules for Lenfest Communications, Inc. and Subsidiaries: <TABLE> <CAPTION> Consolidated Financial Statements: Page ---------------------------------- ---- <S> <C> <C> Independent Auditors' Report F-131 Consolidated Balance Sheets F-132 to F-133 Consolidated Statements of Income (Loss) F-134 Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-135 Consolidated Statements of Cash Flows F-136 to F-137 Notes to Consolidated Financial Statements F-138 to F-163 Schedules: ---------- Independent Auditor's Report on Schedules F-164 Schedule V. Property and Equipment F-165 Schedule VI. Accumulated Depreciation and Amortization of Property and Equipment F-166 Schedule VIII. Valuation and Qualifying Accounts F-167 Schedule X. Supplementary Consolidated Statements of Income (Loss) Information F-168 </TABLE> All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 8 <PAGE> 10 (ii)(a)(2)(C) Separate financial statements and related schedules for the Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc.: Consolidated Financial Statements: Page ---------------------------------- ---- Independent Auditors' Report F-169 Combined Balance Sheets F-170 Combined Statements of Earnings F-171 Combined Statements of Changes in Partners' Capital F-172 Combined Statements of Cash Flows F-173 Notes to Combined Financial Statements F-174 to F-189 Schedules --------- Independent Auditors' Report F-190 Schedule IV. Indebtedness to Related Parties F-191 Schedule VIII. Valuation and Qualifying Accounts F-192 Schedule X. Supplementary Income Statement Information F-193 All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 9 <PAGE> 11 (ii)(a)(2)(D) Separate financial statements and related schedules for Columbia Associates, L.P.: Consolidated Financial Statements: Page ---------------------------------- ---- Report of Independent Public Accountants F-194 Consolidated Balance Sheets F-195 Consolidated Statements of Operations F-196 Consolidated Statements of Partners' Equity (Deficit) F-197 Consolidated Statements of Cash Flows F-198 Notes to Consolidated Financial Statements F-199 to F-205 Schedules: --------- Report of Independent Public Accountants F-206 Schedule V. Property, Plant and Equipment F-207 Schedule VI. Accumulated Depreciation of Property, Plant and Equipment F-208 Schedule of Supplementary Income Statement Information F-209 All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 10 <PAGE> 12 (ii)(a)(2)(E) Separate financial statements and related schedules for SportsChannel Chicago Associates (A General Partnership): Consolidated Financial Statements: Page -------------------------------- ---- Independent Auditors' Report F-210 Balance Sheets F-211 Statements of Income F-212 Statements of Partners' Capital F-213 Statements of Cash Flows F-214 Notes to Financial Statements F-215 to F-218 Schedules: --------- Schedule VIII. Valuation and Qualifying Accounts F-219 Schedule X. Supplementary Income Statement Information F-220 All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 11 <PAGE> 13 (ii)(a)(2)(F) Separate financial statements and related schedules for American Movie Classics Company (A General Partnership): Consolidated Financial Statements: Page --------------------------------- ---- Independent Auditors' Report F-221 Balance Sheets F-222 Statements of Income F-223 Statements of Partners' Capital (Deficiency) F-224 Statements of Cash Flows F-225 Notes to Financial Statements F-226 to F-232 Schedules: --------- Schedule VIII. Valuation and Qualifying Accounts F-233 Schedule X. Supplementary Income Statement Information F-234 All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 12 <PAGE> 14 (ii)(a)(2)(G) Separate financial statements and related schedules for Kansas City Cable Partners: General Partnership): [CAPTION] Consolidated Financial Statements: Page --------------------------------- ---- [S] Report of Independent Auditors F-235 Balance Sheets F-236 Statements of Operations and Accumulated Earnings F-237 Statements of Partners' (Deficit) Capital F-238 Statements of Cash Flows F-239 to F-240 Notes to Financial Statements F-241 to F-247 Schedules: --------- Schedule V. Property, Plant and Equipment F-248 Schedule VI. Accumulated Depreciation of Property, Plant and Equipment F-249 Schedule VIII. Valuation and Qualifying Accounts F-250 Schedule X. Supplementary Income Statement Information F-251 All other schedules are omitted because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 13 <PAGE> 15 (ii)(a)(2)(H) Separate financial statements and related schedules for QVC, Inc.: <TABLE> <CAPTION> Consolidated Financial Statements: Page --------------------------------- ---- <S> <C> <C> Independent Auditors' Report F-252 Consolidated Balance Sheets F-253 Consolidated Statements of Operations F-254 Consolidated Statements of Cash Flows F-255 Consolidated Statements of Shareholder's Equity F-256 Notes to Consolidated Financial Statements F-257 to F-274 Schedules: --------- Schedule II. Amounts Receivable From Related Parties and Underwriters, Promoters and Employees Other than Related Parties F-275 Schedule VIII. Valuation and Qualifying Accounts F-276 Schedule X. Supplementary Income Statement Information F-277 </TABLE> Financial statements and related schedules of other 50% or less owned persons accounted for under the equity method are omitted as they are not required. (b) The following financial statements of Liberty are incorporated herein by reference to Liberty's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (file no. 0-19036). <TABLE> <CAPTION> Document Page -------- ---- <S> <C> <C> Consolidated Balance Sheets, March 31, 1994 and December 31, 1993 (unaudited) F-278 to F-279 Consolidated Statements of Operations, Three months ended March 31, 1994 and 1993 (unaudited) F-280 Consolidated Statement of Stockholders' Equity, Three months ended March 31, 1994 (unaudited) F-281 Consolidated Statements of Cash Flows, Three months ended March 31, 1994 and 1993 (unaudited) F-282 to F-283 Notes to Consolidated Financial Statements, March 31, 1994 (unaudited) F-284 to F-301 </TABLE> 14 <PAGE> 16 (B) TCI and Liberty Pro Forma Financial Statements (i) The following condensed Pro Forma Financial Statements of TCI are included in the Proxy Statement/Prospectus annexed hereto as Exhibit 1. <TABLE> <CAPTION> Financial Statements: Page -------------------- ---- <S> <C> <C> Condensed Pro Forma Financial Statements F-2 Condensed Pro Forma Balance Sheet, March 31, 1994 (unaudited) F-3 Condensed Pro Forma Statement of Operations, Three months ended March 31, 1994 (unaudited) Year ended December 31, 1993 (unaudited) F-4 to F-5 Notes to Condensed Pro Forma Financial Statements (unaudited) F-6 (ii) The following condensed Pro Forma Combined Financial Statements of Liberty are included in the Proxy Statement/Prospectus annexed hereto as Exhibit 1. Financial Statements: Page -------------------- ---- Condensed Pro Forma Financial Statements F-7 Condensed Pro Forma Balance Sheet, March 31, 1994 (unaudited) F-8 Condensed Pro Forma Statement of Operations, Three months ended March 31, 1994 (unaudited) Year ended December 31, 1993 (unaudited) F-9 to F-10 Notes to Condensed Pro Forma Financial Statements (unaudited) F-11 to F-13 </TABLE> 15 <PAGE> 17 (b) Exhibits (items marked with an * are incorporated herein by reference) <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 1 Proxy Statement/Prospectus, dated June 23, 1994, which constitutes the Prospectus of TCI/Liberty (TCI/Liberty Form S-4, Registration No. 33-54263 (effective June 28, 1994)). *2 Agreement and Plan of Merger, dated as of January 27, 1994, by and among TCI, Liberty, TCI/Liberty, TCI Mergerco and Liberty Mergerco, as amended (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), Appendix I to Proxy Statement/Prospectus). *3.1 Certificate of Incorporation of TCI/Liberty, filed January 24, 1994 and dated January 21, 1994 (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 3.1). *3.2 Form of Amended and Restated Certificate of Incorporation of TCI/Liberty to be filed in connection with the Mergers described in the Proxy Statement/Prospectus (TCI/Liberty S-4, Registration No. 33-54263, (effective June 28, 1994), exhibit 3.2). *3.3 Bylaws of TCI/Liberty as adopted January 25, 1994 (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 3.3). *3.4 Form of Bylaws of TCI/Liberty to be adopted in connection with the Mergers described in the Proxy Statement/Prospectus (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 3.4). *4.1 Specimen Stock Certificate for Class A Common (TCI/Liberty S-4, Registration No. 33-54263, (effective June 28, 1994), exhibit 4.1). *4.2 Specimen Stock Certificate for Class B Common (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 4.2). *4.3 Specimen Stock Certificate for Class B Preferred (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 4.3). *4.4 Form of Amended and Restated Certificate of Incorporation of TCI/Liberty (included as exhibit 3.2). *4.5 Form of Junior Exchange Note Indenture (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 4.5). </TABLE> 16 <PAGE> 18 <TABLE> <S> <C> *10.1 TCI/Liberty 1994 Stock Incentive Plan (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), Appendix IV to Proxy Statement/Prospectus). *10.2 Restated and Amended Employment Agreement, dated as of November 1, 1992, between TCI and Bob Magness (TCI's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A (amendment No. 1) Commission File No. 0-5550). *10.3 Restated and Amended Employment Agreement, dated as of November 1, 1993, between TCI and John C. Malone (TCI's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A (amendment no. 1) Commission File No. 0-5550). *10.4 Employment Agreement, dated as of November 1, 1992, between TCI and J.C. Sparkman (TCI's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A (amendment no. 1) Commission File No. 0- 5550). *10.5 Employment Agreement, dated as of November 1, 1992, between TCI and Fred A. Vierra (TCI's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A (amendment no. 1) Commission File No. 0- 5550). *10.6 Employment Agreement, dated as of February 8, 1991, between Liberty and John C. Malone (Amendment No. 6 to Liberty's Registration Statement on Form S-4, dated February 11, 1991, (No. 33-37673)). *10.7 First Amendment, dated October 24, 1991, to Employment Agreement between Liberty and John C. Malone (Liberty's Current Report on Form 8-K, dated October 24, 1991). *10.8 Form of Indemnification Agreement (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 10.8). *10.9 Qualified Employee Stock Purchase Plan of TCI as amended (TCI's Registration Statement on Form S-8 (Commission File No. 33-59058)). *21 Subsidiaries of TCI/Liberty (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 21). *24 Power of Attorney (TCI/Liberty S-4, Registration No. 33-54263 (effective June 28, 1994), exhibit 24). </TABLE> 17 <PAGE> 19 SIGNATURE --------- Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized. TCI/LIBERTY HOLDING COMPANY (Registrant) By: /s/ Stephen M. Brett --------------------------------- Name: Stephen M. Brett Title: Executive Vice President and Secretary Date: July 13, 1994 <PAGE> 20 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited the accompanying consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tele-Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ KPMG Peat Marwick KPMG Peat Marwick Denver, Colorado March 21, 1994 F-1 <PAGE> 21 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1993 and 1992 <TABLE> <CAPTION> Assets 1993 1992* - ------ ------ ------ amounts in millions <S> <C> <C> Cash $ 1 34 Trade and other receivables, net 232 201 Investment in Liberty Media Corporation ("Liberty") (note 3) 489 432 Investment in other affiliates, accounted for under the equity method, and related receivables (note 4) 645 721 Investment in Turner Broadcasting System, Inc. (note 5) 491 491 Property and equipment, at cost: Land 73 71 Distribution systems 6,629 6,075 Support equipment and buildings 818 712 ------- ------ 7,520 6,858 Less accumulated depreciation 2,585 2,296 ------- ------ 4,935 4,562 ------- ------ Franchise costs 10,620 10,467 Less accumulated amortization 1,423 1,167 ------- ------ 9,197 9,300 ------- ------ Other assets, at cost, net of amortization 530 569 ------- ------ $16,520 16,310 ======= ====== *Reclassified and restated - see notes 1, 3 and 10. </TABLE> (continued) F-2 <PAGE> 22 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued <TABLE> <CAPTION> 1993 1992* ------ ------ Liabilities and Stockholders' Equity amounts in millions - ------------------------------------ <S> <C> <C> Accounts payable $ 124 99 Accrued interest 157 94 Other accrued expenses 500 465 Debt (note 6) 9,900 10,285 Deferred income taxes (note 10) 3,310 3,164 Other liabilities 114 87 ------- ------ Total liabilities 14,105 14,194 ------- ------ Minority interests in equity of consolidated subsidiaries 285 280 Redeemable preferred stocks (note 7) 18 110 Stockholders' equity (note 8): Preferred stock, $1 par value. Authorized 10,000,000 shares, issued and outstanding 6,201 and 4,778,595 shares of redeemable preferred stocks in 1993 and 1992 -- -- Class A common stock, $1 par value. Authorized 1,000,000,000 shares; issued 481,837,347 shares in 1993 and 461,722,382 shares in 1992 482 462 Class B common stock, $1 par value. Authorized 100,000,000 shares; issued 47,258,787 shares in 1993 and 47,708,677 shares in 1992 47 48 Additional paid-in capital 2,293 1,909 Cumulative foreign currency translation adjustment (29) (19) Accumulated deficit (348) (341) ------- ------ 2,445 2,059 Treasury stock, at cost (79,335,038 shares of Class A common stock) (333) (333) ------- ------ Total stockholders' equity 2,112 1,726 ------- ------ Commitments and contingencies (note 11) $16,520 16,310 ======= ====== </TABLE> *Restated and reclassified - see notes 1, 3 and 10. See accompanying notes to consolidated financial statements. F-3 <PAGE> 23 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 * 1991 * ------ ------ ------ amounts in millions, except per share amounts <S> <C> <C> <C> Revenue (note 3) $4,153 3,574 3,214 Operating costs and expenses: Operating (note 3) 1,190 1,028 1,021 Selling, general and administrative (note 4) 1,105 909 763 Compensation relating to stock appreciation rights (note 8) 31 1 -- Restructuring charge -- 8 -- Depreciation 622 512 529 Amortization 289 252 227 ------ ----- ----- 3,237 2,710 2,540 ------ ----- ----- Operating income 916 864 674 Other income (expense): Interest expense (731) (718) (826) Interest and dividend income 34 69 53 Share of earnings of Liberty (note 3) 4 22 40 Share of losses of other affiliates (note 4) (76) (105) (60) Gain on disposition of assets, net 42 9 43 Premium received on redemption of preferred stock investment (note 4) -- 14 -- Loss on early extinguishment of debt (notes 4 and 6) (17) (67) (7) Minority interests in earnings of consolidated subsidiaries, net (5) (41) (24) Other, net (6) (2) (1) ------ ----- ----- (755) (819) (782) ------ ----- ----- Earnings (loss) from continuing operations before income taxes 161 45 (108) Income tax benefit (expense) (note 10) (168) (38) 30 ------ ----- ----- Earnings (loss) from continuing operations (7) 7 (78) Loss from discontinued operations, net of income taxes (note 12) -- (15) (19) ------ ----- ----- Net loss (7) (8) (97) Dividend requirement on redeemable preferred stocks (2) (15) -- ------- ----- ----- Net loss attributable to common shareholders $ (9) (23) (97) ====== ===== ===== Loss attributable to common shareholders per common share (note 1): Continuing operations $ (.02) (.01) (.22) Discontinued operations -- (.04) (.05) ------ ----- ----- $ (.02) (.05) (.27) ====== ===== ===== </TABLE> *Restated and reclassified - see notes 1, 3 and 10. See accompanying notes to consolidated financial statements. F-4 <PAGE> 24 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Cumulative foreign Common stock Additional currency Total ------------ paid-in translation Accumulated Treasury stockholders' Class A Class B capital adjustment deficit * stock equity * ------- ------- ---------- ----------- --------- -------- ------------- amounts in millions <S> <C> <C> <C> <C> <C> <C> <C> Balance at January 1, 1991 $ 310 48 626 -- (436) -- 548 Restatement for change in accounting principle for income taxes -- -- -- -- 200 -- 200 ----- -- ----- ---- ---- ---- ----- Balance at January 1, 1991, as restated 310 48 626 -- (236) -- 748 Net loss -- -- -- -- (97) -- (97) Issuance of common stock upon conversion of debentures -- -- 4 -- -- -- 4 Issuance of common stock upon exercise of options -- 2 3 -- -- -- 5 Income tax effect of stock option deduction -- -- 7 -- -- -- 7 Retirement of common stock upon redemption of Liberty preferred stock (5) -- (86) -- -- -- (91) Issuance of shares of Class A common stock for an acquisition 1 -- 10 -- -- -- 11 Issuance of common stock upon acquisition of remaining minority interest in United Artists Entertainment Company ("UAE") 143 -- 1,190 -- -- (333) 1,000 Acquisition and retirement of common stock -- (1) (16) -- -- -- (17) ----- -- ----- ---- ---- ---- ----- Balance at December 31, 1991 449 49 1,738 -- (333) (333) 1,570 Net loss -- -- -- -- (8) -- (8) Conversion of public debentures (note 6) 7 -- 105 -- -- -- 112 Issuance of common stock upon exercise of options 1 -- 13 -- -- -- 14 Issuance of Class A common stock for acquisition and investment 5 -- 93 -- -- -- 98 Dividends on redeemable preferred stocks -- -- (15) -- -- -- (15) Foreign currency translation adjustment -- -- -- (19) -- -- (19) Acquisition and retirement of common stock -- (1) (25) -- -- -- (26) ----- --- ----- ---- ---- ---- ----- Balance at December 31, 1992 462 48 1,909 (19) (341) (333) 1,726 Net loss -- -- -- -- (7) -- (7) Issuance of common stock upon conversion of notes (note 6) 20 -- 383 -- -- -- 403 Issuance of common stock upon exercise of options -- -- 7 -- -- -- 7 Dividends on redeemable preferred stocks -- -- (2) -- -- -- (2) Foreign currency translation adjustment -- -- -- (10) -- -- (10) Acquisition and retirement of common stock -- (1) (4) -- -- -- (5) ----- --- ----- ---- ---- ---- ----- Balance at December 31, 1993 $ 482 47 2,293 (29) (348) (333) 2,112 ===== === ===== ==== ==== ==== ===== </TABLE> *Restated - see notes 1, 3 and 10. See accompanying notes to consolidated financial statements. F-5 <PAGE> 25 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 * 1991 * ------ ------ ------ amounts in millions (see note 2) <S> <C> <C> <C> Cash flows from operating activities: Net loss $ (7) (8) (97) Adjustments to reconcile net loss to net cash provided by operating activities: Discontinued operations -- 15 19 Restructuring charge -- 8 -- Payment of restructuring charge (8) -- -- Depreciation and amortization 911 764 756 Share of earnings of Liberty (4) (22) (40) Share of losses of other affiliates 76 105 60 Gain on disposition of assets (42) (9) (43) Premium received on preferred stock investment redemption -- (14) -- Payment of premium received on preferred stock investment redemption 14 -- -- Loss on early extinguishment of debt 17 67 7 Compensation relating to stock appreciation rights 31 1 -- Payment for stock appreciation rights -- (80) (45) Minority interests in earnings 5 41 24 Deferred income tax expense (benefit) 139 28 (39) Amortization of debt discount 27 27 16 Noncash interest and dividend income (7) (40) (28) Other noncash charges -- -- (2) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (32) (3) (36) Change in accrued interest 63 -- (14) Change in other accruals and payables 68 77 45 ------- ----- ----- Net cash provided by operating activities 1,251 957 583 ------- ----- ----- Cash flows from investing activities: Cash paid for acquisitions (158) (1,256) (399) Capital expended for property and equipment (947) (526) (566) Cash proceeds from disposition of assets 149 66 103 Cash proceeds from disposition of discontinued operations -- 220 -- Discontinued operations -- 9 31 Additional investments in and loans to affiliates and others (361) (205) (192) Payment received on preferred stock investment redemption 183 -- -- Return of capital from affiliates 1 1 34 Repayment of loans by affiliates and others 62 32 35 Other investing activities (99) (155) (138) ------- ----- ----- Net cash used in investing activities (1,170) (1,814) (1,092) ------- ----- ----- </TABLE> (continued) F-6 <PAGE> 26 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 * 1991 * ------ ------ ------ amounts in millions (see note 2) <S> <C> <C> <C> Cash flows from financing activities: Borrowings of debt 6,305 5,354 5,918 Repayments of debt (6,321) (4,435) (5,412) Borrowings of short-term notes to affiliate -- -- 22 Repayment of short-term notes to affiliate -- (22) -- Sales of equity securities of subsidiaries -- -- 9 Preferred stock dividends of subsidiaries (6) (6) (19) Preferred stock dividends (2) (15) -- Repurchase of preferred stock (92) (5) -- Issuances of common stock 6 7 2 Repurchases of common stock (4) (19) (9) ------- ----- ----- Net cash provided (used) by financing activities (114) 859 511 ------- ----- ----- Net increase (decrease) in cash (33) 2 2 Cash at beginning of year 34 32 30 ------- ----- ----- Cash at end of year $ 1 34 32 ======= ===== ===== </TABLE> *Restated and reclassified - see notes 1, 3 and 10. See accompanying notes to consolidated financial statements. F-7 <PAGE> 27 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1993, 1992 and 1991 (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Restated Financial Statements for Implementation of Statement of Financial Accounting Standards No. 109, "Accounting fo Income Taxes" Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("Statement No. 109"), "Accounting for Income Taxes" and has applied the provisions of Statement No. 109 retroactively to January 1, 1986. The accompanying 1992 and 1991 consolidated financial statements and related notes have been restated to reflect the implementation of Statement No. 109. See note 10. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1993 and 1992 was not material. Investments Investments in which the ownership interest is less than 20% are generally carried at cost. Investments in marketable equity securities are carried at the lower of aggregate cost or market and any declines in value which are other than temporary are reflected as a reduction in the Company's carrying value of such investment. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and guarantees for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of purchase adjustments. Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1993, 1992 and 1991, interest capitalized was not material. (continued) F-8 <PAGE> 28 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Beginning in April of 1993, based upon changes in Federal Communications Commission ("FCC") regulations, the Company revised its estimate of useful lives of certain distribution equipment to correspond to the Company's anticipated remaining period of ownership of such equipment. This revision resulted in a decrease to net earnings of approximately $12 million ($.03 per share) for the year ended December 31, 1993. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. However, recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the Company in obtaining franchises are being amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause the Company to repurchase such holders' common equity. Included in minority interests in equity of consolidated subsidiaries are $50 million and $46 million at December 31, 1993 and 1992, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. The current dividend requirements on these preferred stocks aggregate $6 million per annum and such dividend requirements are reflected as minority interests in the accompanying consolidated statements of operations. Foreign Currency Translation All balance sheet accounts of foreign investments are translated at the current exchange rate as of the end of the accounting period. Statement of operations items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. (continued) F-9 <PAGE> 29 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Loss Per Common Shares The loss per common share for 1993, 1992 and 1991 was computed by dividing net loss by the weighted average number of common shares outstanding during such periods (432.6 million, 424.1 million and 359.9 million for 1993, 1992 and 1991, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Reclassification Certain amounts have been reclassified for comparability with the 1993 presentation. (2) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $641 million, $689 million and $829 million for 1993, 1992 and 1991, respectively. Also, during these years, cash paid for income taxes was not material. Significant noncash investing and financing activities are as follows: <TABLE> <CAPTION> Years ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- amounts in millions <S> <C> <C> <C> Acquisitions: Fair value of assets acquired $ 172 1,231 1,877 Liabilities assumed, net of current assets (7) 21 (12) Deferred tax asset (liability) recorded in acquisitions (7) 7 (337) Minority interests in equity of acquired entities -- -- (3) Value of TCI preferred stock issued in acquisitions -- -- (115) Value of TCI common stock issued in acquisitions -- (3) (1,011) ----- ----- ----- Cash paid for acquisitions $ 158 1,256 399 ====== ===== ===== Value of TCI Class A common stock issued as part of purchase price of equity investment $ -- 95 -- ====== ===== ===== Note received upon disposition of assets $ -- 15 -- ====== ===== ===== Contribution of certain interests to Liberty in exchange for preferred stock (see note 3) $ -- -- 530 ====== ===== ===== Common stock received upon redemption of preferred stock of Liberty (see note 3) $ -- -- 91 ====== ===== ===== </TABLE> (continued) F-10 <PAGE> 30 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements <TABLE> <CAPTION> Years ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- amounts in millions <S> <C> <C> <C> Receipt of notes receivable upon disposition of Liberty common stock and preferred stock (note 3) $ 182 -- -- ====== ===== ===== Noncash capital contribution to Community Cable Television ("CCT") (note 3) $ 22 -- -- ====== ===== ===== Noncash exchange of equity investment for consolidated subsidiary and equity investment $ 22 -- -- ====== ===== ===== Contribution of assets to an affiliate $ -- -- 108 ====== ===== ===== Effect of foreign currency translation adjustment on book value of foreign equity investments $ 10 19 -- ====== ===== ===== Common stock issued upon conversion of notes (with accrued interest through conversion) $ 403 112 4 ====== ===== ===== Common stock surrendered in lieu of cash upon exercise of stock options $ 1 7 3 ====== ===== ===== Note payable issued for repurchase of common stock $ -- -- 5 ====== ===== ===== Exchange of preferred stock investment for marketable equity securities $ -- -- 156 ====== ===== ===== Deferred tax liability resulting from stock option deduction $ -- -- 7 ====== ===== ===== </TABLE> (3) Investment in Liberty As of January 27, 1994, TCI and Liberty entered into a definitive agreement to combine the two companies. The transaction will be structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company ("TCI/Liberty"). TCI shareholders will receive one share of TCI/Liberty for each of their shares. Liberty common shareholders will receive 0.975 of a share of TCI/Liberty for each of their common shares. The transaction is subject to the approval of both sets of shareholders as well as various regulatory approvals and other customary conditions. Subject to timely receipt of such approvals, which cannot be assured, it is anticipated the closing of such transaction will take place during 1994. (continued) F-11 <PAGE> 31 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements TCI owns 3,477,778 shares of Liberty Class A common stock (after giving effect to the repurchase by Liberty during the year ended December 31, 1993 of 927,900 shares of Class A common stock) and 55,070 shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock received in January of 1993 upon conversion of the Liberty Class A Redeemable Convertible Preferred Stock. Such common shares represent less than 5% of the outstanding Class A common stock of Liberty. Of the remaining classes of preferred stock of Liberty held by the Company, one class entitles TCI to elect a number of members of Liberty's board of directors equal to no less than 11% of the total number of directors and another class is exchangeable for TCI common stock. Due to the significant economic interest held by TCI through its ownership of Liberty preferred stock and Liberty common stock and other related party considerations, TCI has accounted for its investment in Liberty under the equity method. Accordingly, the Company has not recognized any income relating to dividends, including preferred stock dividends, and the Company has continued to record the earnings or losses generated by the interests contributed to Liberty (by recognizing 100% of Liberty's earnings or losses before deducting preferred stock dividends). On December 30, 1991, TCI Liberty, Inc. ("TCIL"), a wholly-owned subsidiary of TCI, entered into a Commercial Paper Purchase Agreement with Liberty whereby TCIL could from time to time sell short-term notes to Liberty from TCIL of up to an aggregate amount of $100 million. TCIL borrowed $22 million from Liberty on December 31, 1991, pursuant to the Commercial Paper Purchase Agreement. The full amount, including interest, was repaid on January 15, 1992. Interest rates on the short-term notes were determined by the parties by reference to prevailing money-market rates. This agreement was terminated on March 23, 1993. During 1992, the Company and Liberty formed CCT, a general partnership created for the purpose of acquiring and operating cable television systems with Tele-Communications of Colorado, Inc. ("TCIC"), an indirect wholly-owned subsidiary of TCI, owning a 49.999% interest and Liberty Cable Partner, Inc. ("LCP"), an indirect wholly-owned subsidiary of Liberty, owning a 50.001% interest. Pursuant to an amendment to the CCT General Partnership Agreement (the "Amendment"), certain non-cash contributions previously made to CCT were rescinded, TCIC contributed to CCT a $10,590,000 promissory note of TCI Development Corporation ("TCID") as of the date of the originally contributed assets, and LCP agreed to contribute its equity and debt interests in Daniels & Associates Partners Limited ("DAPL"), a general partner of Mile Hi Cablevision Associates, Ltd. ("Mile Hi"), to CCT immediately prior to the closing of the acquisition of Mile Hi described below which closed on March 15, 1993. TCIC also agreed to contribute, at the time of the contribution by LCP of its DAPL interests, a TCID promissory note in the amount of $66,900,000. (continued) F-12 <PAGE> 32 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On March 12, 1993, the CCT General Partnership Agreement was further amended (the "Second Amendment"). Under the Second Amendment, LCP agreed to contribute its Mile Hi partnership interest but not a loan receivable from Mile Hi in the amount of $50 million (including accrued interest) (the "Mile Hi Note") (both of which it received upon the liquidation of DAPL on March 12, 1993 as described below) to CCT in exchange for 50.001% of a newly created Class B partnership interest in CCT. TCIC agreed to contribute a $21,795,000 promissory note from TCID in exchange for 49.999% of the Class B partnership interests in place of the $66,900,000 note which was to be contributed under the Amendment. On March 15, 1993, each party made its respective contribution required by the Second Amendment. On June 3, 1993, Liberty and TCI completed the transactions contemplated by a recapitalization agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization Agreement, Liberty repurchased 927,900 shares of Liberty Class A common stock owned by TCI and repurchased all of the outstanding shares of the Liberty Class C Redeemable Exchangeable Preferred Stock. The total purchase price of $194 million was paid through the delivery of cash amounting to $12 million and promissory notes of Liberty in the aggregate principal amount of $182 million. In connection with the Recapitalization Agreement, TCIC and LCP entered into an Option-Put Agreement (the "Option-Put Agreement"), which was amended on November 30, 1993. Under the amended Option-Put Agreement, between June 30, 1994 and September 28, 1994, and between January 1, 1996 and January 31, 1996, TCIC will have the option to purchase all of LCP's interest in CCT and the Mile Hi Note for an amount equal to $77 million plus interest accruing at the rate of 11.6% per annum on such amount from June 3, 1993. Between April 1, 1995 and June 29, 1995, and between January 1, 1997 and January 31, 1997, LCP will have the right to require TCIC to purchase LCP's interest in CCT and the Mile Hi Note for an amount equal to $77 million plus interest on such amount accruing at the rate of 11.6% per annum from June 3, 1993. Under a separate agreement, on June 3, 1993, TCI Holdings, Inc. ("TCIH"), a wholly-owned subsidiary of TCI, purchased a 16% limited partnership interest in Intermedia Partners from LCP and all of LCP's interest in a special allocation of income and gain of $7 million under the partnership agreement of Intermedia Partners for a purchase price of approximately $9 million. TCIH also received an option to purchase LCP's remaining 6.37% limited partnership interest in Intermedia Partners prior to December 31, 1995 for a price equal to $4 million plus interest at 8% per annum from June 3, 1993. (continued) F-13 <PAGE> 33 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In September of 1993, Encore QE Programming Corp. ("QEPC"), a wholly-owned subsidiary of Encore Media Corporation ("EMC"), a 90% owned subsidiary of Liberty, entered into a limited partnership agreement with TCI Starz, Inc. ("TCIS"), a wholly-owned subsidiary of TCI, for the purpose of developing, operating and distributing STARZ!, a first-run movie premium programming service launched in 1994. QEPC is the general partner and TCIS is the limited partner. Losses are allocated 1% to QEPC and 99% to TCIS. Profits are allocated 1% to QEPC and 99% to TCIS until certain defined criteria are met. Subsequently, profits are allocated 20% to QEPC and 80% to TCIS. TCIS has the option, exercisable at any time and without payment of additional consideration, to convert its limited partner interest to an 80% general partner interest with QEPC's partnership interest simultaneously converting to a 20% limited partnership interest. In addition, during specific periods commencing April 1999 and April 2001, respectively, QEPC may require TCIS to purchase, or TCIS may require QEPC to sell, the partnership interest of QEPC in the partnership for a formula-based price. EMC is paid a management fee equal to 20% of "managed costs" as defined, in order to manage the service. EMC manages the service and has agreed to provide the limited partnership with certain programming under a programming agreement whereby the partnership will pay its pro rata share of the total costs incurred by EMC for such programming. The Company accounts for the partnership as a consolidated subsidiary. (See note 11). On March 15, 1993, Mile Hi Cable Partners, L.P. ("New Mile Hi") acquired all the general and limited interests in Mile Hi, the owner of the cable television system serving Denver, Colorado. New Mile Hi is a limited partnership formed among CCT (78% limited partnership interest), Daniels Cablevision, Inc. ("DCI") (1% limited partner) and P & B Johnson Corp. ("PBJC") (21% general partnership interest), a corporation controlled by Robert L. Johnson, a member of Liberty's board of directors. As a result of the acquisition, New Mile Hi is a consolidated subsidiary of Liberty for financial reporting purposes. Prior to the acquisition, LCP indirectly owned a 32.175% interest in Mile Hi through its ownership of a limited partnership interest in DAPL, one of Mile Hi's general partners. The other partners in Mile Hi were Time Warner Entertainment Company, L.P., various individual investors and Mile Hi Cablevision, Inc., a corporation in which all the other partners in Mile Hi were the shareholders. DAPL was liquidated on March 12, 1993, at which time LCP received a liquidating distribution consisting of its proportionate interest in DAPL's partnership interest in Mile Hi, representing the aforementioned 32.175% interest in Mile Hi. The subsidiary of Liberty also received the Mile Hi Note in novation of a loan receivable from DAPL in an equal amount. (continued) F-14 <PAGE> 34 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The total value of the acquisition was approximately $180 million. Of that amount, approximately $70 million was in the form of Mile Hi debt paid at the closing. Another $50 million was in the form of the Mile Hi Note, which debt was assumed by New Mile Hi and then by CCT. Of the remaining $60 million, approximately $40 million was paid in cash to partners in Mile Hi in exchange for their partnership interests. The remaining $20 million of interest in Mile Hi was acquired by New Mile Hi through the contribution by Liberty's subsidiary to CCT and by CCT to New Mile Hi of the 32.175% interest in Mile Hi received in the DAPL liquidation and by DCI's contribution to New Mile Hi of a 0.4% interest in Mile Hi. Of the estimated $110 million in cash required by New Mile Hi to complete the transaction, $105 million was loaned to New Mile Hi by CCT and $5 million was provided by PBJC as a capital contribution to New Mile Hi. Of the $5 million contributed by PBJC, approximately $4 million was provided by CCT through loans to Mr. Johnson and trusts for the benefit of his children. CCT funded its loans to New Mile Hi and the Johnson interests by borrowing $93 million under its revolving credit facility and by borrowing $16 million from TCIC in the form of a subordinated note. Liberty's investment in Mile Hi, which was previously accounted for under the cost method, was received from TCI in the March 28, 1991 transaction whereby TCI contributed its interests in certain programming businesses and cable television systems in exchange for several different classes and series of preferred stock of Liberty. Liberty adopted Statement No. 109 in 1993 and has applied the provisions of Statement No. 109 retroactively to March 28, 1991. During the year ended December 31, 1992, Liberty increased its economic and voting interest in Lenfest Communications, Inc. ("LCI") to 50% and, accordingly, adopted the equity method of accounting. Liberty's investment in LCI, which was previously accounted for under the cost method, was received from TCI in March of 1991. Additionally, LCI adopted Statement No. 109 in 1993 and has applied its provisions on a retroactive basis. As a result of the aforementioned acquisition of Mile Hi and the implementation of Statement No. 109 by Liberty and LCI, the Company restated the carrying amount of its investment in Liberty preferred stock at December 31, 1992 through an increase of $19 million. Included in the restated balance is the recognition of previously reserved interest income on the Mile Hi Note. These restatements resulted in an increase of $6 million to the Company's results of operations for the year ended December 31, 1992, a decrease of $2 million for the year ended December 31, 1991 and an increase of $7 million for prior years. (continued) F-15 <PAGE> 35 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Also, during the year ended December 31, 1992, Liberty increased its economic and voting interest in Columbia Associates, L.P. ("Columbia") to 39.609% and, accordingly, adopted the equity method of accounting. Liberty's investment in Columbia, which was previously accounted for under the cost method, was received from TCI in March of 1991. On December 31, 1992, Liberty sold certain notes receivable of Intermedia Partners to TCI for $36,300,000 in cash. The Company purchases sports and other programming from certain subsidiaries of Liberty. Charges to TCI (which are based upon customary rates charged to others) for such programming were $44 million, $44 million and $25 million for the years ended December 31, 1993 and 1992 and the period from March 29, 1991 through December 31, 1991 respectively. Such amounts are included in operating expenses in the accompanying consolidated statements of operations. Certain subsidiaries of Liberty purchase from TCI, at TCI's cost plus an administrative fee, certain pay television and other programming. In addition, a consolidated subsidiary of Liberty pays a commission to TCI for merchandise sales to customers who are subscribers of TCI's cable systems. Aggregate commission and charges for such programming were $11 million, $3 million and $2 million for the years ended December 31, 1993 and 1992 and the period from March 29, 1991 through December 31, 1991, respectively. Such amounts are recorded in revenue in the accompanying consolidated statements of operations. Summarized unaudited financial information of Liberty as of December 31, 1993 and 1992 and for the years ended December 31, 1993 and 1992 and the period from March 29, 1991 through December 31, 1991 is as follows: <TABLE> <CAPTION> December 31, ------------ Consolidated Financial Position 1993 1992 ------------------------------- ---- ---- amounts in millions <S> <C> <C> Cash and cash equivalents $ 91 96 Investment in TCI common stock 104 104 Receivable from TCI -- 5 Other investments and related receivables 372 453 Other assets, net 870 172 ------ ---- Total assets $1,437 830 ====== ==== Debt $ 446 167 Deferred income taxes 2 15 Other liabilities 307 54 Minority interests 175 10 Redeemable preferred stocks 155 155 Stockholders' equity 352 429 ----- ---- Total liabilities and stockholders' equity $1,437 830 ====== ==== </TABLE> (continued) F-16 <PAGE> 36 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements <TABLE> <CAPTION> Consolidated Operations 1993 1992 1991 ----------------------- ---- ---- ---- amounts in millions <S> <C> <C> <C> Revenue $ 1,153 157 85 Operating expenses (1,105) (144) (74) Depreciation and amortization (49) (16) (10) ------- ----- ---- Operating income (loss) (1) (3) 1 Interest expense (31) (7) (5) Other, net 36 32 44 ------- ---- ---- Net earnings $ 4 22 40 ======= ==== ==== </TABLE> (4) Investments in Other Affiliates Investments in affiliates, other than Liberty (see note 3), accounted for under the equity method, amounted to $567 million and $650 million at December 31, 1993 and 1992, respectively. On December 2, 1992, SCI Holdings, Inc. ("SCI") consummated a transaction (the "Split-Off") that resulted in the ownership of its cable systems being split between its two stockholders, which stockholders were Comcast Corporation ("Comcast") and the Company. Prior to the Split-Off, the Company had an investment in the common stock of SCI and the preferred stock of its wholly-owned subsidiary, Storer Communications, Inc. ("Storer"). The Split-Off, which permitted refinancing of substantially all of the publicly held debt of SCI and the preferred stock of SCI's wholly-owned subsidiary, Storer, was effected by the distribution of approximately 50% of the net assets of SCI to three holding companies formed by the Company (the "Holding Companies"). Prior to the Split-off, the Company contributed its SCI common stock to the Holding Companies in exchange for 100% of such Holding Companies' common stock. The amount of SCI common stock contributed to each of the Holding Companies was based upon the proportionate value of net assets to be received by each of the Holding Companies in the Split-Off. SCI then merged into Storer and the SCI common stock held by the Holding Companies was converted into Storer common stock. (continued) F-17 <PAGE> 37 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Also prior to the Split-Off, (i) the Holding Companies incurred long-term debt aggregating approximately $1.1 billion and contributed substantially all of the resulting proceeds to Storer and (ii) a consolidated subsidiary of TCI redeemed approximately $476 million of its debt securities held by Storer with proceeds of its separate financing, and an affiliate of Comcast redeemed approximately $274 million of its debt securities held by Storer. In turn, Storer utilized substantially all of the proceeds of such contributions and redemptions to repurchase its preferred stock and extinguished all of its debt. The Company's share of Storer's loss on early extinguishment of debt was $52 million and such amount is included in loss on early extinguishment of debt in the accompanying consolidated statements of operations. Additionally, the Company received a premium, amounting to $14 million, on the repurchase of the Storer preferred stock. Such amount is reflected separately in the accompanying consolidated financial statements. In the Split-Off, Storer redeemed its common stock held by the Holding Companies in exchange for 100% of the capital stock of certain operating subsidiaries of Storer. Immediately following the Split-Off, the Company owned a majority of the common stock of the Holding Companies and Comcast owned 100% of the common stock of Storer. As such, the Company, which previously accounted for its investment in SCI using the equity method, now consolidates its investment in the Holding Companies. The tangible assets of the Holding Companies were recorded at predecessor cost. In connection with the Company's 1988 acquisition of an equity interest in SCI, a subsidiary of the Company issued certain debt and equity securities to Storer for $650 million. Such debt securities were redeemed and the equity securities were received by one of the Holding Companies in the Split-Off. Interest charges and preferred stock dividend requirements on these debt and equity securities, prior to the Split-Off, aggregated $81 million and $89 million for the period ended December 2, 1992 and the year ended December 31, 1991. The Company's share of losses of SCI, prior to the Split-Off for the period ended December 2, 1992 and the year ended December 31, 1991 amounted to $51 million and $54 million, as adjusted for the effect of interest and dividends accounted for by Storer as capital transactions due to their related party nature. The Company had a management consulting agreement with Storer which provided for the operational management of certain of Storer's cable television systems by TCI. This agreement provided for a management fee based on 3.5% of the revenue of those cable television systems managed by the Company. The Company also entered into a programming service agreement with Storer whereby the Company, for a fee, managed Storer's purchases of programming. The total management fees under the consulting and programming service agreements, prior to the Split-Off, amounted to $7 million in each of the period from January 1 1992 through December 2, 1992 and the year ended December 31, 1991 (which amounts are recorded as a reduction of selling, general and administrative expenses in the accompanying consolidated statements of operations). (continued) F-18 <PAGE> 38 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company is a partner in certain joint ventures, accounted for under the equity method, which have operations in the United Kingdom and other parts of Europe. These joint ventures, which are currently operating and constructing cable television and telephone systems, have generated losses to the Company in 1993 and 1992 amounting to $47 million and $37 million, including $3 million and $6 million in 1993 and 1992, respectively, resulting from foreign currency transaction losses. Summarized unaudited financial information for affiliates other than Liberty (including those contributed to Liberty through March 28, 1991), is as follows: <TABLE> <CAPTION> December 31, -------------- 1993 1992 ---- ---- Combined Financial Position amounts in millions --------------------------- <S> <C> <C> Property and equipment, net $1,059 757 Franchise costs, net 266 211 Other assets, net 727 467 ------ ------ Total assets $2,052 1,435 ====== ====== Debt $ 593 661 Due to TCI 78 71 Other liabilities 338 185 Owners' equity 1,043 518 ------ ------ Total liabilities and equity $2,052 1,435 ====== ====== </TABLE> <TABLE> <CAPTION> Years ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Combined Operations amounts in millions ------------------- <S> <C> <C> <C> Revenue $ 713 1,224 1,461 Operating expenses (648) (786) (993) Depreciation and amortization (127) (303) (329) ------ ------ ------ Operating income (loss) (62) 135 139 Interest expense (37) (295) (374) Other, net 98 (234) (47) ----- ------ ------ Net loss $ (1) (394) (282) ====== ====== ====== </TABLE> Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) F-19 <PAGE> 39 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investment in Turner Broadcasting System, Inc. In 1987, the Company and several other cable television operators purchased shares of two classes of preferred stock of Turner Broadcasting System, Inc. ("TBS"). During 1991, TBS made an offer to exchange shares of one class of its preferred stock (and accrued dividends thereon) for shares of TBS common stock and, as a result, the Company received common shares valued at $178 million. Shares of the other class of preferred stock have voting rights and are convertible into shares of TBS common stock. The holders of those preferred shares, as a group, are entitled to elect seven of fifteen members of the board of directors of TBS, and the Company appoints three such representatives. However, voting control over TBS continues to be held by its chairman of the board and chief executive officer (an unrelated third party). The Company's total holdings of TBS common and preferred stocks represent an approximate 12% voting interest for those matters for which preferred and common stock vote as a single class. The Company's investment in TBS common stock had an aggregate market value of $803 million and $628 million (which exceeded cost by $485 million and $310 million) at December 31, 1993 and 1992, respectively. In addition, the Company's investment in TBS preferred stock had an aggregate market value of $954 million and $746 million, based upon the common market value, (which exceeded cost by $781 million and $573 million) at December 31, 1993 and 1992, respectively. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. Under the new rules, debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available-for-sale or trading and carried at fair value. Unrealized holding gains and losses on securities classified as available-for sale are carried as a separate component of shareholders' equity. Unrealized holding gains and losses on securities classified as trading are reported in earnings. The Company holds no material debt securities. Marketable equity securities are currently reported by the Company at the lower of cost or market ("LOCOM") and net unrealized losses are reported in earnings. The Company will apply the new rules starting in the first quarter of 1994. Application of the new rules will result in an estimated increase of approximately $300 million in stockholders' equity as of January 1 1994, representing the recognition of unrealized appreciation, net of taxes, for the Company's investment in equity securities determined to be available-for-sale, previously carried at LOCOM. (continued) F-20 <PAGE> 40 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Debt Debt is summarized as follows: <TABLE> <CAPTION> Weighted-average December 31, interest rate at ---------------- December 31, 1993 1993 1992 ----------------- ------ ------ amounts in millions <S> <C> <C> <C> Parent company debt: Senior notes 8.6% $ 5,052 1,960 Liquid Yield OptionTM Notes (a) -- -- 386 Bank credit facilities 6.0% 80 500 Commercial paper 4.1% 44 50 Other debt 2 1 ------- ------ 5,178 2,897 Debt of subsidiaries: Bank credit facilities 4.6% 3,264 5,526 Commercial paper -- -- 12 Notes payable 10.3% 1,321 1,732 Convertible notes (b) 9.5% 47 48 Other debt 90 70 ------- ------ $ 9,900 10,285 ======= ====== </TABLE> (a) These subordinated notes, which were stated net of unamortized discount of $764 million at December 31, 1992, were issued through a public offering. On October 28, 1993, the Company called for redemption all of its remaining Liquid Yield OptionTM Notes. In connection with such call for redemption, Notes aggregating $405 million were converted into 18,694,377 shares of Class A common stock and Notes aggregating less than $1 million were redeemed together with accrued interest to the redemption date. Prior to the aforementioned redemption, Notes aggregating $6 million were converted into 259,537 shares of TCI Class A common stock during 1993. (b) These convertible notes, which are stated net of unamortized discount of $197 million and $201 million on December 31, 1993 and 1992, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. During the year ended December 31, 1993, certain of these notes were converted into 819,000 shares of Class A common stock. At December 31, 1993, the notes were convertible, at the option of the holders, into an aggregate of 41,060,990 shares of Class A common stock. During the year ended December 31, 1992, TCI called for redemption all of its 7% convertible subordinated debentures. Debentures aggregating $114 million were converted into 6,636,881 shares of Class A common stock and the remaining debentures were redeemed at 104.2% of the principal amount together with accrued interest to the redemption date. (continued) F-21 <PAGE> 41 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company's bank credit facilities and various other debt instruments generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and dividend payments. As security for borrowings under one of its credit facilities, the Company pledged a portion of the common stock (with a quoted market value of approximately $643 million at December 31, 1993) it holds of TBS. In order to provide interest rate protection on a portion of its variable rate indebtedness, the Company has entered into various interest rate exchange agreements pursuant to which it pays fixed interest rates, ranging from 7.7% to 9.9%, on notional amounts of $608 million. The Company has also entered into various other exchange agreements, pursuant to which it pays variable interest rates on notional amounts of $2,275 million. The Company is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate nonperformance by the counterparties and, in any event, such amounts were not material at December 31, 1993. The Company has also entered into various interest rate hedge agreements on notional amounts of $345 million which fix the maximum variable interest rates, at rates ranging from 10% to 11%. The term of such agreements is approximately two years. TCI and certain of its subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, TCI and certain of its subsidiaries pay fees, ranging from 1/4% to 1/2% per annum, on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $9,900 million, was $10,572 million at December 31, 1993. The fair value of the interest rate exchange agreements is the estimated amount that the Company would pay or receive to terminate the agreements at December 31, 1993, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. The Company would receive $13 million at December 31, 1993 upon termination of the agreements. (continued) F-22 <PAGE> 42 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Annual maturities of debt for each of the next five years are as follows: <TABLE> <CAPTION> Parent Total ------ ----- amounts in millions <S> <C> <C> 1994 $ 69* 927* 1995 212 705 1996 210 993 1997 151 885 1998 349 799 </TABLE> * Includes $44 million of commercial paper. (7) Redeemable Preferred Stocks <TABLE> <CAPTION> December 31, ----------------- 1993 1992 ------ ------ amounts in millions <S> <C> <C> 12-7/8% Cumulative Compounding Preferred Stock, Series A; issued and outstanding 4,772,394 shares in 1992 (a) $ -- 92 6-3/4% Convertible Preferred Stock, Series B; issued and outstanding 6,201 shares at December 31, 1992 (b) -- 18 4-1/2% Convertible Preferred Stock, Series C; issued and outstanding 6,201 shares at December 31, 1993 (b) 18 -- ---- ---- $ 18 110 ==== === </TABLE> (a) The 12-7/8% Cumulative Compounding Preferred Stock was stated at its redemption value of $19.25 per share. Dividends were cumulative and accrued at 12-7/8% of the redemption value. In October of 1992, the Company acquired and retired 250,000 shares of this preferred stock in the open market for a purchase price of $19.56 per share. All remaining outstanding shares of such preferred stock were redeemed on February 1, 1993 for a redemption price of $19.25 per share plus all unpaid dividends accrued thereon. (continued) F-23 <PAGE> 43 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (b) The 4-1/2% Convertible Preferred Stock is stated at its redemption value of $3,000 per share, and each share is convertible into 204 shares of TCI Class A common stock. In 1993, the Company designated this Series C Convertible Preferred Stock with all of the same attributes of the Series B Convertible Preferred Stock except that dividends on each share of the Series C stock accrued on a daily basis at the rate of 4-1/2% per annum instead of 6-3/4% per annum, and such Series C stock was not subject to optional redemption by the Company until after January 10, 1994. During the year ended December 31, 1993, the shares so designated were exchanged for the existing Series B shares. Subsequent to December 31, 1993, all of the Series C shares were converted into 1,265,004 shares of TCI Class A common stock. (8) Stockholders' Equity Common Stock The Class A common stock has one vote per share and the Class B common stock has ten votes per share. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock. Employee Benefit Plans The Company has an Employee Stock Purchase Plan ("ESPP") to provide employees an opportunity for ownership in the Company and to create a retirement fund. Terms of the ESPP provide for employees to contribute up to 10% of their compensation to a trust for investment in TCI common stock. The Company, by annual resolution of the Board of Directors, contributes up to 100% of the amount contributed by employees. Certain of the Company's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $16 million, $13 million and $12 million for 1993, 1992 and 1991, respectively. (continued) F-24 <PAGE> 44 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Stock Options Two officers (one of whom is also a director) each held an option to acquire 200,000 shares of Class A common stock at an adjusted purchase price of $10.00 per share. One of such officers received payment of $550,000 from the Company in December of 1991 upon cancellation of a portion of his option covering 100,000 shares. The amount paid was based on the then market value of Class A common stock of $15.50 per share. The same officer received payments of $512,500 and $569,000 from the Company (based on the then market value of Class A common stock of $20.25 and $21.375 per share) in July and December of 1992, respectively, in cancellation of the remainder of his option covering 100,000 shares of TCI Class A common stock. The other officer received payment of $2,276,000 from the Company in December of 1992 upon cancellation of his option covering 200,000 shares of TCI Class A common stock. The amount paid was based on the then market value of Class A common stock of $21.375 per share. The Company had an Incentive Stock Option Plan ("ISOP") which has expired. Options granted under the ISOP (prior to its expiration) have an option price equal to the fair market value on the date of grant, are all currently exercisable and expire five years from the date of grant. Options to purchase 217,008 shares of TCI Class A common stock are outstanding at December 31, 1993, with a price of $17.25 per share. During the years ended December 31, 1993, 1992 and 1991, options to acquire 96,242, 321,406 and 78,642 shares, respectively were exercised at prices ranging from $10.00 to $17.25 per share and options for 25,000, 12,000 and 15,000 shares, respectively, were cancelled. TCI assumed certain stock options previously granted by UAE to certain of its employees. These options, which are currently exercisable, represent the right, as of December 31, 1993, to acquire 167,328 shares of TCI Class A common stock at adjusted purchase prices ranging from $8.83 to $18.63 per share. During the year ended December 31, 1993, no options were exercised or cancelled. No additional options may be granted by UAE. (continued) F-25 <PAGE> 45 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has adopted the 1992 Stock Incentive Plan (the "Plan"). The Plan provides for awards to be made with respect to a maximum of 10 million shares of Class A common stock. Awards may be made as grants of stock options, stock appreciation rights, restricted shares, stock units or any combination thereof. On November 11, 1992, stock options in tandem with stock appreciation rights to purchase 4,020,000 shares of Class A common stock were granted pursuant to the Plan to certain officers and other key employees at a purchase price of $16.75 per share. Such options become exercisable and vest evenly over five years, first became exercisable beginning November 11, 1993 and expire on November 11, 2002. During the year ended December 31, 1993, stock options covering 50,000 shares of Class A common stock were cancelled upon termination of employment. On October 12, 1993, stock options in tandem with stock appreciation rights to purchase 1,355,000 shares of TCI Class A common stock were granted pursuant to the Plan to certain officers and other key employees at a purchase price of $16.75 per share. On November 12, 1993, an additional grant of stock options in tandem with stock appreciation rights to purchase 600,000 shares of TCI Class A common stock were granted to two officers at a purchase price of $16.75 per share. Such options become exercisable and vest evenly over four years, first become exercisable beginning October 12, 1994 and expire on October 12, 2003. Separately from the Plan, an additional grant of stock options in tandem with stock appreciation rights to purchase 2,000,000 shares of TCI Class A common stock at a purchase price of $16.75 per share was made on November 12, 1993 to an individual who thereafter became a director of the Company. Twenty percent of such options vested and became exercisable immediately and the remainder become exercisable evenly over 4 years. The options expire October 12, 1998. Estimates of the compensation relating to these grants have been recorded through December 31, 1993, but are subject to future adjustment based upon market value and, ultimately, on the final determination of market value when the rights are exercised. Two officers (who are also directors) each held an option, expiring December 31, 1991, to acquire 1,200,000 shares of Class B common stock at an adjusted purchase price of $1.10 per share. In June of 1991, one of the aforementioned officers exercised in full his option to acquire 1,200,000 shares of Class B common stock by delivery of 80,000 shares of Class B common stock valued at $16.50 per share and, on the same date, sold 400,000 of such option shares (at a price of $16.50 per share) to TCI for cash and a short-term note. In December of 1991, the other officer exercised his option to purchase 900,000 shares of Class B common stock by delivery of 63,871 shares of Class A common stock valued at $15.50 per share. Such officer agreed to forego exercising the balance of his option to purchase 300,000 shares of Class B common stock in exchange for the payment by the Company of $4,320,000 as compensation to be applied towards federal and state income taxes withheld by the Company for his account. Other The excess of consideration received on debentures converted or options exercised over the par value of the stock issued is credited to additional paid-in capital. (continued) F-26 <PAGE> 46 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1993, there were 50,635,330 Class A shares of TCI common stock reserved for issuance under exercise privileges related to options and convertible debt securities described in this note 8 and in notes 6 and 7. In addition, one share of Class A common stock is reserved for each share of Class B common stock. (9) Transactions with Officers and Directors On December 10, 1992, pursuant to a restricted stock award agreement, an officer, who is also a director, of the Company was transferred the right, title and interest in and to 124.03 shares (having a liquidation value of $4 million) of the 12% Series B cumulative compounding preferred stock of WestMarc Communications, Inc. (a wholly-owned subsidiary of the Company) owned by the Company. Such preferred stock is subject to forfeiture in the event of certain circumstances from the date of grant through February 1, 2002, decreasing by 10% on February 1 of each year. On December 14, 1992, an officer, who is also a director, sold 100,000 shares of Class B common stock to the Company for $2,138,000. (10) Income Taxes TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which the Company owns less than 80% each file a separate income tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. The Financial Accounting Standards Board Statement No. 109 requires a change from the deferred method of accounting for income taxes of APB Opinion No. 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted Statement No. 109 in 1993 and has applied the provisions of Statement No. 109 retroactively to January 1, 1986. The Company restated its financial statements for the years beginning January 1, 1986 through December 31, 1992. The effect of the implementation of Statement No. 109 at December 31, 1992 was a $2 million decrease in receivables, $48 million net increase in investments, $178 million net increase in property and equipment, $2,901 million net increase in franchise costs, $2 million increase in other assets, $34 million increase in other liabilities, $2,865 million increase in deferred taxes payable and $228 million decrease in accumulated deficit. (continued) F-27 <PAGE> 47 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The financial statements for the years ended December 31, 1992 and 1991 have been restated to comply with the provisions of Statement No. 109. The following summarizes the impact of applying Statement No. 109 on net loss and loss per common share for the years ended December 31, 1992 and 1991: <TABLE> <CAPTION> December 31, -------------------- 1992 1991 ------- -------- amounts in millions <S> <C> <C> Net loss as previously reported $ (34) (103) Effect of restatements: Liberty, including the effects of Mile Hi and LCI (note 3) 6 (2) Statement No. 109 20 8 ------- ------- As restated $ (8) (97) ======= ======= Per share amounts as previously reported $ (.12) (.29) Effect of restatements: Liberty, including the effects of Mile Hi and LCI (note 3) .02 -- Statement No. 109 .05 .02 ------- ------- As restated $ (.05) (.27) ======= ======= </TABLE> Income tax benefit (expense) attributable to income or loss from continuing operations for the years ended December 31, 1993, 1992 and 1991 consists of: <TABLE> <CAPTION> Current Deferred Total ------- -------- ------- amounts in millions <S> <C> <C> <C> Year ended December 31, 1993: Federal $(14) (119) (133) State and local (15) (20) (35) ---- ---- ---- $(29) (139) (168) ==== ==== ==== Year ended December 31, 1992: Federal $ -- (24) (24) State and local (10) (4) (14) ---- ---- ---- $(10) (28) (38) ==== ==== ==== Year ended December 31, 1991: Federal $ (2) 33 31 State and local (7) 6 (1) ---- ---- ---- $ (9) 39 30 ==== ==== ==== </TABLE> (continued) F-28 <PAGE> 48 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The significant components of deferred income tax benefit (expense) for the years ended December 31, 1993, 1992 and 1991 are as follows: <TABLE> <CAPTION> Years ended December 31, ----------------------- 1993 1992 1991 ----- ------ ------ amounts in millions <S> <C> <C> <C> Deferred tax benefit (expense) (exclusive of effects of other components listed below) $ (63) (28) 39 Adjustment to deferred tax assets and liabilities for enacted change in tax rates (76) -- -- ----- ----- ----- $(139) (28) 39 ===== ===== ===== </TABLE> Income tax benefit (expense) attributable to income or loss from continuing operations differs from the amounts computed by applying the Federal income tax rate of 35% in 1993 and 34% in 1992 and 1991 as a result of the following: <TABLE> <CAPTION> Years ended December 31, ----------------------- 1993 1992 1991 ----- ------ ------ amounts in millions <S> <C> <C> <C> Computed "expected" tax benefit (expense) $ (56) (15) 37 Adjustment to deferred tax assets and liabilities for enacted change in Federal income tax rate (76) -- -- Dividends excluded for income tax purposes 4 10 13 Amortization not deductible for tax purposes (12) (8) (7) Minority interest in earnings of consolidated subsidiaries (1) (14) (13) Recognition of losses of consolidated partnership (8) -- -- State and local income taxes, net of Federal income tax benefit (23) (9) 1 Other 4 (2) (1) ------ ------ ------ $ (168) (38) 30 ====== ====== ====== </TABLE> (continued) F-29 <PAGE> 49 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Note to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 and 1992 are presented below: <TABLE> <CAPTION> December 31, --------------------- 1993 1992 ------ ------ amounts in millions <S> <C> <C> Deferred tax assets: Net operating loss carryforwards $ 590 665 Less - valuation allowance (90) (88) Investment tax credit carryforwards 140 140 Less - valuation allowance (36) (34) Alternative minimum tax credit carryforwards 19 11 Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 266 321 Future deductible amounts principally due to non-deductible accruals 27 19 Other 13 5 ------ ------ Net deferred tax assets 929 1,039 ------ ------ Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,193 1,136 Franchise costs, principally due to differences in amortization 2,784 2,720 Investment in affiliates, due principally to undistributed earnings of affiliates 256 332 Other 6 15 ------ ------ Total gross deferred tax liabilities 4,239 4,203 ------ ------ Net deferred tax liability $3,310 3,164 ====== ====== </TABLE> The valuation allowance for deferred tax assets as of December 31, 1993 was $126 million. Such balance increased by $4 million from December 31, 1992. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1993 will be recorded as reductions of franchise costs. At December 31, 1993, the Company had net operating loss carryforwards for income tax purposes aggregating approximately $1,071 million of which, if not utilized to reduce taxable income in future periods, $8 million expires through 1998, $17 million in 2001, $76 million in 2002, $153 million in 2003, $132 million in 2004, $384 million in 2005 and $301 million in 2006. Certain subsidiaries of the Company had additional net operating loss carryforwards for income tax purposes aggregating approximately $368 million and these net operating losses are subject to certain rules limiting their usage. (continued) F-30 <PAGE> 50 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1993, the Company had remaining available investment tax credits of approximately $85 million which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of the Company had additional investment tax credit carryforwards aggregating approximately $55 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. Certain of the Federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the Internal Revenue Service ("IRS") for the years 1979 through 1992. In the opinion of management, any additional tax liability, not previously provided for, resulting from these examinations, ultimately determined to be payable, should not have a material adverse effect on the consolidated financial position of the Company. The Company pursued a course of action on certain issues (primarily the deductibility of franchise cost amortization) the IRS had raised and such issues were argued before the United States Tax Court. During 1990, the Company received a favorable decision regarding these issues. The IRS appealed this decision but the Company prevailed in the appeal. The IRS may further appeal the decision to the Supreme Court until March 27, 1994. New tax legislation was enacted in the third quarter of 1993 which, among other matters, increased the corporate Federal income tax rate from 34% to 35%. The Company has reflected the tax rate change in its consolidated statements of operations in accordance with the treatment prescribed by Statement No. 109. Such tax rate change resulted in an increase of $76 million to income tax expense and deferred income tax liability. (11) Commitments and Contingencies On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. Such rate regulations became effective on September 1, 1993. The rate increase moratorium, which began on April 5, 1993, continues in effect through May 15, 1994. As a result of such actions, the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. Subsequent to September 1, 1993, any cable system charging basic cable rates that exceed the FCC's benchmark rate may be required to substantiate its rates by demonstrating its cost of providing basic cable services to subscribers. If, as a result of this process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received since September 1, 1993. (continued) F-31 <PAGE> 51 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, since the Company's rates for Regulated Services are subject to review, the Company may be subject to a refund liability. The amount of refunds, if any, which could be payable by the Company in the event that systems' rates are successfully challenged by franchising authorities is not currently estimable. In connection with the acquisition from TCI of a 19.9% minority interest in Heritage Communications, Inc. ("Heritage") by Comcast, Comcast has the right, through December 31, 1994, to require TCI to purchase or cause to be purchased from Comcast all shares of Heritage directly or indirectly owned by Comcast for either cash or assets or, at TCI's election, shares of TCI common stock. The purchase price of the shares of Heritage directly or indirectly owned by Comcast will be determined by external appraisal. The Company is obligated to pay fees for the license to exhibit certain qualifying films that are released theatrically by various motion picture studios from January 1, 1993 through December 31, 2002 (the "Film License Obligations"). The aggregate minimum liability under certain of the license agreements is approximately $105 million. The aggregate amount of the Film License Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films produced by the motion picture studios, the amount of United States theatrical film rentals for such qualifying films, and certain other factors. Nevertheless, the Company's aggregate payments under the Film License Obligations could prove to be significant. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $237 million at December 31, 1993. The Company leases business offices, has entered into pole rental agreements and uses certain equipment under lease arrangements. Minimum rental expense under such arrangements, net of sublease rentals, amounted to $59 million, $57 million and $52 million for 1993, 1992 and 1991, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions): <TABLE> <CAPTION> Years ending December 31, ------------ <S> <C> 1994 $16 1995 12 1996 9 1997 7 1998 6 </TABLE> It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1994. (continued) F-32 <PAGE> 52 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Discontinued Operations The Company sold its motion picture theatre business and certain theatre-related real estate assets on May 12, 1992. The selling price (including liabilities assumed) was approximately $680 million. In connection with the disposition, the Company paid $92.5 million for certain preferred stock of the buyer. No gain or loss was recognized in connection with this transaction as the net assets of discontinued operations were reflected at their net realizable value. Operating results for the theatre operations for the period from January 1, 1992 through May 12, 1992 and the year ended December 31, 1991 are reported separately in the consolidated statements of operations under the caption "Loss from discontinued operations" and include: <TABLE> <CAPTION> 1992 1991 ------ ------ amounts in millions <S> <C> <C> Revenue $ 211 613 Loss before income taxes $ (16) (18) Income tax benefit (expense) $ 1 (1) Net loss $ (15) (19) </TABLE> (continued) F-33 <PAGE> 53 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Quarterly Financial Information (Unaudited) <TABLE> <CAPTION> 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- amounts in millions, 1993: except per share amounts --- <S> <C> <C> <C> <C> Revenue $1,018 1,042 1,044 1,049 Operating income: As previously reported $ 247 255 248 Adjustment to revise estimate of useful lives of certain distribution equipment -- (6) (6) Adjustment to properly reflect compensation relating to stock appreciation rights -- (3) (6) ----- ---- ----- As adjusted $ 247 246 236 187 ====== ==== ===== ==== Gain (loss) on disposition of assets $ 40 5 4 (7) Income tax benefit (expense): As previously reported $ (38) (21) (116) Adjustment to revise estimate of useful lives of certain distribution equipment -- 3 3 Adjustment to properly reflect compensation relating to stock appreciation rights -- 1 2 Adjustment to income taxes upon revision of Statement No. 109 -- -- (3) ------ ---- ---- As adjusted $ (38) (17) (114) 1 ====== ==== ==== ==== Net earnings (loss): As previously reported $ 53 31 (55) Adjustment to revise estimate of useful lives of certain distribution equipment -- (3) (3) Adjustment to properly reflect compensation relating to stock appreciation rights -- (2) (4) Adjustment to income taxes upon revision of Statement No. 109 -- -- (3) ------ ---- ---- As adjusted $ 53 26 (65) (21) ====== ==== ==== ==== Primary and fully diluted earnings (loss) attributable to common shareholder per common and common equivalent share: As previously reported $ .11 .07 (.13) Adjustment to revise estimate of useful lives of certain distribution equipment -- (.01) -- Adjustment to properly reflect compensation relating to stock appreciation rights -- -- (.01) Adjustment to income taxes upon revision of Statement No. 109 -- -- -- ------ ---- ---- As adjusted $ .11 .06 (.14) (.05) ====== ==== ==== ==== </TABLE> (continued) F-34 <PAGE> 54 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements <TABLE> <CAPTION> 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- amounts in millions, 1992: except per share amounts --- <S> <C> <C> <C> <C> Revenue $ 856 879 896 943 Operating income: As previously reported $ 197 225 242 226 Adjustment to depreciation and amortization upon revision of Statement No. 109 (2) (1) -- (23) ----- ---- ---- ---- As adjusted $ 195 224 242 203 ===== ==== ==== ==== Gain (loss) on disposition of assets $ 3 (3) (1) 10 Income tax benefit (expense): As previously reported $ 1 (15) 6 (49) Adjustment to income taxes for the restatement of share of earnings of Liberty (note 3) -- (3) (5) 3 Adjustment to revise/implement Statement No. 109 1 -- -- 23 ----- ---- ---- ---- As adjusted $ 2 (18) 1 (23) ===== ==== ==== ==== Earnings (loss) from continuing operations: As previously reported $ (18) 9 63 (51) Adjustment to restate share of earnings of Liberty (note 3) -- 4 7 (5) Adjustment to depreciation, amortization and income taxes upon revision/ implementation of Statement No. 109 (1) (1) -- -- ----- ---- ---- ---- As adjusted $ (19) 12 70 (56) ===== ==== ==== ==== Loss from discontinued operations $ -- (15) -- -- ===== ==== ==== ==== Net earnings (loss): As previously reported $ (18) (6) 63 (51) Adjustment to restate share of earnings of Liberty (note 3) -- 4 7 (5) Adjustment to depreciation, amortization and income taxes upon revision/ implementation of Statement No. 109 (1) (1) -- -- ----- ---- ---- ---- As adjusted $ (19) (3) 70 (56) ===== ==== ==== ==== Primary and fully diluted earnings (loss) attributable to common shareholders per common and common equivalent share: Continuing operations: As previously reported $(.05) .01 .13 (.12) Adjustment to restate share of earnings of Liberty (note 3) -- .01 .01 (.01) Adjustment to depreciation, amortization and income taxes upon revision/ implementation of Statement No. 109 (.01) -- -- -- ----- ---- ---- ---- As adjusted (.06) .02 .14 (.13) Discontinued operations -- (.03) -- -- ----- ----- ---- ---- $(.06) (.01) .14 (.13) ===== ==== ==== ==== </TABLE> F-35 <PAGE> 55 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: Under date of March 21, 1994, we reported on the consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, as contained in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for income taxes. /s/ KPMG Peat Marwick KPMG Peat Marwick Denver, Colorado March 21, 1994 F-36 <PAGE> 56 Schedule II TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Amounts Receivable from Related Parties and Employees Other Than Related Parties Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Balance at Balance beginning at end Name of debtor of year Additions Deductions of year - -------------- ---------- --------- ---------- ------- amounts in millions <S> <C> <C> <C> <C> Year ended December 31, 1993: Russ Skinner $0.2 -- -- 0.2 (1) ==== ==== ==== ==== Year ended December 31, 1992: Russ Skinner $0.2 -- -- 0.2 ==== ==== ===== ==== Year ended December 31, 1991: Russ Skinner $0.2 -- -- 0.2 Arthur Lee -- 0.2 (0.2) -- Ron Rierson 0.1 -- (0.1) -- ---- ---- ---- ---- $0.3 0.2 (0.3) 0.2 ==== ==== ==== ==== </TABLE> (1) This note receivable is due in 2003 or upon sale of certain property and has no stated interest rate. Interest will be based upon appreciation of the underlying property. Note - Amounts include accrued interest on note receivable balances. F-37 <PAGE> 57 Schedule III Page 1 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to the Financial Position of the Registrant December 31, 1993 and 1992 <TABLE> <CAPTION> Assets 1993 1992* - ------ ---- ---- amounts in millions <S> <C> <C> Cash $ 4 79 Investments in and advances to consolidated subsidiaries - eliminated upon consolidation 7,560 4,795 Property and equipment, at cost 40 27 Less accumulated depreciation 16 12 ------ ----- 24 15 ------ ----- Other assets, at cost, net of amortization 44 32 ------ ----- $7,632 4,921 ====== ===== Liabilities and Stockholders' Equity - ------------------------------------ Accrued liabilities $ 324 188 Debt 5,178 2,897 ------ ----- Total liabilities 5,502 3,085 Redeemable preferred stocks 18 110 Stockholders' equity (see detail on page II-15) 2,112 1,726 ------ ----- $7,632 4,921 ====== ===== Guarantee (see Schedule VII) $ 44 ====== </TABLE> *Restated - see notes 1, 3 and 10 to consolidated financial statements. F-38 <PAGE> 58 Schedule III Page 2 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to the Operations of the Registrant Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992* 1991* ---- ---- ---- amounts in millions <S> <C> <C> <C> Management costs reimbursed by subsidiaries $ 98 106 54 ----- ----- ----- Operating expenses (income): Selling, general and administrative 134 99 50 Interest expense 369 226 164 Interest income, principally from consolidated subsidiaries (370) (232) (165) Depreciation and amortization 8 5 3 Gain on disposition of assets (43) (2) -- Loss on early extinguishment of debt -- 10 2 ----- ----- ----- 98 106 54 ----- ----- ----- Earnings from operations before share of losses of consolidated subsidiaries -- -- -- Share of losses of consolidated subsidiaries, including loss from discontinued operations (7) (8) (97) ----- ----- ----- Net loss $ (7) (8) (97) ===== ===== ===== </TABLE> *Restated - see notes 1, 3 and 10 to consolidated financial statements. F-39 <PAGE> 59 Schedule III Page 3 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to Cash Flows of the Registrant Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 1991 ---- ---- ---- amounts in millions <S> <C> <C> <C> Cash flows from operating activities: Earnings before share of losses of consolidated subsidiaries, including loss from discontinued operations $ -- -- -- Adjustments to reconcile loss to net cash provided by operating activities: Depreciation and amortization 8 5 3 Loss on early extinguishment of debt -- 10 2 Gain on disposition of assets (43) (2) -- Amortization of debt discount 27 26 15 Change in accrued liabilities 136 90 40 ------ ----- ----- Net cash provided by operating activities 128 129 60 ------ ----- ----- Cash flows from investing activities: Reduction in or additional investments in and advances to consolidated subsidiaries, net (2,723) (1,036) (508) Proceeds on disposition of assets 111 12 -- Capital expended for property and equipment and other assets, net (38) (25) (19) ------ ----- ----- Net cash used by investing activities (2,650) (1,049) (527) ------ ----- ----- Cash flows from financing activities: Borrowings of debt 3,274 2,327 1,996 Repayment of debt (735) (1,332) (1,512) Preferred stock dividends (2) (15) -- Repurchase of preferred stock (92) (5) -- Issuances of common stock 6 7 2 Repurchases of common stock (4) (19) (9) ------ ----- ----- Net cash provided by financing activities 2,447 963 477 ------ ----- ----- Increase (decrease) in cash (75) 43 10 Cash at beginning of year 79 36 26 ------ ----- ----- Cash at end of year $ 4 79 36 ====== ===== ===== Supplemental disclosure of cash flow information - Cash paid during the year for interest $ 257 177 142 ====== ===== ===== </TABLE> See also note 2 to the consolidated financial statements. F-40 <PAGE> 60 Schedule V TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Property and Equipment Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Balance at Retire- Balance beginning Additions ments at end Classification of year* at cost* or sales* Other of year* - -------------- ------- ------- -------- ----- ------- amounts in millions <S> <C> <C> <C> <C> <C> Year ended December 31, 1993: Land $ 71 1 (1) 2 73 Distribution systems 6,075 899 (323) (22) 6,629 Support equipment and buildings 712 120 (29) 15 818 ------ ------ ------ ---- ------ $6,858 1,020 (353) (5) 7,520 ====== ====== ====== ==== ====== Year ended: December 31, 1992: Land $ 59 10 (2) 4 71 Distribution systems 5,191 1,075 (151) (40) 6,075 Support equipment and buildings 598 123 (33) 24 712 ------ ------ ------ ---- ------ $5,848 1,208 (186) (12) 6,858 ====== ====== ====== ==== ====== Year ended December 31, 1991: Land $ 66 1 (8) -- 59 Distribution systems 4,976 551 (336) -- 5,191 Support equipment and buildings 528 118 (48) -- 598 ------ ------ ------ ---- ------ $5,570 670 (392) -- 5,848 ====== ====== ====== ==== ====== </TABLE> *Restated and Reclassified - see notes 1 and 10 to consolidated financial statements. Note - Columns which would have been answered "none" have been omitted. F-41 <PAGE> 61 Schedule VI TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Accumulated Depreciation of Property and Equipment Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Additions Balance at charged Balance beginning to profit Retire- at end Description of year* and loss* ments* Other* of year* - ----------- ---------- --------- ------- ------ -------- amounts in millions <S> <C> <C> <C> <C> <C> Year ended December 31, 1993: Distribution systems $1,993 544 (315) -- 2,222 Support equipment and buildings 303 78 (18) -- 363 ------ ------ ------ ----- ------ $2,296 622 (333) -- 2,585 ====== ====== ====== ===== ====== Year ended December 31, 1992: Distribution systems $1,536 445 (142) 154 1,993 Support equipment and buildings 231 67 (22) 27 303 ------ ------ ------ ----- ------ $1,767 512 (164) 181** 2,296 ====== ====== ====== ===== ====== Year ended December 31, 1991: Distribution systems $1,230 467 (155) (6) 1,536 Support equipment and buildings 184 62 (19) 4 231 ------ ------ ------ ----- ------ $1,414 529 (174) (2) 1,767 ====== ====== ====== ===== ====== </TABLE> *Restated and Reclassified - see notes 1 and 10 to consolidated financial statements. **Amount represents the historical accumulated depreciation of the Storer assets received by the Holding Companies in the Split-Off (see note 4 to the consolidated financial statements). F-42 <PAGE> 62 Schedule VII TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Guarantees of Securities of Other Issuers December 31, 1993 <TABLE> <CAPTION> Title of issue Name of issuer of securities of each class Total amount Nature guaranteed by person for of securities guaranteed and of which statement is filed guaranteed outstanding guarantee - ---------------------------- -------------- -------------- --------- amounts in millions <S> <C> <C> <C> Parent company guarantee: ARP Partnership General $ 1 Letter of liabilities credit TCG Partners General 9 Letter of liabilities credit Reiss Media Enterprises, Inc. Bank loan 3 Funding commitment London South Cable Bank loan Principal and Partnership and Avon interest Cable Limited Partnership 31 ---- $ 44 ==== Subsidiaries' guarantees: Tempo Satellite, Inc. Construction $125 Payment of liability obligations Robin Media Group, Inc. Bank loan 30 Principal and interest Interactive Network, Inc. Bank loan 2 Principal and interest UA-Israel, Inc. Bank loan 5 Principal and and general interest liabilities and payment obligations UA-Malta, Inc. Bank loan 5 Principal and and general interest liabilities and payment obligations Tevel Israel International General Letter of Communications, Ltd. liabilities 1 credit E! Entertainment Building Lease Television, Inc. lease 1 guarantee United Artists Properties I Bank loan 12 Principal and interest United Artists Properties II Bank loan 12 Principal and ---- interest $193 ==== </TABLE> Note - Columns which would have been answered "none" have been omitted. F-43 <PAGE> 63 Schedule VIII TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Additions Deductions --------- ---------- Balance at Charged to Write-offs Balance beginning profit net of at end Description of year* and loss* recoveries* of year* - ----------- ---------- ---------- ---------- ------- amounts in millions <S> <C> <C> <C> <C> Year ended December 31, 1993: Allowance for doubtful receivables - trade $15 58 (54) 19 === === === === Year ended December 31, 1992: Allowance for doubtful receivables - trade $16 45 (46) 15 === === === === Year ended December 31, 1991: Allowance for doubtful receivables - trade $11 46 (41) 16 === === === === </TABLE> *Reclassified - see note 1 to consolidated financial statements. F-44 <PAGE> 64 Schedule IX TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Short-Term Borrowings Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> End of Year During the year ---------------------- ------------------------------------ Category of Weighted Weighted aggregate average Maximum Average average short-term Amount interest amount amount interest borrowing Outstanding rate outstanding outstanding rate - ---------- ----------- -------- ----------- ----------- -------- amounts in millions, except percentage amounts <S> <C> <C> <C> <C> <C> Year ended December 31, 1993 - Commercial paper $ 44 3.94% $ 306 $128 3.75% ==== ==== ====== ==== ==== Year ended December 31, 1992 - Commercial paper $ 62 3.70% $ 266 $171 4.55% ==== ==== ====== ==== ==== Year ended December 31, 1991 - Commercial paper $ 47 5.70% $ 188 $110 6.31% ==== ==== ====== ==== ==== </TABLE> F-45 <PAGE> 65 Schedule X TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Supplementary Statement of Operations Information Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Charged to expense ---------------------- 1993 1992* 1991* ---- ---- ---- amounts in millions <S> <C> <C> <C> Maintenance and repairs $ 45 43 37 ==== ==== ==== Amortization: Franchise costs $258 230 207 Other 31 22 20 ---- ---- ---- $289 252 227 ==== ==== ==== Taxes, other than payroll and income $203 170 97 ==== ==== ==== Royalties - Copyright fees $ 43 40 28 ==== ==== ==== Advertising costs $ 20 21 36 ==== ==== ==== </TABLE> *Restated and Reclassified - see notes 1 and 10 to consolidated financial statements. F-46 <PAGE> 66 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) <TABLE> <CAPTION> March 31, December 31, Assets 1994 1993 - ------ --------- ------------ amounts in millions <S> <C> <C> Cash $ 51 1 Trade and other receivables, net 234 232 Investment in Liberty Media Corporation ("Liberty") (note 4) 507 489 Investments in other affiliates, accounted for under the equity method, and related receivables (note 5) 693 645 Investment in Turner Broadcasting System, Inc. (note 6) 786 491 Property and equipment, at cost: Land 73 73 Distribution systems 6,851 6,629 Support equipment and buildings 850 818 ------- ------ 7,774 7,520 Less accumulated depreciation 2,748 2,585 ------- ------ 5,026 4,935 ------- ------ Franchise costs 10,628 10,620 Less accumulated amortization 1,487 1,423 ------- ------ 9,141 9,197 ------- ------ Other assets, at cost, net of amortization 620 530 ------- ------ $17,058 16,520 ======= ====== </TABLE> (continued) F-47 <PAGE> 67 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued (unaudited) <TABLE> <CAPTION> March 31, December 31, Liabilities and Stockholders' Equity 1994 1993 - ------------------------------------ --------- ------------ amounts in millions <S> <C> <C> Accounts payable $ 156 124 Accrued interest 131 157 Other accrued expenses 556 500 Debt (note 7) 10,008 9,900 Deferred income taxes 3,456 3,310 Other liabilities 97 114 ------- ------ Total liabilities 14,404 14,105 ------- ------ Minority interests in equity of consolidated subsidiaries 300 285 Redeemable preferred stocks -- 18 Stockholders' equity (note 8): Preferred stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,201 shares of redeemable preferred stocks in 1993 -- -- Class A common stock, $1 par value. Authorized 1,000,000,000 shares; issued 483,106,459 shares in 1994 and 481,837,347 shares in 1993 483 482 Class B common stock, $1 par value. Authorized 100,000,000 shares; issued 47,258,787 shares in 1994 and 1993 47 47 Additional paid-in capital 2,310 2,293 Cumulative foreign currency translation adjustment (28) (29) Unrealized holding gains for available-for-sale securities 191 -- Accumulated deficit (316) (348) ------- ------ 2,687 2,445 Treasury stock, at cost (79,335,038 shares of Class A common stock in 1994 and 1993) (333) (333) ------- ------ Total stockholders' equity 2,354 2,112 ------- ------ Commitments and contingencies (note 9) $17,058 16,520 ======= ====== </TABLE> See accompanying notes to consolidated financial statements. F-48 <PAGE> 68 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) <TABLE> <CAPTION> Three months ended March 31, ----------------- 1994 1993 ------ ------ amounts in millions, except per share amounts <S> <C> <C> Revenue (note 4) $1,060 1,018 Operating costs and expenses: Operating (note 4) 315 292 Selling, general and administrative 295 259 Compensation relating to stock appreciation rights -- 3 Adjustment to compensation relating to stock appreciation rights (19) -- Depreciation 163 144 Amortization 72 73 ------ ----- 826 771 ------ ----- Operating income 234 247 Other income (expense): Interest expense (178) (181) Interest and dividend income 10 5 Share of earnings of Liberty (note 4) 14 10 Share of losses of other affiliates, net (note 5) (9) (14) Gain on disposition of assets -- 40 Loss on early extinguishment of debt (2) (8) Minority interests in earnings of consolidated subsidiaries, net (2) (4) Other, net (4) (4) ------ ----- (171) (156) ------ ----- Earnings before income taxes 63 91 Income tax expense (31) (38) ------ ----- Net earnings 32 53 Dividend requirement on redeemable preferred stocks -- (1) ------ ----- Net earnings attributable to common shareholders $ 32 52 ====== ===== Primary and fully diluted earnings attributable to common shareholders per common and common equivalent share (note 2) $ .07 .11 ====== ===== </TABLE> See accompanying notes to consolidated financial statements. F-49 <PAGE> 69 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Three months ended March 31, 1994 (unaudited) <TABLE> <CAPTION> Unrealized Cumulative holding foreign gains for Common stock Additional currency available- Total ------------ paid-in translation for-sale Accumulated Treasury stockholders' Class A Class B capital adjustment securities deficit stock equity ------- ------- ---------- ----------- ---------- ----------- -------- ------------- amounts in millions <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at January 1, 1994 $ 482 47 2,293 (29) -- (348) (333) 2,112 Net earnings -- -- -- -- -- 32 -- 32 Conversion of redeemable preferred stock 1 -- 17 -- -- -- -- 18 Foreign currency translation adjustment -- -- -- 1 -- -- -- 1 Unrealized holding gains for available-for-sale securities -- -- -- -- 191 -- -- 191 ----- --- ----- ---- ---- ---- ---- ----- Balance at March 31, 1994 $ 483 47 2,310 (28) 191 (316) (333) 2,354 ===== === ===== ==== ==== ==== ==== ===== </TABLE> See accompanying notes to consolidated financial statements. F-50 <PAGE> 70 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) <TABLE> <CAPTION> Three months ended March 31, ----------------- 1994 1993 ------ ------ amounts in millions (see note 4) <S> <C> <C> Cash flows from operating activities: Net earnings $ 32 53 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 235 217 Compensation relating to stock appreciation rights -- 3 Adjustment to compensation relating to stock appreciation rights (19) -- Share of earnings of Liberty (14) (10) Share of losses of other affiliates 9 14 Deferred income tax expense 13 32 Minority interests in earnings 2 4 Amortization of debt discount -- 7 Loss on early extinguishment of debt 2 8 Gain on disposition of assets -- (40) Payment received on preferred stock investment redemption -- 197 Noncash interest and dividend income (2) (2) Other noncash charges 1 -- Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables 7 4 Change in accrued interest (26) 27 Change in other accruals and payables 86 (1) ------- ------ Net cash provided by operating activities 326 513 ------- ------ Cash flows from investing activities: Cash paid for acquisitions (10) (19) Capital expended for property and equipment (243) (175) Proceeds from disposition of assets 8 109 Additional investments in and loans to affiliates and others (97) (118) Repayment of loans by affiliates and others 31 3 Other investing activities (71) (29) ------- ------ Net cash used in investing activities (382) (229) ------- ------ Cash flows from financing activities: Borrowings of debt 1,296 2,493 Repayments of debt (1,188) (2,692) Preferred stock dividends of subsidiaries (2) (1) Preferred stock dividends -- (1) Repurchase of preferred stock -- (92) Repurchases of common stock -- (2) ------- ------ Net cash provided (used) by financing activities 106 (295) ------- ------ Net increase (decrease) in cash 50 (11) Cash at beginning of period 1 34 ------- ------ Cash at end of period $ 51 23 ======= ====== </TABLE> See accompanying notes to consolidated financial statements. F-51 <PAGE> 71 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1994 (unaudited) (1) General The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1993. Certain amounts have been reclassified for comparability with the 1994 presentation. (2) Earnings Per Common and Common Equivalent Share Primary earnings per common and common equivalent share attributable to common shareholders was computed by dividing net earnings attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding (491.9 million and 468.7 million for the three months ended March 31, 1994 and 1993, respectively). Fully diluted earnings per common and common equivalent share attributable to common shareholders was computed by dividing earnings attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding (491.9 million and 468.7 million for the three months ended March 31, 1994 and 1993, respectively). Shares issuable upon conversion of the Liquid Yield OptionTM Notes and upon conversion of the Convertible Preferred Stock have not been included in the 1993 computations of weighted average shares outstanding because their inclusion would be anti- dilutive. (continued) F-52 <PAGE> 72 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $204 million and $158 million for the three months ended March 31, 1994 and 1993, respectively. Also, during these periods, cash paid for income taxes was not material. Significant noncash investing and financing activities are as follows: <TABLE> <CAPTION> Three months ended March 31, ----------------- 1994 1993 ------ ------ amounts in millions <S> <C> <C> Common stock issued upon conversion of redeemable preferred stock $ 18 -- ==== ==== Effect of foreign currency translation adjustment on book value of foreign equity investments $ 1 -- ==== ==== Unrealized gains, net of deferred income taxes, on available-for-sale securities $191 -- ==== ==== Noncash exchange of equity investments and consolidated subsidiaries for consolidated subsidiary $ 38 -- ==== ==== Cash paid for acquisitions: Fair value of assets acquired $ 10 26 Liabilities assumed -- (7) ---- ---- Cash paid for acquisitions $ 10 19 ==== ==== Noncash exchange of equity investment for consolidated subsidiary and equity investment $ -- 19 ==== ==== Noncash capital contribution to Community Cable Television ("CCT") (note 4) $ -- 22 ==== ==== Common stock issued upon conversion of notes $ -- 1 ==== ==== </TABLE> (4) Investment in Liberty As of January 27, 1994, TCI and Liberty entered into a definitive agreement to combine the two companies. The transaction will be structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company ("TCI/Liberty"). TCI shareholders will receive one share of TCI/Liberty for each of their shares. Liberty common shareholders will receive 0.975 of a share of TCI/Liberty for each of their common shares. The transaction is subject to the approval of both sets of shareholders as well as various regulatory approvals and other customary conditions. Subject to timely receipt of such approvals, which cannot be assured, it is anticipated the closing of such transaction will take place during 1994. (continued) F-53 <PAGE> 73 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements TCI owns 3,477,778 shares of Liberty Class A common stock (after giving effect to the repurchase by Liberty during the year ended December 31, 1993 of 927,900 shares of Class A common stock) and 55,070 shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock received in January of 1993 upon conversion of the Liberty Class A Redeemable Convertible Preferred Stock. Such common shares represent less than 5% of the outstanding Class A common stock of Liberty. Of the remaining classes of preferred stock of Liberty held by the Company, one class entitles TCI to elect a number of members of Liberty's board of directors equal to no less than 11% of the total number of directors and another class is exchangeable for TCI common stock. Due to the significant economic interest held by TCI through its ownership of Liberty preferred stock and Liberty common stock and other related party considerations, TCI has accounted for its investment in Liberty under the equity method. Accordingly, the Company has not recognized any income relating to dividends, including preferred stock dividends, and the Company has continued to record the earnings or losses generated by the interests contributed to Liberty (by recognizing 100% of Liberty's earnings or losses before deducting preferred stock dividends). TCI and Liberty entered into an Option-Put Agreement (the "Option-Put Agreement"), which was amended on November 30, 1993. Under the amended Option-Put Agreement, between June 30, 1994 and September 28, 1994, and between January 1, 1996 and January 31, 1996, TCI will have the option to purchase all of Liberty's interest in CCT and a loan receivable in the amount of $50 million (the "Mile Hi Note") for an amount equal to $77 million plus interest accruing at the rate of 11.6% per annum on such amount from June 3, 1993. Between April 1, 1995 and June 29, 1995, and between January 1, 1997 and January 31, 1997, Liberty will have the right to require TCI to purchase Liberty's interest in CCT and the Mile Hi Note for an amount equal to $77 million plus interest on such amount accruing at the rate of 11.6% per annum from June 3, 1993. The Company purchases sports and other programming from certain subsidiaries of Liberty. Charges to TCI (which are based upon customary rates charged to others) for such programming were $12 million and $11 million for the three months ended March 31, 1994 and 1993, respectively. Such amounts are included in operating expenses in the accompanying consolidated statements of operations. Certain subsidiaries of Liberty purchase from TCI, at TCI's cost plus an administrative fee, certain pay television and other programming. In addition, a consolidated subsidiary of Liberty pays a commission to TCI for merchandise sales to customers who are subscribers of TCI's cable systems. Aggregate commission and charges for such programming were $3 million and $1 million for the three months ended March 31, 1994 and 1993, respectively. Such amounts are recorded in revenue in the accompanying consolidated statements of operations. (continued) F-54 <PAGE> 74 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In September of 1993, Encore QE Programming Corp. ("QEPC"), a wholly-owned subsidiary of Encore Media Corporation ("EMC), a 90% owned subsidiary of Liberty, entered into a limited partnership agreement with TCI Starz, Inc. ("TCIS"), a wholly-owned subsidiary of TCI, for the purpose of developing, operating and distributing STARZ!, a first-run movie premium programming service launched in the first quarter of 1994. QEPC is the general partner and TCIS is the limited partner. Losses are allocated 1% to QEPC and 99% to TCIS. Profits are allocated 1% to QEPC and 99% to TCIS until certain defined criteria are met. Subsequently, profits are allocated 20% to QEPC and 80% to TCIS. TCIS has the option, exercisable at any time and without payment of additional consideration, to convert its limited partner interest to an 80% general partner interest with QEPC's partnership interest simultaneously converting to a 20% limited partnership interest. In addition, during specific periods commencing April 1999 and April 2001, respectively, QEPC may require TCIS to purchase, or TCIS may require QEPC to sell, the partnership interest of QEPC in the partnership for a formula-based price. EMC is paid a management fee equal to 20% of "managed costs" as defined, in order to manage the service. EMC manages the service and has agreed to provide the limited partnership with certain programming under a programming agreement whereby the partnership will pay its pro rata share of the total costs incurred by EMC for such programming. The Company accounts for the partnership as a consolidated subsidiary. (See note 9.) Summarized unaudited financial information of Liberty for the three months ended March 31, 1994 and 1993 is as follows: <TABLE> <CAPTION> Consolidated Operations 1994 1993 ----------------------- ---- ---- amounts in millions <S> <C> <C> Revenue $333 179 Operating expenses (295) (169) Depreciation and amortization (13) (8) ---- ----- Operating income 27 2 Interest expense (9) (5) Other, net (4) 13 ---- ---- Net earnings $ 14 10 ==== ==== </TABLE> F-55 <PAGE> 75 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investments in Other Affiliates Summarized unaudited results of operations for affiliates, other than Liberty, accounted for under the equity method, are as follows: <TABLE> <CAPTION> Three months ended Combined Operations March 31, ------------------- ----------------- 1994 1993 ------ ------ amounts in millions <S> <C> <C> Revenue $ 195 188 Operating expenses (173) (158) Depreciation and amortization (31) (44) ------ ------ Operating loss (9) (14) Interest expense (9) (22) Other, net (20) (3) ------ ------ Net loss $ (38) (39) ====== ====== </TABLE> Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts of that partnership in the event liabilities of that partnership were to exceed its assets. (6) Investment in Turner Broadcasting System, Inc. The Company owns shares of a class of preferred stock of Turner Broadcasting System, Inc. ("TBS") which has voting rights and are convertible into shares of TBS common stock. The holders of those preferred shares, as a group, are entitled to elect seven of fifteen members of the board of directors of TBS, and the Company appoints three such representatives. However, voting control over TBS continues to be held by its chairman of the board and chief executive officer (an unrelated third party). The Company's total holdings of TBS common and preferred stocks represent an approximate 12% voting interest for those matters for which preferred and common stock vote as a single class. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. Under the new rules, debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available-for-sale or trading and carried at fair value. Unrealized holding gains and losses on securities classified as available-for sale are carried as a separate component of shareholders' equity. Unrealized holding gains and losses on securities classified as trading are reported in earnings. (continued) F-56 <PAGE> 76 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company applied the new rules beginning in the first quarter of 1994. Application of the new rules resulted in an net increase of $191 million to stockholders' equity, representing the recognition of unrealized appreciation, net of taxes, for the Company's investment in equity securities determined to be available-for-sale. The majority of such securities represents the Company's investment in TBS common stock. The Company holds no material debt securities. (7) Debt Debt is summarized as follows: <TABLE> <CAPTION> March 31, December 31, 1994 1993 ------------- ------------ amounts in millions <S> <C> <C> Parent company debt: Senior notes $ 5,052 5,052 Bank credit facilities 355 80 Commercial paper 37 44 Other debt 3 2 ------- ------ 5,447 5,178 Debt of subsidiaries: Bank credit facilities 3,205 3,264 Notes payable 1,225 1,321 Convertible notes (a) 47 47 Other debt 84 90 ------- ------ $10,008 9,900 ======= ====== </TABLE> (a) These convertible notes, which are stated net of unamortized discount of $197 million, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. At March 31, 1994, the notes were convertible, at the option of the holders, into an aggregate of 41,060,990 shares of Class A common stock. The Company's bank credit facilities and various other debt instruments generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. As security for borrowings under one of its credit facilities, the Company pledged a portion of the common stock (with a quoted market value of approximately $488 million at March 31, 1994) it holds of TBS. (continued) F-57 <PAGE> 77 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In order to provide interest rate protection on a portion of its variable rate indebtedness, the Company has entered into various interest rate exchange agreements. The Company is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate nonperformance by the counterparties and, in any event, such amounts were not material at March 31, 1994. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $10,008 million, was $10,496 million at March 31, 1994. The fair value of the interest rate exchange agreements is the estimated amount that the Company would pay or receive to terminate the agreements at March 31, 1994, taking into consideration current interest rates and the current creditworthiness of the counterparties. The Company would be required to pay $109 million at March 31, 1994 to terminate the agreements. TCI and certain of its subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. (8) Stockholders' Equity Common Stock The Class A common stock has one vote per share and the Class B common stock has ten votes per share. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock. Stock Options The Company had an Incentive Stock Option Plan ("ISOP") which has expired. Options granted under the ISOP (prior to its expiration) have an option price equal to the fair market value on the date of grant, are all currently exercisable and expire five years from the date of grant. Options to purchase 210,508 shares of TCI Class A common stock are outstanding at March 31, 1994, with a purchase price of $17.25 per share. During the three months ended March 31, 1994, options to acquire 5,500 shares were exercised and options for 1,000 shares were cancelled. TCI assumed certain stock options previously granted by United Artists Entertainment Company ("UAE") to certain of its employees. These options, which are currently exercisable, represent the right, as of March 31, 1994, to acquire 167,328 shares of TCI Class A common stock at adjusted purchase prices ranging from $8.83 to $18.63 per share. During the three months ended March 31, 1994, no options were exercised or cancelled. No additional options may be granted by UAE. (continued) F-58 <PAGE> 78 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has adopted the 1992 Stock Incentive Plan (the "Plan"). The Plan provides for awards to be made with respect to a maximum of 10 million shares of Class A common stock. Awards may be made as grants of stock options, stock appreciation rights, restricted shares, stock units or any combination thereof. On November 11, 1992, stock options in tandem with stock appreciation rights to purchase 4,020,000 shares of Class A common stock were granted pursuant to the Plan to certain officers and other key employees at a purchase price of $16.75 per share. Such options become exercisable and vest evenly over five years, first became exercisable beginning November 11, 1993 and expire on November 11, 2002. During the year ended December 31, 1993, stock options covering 50,000 shares of Class A common stock were cancelled upon termination of employment. On October 12, 1993, stock options in tandem with stock appreciation rights to purchase 1,355,000 shares of TCI Class A common stock were granted pursuant to the Plan to certain officers and other key employees at a purchase price of $16.75 per share. On November 12, 1993, an additional grant of stock options in tandem with stock appreciation rights to purchase 600,000 shares of TCI Class A common stock were granted to two officers at a purchase price of $16.75 per share. Such options become exercisable and vest evenly over four years, first become exercisable beginning October 12, 1994 and expire on October 12, 2003. Separately from the Plan, an additional grant of stock options in tandem with stock appreciation rights to purchase 2,000,000 shares of TCI Class A common stock at a purchase price of $16.75 per share was made on November 12, 1993 to an individual who thereafter became a director of the Company. Twenty percent of such options vested and became exercisable immediately and the remainder become exercisable evenly over 4 years. The options expire October 12, 1998. Estimates of the compensation relating to these grants have been recorded through March 31, 1994, but are subject to future adjustment based upon market value and, ultimately, on the final determination of market value when the rights are exercised. Other The excess of consideration received on debentures converted or options exercised over the par value of the stock issued is credited to additional paid-in capital. At March 31, 1994, there were 49,356,326 shares of TCI Class A common stock reserved for issuance under exercise privileges related to options and convertible debt securities described in this note 8 and in note 7. In addition, one share of Class A common stock is reserved for each share of Class B common stock. (continued) F-59 <PAGE> 79 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Commitments and Contingencies On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993, the Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. Such rate regulations became effective on September 1, 1993. The rate increase moratorium, which began on April 5, 1993, continues in effect through May 15, 1994. As a result of such actions, the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. Subsequent to September 1, 1993, any cable system charging basic cable rates that exceed the FCC's benchmark rate may be required to substantiate its rates. If, as a result of this process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received since September 1, 1993. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, since the Company's rates for regulated services are subject to review, the Company may be subject to a refund liability. The amount of refunds, if any, which could be payable by the Company in the event that systems' rates are successfully challenged by franchising authorities is not currently estimable. In connection with the acquisition from TCI of a 19.9% minority interest in Heritage Communications, Inc. ("Heritage") by Comcast, Comcast has the right, through December 31, 1994, to require TCI to purchase or cause to be purchased from Comcast all shares of Heritage directly or indirectly owned by Comcast for either cash or assets or, at TCI's election, shares of TCI common stock. The purchase price of the shares of Heritage directly or indirectly owned by Comcast will be determined by external appraisal. The Company is obligated to pay fees for the license to exhibit certain qualifying films that are released theatrically by various motion picture studios from January 1, 1993 through December 31, 2002 (the "Film License Obligations"). The aggregate minimum liability under certain of the license agreements is approximately $105 million. The aggregate amount of the Film License Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films produced by the motion picture studios, the amount of United States theatrical film rentals for such qualifying films, and certain other factors. Nevertheless, the Company's aggregate payments under the Film License Obligations could prove to be significant. (continued) F-60 <PAGE> 80 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $195 million at March 31, 1994. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. F-61 <PAGE> 81 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS LIBERTY MEDIA CORPORATION: We have audited the accompanying consolidated balance sheets of Liberty Media Corporation and subsidiaries (Successor) as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1993 and 1992 and the period from April 1, 1991 to December 31, 1991 (Successor Periods) and the consolidated statements of operations, stockholders' equity, and cash flows of Liberty Media (a combination of certain programming interests and cable television assets of Tele-Communications, Inc. (Predecessor) for the period from January 1, 1991 to March 31, 1991 (Predecessor Period). These consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of Liberty Media Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for the Successor Periods, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows for the Predecessor Period, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective March 28, 1991, Tele-Communications, Inc. (TCI) (the former parent of the Company) contributed to Liberty Media Corporation its interests in certain cable television programming businesses and cable television systems in exchange for several different classes and series of the Company's preferred stock. As a result, the Company recorded the exchange at TCI's historical cost basis, therefore the consolidated financial information for the period after the contribution is presented on a predecessor cost basis. As discussed in notes 3 and 13 to the consolidated financial statements, the Companies changed their method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /s/ KPMG Peat Marwick Denver, Colorado KPMG Peat Marwick March 18, 1994 F-62 <PAGE> 82 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS <TABLE> <CAPTION> DECEMBER 31, ---------------------- 1993 1992* ---------- -------- AMOUNTS IN THOUSANDS <S> <C> <C> Cash and cash equivalents $ 91,305 96,253 Trade and other receivables 57,458 20,926 Less allowance for doubtful receivables 3,032 2,404 ---------- -------- 54,426 18,522 ---------- -------- Inventories, net 112,005 -- Due from Tele-Communications, Inc. ("TCI") (note 16) -- 4,786 Prepaid expenses 25,210 6,253 Investments in affiliates, accounted for under the equity method, and related receivables (note 6) 151,540 239,535 Other investments, at cost, and related receivables (note 7) 220,218 212,993 Investment in TCI common stock (note 8) 104,011 104,011 Property and equipment, at cost: Land 21,662 77 Cable distribution systems 87,437 36,428 Support equipment and buildings 124,727 18,365 Computer and broadcast equipment 61,820 -- ---------- -------- 295,646 54,870 Less accumulated depreciation 39,968 19,395 ---------- -------- 255,678 35,475 ---------- -------- Franchise costs 142,789 52,808 Less accumulated amortization 5,351 1,856 ---------- -------- 137,438 50,952 ---------- -------- Excess cost over acquired net assets 255,842 17,659 Less accumulated amortization 9,818 480 ---------- -------- 246,024 17,179 ---------- -------- Other intangibles 96,873 79,428 Less accumulated amortization 65,895 40,372 ---------- -------- 30,978 39,056 ---------- -------- Other assets, at cost, net of amortization 7,715 5,172 ---------- -------- $1,436,548 830,187 ========= ======= </TABLE> (continued) F-63 <PAGE> 83 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED LIABILITIES AND STOCKHOLDERS' EQUITY <TABLE> <CAPTION> DECEMBER 31, --------------------- 1993 1992* --------- ------- AMOUNTS IN THOUSANDS <S> <C> <C> Accounts payable $ 99,680 9,985 Accrued liabilities 96,566 21,562 Accrued litigation settlements (note 10) 29,000 -- Due to TCI, including accrued interest payable (notes 11 and 16) 17,874 -- Accrued compensation relating to stock appreciation rights (note 15) 36,996 18,171 Income taxes payable 24,624 808 Debt (notes 11 and 17) 260,180 163,330 Debt to TCI (notes 11 and 17) 185,918 4,322 Deferred income taxes (note 13) 1,653 14,974 Other liabilities 1,585 3,003 --------- ------- Total liabilities 754,076 236,155 --------- ------- Minority interests in equity of consolidated subsidiaries (note 12) 174,738 10,020 Preferred stock subject to mandatory redemption requirements (including accreted dividends) (notes 8, 14 and 17): Class A Redeemable Convertible Preferred Stock, $.01 par value -- 12,720 Class B Redeemable Exchangeable Preferred Stock, $.01 par value 132,652 122,056 Class D Redeemable Voting Preferred Stock, $.01 par value 22,585 20,485 --------- ------- 155,237 155,261 --------- ------- Stockholders' equity (notes 2, 15 and 18): Class C Redeemable Exchangeable Preferred Stock, $.01 par value -- 4 Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value 17 16 Class A common stock, $1 par value 87,515 76,036 Class B common stock, $1 par value 43,339 43,340 Additional paid-in capital 236,126 323,855 Retained earnings -- -- Note receivable from related party (14,500) (14,500) --------- ------- 352,497 428,751 --------- ------- Commitments and contingencies (notes 6, 11 and 18) $1,436,548 830,187 ========= ======= </TABLE> * Restated -- see notes 6, 9 and 13. See accompanying notes to consolidated financial statements. F-64 <PAGE> 84 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992* 1991* 1991* ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA <S> <C> <C> <C> | <C> Revenue: | Net sales from home shopping services $ 942,940 -- -- | -- From TCI (note 16) 44,074 42,834 25,191 | 3,879 From cable and programming services 166,242 113,679 60,206 | 17,529 ------------ ------------ ------------ | ------------ 1,153,256 156,513 85,397 | 21,408 ------------ ------------ ------------ | ------------ Cost of sales, operating costs and | expenses: | Cost of sales 611,526 -- -- | -- Operating, selling, general and | administrative 442,142 120,851 68,237 | 24,958 Charges by TCI (note 16) 10,856 6,573 4,345 | 495 Compensation relating to stock | appreciation rights (note 15) 40,366 16,939 1,398 | -- Depreciation 24,958 3,815 2,278 | 1,246 Amortization 24,311 11,731 8,354 | 2,747 ------------ ------------ ------------ | ------------ 1,154,159 159,909 84,612 | 29,446 ------------ ------------ ------------ | ------------ Operating income (loss) (903) (3,396) 785 | (8,038) Other income (expense): | Interest expense to TCI (notes 11 and 12) (13,039) (271) -- | (98) Other interest expense (18,041) (7,058) (4,687) | (1,685) Interest income from TCI (note 12) 3,788 846 -- | -- Dividend and interest income, primarily | from affiliates 19,761 30,063 25,116 | 7,849 Premium received upon redemption of | preferred stock investment -- 8,248 -- | -- Share of earnings (losses) of affiliates, | net (note 6) 34,044 17,815 13,955 | (2,414) Gain on sale of investment 31,972 -- -- | -- Loss on transactions with TCI (note 16) (30,296) (17,826) -- | -- Minority interests in losses of | consolidated subsidiaries 289 4,734 5,618 | 3,817 Recognition of deferred gain upon | repayment of note receivable from | affiliate -- -- 16,412 | -- Litigation settlements (note 10) (7,475) -- -- | -- Other, net (1,592) (328) 83 | 42 ------------ ------------ ------------ | ------------ Earnings (loss) before income | taxes and extraordinary item 18,508 32,827 57,282 | (527) Income tax benefit (expense) (note 13) (11,522) (10,443) (16,961) | 753 ------------ ------------ ------------ | ------------ Earnings before extraordinary | item 6,986 22,384 40,321 | 226 Extraordinary item -- loss on early | extinguishment of debt, net of taxes | (note 11) (2,191) -- -- | -- ------------ ------------ ------------ | ------------ Net earnings 4,795 22,384 40,321 | 226 Dividend requirement on preferred stocks | (notes 14 and 15) (31,972) (41,631) (24,499) | -- ------------ ------------ ------------ | ------------ Net earnings (loss) attributable to common | shareholders $ (27,177) (19,247) 15,822 | 226 ============ ============ ============ | ============ Earnings (loss) per share: Net earnings (loss) before extraordinary item $ (0.19) (0.16) 0.13 Extraordinary item, net (0.02) -- -- ------------ ------------ ------------ Net earnings (loss) attributable to common shareholders $ (0.21) (0.16) 0.13 ============ ============ ============ </TABLE> * Restated -- see notes 6, 9 and 13. See accompanying notes to consolidated financial statements. F-65 <PAGE> 85 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> NOTE RECEIVABLE TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED FROM STOCK- ----------------- ----------------- PAID-IN COMBINED EARNINGS RELATED HOLDERS' CLASS C CLASS B CLASS A CLASS B CAPITAL* EQUITY (DEFICIT)* PARTY EQUITY* ------- ------- ------- ------- ---------- -------- ---------- ---------- ------- AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> PREDECESSOR COMPANIES: BALANCE AT JANUARY 1, 1991 $ -- -- -- -- -- 497,503 (60,916) -- 436,587 Restatement for change in accounting principle for income taxes -- -- -- -- -- -- 59,833 -- 59,833 ----- ------ ------ ----- ------- ------- ------- ------- ------- BALANCE AT JANUARY 1, 1991, AS RESTATED -- -- -- -- -- 497,503 (1,083) -- 496,420 Change in contributions or advances from parent -- -- -- -- -- 4,255 -- -- 4,255 Net earnings -- -- -- -- -- -- 226 -- 226 ----- ------ ------ ----- ------- ------- ------- ------- ------- BALANCE PRIOR TO TRANSACTIONS $ -- -- -- -- -- 501,758 (857) -- 500,901 ===== ====== ====== ===== ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------------------- LIBERTY: Net effect of Transactions (note 2) $ -- -- 544 171 38,239 -- -- -- 38,954 Issuance of common stock upon exercise of stock options (note 15) -- -- -- 100 25,500 -- -- (25,500) 100 Income tax effect of stock options deduction -- -- -- -- 320 -- -- -- 320 Income tax effect related to redemption of Class B Redeemable Exchangeable Preferred Stock, Series 2 -- -- -- -- 1,151 -- -- -- 1,151 Partial repayment of note receivable from related party (note 15) -- -- -- -- -- -- -- 12,195 12,195 Excess of fair value paid for assets acquired from affiliate over net book value, net of tax (note 16) -- -- -- -- -- -- (21,322) -- (21,322) Excess of fair value of assets sold to an affiliate over net book value, net of tax (note 16) -- -- -- -- 16,564 -- -- -- 16,564 Accreted dividends on all classes of preferred stock -- -- -- -- (5,516) -- (18,983) -- (24,499) Acquisition and retirement of common stock -- -- (2) -- (772) -- -- -- (774) Net earnings -- -- -- -- -- -- 40,321 -- 40,321 Retroactive effect of recapitalization (note 2) 4 16 10,306 5,151 399,242 -- (16) -- 414,703 ----- ------ ------ ----- ------- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1991 $ 4 16 10,848 5,422 474,728 -- -- (13,305) 477,713 ----- ------ ------ ----- ------- ------- ------- ------- ------- </TABLE> (continued) F-66 <PAGE> 86 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED <TABLE> <CAPTION> NOTE RECEIVABLE TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL FROM STOCK- ----------------- ----------------- PAID-IN RETAINED RELATED HOLDERS' LIBERTY (CONTINUED): CLASS C CLASS E CLASS A CLASS B CAPITAL* EARNINGS* PARTY EQUITY* - ------------------------------------------ ------- ------- ------- ------- ---------- --------- ---------- -------- AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE AT DECEMBER 31, 1991 $ 4 16 10,848 5,422 474,728 -- (13,305) 477,713 Dividends, including accretion, on all classes of preferred stock -- -- -- -- (19,247) (22,384) -- (41,631) Dividends, including accretion, on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- 28,850 -- -- 28,850 Stock split effected in the form of a dividend (note 2) -- -- 28,514 16,252 (44,766) -- -- -- Acquisition and retirement of common stock -- -- (1,348) -- (56,022) -- -- (57,370) Accrued interest on note receivable from related party -- -- -- -- -- -- (1,195) (1,195) Exchange of Class B common stock for Class A common stock -- -- 4 (4) -- -- -- -- Net earnings -- -- -- -- -- 22,384 -- 22,384 Retroactive effect of stock split effected in the form of a dividend (note 2) -- -- 38,018 21,670 (59,688) -- -- -- -- ---- ------ ------ -------- ------- ------- -------- BALANCE AT DECEMBER 31, 1992 4 16 76,036 43,340 323,855 -- (14,500) 428,751 Dividends, including accretion, on all classes of preferred stock -- -- -- -- (27,177) (4,795) -- (31,972) Dividends, including accretion, on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- 19,229 -- -- 19,229 Cash dividends on Class B preferred stock -- -- -- -- (9,743) -- -- (9,743) Issuance of Class A common stock and Class E Preferred Stock upon conversion of preferred stock (note 16) -- 1 4,406 -- 8,360 -- -- 12,767 Issuance of Class A common stock for acquisition (note 9) -- -- 8,000 -- 115,000 -- -- 123,000 Redemption of preferred stock (note 16) (4) -- -- -- (175,787) -- -- (175,791) Acquisition and retirement of common stock (note 16) -- -- (928) -- (17,611) -- -- (18,539) Exchange of Class B common stock for Class A common stock -- -- 1 (1) -- -- -- -- Accrued interest on note receivable from related party (note 15) -- -- -- -- -- -- (984) (984) Prepayment of interest on note receivable from related party (note 15) -- -- -- -- -- -- 984 984 Net earnings -- -- -- -- -- 4,795 -- 4,795 -- ---- ------ ------ -------- ------- ------- -------- BALANCE AT DECEMBER 31, 1993 $ -- 17 87,515 43,339 236,126 -- (14,500) 352,497 ==== ==== ====== ====== ======== ====== ======= ======== </TABLE> *Restated -- see notes 6, 9 and 13. See accompanying notes to consolidated financial statements. F-67 <PAGE> 87 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> PREDECESSOR COMPANIES LIBERTY ------------ ------------------------------------------ THREE MONTHS YEAR ENDED YEAR ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992* 1991* 1991* ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS (SEE NOTES 4 AND 5) <S> <C> <C> <C> <C> Cash flows from operating activities: | Net earnings $ 4,795 22,384 40,321 | 226 Adjustments to reconcile net earnings to net | cash provided (used) by operating | activities: | Depreciation and amortization 49,269 15,546 10,632 | 3,993 Compensation relating to stock | appreciation rights 40,366 16,939 1,398 | -- Payment of compensation relating to stock | appreciation rights (21,541) (166) -- | -- Share of (earnings) losses of affiliates, | net (34,044) (17,815) (13,955) | 2,414 Loss on transactions with TCI 30,296 17,826 -- | -- Premium received upon redemption of | preferred stock investment -- (8,248) -- | -- Deferred income tax (benefit) expense (12,206) 7,952 15,181 | (650) Minority interests in losses (289) (4,734) (5,618) | (3,817) Noncash interest and dividends (4,941) (7,547) (18,446) | (6,662) Gain on sale of investment (31,972) -- -- | -- Litigation settlements 7,475 -- -- | -- Payment of premium received upon | redemption of preferred stock | investment 8,248 -- -- | -- Loss on early extinguishment of debt, net | of tax 2,191 -- -- | -- Amortization of debt discount -- 520 1,483 | 455 | Recognition of deferred gain -- -- (16,412) | -- Other noncash charges 8,925 -- -- | 12 Changes in operating assets and | liabilities, net of effect of | acquisitions: | Change in receivables (15,318) (85) (1,647) | (1,695) Change in inventories (7,606) -- -- | -- Change in due to/from TCI, other than | repayment for commercial paper 22,660 (735) (4,051) | (150) Change in prepaid expenses (10,347) (606) (3,345) | (1,487) Change in payables and accruals 43,810 5,353 11,083 | 1,832 ----------- ---------- ---------- | ---------- Net cash provided (used) by | operating activities 79,771 46,584 16,624 | (5,529) ----------- ---------- ---------- | ---------- </TABLE> (continued) F-68 <PAGE> 88 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992* 1991* 1991* ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS (SEE NOTES 4 AND 5) <S> <C> <C> <C> <C> Cash flows from investing activities: | Cash paid for acquisitions $ (264,180) (57,016) -- | -- Capital expended for property and | equipment (25,476) (3,315) (3,353) | (845) Additional investments in and loans to | affiliates and others (48,155) (113,811) (21,807) | (3,368) Purchase of commercial paper from TCI -- -- (22,004) | -- Repayment for commercial paper from TCI -- 22,004 -- | -- Return of capital from affiliates 84,750 42,295 30,140 | 725 Collections on loans to affiliates and | others 20,541 5,440 38,130 | 1,610 Cash received on redemption of preferred | stock investment 104,336 -- -- | -- Proceeds from disposition of assets 53,228 36,300 20,933 | -- Cash resulting from consolidation of a | certain affiliate, net of payment | therefor -- 1,269 -- | -- Other investing activities, net (2,719) (1,336) 567 | (1,113) --------- ---------- ---------- | --------- Net cash provided (used) by | investing activities (77,675) (68,170) 42,606 | (2,991) --------- ---------- ---------- | --------- Cash flows from financing activities: | Borrowings of debt 291,314 98,066 11 | 27 Repayments of debt (317,326) (25,220) (9,758) | (2,192) Dividends on preferred stock (9,743) -- -- | -- Cash paid for redemption of preferred | stock (12,338) -- -- | -- Excess of fair value paid for assets | acquired from affiliate over net book | value -- -- (33,171) | -- Excess of fair value of assets sold to an | affiliate over net book value -- -- 23,333 | -- Purchases and retirements of common stock -- (57,370) (774) | -- Issuance of common stock -- -- 100 | -- Contributions or advances from parent -- -- -- | 8,018 Contributions by minority shareholders of | subsidiaries 41,049 2,774 3,324 | 1,893 --------- ---------- ---------- | --------- Net cash provided (used) by | financing activities (7,044) 18,250 (16,935) | 7,746 --------- ---------- ---------- | --------- Net increase (decrease) in cash | and cash equivalents (4,948) (3,336) 42,295 | (774) Cash and cash equivalents at beginning of | period 96,253 99,589 57,294 | 8,068 --------- ---------- ---------- | --------- Cash and cash equivalents at end of | period $ 91,305 96,253 99,589 | 7,294 ========= ========== ========== | ========= </TABLE> * Restated -- see notes 6, 9 and 13. See accompanying notes to consolidated financial statements. F-69 <PAGE> 89 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1992 AND 1991 (1) FORMATION AND RELATED TRANSACTIONS The accompanying consolidated financial statements include the accounts of Liberty Media Corporation, those of all majority-owned subsidiaries and entities for which there is a controlling voting interest ("Liberty" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company has made certain significant acquisitions in 1993 (see note 9). On January 27, 1994, Liberty and TCI entered into a definitive merger agreement (the "Merger Agreement"). Under the Merger Agreement, the transaction will be structured as a tax-free exchange of shares of Class A and Class B common stock of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company ("TCI/Liberty"). TCI stockholders will receive one share of TCI/Liberty common stock for each of their shares. Liberty common stockholders will receive 0.975 of a share of TCI/Liberty common stock for each of their shares. Holders of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock (the "Class E Preferred Stock") will receive one share of a substantially identical class of voting preferred stock of TCI/Liberty for each of their shares. The transaction is subject to the approval of both sets of shareholders as well as various regulatory approvals and other customary conditions. Subject to timely receipt of such approvals, which cannot be assured, it is anticipated the closing of such transaction will take place during 1994. During February 1991, Liberty, then a newly formed Delaware corporation and an indirect wholly owned subsidiary of TCI, distributed to certain security holders of TCI the transferable right (the "Class A Exchange Right") to exchange shares of TCI Class A common stock for shares of Liberty Class A common stock at an exchange rate of 160 shares of Liberty Class A common stock, after giving effect to the Stock Splits as defined in note 2, for every 16 shares of TCI Class A common stock exchanged, and the transferable right (the "Class B Exchange Right") to exchange shares of TCI Class B common stock for shares of Liberty Class B common stock at an exchange rate of 160 shares of Liberty Class B common stock, after giving effect to the Stock Splits as defined in note 2, for every 16 shares of TCI Class B common stock exchanged (the "Exchange Offers"). F-70 (continued) <PAGE> 90 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Class A Exchange Rights were issued to the holders of shares of TCI Class A common stock, on the basis of one Class A Exchange Right for every 200 shares of TCI Class A common stock held of record, and to the holders of certain options and convertible debt securities that are exercisable for or convertible into TCI Class A common stock on the basis of one Class A Exchange Right for every 200 shares of TCI Class A common stock issuable on exercise or conversion of such securities. The Class B Exchange Rights were issued to the holders of shares of TCI Class B common stock, on the basis of one Class B Exchange Right for every 200 shares of TCI Class B common stock held of record, and to the holders of certain options to purchase TCI Class B common stock on the basis of one Class B Exchange Right for every 200 shares of TCI Class B stock issuable on exercise of the options. On March 28, 1991, the Company issued 87,136,960 shares of Liberty Class A common stock and 27,377,120 shares of Liberty Class B common stock, after giving effect to the Stock Splits as defined in note 2, in the consummation of the Exchange Offers in exchange for 8,713,696 shares of TCI Class A common stock and 2,737,712 shares of TCI Class B common stock (the "Exchange"). Also, on March 28, 1991, various subsidiaries of TCI contributed their interests in certain cable television programming businesses and cable television systems to the Company (the "Contribution") and the Company issued to said subsidiaries of TCI shares of several different classes and series of the Company's preferred stocks with an aggregate issue price of $624,295,000; and the one share of Liberty common stock owned by TCI on the date thereof was redeemed for its par value. In these notes to the consolidated financial statements, any reference to TCI in connection with the issuance of the Company's preferred stock includes subsidiaries of TCI. (2) BASIS OF PRESENTATION For financial reporting purposes, the Exchange and the Contribution (the "Transactions") are deemed to be effective on March 31, 1991. The statements of operations and cash flows for the years ended December 31, 1993 and 1992 and the nine months ended December 31, 1991 present the results of operations and cash flows of the Company after giving effect to the Transactions. The accompanying statements of operations and cash flows for the three months ended March 31, 1991, representing a combination of certain programming interests and cable television assets of TCI (referred to herein as the "Predecessor Companies"), are presented for comparative purposes. F-71 (continued) <PAGE> 91 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's accounting basis in each share of TCI common stock acquired in the Exchange is $16 (the average of the high and low sales price for shares of both classes of TCI common stock on February 6, 1991, the record date of the Exchange Offers). The Company's interests in the cable television programming businesses and cable television systems received in the Contribution were accounted for utilizing the predecessor cost of TCI. The excess of the aggregate issue amount of the preferred stock issued to TCI over the restated historical basis (see notes 6, 9, and 13) in the net assets received in the Contribution is accounted for by the Company similar to a "preferential dividend" by deducting such amount from stockholders' equity. The following table reflects the recapitalization (after giving effect to the restatements described in notes 6, 9 and 13) resulting from the Transactions (amounts in thousands): <TABLE> <S> <C> Combined net equity of Predecessor Companies prior to Transactions $ 500,901 Liberty common stock issued in the Exchange 183,223 Redeemable preferred stock issued in connection with the Contribution (624,295) Deferred tax liability for temporary difference arising from difference in book and tax basis of TCI common stock received in the Exchange (31,458) Cash contributed by TCI 10,583 -------- Initial common stockholders' equity of Liberty subsequent to the Transactions $ 38,954 ======== </TABLE> The subsidiaries of TCI which were contributed to the Company are separately operated. As such, there were no material expenses incurred by TCI on behalf of these subsidiaries. Therefore, no allocation of expenses (other than the allocation of income taxes described in note 13) has been reflected in the financial statements of the Predecessor Companies. On March 12, 1992, the shareholders of the Company voted to adopt a plan of recapitalization (the "Recapitalization") by approving amendments to the Company's Restated Certificate of Incorporation. The effect of the Recapitalization has been reflected retroactively to December 31, 1991. F-72 (continued) <PAGE> 92 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the Recapitalization, among other things, each outstanding share of Liberty's common stock was reclassified and exchanged into 20 shares of the same class of Liberty common stock and two shares of Class E Preferred Stock. Subsequently, Liberty effected the following stock splits each in the form of a stock dividend (together with the Recapitalization, the "Stock Splits"): (i) On December 3, 1992, each stockholder received three additional shares for each share they held of record on November 23, 1992; and (ii) on March 17, 1993 each stockholder received one additional share for each share they held of record on March 10, 1993. The share amounts throughout the notes to the consolidated financial statements have been adjusted to give effect to the Stock Splits. Certain amounts have been reclassified for comparability with the 1993 presentation. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash equivalents consist of investments which are readily convertible into cash and have original maturities of three months or less. TRADE AND OTHER RECEIVABLES A sales program with a deferred payment arrangement, "flex-pay," allows customers to charge their purchase to third party credit cards in installments, generally over three consecutive months. Flex-pay receivables at December 31, 1993 were $15,547,000. INVENTORIES, NET Inventories, consisting of products held for sale, are valued at the lower of cost or market, cost being determined using the first-in, first-out method. Cost includes freight, certain warehousing costs and other allocable overhead. Market is determined on the basis of replacement cost or net realizable value, giving consideration to obsolescence and other factors. The inventory balances are presented net of a reserve of $25,246,000 at December 31, 1993. INVESTMENTS Investments in which the ownership interest is less than 20% are generally carried at cost. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, F-73 (continued) <PAGE> 93 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and guarantees for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of purchase adjustments. PROPERTY AND EQUIPMENT Property and equipment, including significant improvements, is stated at cost which includes acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. Interest capitalized during the periods presented was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 5 to 15 years for cable distribution systems, 3 to 40 years for support equipment and buildings and 6 to 13 years for computer and broadcast equipment. Repairs and maintenance and any gains or losses on disposition of assets in their entirety are included in operations. However, recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. FRANCHISE COSTS Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by Liberty in obtaining franchises are being amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. EXCESS COST OVER ACQUIRED NET ASSETS Excess cost over acquired net assets consists of the difference between the cost of acquiring programming entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over 30 years. F-74 (continued) <PAGE> 94 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER INTANGIBLE ASSETS Other intangible assets consist of amounts assigned to covenants not to compete and amounts (in excess of tangible assets) assigned to sports program rights agreements, affiliate agreements and distribution agreements. The amounts assigned to these agreements are amortized over the respective lives of the agreements ranging from 1 to 10 years. NET SALES Net Sales include merchandise sales and shipping and handling revenues, and are reduced by incentive discounts and sales returns to arrive at net sales. The Company's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days after the date of sale. An allowance for returned merchandise is provided based upon past experience. RESTATED FINANCIAL STATEMENTS FOR IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 109, "ACCOUNTING FOR INCOME TAXES" Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("Statement No. 109"), "Accounting for Income Taxes" and has applied the provisions of Statement No. 109 retroactively to Liberty and the Predecessor Companies to January 1, 1986. The accompanying 1992 and 1991 consolidated financial statements and related notes have been restated to reflect the implementation of Statement No. 109. See note 13. PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Loss per common share attributable to common shareholders for the years ended December 31, 1993 and 1992 was computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding (130,574,056 and 123,391,426, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Primary earnings per common and common equivalent share attributable to common shareholders for the nine months ended December 31, 1991 was computed by dividing net earnings attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding of 120,682,737. F-75 (continued) <PAGE> 95 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fully diluted earnings per common and common equivalent share attributable to common shareholders was computed by dividing earnings attributable to common shareholders by the weighted average number of common and common equivalent shares outstanding (120,878,097 for the nine months ended December 31, 1991). Shares issuable upon conversion of the Class A Redeemable Convertible Preferred Stock (the "Class A Preferred Stock") have not been included in the 1991 computation of weighted average shares outstanding as their inclusion would be anti-dilutive. (4) SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS RELATING TO THE TRANSACTIONS <TABLE> <CAPTION> AMOUNTS IN THOUSANDS -------------------- <S> <C> Cash Prior to the Transactions $ 7,294 Repayment of amounts due from TCI and cash contributed by TCI 50,000 -------- Cash subsequent to the Transactions $ 57,294 ======== </TABLE> (5) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest was $20,354,000, $4,373,000, $2,219,000 and $1,493,000 for the years ended December 31, 1993 and 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. Cash paid for income taxes during the years ended December 31, 1993 and 1992 was $6,621,000 and $3,336,000, respectively. Cash paid for income taxes during the remaining periods was not material. F-76 (continued) <PAGE> 96 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant noncash investing and financing activities: <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> Cash paid for acquisitions: | Fair value of assets acquired $ 686,200 64,602 -- | -- Net liabilities assumed (197,536) (7,586) -- | -- Deferred tax asset recorded upon | acquisition 1,115 -- -- | -- Common stock issued for acquisition (123,000) -- -- | -- Noncash contribution for acquisition (32,673) -- -- | -- Minority interests in equity of acquired | entities (69,926) -- -- | -- --------- ---------- --------- | --------- $ 264,180 57,016 -- | -- ========= ========== ========= | ========= Cash resulting from consolidation of a | certain affiliate net of payment | therefor: | Fair value of assets acquired $ -- (26,186) -- | -- Net liabilities assumed -- 27,485 -- | -- Payment for additional interest -- (30) -- | -- --------- ---------- --------- | --------- $ -- 1,269 -- | -- ========= ========== ========= | ========= Liberty Class A common stock issued upon | conversion of preferred stock $ 12,767 -- -- | -- ========= ========== ========= | ========= Note issued in exchange for Liberty Class A | common stock $ 18,539 -- -- | -- ========= ========== ========= | ========= Notes issued in redemption of preferred | stocks $ 163,057 -- -- | -- ========= ========== ========= | ========= Accreted and unpaid preferred stock | dividends $ 30,348 41,631 24,499 | -- ========= ========== ========= | ========= Redemption of preferred stock in exchange | for TCI Class A common stock $ -- -- 91,611 | -- ========= ========== ========= | ========= Note received upon exercise of stock option $ -- -- 25,500 | -- ========= ========== ========= | ========= Note issued in exchange for investment in | affiliate $ -- -- 4,322 | -- ========= ========== ========= | ========= TCI common stock received as partial | repayment of note and interest receivable $ -- -- 12,195 | -- ========= ========== ========= | ========= Partial repayment of note receivable with | common stock of an affiliate $ -- -- 18,867 | -- ========= ========== ========= | ========= Deferred tax liability recorded as a | reduction to paid-in capital $ -- -- 5,298 | -- ========= ========== ========= | ========= Deferred tax asset recorded as an increase | to retained earnings $ -- -- 11,849 | -- ========= ========== ========= | ========= Transfers of assets (other than in the | Contribution), net of liabilities, from | TCI $ -- -- -- | 3,763 ========= ========== ========= | ========= </TABLE> (continued) F-77 <PAGE> 97 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INVESTMENTS IN AFFILIATES Summarized unaudited financial information for affiliates accounted for under the equity method, which operate in three related industries (see note 19) is as follows: <TABLE> <CAPTION> DECEMBER 31, DECEMBER 31, 1993 1992 ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> Combined Financial Position Property and equipment, net $ 649,901 661,546 Franchise costs, net 678,232 623,904 Investments 362,748 243,675 Feature film inventory 112,183 60,217 Cable distribution rights 99,579 116,557 Excess costs, other intangibles and other assets 700,851 620,582 ---------- --------- Total assets $ 2,603,494 2,326,481 ========== ========= Debt $ 1,633,207 1,613,345 Due to Liberty 4,254 3,848 Feature film rights payable 104,096 38,578 Other liabilities 506,072 437,249 Owners' equity 355,865 233,461 ---------- --------- Total liabilities and equity $ 2,603,494 2,326,481 ========== ========= </TABLE> <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> Combined Operations | Revenue $ 2,131,210 1,834,965 952,889 | 404,221 Operating expenses (1,595,103) (1,383,782) (624,087) | (311,599) Depreciation and amortization (199,304) (202,235) (165,212) | (47,326) ---------- ---------- --------- | --------- Operating income 336,803 248,948 163,590 | 45,296 Interest expense (98,933) (120,618) (129,909) | (42,296) Other, net (116,686) (73,174) (28,802) | (7,262) ---------- ---------- --------- | --------- Net earning (loss) $ 121,184 55,156 4,879 | (4,262) ========== ========== ========= | ========== </TABLE> (continued) F-78 <PAGE> 98 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the carrying value of the Company's investments accounted for under the equity method, including related receivables: <TABLE> <CAPTION> December 31, December 31, 1993 1992 ---------- ---------- AMOUNTS IN THOUSANDS <S> <C> <C> QVC, Inc. ("QVC") $ 60,397 58,509 Kansas City Cable Partners ("KCCP") (33,618) 35,860 US Cable of Lake County ("Lake County") 25,650 25,013 Columbia Associates, L.P. ("Columbia") 7,720 12,975 Lenfest Communications, Inc. ("Lenfest") 16,508 23,217 Mile Hi Cablevision Associates, Ltd. ("Mile Hi") (see note 9) --- 32,689 The Cable Partnerships of Country Cable and Knight-Ridder Cablevision, Inc. (SCI Cable Partners and TKR Cable Company) (collectively referred to as "TKR") 34,270 22,912 Sunshine Network Joint Venture ("Sunshine") 9,131 12,202 American Movie Classics Company ("AMC") (11,026) (22,125) Sioux Falls Cable Television ("Sioux Falls") (11,675) (13,463) SportsChannel Chicago Associates ("Sports") 32,561 31,385 Home Team Sports Limited Partnership ("HTS") 4,610 10,958 Other investments 17,012 9,403 -------- -------- $ 151,540 239,535 ======== ======== </TABLE> The common stock of QVC is publicly traded. At December 31, 1993, based on the trading price of QVC common stock, the Company's investment in QVC had a market value of $402,543,000 (which exceeded its cost by $342,146,000) (excluding the effect of the Diller option described below). F-79 (continued) <PAGE> 99 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the Company's share of earnings (losses) of each of the aforementioned affiliates: <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> QVC $ 13,978 13,217 6,911 | (1,260) KCCP 10,522 8,805 4,869 | 1,498 Lake County 637 (1,050) -- | -- Columbia (5,256) (10,849) (881) | (1,234) Lenfest (6,710) (8,843) (3,588) | (1,197) Mile Hi (380) (2,337) (1,480) | (746) TKR 11,358 10,870 5,533 | 142 Sunshine (957) (1,055) (1,833) | (433) AMC 11,313 7,839 5,911 | 1,948 Sioux Falls 1,788 1,532 1,229 | 598 Sports 5,859 3,348 -- | -- HTS (7,076) 748 271 | (162) Other (1,032) (4,410) (2,987) | (1,568) ------- --------- -------- | --------- $ 34,044 17,815 13,955 | (2,414) ======= ========= ======== | ========= </TABLE> (continued) F-80 <PAGE> 100 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On November 11, 1993, Liberty entered into an agreement with the staff of the Federal Trade Commission pursuant to which Liberty agreed to divest all of its equity interests in QVC during an 18 month time period if QVC was successful in its offer to buy Paramount Communications, Inc. ("Paramount") and not to vote or otherwise exercise or influence control over QVC until such time as QVC withdrew its offer for Paramount. Simultaneously, Liberty agreed to withdraw from a stockholders agreement pursuant to which Liberty and certain other stockholders exercised control over QVC (the "Stockholders' Agreement"). On February 15, 1994, QVC terminated its offer for Paramount. Upon termination of such offer, Liberty has the right to be reinstated as a party to the Stockholders' Agreement so long as such option is exercised within 90 days after such termination. However, Liberty has not yet determined if it will rejoin the control group under the Stockholders' Agreement. On November 16, 1993, Liberty sold 1,690,041 shares of common stock of QVC to Comcast Corporation ("Comcast") for aggregate consideration of approximately $31,461,000. The sale to Comcast reduced Liberty's interest in QVC common stock (on a fully diluted basis) from 21.6% to 18.5%. Liberty continues to account for its investment in QVC under the equity method, although it no longer exercises significant control over such affiliate, pending the determination of whether it will rejoin the control group under the Stockholders' Agreement. Liberty will change to the cost method of accounting in the event it elects not to be reinstated as a party to the Stockholders' Agreement. Certain of the shares of stock of QVC owned by Liberty are subject to repurchase by QVC in the event that commitments to carry its programming are not met. Approximately 46% of the shares which the Company holds or would hold upon exercise or conversion of convertible securities, are "unvested" and are subject to such repurchase rights by QVC. QVC's repurchase rights with respect to QVC securities held by the Company are exercisable over a period of time, ending in the year 2004, if certain carriage commitments made by Satellite Services, Inc., ("SSI"), an indirect wholly owned subsidiary of TCI, are not met. Under the terms of a certain agreement pursuant to which the Company acquired from TCI a substantial number of the QVC securities it now beneficially owns, TCI has agreed to reimburse the Company in the event QVC exercises its right to repurchase certain of the "unvested" shares. Such reimbursement will be based on the value assigned such shares when the Company acquired them from TCI, which is substantially below the current market price of such shares. Pursuant to an agreement with Comcast and Mr. Barry Diller ("Diller"), Liberty may be required to sell approximately 1.63 million shares of QVC common stock to Diller. The purchase price under the Diller purchase right is $34.082 per share. F-81 (continued) <PAGE> 101 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1992, AMC distributed $39,000,000 to the Company. The Company recorded the amount received as a reduction of its investment in AMC. On September 16, 1993, Liberty announced that one of its subsidiaries received notice from Rainbow Program Enterprises ("Rainbow") that Rainbow had elected to purchase Liberty's 50% partnership interest in AMC under the terms of a buy/sell provision contained in the AMC partnership agreement. Liberty expects to receive net pre tax cash proceeds of approximately $170 million from the sale and an additional $5 million from a buy-out of Liberty's consulting agreement with AMC. The $170 million cash proceeds consist of $195 million sales price reduced by Liberty's proportionate share of AMC's debt. On March 9, 1994 Liberty and Rainbow agreed to a postponement of the closing of the sale until May 31, 1994. Liberty and Rainbow are continuing their discussions regarding other possible transactions which, if consummated, may result in the parties amending or terminating the sale by Liberty of its AMC partnership interest. On October 1, 1993 KCCP made an $80,000,000 distribution to the Company. The Company recorded the amount received as a reduction of its investment in KCCP. Approximately $63,174,000 was used to repay a note payable to KCCP, including accrued interest. TKR and Lenfest adopted Statement No. 109 in 1993 and have applied the provisions of Statement No. 109 on a retroactive basis. Liberty's (and the Predecessor Companies') investment, results of operations and stockholders' equity were adjusted retroactively to reflect Liberty's share of the restated results of operations of TKR and Lenfest. Upon restatement of Liberty's (and the Predecessor Companies') share of earnings (losses) of Lenfest and TKR, the Company's net earnings was increased by approximately $4,562,000 for the year ended December 31, 1992. The Company's net earnings was reduced through a charge of approximately $1,966,000 and $656,000 for the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. During 1992, the Company increased its investment in Lenfest and adopted the equity method of accounting for its investment in Lenfest, which was previously accounted for under the cost method. Accordingly, Liberty's (and the Predecessor Companies') investment, results of operations and stockholders' equity were adjusted retroactively to reflect the equity method of accounting. As of December 31, 1992, the Company reduced the carrying amount of its investment in Lenfest by $56 million. Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. F-82 (continued) <PAGE> 102 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) OTHER INVESTMENTS Other investments, accounted for under the cost method, and related receivables, are summarized as follows: <TABLE> <CAPTION> December 31, ---------------- 1993 1992 ------ ------ AMOUNTS IN THOUSANDS <S> <C> <C> Limited partnership interest and related receivables $ 3,647 43,109 Marketable equity securities (a) 25,811 8,841 Convertible debt, accrued interest and preferred stock investment 46,457 46,459 Note receivable including accrued interest (b) 132,303 --- Receivable for redemption of preferred stock investment --- 112,583 Other investments and related receivables 12,000 2,001 -------- ------- $220,218 212,993 ======== ======= </TABLE> (a) The marketable equity securities, which are being accounted for at the lower of cost or market, had an aggregate market value of $111,549,000 and $55,825,000 (which exceeded cost by $85,738,000 and $46,984,000) at December 31, 1993 and December 31, 1992, respectively. (b) In December 1992, Home Shopping Network, Inc. ("HSN"), a cost investment of the Company at that time and a consolidated subsidiary of the Company at December 31, 1993 (see note 9), distributed the capital stock of Silver King Communications, Inc. ("SKC"), formerly a wholly owned subsidiary of HSN, to their stockholders of record, including Liberty. This transaction was treated as a stock dividend by HSN. At the time of said dividend, intercompany indebtedness in an amount of approximately $135 million owed by SKC to HSN was converted into a secured long-term senior loan to SKC (a cost investment of the Company). F-83 (continued) <PAGE> 103 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Such loan is evidenced by a promissory note, the terms of which are governed by a loan agreement and the liability evidenced thereby is secured by substantially all of SKC's assets, and bears interest on the unpaid principal amount at 9.5% per annum. The note is payable in equal monthly installments of principal and interest over fifteen years. Management of the Company estimates that the market value, calculated utilizing a multiple of cash flow approach or publicly quoted market prices, of all of the Company's other investments aggregated $406 million and $338 million at December 31, 1993 and 1992, respectively, including amounts previously disclosed for marketable equity securities. No independent external appraisals were conducted for those assets which were valued utilizing a multiple of cash flow approach. In May 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," ("Statement No. 115") effective for fiscal years beginning after December 15, 1993. Under the new rules, debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available-for-sale or trading and carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried as a separate component of stockholders' equity. Unrealized holding gains and losses on securities classified as trading are reported in earnings. Presently, the Company has no debt securities. Marketable equity securities are currently reported at the lower of cost or market and net unrealized losses are reported in earnings. The Company will apply the new rules starting in the first quarter of 1994. Application of the new rules will result in an estimated increase of $54,015,000 in stockholders' equity as of January 1, 1994, representing the recognition of unrealized appreciation, net of taxes, for the Company's investment in equity securities determined to be available-for-sale, previously carried at lower of cost or market. However, the unrealized holding gain does not include any unrealized gain associated with the Company's investment in TCI common stock as such common stock is deemed to be restricted stock. Restricted stock, under Statement No. 115, is not considered to have a readily determinable fair value. See note 8. F-84 (continued) <PAGE> 104 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) INVESTMENT IN TCI COMMON STOCK The Company holds 2,988,009 shares of TCI class A common stock and 3,537,712 shares of TCI class B common stock. At December 31, 1993 and 1992, the market value of the Company's investment in TCI amounted to $209,785,000 and $140,440,000, respectively, based on its publicly quoted market price. Certain of the TCI common stock is held in escrow for delivery upon exchange of the Liberty Class B Redeemable Exchangeable Preferred Stock (the "Class B Preferred Stock"). Pending such exchange and provided that the Company is not in default of its obligations to redeem, exchange or purchase shares of the Class B Preferred Stock, the Company has the right to vote the TCI common stock held in escrow on all matters submitted for a vote to the holders of TCI common stock. (9) ACQUISITIONS On February 11, 1993, Liberty acquired 20,000,000 shares of the Class B Stock of HSN from RMS Limited Partnership ("RMS") for $58,000,000 in cash and 8,000,000 shares of Liberty Class A common stock. Liberty had previously acquired shares of common stock of HSN in 1992. Such common stock acquired in 1992 and the Class B Stock acquired represented 23.5% of the common equity and 65.6% of the controlling voting interest of HSN as of the date of acquisition. As a result of the acquisition of the controlling voting interest, HSN became a consolidated subsidiary of the Company for financial reporting purposes. On June 1, 1993, Liberty completed the purchase of approximately 16,000,000 shares of HSN common stock at a price of $7 per share. The shares had been tendered pursuant to a tender offer initiated by the Company in April 1993. On March 15, 1993, Mile Hi Cable Partners, L.P. ("New Mile Hi") completed the acquisition of all the general and limited partnership interests in Mile Hi, the owner of the cable television system serving Denver, Colorado. New Mile Hi is a limited partnership formed among Community Cable Television ("CCT") a general partnership owned 50.001% by the Company and 49.999% by TCI, (78% limited partnership interest), Daniels Communications, Inc. ("DCI") (1% limited partner) and P & B Johnson Corp. ("PBJC") (21% general partnership interest), a corporation controlled by Robert L. Johnson, a member of the Company's Board of Directors. New Mile Hi is a consolidated subsidiary of the Company for financial reporting purposes. Liberty's investment in Mile Hi, which was previously accounted for under the cost method, was received from TCI F-85 (continued) <PAGE> 105 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Transactions. As a result of the aforementioned acquisition of Mile Hi, Liberty's (and the Predecessor Companies') investment, results of operations and stockholders' equity were adjusted retroactively to reflect Liberty's share of historical losses of Mile Hi adjusted for the amortization of the excess cost over Liberty's share of Mile Hi's historical net book value. In addition, Liberty's (and the Predecessor Companies') investment, results of operations and stockholders' equity were adjusted retroactively to reflect previously reserved interest income on a loan receivable of approximately $50 million (including accrued interest) (the "Mile Hi Note") at the time of consolidation of New Mile Hi. The Mile Hi Note was eliminated upon consolidation. Upon restatement of Liberty's share of historical losses of Mile Hi, net of the restatement of previously reserved interest income on the Mile Hi Note, the Company's net earnings was increased by approximately $1,397,000, $1,111,000 and $220,000 for the year ended December 31, 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. Prior to the acquisition, the Company, through a wholly owned subsidiary, indirectly owned a 32.175% interest in Mile Hi through its ownership of a limited partnership interest in Daniels & Associates Partners Limited ("DAPL"), one of Mile Hi's general partners. DAPL was liquidated on March 12, 1993, at which time a subsidiary of Liberty (and partner in DAPL) received a liquidating distribution consisting of its proportionate interest in DAPL's partnership interest in Mile Hi, representing the aforementioned 32.175% interest in Mile Hi. The subsidiary of Liberty also received the Mile Hi Note in novation of a loan receivable from DAPL in an equal amount. The subsidiary then was merged into Liberty Cable Partner, Inc. ("LCP") a wholly owned subsidiary of the Company and a general partner of CCT. The total value of the acquisition was approximately $180 million. Of that amount, approximately $70 million was in the form of Mile Hi debt paid at the closing. Another $50 million was in the form of the Mile Hi Note, which debt was assumed by New Mile Hi and then by CCT. Of the remaining $60 million, approximately $40 million was paid in cash to partners in Mile Hi in exchange for their partnership interests. The remaining $20 million of interest in Mile Hi was acquired by New Mile Hi through the contribution by LCP to CCT and by CCT to New Mile Hi of the 32.175% interest in Mile Hi received in the DAPL liquidation and by DCI's contribution to New Mile Hi of a 0.4% interest in Mile Hi. Of the $110 million in cash required by New Mile Hi to complete the transaction, $105 million was loaned to New Mile Hi by CCT and $5 million was provided by PBJC as a capital contribution to New Mile Hi. Of the $5 million contributed by PBJC, F-86 (continued) <PAGE> 106 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately $4 million was provided by CCT through loans to Mr. Johnson and trusts for the benefit of his children. CCT funded its loans to New Mile Hi and the Johnson interests by borrowing $93 million under its revolving credit facility and by borrowing $16 million from TCI in the form of a subordinated note. The acquisitions of HSN and all the general and limited partnership interests in Mile Hi were accounted for by the purchase method. Accordingly, the results of operations of such acquired entities have been consolidated with those of the Company since their respective dates of acquisition. On a pro forma basis the Company's revenue would have been increased by approximately $111,208,000 and $1,106,394,000 for the years ended December 31, 1993 and 1992, respectively, had the acquisition occurred prior to January 1, 1992. Earnings before extraordinary item, on a pro forma basis would have been decreased by approximately $9,378,000 and $25,074,000 for the years ended December 31, 1993 and 1992, respectively. Net loss attributable to common shareholders and loss per common share would have increased by $14,429,000 and $0.11, respectively, for the year ended December 31, 1993. Net loss attributable to common shareholders and loss per common share would have increased by $24,508,000 and $0.19, respectively for the year ended December 31, 1992. The foregoing unaudited pro forma financial information was based upon historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of the results had the Company operated the acquired entities since prior to January 1, 1992. F-87 (continued) <PAGE> 107 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) LITIGATION SETTLEMENTS The Company has reached agreements in principle to settle certain lawsuits related to HSN. Under the terms of the settlements, the Company will pay approximately the following (amounts in thousands): <TABLE> <S> <C> Civil actions pending Court approval in Delaware and Colorado to be paid by the parent $ 13,000 Civil actions pending Court approval in the United States District Court for the Middle District of Florida to be paid by HSN 8,500 Settlement to Western Hemisphere, Inc. to be paid by HSN 4,500 Settlements to be paid by HSN which will be reimbursed by Roy M. Speer, former chairman of the board of HSN 3,000 -------- Accrued litigation settlements $ 29,000 ======== </TABLE> Any attorneys' fees awarded by the Courts to the plaintiffs' attorneys in such actions will be paid out of the above amounts. The portion of the accrued litigation settlements to be paid by the parent which will be paid to the class who sold shares of HSN common stock to Liberty as part of the June 1, 1993 purchase (approximately $5.5 million) (see note 9), was capitalized as additional acquisition costs. The portion of the accrued litigation settlements to be paid by HSN were capitalized by the Company as additional acquisition costs. A receivable amounting to $3 million has been recorded by the Company in anticipation of reimbursement by Roy M. Speer. F-88 (continued) <PAGE> 108 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) DEBT Debt is summarized as follows: <TABLE> <CAPTION> Weighted average December 31, interest rate at ------------ December 31, 1993 1993 1992 ----------------- -------- -------- AMOUNTS IN THOUSANDS <S> <C> <C> <C> Parent company debt: Note payable to TCI (a) 11.6% $ 76,952 --- Note payable to TCI (b) 6.0% 104,644 --- ---------- --------- Debt of subsidiaries: 181,596 --- Note payable to TCI (c) 6.0% 4,322 4,322 ---------- --------- Debt due TCI 185,918 4,322 ---------- --------- Note payable to bank (d) 7.3% 5,815 6,257 Note payable to bank (e) 4.4% 23,425 25,954 Note payable to bank (f) 4.7% 79,500 25,000 Liability to seller (g) --- 19,637 19,637 Unsecured note payable (h) 6.0% 545 1,635 Convertible note payable (i) 10.0% 13,131 12,121 Notes payable to bank (j) 5.5% 110,000 --- Note payable to affiliate --- --- 61,391 Note payable to bank --- --- 7,000 Other debt, with varying rates and maturities 8.9% 8,127 4,335 ---------- --------- 260,180 163,330 ---------- --------- $ 446,098 167,652 ========== ========= </TABLE> (a) Payable by Liberty. The notes payable are due on February 1, 1997 and are secured by the Company's partnership interest in CCT and in the Mile Hi Note. (b) Payable by Liberty. These notes payable were amended to extend the due date from December 3, 1993 to the earlier of June 30, 1994 or ten days following termination of the proposed F-89 (continued) <PAGE> 109 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS business combination of TCI and Liberty (see note 1). From and after maturity, the unpaid amount of these notes will bear interest at 10% per annum, payable on demand. (c) Payable by LMC Chicago Sports, Inc. This note is payable on December 31, 1996 and is secured by the Company's general partnership interest in Sports. (d) Payable by Command Cable of Eastern Illinois Limited Partnership ("Command"). This loan is payable in quarterly installments as defined in the related loan agreement, with a final payment on September 30, 1994. The quarterly installments consist of a fixed amount per quarter plus additional principal payments based on a percentage of the previous quarter's cash flow. The loan agreement contains provisions for the maintenance of certain financial ratios and other matters. At December 31, 1993, Command did not meet certain provisions of the note and the bank has the right to declare the loan in default. Command has requested a waiver of these items from the bank. All of Command's cable television assets are pledged as collateral under this loan agreement. The Company's investment in Command has been reduced to zero and therefore a default by Command under its loan agreement will have no material effect on Liberty. (e) Payable by US Cable of Paterson ("Paterson"). This term loan has quarterly principal payments in increasing amounts through December 31, 1996. In addition to the scheduled quarterly payments, an annual payment may be required based upon the prior year's excess cash flow, as defined. The terms of the agreement include, in addition to other requirements, compliance with certain financial ratios and limitations on capital expenditures and leases. The loan is secured and collateralized by the assets of Paterson, the franchise rights, and the assignment of its various leases and contracts. Paterson entered into an interest rate swap agreement to reduce the impact of changes in interest rates on its floating rate bank loan payable. This agreement effectively fixes the interest rate on $6 million of its floating rate debt to 8.25% plus the adjustment based on the results of a certain financial ratio, as discussed above. The agreement which had an expiration date of April 18, 1995 was F-90 (continued) <PAGE> 110 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terminated on December 29, 1993 at a cost of $403,000 including approximately $60,000 of accrued interest through the termination date. Such amounts are included in interest expense in the 1993 consolidated statement of operations. (f) Payable by CCT. This revolving line of credit provides for borrowings of up to $145,000,000 through March 31, 1995. Such facility provides for mandatory commitment reduction payments through December 31, 1999. The revolving credit facility permits CCT to borrow from the banks to fund acquisitions of cable television systems and for other general purposes, subject to compliance with the restrictive covenants (including ratios of debt to cash flow and cash flow to interest expense) contained in the loan agreement governing the facility. (g) Payable by ARC. The liability represents the discounted amount estimated under an "Earnout Rights" agreement. The agreement requires annual payments during a five-year period contingent upon the operations from ARC's "DBS Business," as defined in the agreement. The annual payments equal 86% of the Earnings Before Depreciation, Interest and Income Taxes ("EBDIT"), as defined of the DBS Business over the base EBDIT. The calculated amount required under the agreement is $20 million. At December 31, 1992, the estimated liability was revised to the calculated amount under the agreement. This amount is due on April 30, 1994. ARC has received a $30,000,000 financing commitment from a bank and intends to use a portion of that commitment to repay this obligation. The financing commitment is subject to final documentation, and includes covenants to maintain certain financial ratios and other restrictions. The discount was being deferred and amortized over the life of the agreement using the effective interest method. Amortization of the discount amounted to $520,000, $1,483,000 and $455,000 for the year ended December 31, 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. (h) Payable by LMC Regional Sports, Inc. This note is payable in equal quarterly installments through June 30, 1994. F-91 (continued) <PAGE> 111 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (i) Payable by ARC. These notes are due December 30, 2000. The notes are convertible, at the option of the holders, into an 11.65% limited partnership interest in ARC. (j) Payable by HSN. These notes payable consist of a $60 million unsecured senior term loan, $25 million of which matures on each of June 15, 1994 and 1995 and $10 million of which matures on December 15, 1995; and a $50 million unsecured senior term loan, $25 million of which matures on each of January 31, 1997 and 1998; and a $40 million three-year senior unsecured revolving credit facility. The revolving credit facility provides for yearly extension options at the request of HSN and is subject to the approval of participating banks. At December 31, 1993, $40 million of the senior revolving credit facility remains available. Restrictions contained in the senior term loans and revolving credit agreement include, but are not limited to, limitations on the encumbrance and disposition of assets and the maintenance of various financial covenants and ratios. In February and April 1993, HSN drew $140 million under the above mentioned bank financing agreements. These proceeds, together with available working capital of HSN, were used to retire $143,252,000 principal amount of the Unsecured 11-3/4% Senior Notes, due October 15, 1996 (the "Senior Notes"), at 104% of the principal amount plus accrued interest to the redemption date. During August and September of 1993, HSN repaid $30 million of the outstanding balance on the revolving credit facility. In 1993, HSN entered into interest rate exchange agreements with certain financial institutions to limit its exposure from interest rate volatility. These agreements have notional principal amounts aggregating $115 million, of which $25 million, $35 million and $30 million of the senior term loans, have fixed maximum variable interest rates if the London Interbank Offering Rate ("LIBOR") exceeds 6% until June 1994, 6% until June 1995 and 7% until October 1995, respectively. The senior unsecured revolving credit facility has a principal amount of $25 million with a fixed maximum variable interest rate if LIBOR exceeds 6% until April 1994. The three month LIBOR rate at December 31, 1993 was 3.3125%. On May 11, 1993, HSN retired the remaining $16,915,000 principal balance of its Unsecured 5-1/2% Convertible Subordinated Debentures, due April 22, 2002 (the F-92 (continued) <PAGE> 112 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS "Debentures"), at 101.83% of the principal amount plus accrued interest to the redemption date. The Company recognized extraordinary losses on the early extinguishment of the Senior Notes and the Debentures. Certain of Liberty's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds of such subsidiaries to the parent company in the form of loans, advances or cash dividends. Subsidiaries of Liberty pay fees, generally 1/4% to 3/8% per annum, on the average unborrowed portion of the total amount available for borrowings under their bank credit facilities. Debt maturities are as follows: 1994 - $143,454,000; 1995 - $38,909,000; 1996 - $21,834,000; 1997 - $109,941,000 and 1998 - $67,014,000. (12) PROMISSORY NOTES CCT has a note payable to TCI of approximately $58 million, including accrued interest, due January 1, 2000. The note bears interest at 8% per annum. The note, net of payments made, is reflected as an addition to minority interest in the accompanying consolidated financial statements due to its related party nature. Additionally, CCT has approximately $36 million, including accrued interest, in notes receivable from TCI due January 1, 2000. The notes receivable earn interest at 11.6% per annum. These notes receivable are reflected as a reduction of minority interest in the accompanying consolidated financial statements as they represent subscription notes receivable. (13) INCOME TAXES Liberty files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which the Company owns less than 80% each file a separate income tax return. Liberty and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. The Predecessor Companies were included in the consolidated Federal income tax return of TCI. Income tax expense for the Predecessor Companies was based on those items in the consolidated calculation applicable to the Predecessor Companies. Intercompany tax F-93 (continued) <PAGE> 113 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS allocation represented an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The receivable or payable arising from the intercompany tax allocation was recorded as an increase or decrease in amounts due from TCI. Upon consummation of the Transactions, TCI repaid such amounts. In connection with the Transactions, TCI and Liberty entered into a tax sharing agreement. TCI agreed to reimburse Liberty for the benefit from investment tax credits and net operating losses generated by Liberty which were utilized in the consolidated Federal income tax return of TCI. Upon the consummation of the Transactions, Liberty was no longer included in the consolidated Federal income tax return of TCI. At that time, all investment tax credits and net operating losses generated by Liberty, but not previously utilized by TCI in TCI's consolidated Federal income tax return, became available for use by Liberty in its own consolidated Federal income tax return. Certain of the Federal income tax returns of TCI are presently under examination by the Internal Revenue Service ("IRS") including the years 1979 through the date of the Transactions. These examinations may result in proposed adjustments for additional income taxes relating to Liberty. If and when future settlements with the IRS become final and nonappealable and if adjustments relating to Liberty are required to any consolidated return year as previously filed, Liberty and TCI have agreed to give effect to such adjustments as if they had been made a part of the original calculation of tax liabilities and benefits. Any amount remaining due or previously overpaid shall be paid or refunded as the case may be. Certain of the Federal income tax returns of a less than 80% owned subsidiary of Liberty (the "Subsidiary") are presently under examination by the IRS. During 1993, the IRS completed its examination of the Subsidiary's Federal income tax returns for its 1989 and 1988 fiscal years, proposing adjustments of approximately $11 million, not including interest thereon. The adjustments related primarily to issues currently under protest for the Subsidiary's 1987 and 1986 fiscal years, including the Subsidiary's amortization of acquired FCC broadcast licenses and related intangible assets and the Subsidiary's deduction of certain royalty payments to a related party. The Subsidiary's management believes that it has valid positions related to the adjustments and intends to vigorously defend its interests. The Subsidiary has protested all proposed adjustments to the Appellate Division of the IRS. Management of the Subsidiary believes that the ultimate resolution of the matters will not have a material effect on the results of operations of the Subsidiary. F-94 (continued) <PAGE> 114 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On February 9, 1994, the IRS announced a comprehensive Settlement Initiative which broadly addresses intangibles issues currently being contested by various taxpayers. The intangibles issues currently being protested by the Subsidiary are subject to this Settlement Initiative. At this time, it is not certain whether the IRS will make a settlement offer to the Subsidiary, nor whether the Subsidiary would accept such an offer if made. The Financial Accounting Standards Board Statement No. 109 requires a change from the deferred method of accounting for income taxes of APB Opinion No. 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted Statement No. 109 in 1993 and has applied the provisions of Statement No. 109 retroactively to the Predecessor Companies to January 1, 1986. The Company restated its financial statements for January 1, 1986 through March 28, 1991 for the Predecessor Companies and for March 29, 1991 through December 31, 1992 for Liberty. The effect of the implementation of Statement No. 109 was a net increase to stockholders' equity and a reduction to deferred taxes payable of $60,172,000 and $41,802,000 at March 28, 1991 and December 31, 1992, respectively. F-95 (continued) <PAGE> 115 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The financial statements for the years ended December 31, 1992 and 1991 have been restated to comply with the provisions of Statement No. 109. The following summarizes the impact of applying Statement No. 109 on net earnings and net earnings (loss) per common share attributable to common shareholders: <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES ----------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, 1992 1991 1991 ------------ ------------ ------------ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA <S> <C> <C> <C> Net earnings as previously reported $ 13,933 42,331 | 613 Effect of restatements: | Mile Hi and the Mile Hi Note (note 9) 2,329 1,851 | 367 Lenfest and TKR (note 6) 7,603 (3,276) | (1,093) Statement No. 109 (1,481) (585) | 339 --------- -------- | --------- As restated $ 22,384 40,321 | 226 ========= ======== | ========= Per share amounts as previously reported $ (0.22) 0.15 | Effect of restatements: | Mile Hi and the Mile Hi Note (note 9) 0.02 0.02 | Lenfest and TKR (note 6) 0.05 (0.03) | Statement No. 109 (0.01) (0.01) | --------- -------- | As restated $ (0.16) 0.13 | ========= ======== | (continued) </TABLE> F-96 <PAGE> 116 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax benefit (expense) consists of: <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> Current Federal tax expense $ (19,396) (1,253) (1,080) | -- Current state tax expense (4,332) (1,238) (700) | (47) Intercompany tax benefit allocation -- -- -- | 150 --------- ---------- --------- | --- (23,728) (2,491) (1,780) | 103 Deferred Federal tax benefit (expense) 11,423 (6,759) (12,903) | 552 Deferred state tax benefit (expense) 783 (1,193) (2,278) | 98 --------- ---------- --------- | --- 12,206 (7,952) (15,181) | 650 --------- ---------- --------- | --- $ (11,522) (10,443) (16,961) | 753 ========= ========== ========= | === </TABLE> Income tax benefit (expense) differs from the amounts computed by the Federal income tax rate of 35% in 1993 and 34% in all previous periods as a result of the following: <TABLE> <CAPTION> PREDECESSOR LIBERTY COMPANIES -------------------------------------------- ------------ NINE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> Computed expected tax benefit (expense) $ (6,478) (11,161) (19,476) | 179 Dividends excluded for income tax purposes 182 4,144 2,849 | 976 Amortization not deductible for income tax | purposes (3,944) (155) (116) | (39) Excess executive compensation (689) -- -- | -- Minority interest in consolidated corporate | subsidiaries 386 (132) 40 | -- State and local income taxes, net of | Federal income tax benefit (2,307) (1,604) (1,965) | (8) Effect of change in anticipated state tax | rate 2,043 -- -- | -- Effect of change in Federal tax rate (707) -- -- | -- Other, net (8) (1,535) 1,707 | (355) --------- ---------- --------- | --- $(11,522) (10,443) (16,961) | 753 ========= ========== ========= | === </TABLE> (continued) F-97 <PAGE> 117 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of deferred income tax benefit (expense) are as follows: <TABLE> <CAPTION> LIBERTY PREDECESSOR -------------------------------------------- COMPANIES NINE MONTHS ------------ YEAR ENDED YEAR ENDED ENDED THREE MONTHS DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 1993 1992 1991 31, 1991 ------------ ------------ ------------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> Differences in recognition of | earnings or losses of affiliates | for income tax and financial | statement purposes $ 3,098 (4,679) (17,067) | (2,564) Dividend income, including premium | on redemption, recognized for | financial statement purposes in | excess of income recognized for | income tax purposes (814) (4,179) (660) | (153) Interest income recognized for | income tax purposes in excess of | income recognized for financial | statement purposes -- 4,287 2,509 | 331 Recognition of deferred gain for | financial statement purposes in | excess of gain recognized for | income tax purposes -- (9,020) (4,413) | -- Differences in recognition of | compensation relating to stock | appreciation rights and unearned | compensation arrangements 8,517 6,775 560 | -- Litigation settlement expenses | recognized for financial | statement purposes in excess of | amount recognized for income tax | purposes 2,766 -- -- | -- Inventory costing 4,057 -- -- | -- Accrued liabilities for financial | statement purposes in excess of | amount recognized for income tax | purposes attributable primarily | to home shopping programming | services 3,200 -- -- | -- Generation (utilization) of net | operating loss, capital loss, | investment tax credit and | alternative minimum tax (8,931) (1,113) 3,584 | 70 Change in valuation allowance | during the period (134) -- -- | -- Differences in depreciation and | amortization for income tax and | financial statement purposes (871) -- 300 | 2,820 Net benefit realized due to change | in state and Federal income tax | rates 1,336 -- -- | -- Other, net (18) (23) 6 | 146 ------- --------- ------- | ------ $ 12,206 (7,952) (15,181) | 650 ======= ========= ======= | ====== </TABLE> (continued) F-98 <PAGE> 118 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 and 1992 are presented below: <TABLE> <CAPTION> DECEMBER 31, --------------------- 1993 1992 -------- -------- AMOUNTS IN THOUSANDS <S> <C> <C> Deferred tax assets: Net operating and capital loss carryforwards $ 8,833 22,507 Charitable contribution carryforward 910 -- Investment tax credit carryforward 3,422 4,095 Alternative minimum tax carryforward 5,317 2,499 Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 44,209 59,819 Inventory costing 7,248 -- Provision for returns and allowance 4,669 -- Provision for uncollectable amounts 3,193 128 Future deductible amount attributable to accrued stock appreciation rights and deferred compensation 15,240 7,269 Future deductible amount related to accrued litigation settlements 2,766 -- Other future deductible amounts primarily due to non-deductible accruals 8,672 596 ------- ------- Total gross deferred tax assets 104,479 96,913 Less valuation allowance of deferred tax assets 2,017 1,138 ------- ------- Net deferred tax assets 102,462 95,775 ------- ------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 9,274 1,258 Intangible assets, principally due to differences in amortization 6,170 -- Investments in affiliates, due principally to undistributed earnings of affiliates 88,671 109,491 ------- ------- Total gross deferred tax liabilities 104,115 110,749 ------- ------- Net deferred tax liability $ 1,653 14,974 ======= ======= </TABLE> The valuation allowance for deferred tax assets as of December 31, 1992 was $1,138,000. (continued) F-99 <PAGE> 119 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1993, the Company had net operating and capital loss carryforwards for income tax purposes aggregating approximately $23,872,000 which, if not utilized to reduce taxable income in future periods, expire as follows: $8,345,000 in 1997, $15,353,000 in 2004 and $174,000 in 2005. At December 31, 1993, the Company had remaining available investment tax credits of approximately $3,422,000 which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2004. New tax legislation was enacted in the third quarter of 1993 which, among other matters, increased the corporate Federal income tax rate from 34% to 35%. In addition, the Company recognized the benefit of a reduction in its state income tax rate relating to its receipt of favorable tax rulings from certain state tax authorities. The Company has reflected the tax rate changes in its consolidated statements of operations in accordance with the treatment prescribed by Statement No. 109. Such tax rate changes resulted in a net decrease of $1,336,000 in income tax expense. (14) PREFERRED STOCKS SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS CLASS A REDEEMABLE CONVERTIBLE PREFERRED STOCK The 10,794 shares of Class A Preferred Stock outstanding at December 31, 1992 held by TCI (representing 100% of the issued and outstanding shares at that time) were converted on January 15, 1993 in accordance to its terms, into 4,405,678 shares of Liberty Class A common stock and 55,070 shares of Liberty Class E Preferred Stock. Such Class A Preferred Stock was retired and may not be reissued. CLASS B REDEEMABLE EXCHANGEABLE PREFERRED STOCK The Company is authorized to issue up to 106,000 shares of the Class B Preferred Stock. The aggregate number of shares of such Class B Preferred Stock that was issued to TCI and outstanding at December 31, 1993 is 105,353 shares (representing 100% of the issued and outstanding shares). The accretion rate for the Class B Preferred Stock is 8.5% per annum, compounded semi-annually. At the option of the Company, the shares of the Class B Preferred Stock are redeemable at any time, in whole or in part, at a redemption price equal to the accreted value per share as of the redemption date, payable solely in cash, and at the option of the Company will also be exchangeable, in whole but not in part, for shares of a series of Class F Serial F-100 (continued) <PAGE> 120 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Stock or of any other class or series of preferred stock of the Company then authorized to be issued (the "Convertible Exchangeable Preferred Stock"), the rights, preferences and qualifications of which shall be substantially similar to those of the Class B Preferred Stock as to ranking, voting rights, rights of redemption for cash at the option of the Company and mandatory redemption on March 28, 2006. If the Company elects to issue shares of Convertible Exchangeable Preferred Stock in exchange for Class B Preferred Stock, such shares will be convertible, in whole or in part, at the option of the holder into shares of Liberty Class A common stock, but will not be exchangeable at such holder's option for TCI common stock. The holder will have optional redemption rights equivalent to those for the Class B Preferred Stock, as described below, but the Company will not have the right to satisfy its redemption obligations with respect thereto through the issuance of additional shares of Convertible Exchangeable Preferred Stock. The shares of Convertible Exchangeable Preferred Stock may accrete dividends at a rate different from the accretion rate then applicable to the shares of Class B Preferred Stock for which they are exchanged or may provide for the accrual and payment of cash dividends (which may or may not be cumulative). At the option of the Company, at any time after March 28, 1995, the shares of Convertible Exchangeable Preferred Stock will be exchangeable, in whole but not in part, for subordinated notes of the Company that will be convertible, in whole or in part, at the option of the holder into shares of Liberty Class A common stock (the "Convertible Subordinated Notes"). If the shares of Convertible Exchangeable Preferred Stock that are being exchanged for Convertible Subordinated Notes accrete dividends, then the Convertible Subordinated Notes will be zero coupon notes, the issue price of which shall be equal to the liquidation price of the shares of Convertible Exchangeable Preferred Stock for which they are exchanged as of the date of such exchange, and the principal amount of which shall be equal to the liquidation price of such shares of Convertible Exchangeable Preferred Stock at March 28, 2006. If the shares of Convertible Exchangeable Preferred Stock that are being exchanged for Convertible Subordinated Notes provide for the accrual and payment of cash dividends, the principal amount of such Convertible Subordinated Notes shall be equal to the liquidation price of the shares of Convertible Exchangeable Preferred Stock for which they are exchanged as of the date of such exchange, plus (to the extent not already included in such liquidation price) all accumulated or accrued and unpaid dividends, if any, to the date of such exchange, and interest will accrue, and be payable semiannually, on such principal amount at a rate per annum equivalent to the annual dividend rate for such shares of Convertible Exchangeable Preferred Stock. The terms of the Convertible Subordinated Notes shall otherwise be substantially similar to those of the shares of Convertible Exchangeable Preferred Stock for which they are exchanged, except for such variations as may be appropriate to reflect the differences between debt securities and equity securities and except that such Convertible Subordinated Notes will not be exchangeable for another issue of Convertible Subordinated Notes. F-101 (continued) <PAGE> 121 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition, at any time after March 28, 1995, the shares of Class B Preferred Stock shall each be exchangeable, at the Company's option, in whole but not in part, for zero coupon subordinated notes of the Company (the "Exchangeable Subordinated Notes"). The principal amount of such Exchangeable Subordinated Notes shall be equal to the accreted value of the shares for which they are exchanged as of March 28, 2006 (rounded down to the nearest $1,000) and the issue price of such Exchangeable Subordinated Notes (plus the amount of any cash adjustment payable in lieu of issuing Notes in other than authorized denominations) shall be equal to the accreted value of such shares as of the date of exchange. The terms of the Exchangeable Subordinated Notes shall otherwise be substantially similar to those of the Class B Preferred Stock for which they are exchanged, except for such variations as may be appropriate to reflect the differences between debt securities and equity securities and except that such Exchangeable Subordinated Notes will be exchangeable at the option of the Company at any time after issuance thereof for Convertible Subordinated Notes of the Company, but will not be exchangeable or redeemable for shares of Convertible Exchangeable Preferred Stock or for another issue of Exchangeable Subordinated Notes. The rate at which the Exchangeable Subordinated Notes may be exchanged for shares of TCI common stock at the option of the holder shall be calculated so that the aggregate principal amount of the Exchangeable Subordinated Notes issued in exchange for shares of the Class B Preferred Stock will be exchangeable into the same aggregate number of shares of TCI common stock as the shares of Class B Preferred Stock for which they were exchanged. The shares of Class B Preferred Stock are also exchangeable or redeemable at the option of the holder as described below. The shares of Class B Preferred Stock, unless previously redeemed, will be exchangeable at the option of the holder at any time in whole or in part for shares of TCI common stock. The Company will have the option of delivering shares of TCI Class A common stock or TCI Class B common stock or any combination thereof upon such exchange. The exchange rate for the Class B Preferred Stock is 54.34 shares of TCI common stock for each share of Class B Preferred Stock, subject to adjustment under certain conditions. The exchange rights of the shares of Class B Preferred Stock will expire at the close of business on the business day immediately preceding March 28, 2006 or, in the case of shares of Class B Preferred Stock called for redemption or exchange, at the close of business on the date specified for such redemption or exchange, unless in either case the Company defaults in the payment of the redemption price or the making of the exchange. F-102 (continued) <PAGE> 122 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company deposited with an escrow agent all shares of TCI common stock acquired by the Company in connection with the Exchange. The TCI common stock is held by the escrow agent for delivery to holders of Class B Preferred Stock upon exchange. Upon surrender of shares of Class B Preferred Stock for exchange, the holder thereof shall be entitled to receive the shares of TCI common stock at the then applicable exchange rate. Any shares of TCI common stock remaining in escrow after March 28, 2006 will be returned to and become the sole property of the Company. The holders of shares of Class B Preferred Stock may, by delivery of a written notice of demand (a "Demand Notice"), require the Company to redeem all shares of Class B Preferred Stock covered by such Demand Notice on March 28, 1996 and March 28, 2001 (each such date a "Special Redemption Date"), at a redemption price (the "Special Redemption Price") equal to the accreted value of such shares as of such Special Redemption Date. The Special Redemption Price will be payable by the Company, at its option, in cash, Liberty Class A common stock, Convertible Exchangeable Preferred Stock, TCI common stock, the Company's convertible subordinated extension notes due on March 28, 2006, which are convertible into Liberty Class A common stock (the "Convertible Extension Notes"), the Company's subordinated extension notes due on March 28, 2006 (the "Non-Convertible Extension Notes", and together with the Convertible Extension Notes, the "Extension Notes") or any combination thereof; provided, however, that if any Convertible Extension Notes are issued as such payment, Convertible Extension Notes shall constitute no less than 25% of the Special Redemption Price and if Non-Convertible Extension Notes are issued as such payment, Non-Convertible Extension Notes shall constitute no less than 25% of the Special Redemption Price. Unless all outstanding shares of Class B Preferred Stock to be redeemed or exchanged are at the time held by TCI, the Company's right to redeem shares of Class B Preferred Stock through the delivery of Extension Notes or shares of Liberty Class A common stock, Convertible Exchangeable Preferred Stock or TCI common stock is subject to the Company satisfying various conditions. CLASS D REDEEMABLE VOTING PREFERRED STOCK The Company is authorized to issue up to 18,000 shares of Class D Redeemable Voting Preferred Stock (the "Class D Preferred Stock"). The aggregate number of shares of such Class D Preferred Stock issued to TCI and outstanding at December 31, 1993 is 17,238 shares (representing 100% of the issued and outstanding shares). The accretion rate for the Class D Preferred Stock is 10% per annum, compounded semi-annually. F-103 (continued) <PAGE> 123 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Class D Preferred Stock is redeemable at the option of the Company at any time and from time to time on and after March 28, 1996, in whole or in part, for a redemption price, payable solely in cash, equal to the accreted value per share of such class as of the redemption date. The Class D Preferred Stock is subject to a mandatory redemption requirement on March 28, 2006. Originally, TCI had the exclusive right to elect a number of directors equal to not less than 20% (rounded upward to the nearest whole number) of the total number of members of the Company's Board of Directors for so long as all of the outstanding shares of Class D Preferred Stock are owned by TCI, voting together as a separate class. On March 26, 1993 in conjunction with the Recapitalization Agreement described in note 16, the terms of the Class D Preferred was amended to reduce the number of directors elected by the holders of the Class D Preferred from 20% of the total number of the Company's Board of Directors to 11% (which shall include the right to fill any vacancy created by the death or resignation of any director elected by the holders of Class D Preferred Stock or by the removal by such holders of any director elected by them, and to elect such number of additional directors to fill any newly created directorships as is necessary to maintain such level of representation). In the event that TCI ceases to own in the aggregate 100% of the outstanding shares of Class D Preferred Stock, the foregoing special voting rights of such class shall terminate. F-104 (continued) <PAGE> 124 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the changes in each issue of preferred stock subject to mandatory redemption requirements from the date of issuance through December 31, 1993: <TABLE> <CAPTION> TOTAL PREFERRED STOCK SUBJECT TO CLASS B CLASS B MANDATORY SERIES SERIES CLASS REDEMPTION CLASS A 1 2 CLASS C D REQUIREMENTS -------- ------- ------- -------- ------ ------------ AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> <C> <C> LIBERTY Net effect of Transactions (note 2) $ 10,794 105,353 91,611 399,299 17,238 624,295 Redemption of Class B Preferred Stock -- -- (91,611) -- -- (91,611) Accreted dividends 798 6,954 -- 15,404 1,343 24,499 Retroactive effect of the Recapitalization (note 2) -- -- -- (414,703) -- (414,703) ------- ------- ------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1991 11,592 112,307 -- -- 18,581 142,480 Accreted dividends 1,128 9,749 -- -- 1,904 12,781 ------- ------- ------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1992 12,720 122,056 -- -- 20,485 155,261 Accreted dividends 47 10,596 -- -- 2,100 12,743 Conversion of Class A Preferred Stock for Class A common stock (12,767) -- -- -- -- (12,767) ------- ------- ------- -------- ------ ---------- BALANCE AT DECEMBER 31, 1993 $ -- 132,652 -- -- 22,585 155,237 ======= ======= ======= ======== ====== ========== </TABLE> (continued) F-105 <PAGE> 125 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) STOCKHOLDERS' EQUITY (A) PREFERRED STOCKS NOT SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS CLASS C REDEEMABLE EXCHANGEABLE PREFERRED STOCK On March 26, 1993, pursuant to the Recapitalization Agreement described in note 16, the 399,299 shares of Class C Redeemable Exchangeable Preferred Stock (the "Class C Preferred Stock") held by TCI (representing 100% of the issued and outstanding shares) were repurchased and retired and may not be reissued. CLASS E, 6% CUMULATIVE REDEEMABLE EXCHANGEABLE JUNIOR PREFERRED STOCK The Company is authorized to issue 2,000,000 shares of Class E Preferred Stock. The aggregate number of shares of such Class E Preferred Stock issued upon consummation of the Recapitalization approved by the shareholders on March 12, 1992 was 1,620,026. When issued, the shares had a liquidation value of $100 per share. Dividends accrue on the Class E Preferred Stock at the rate of 6% per annum and are payable on March 1 of each year in cash or, at the option of the Company, in whole or in part, in shares of its Class A common stock. No interest or additional dividends will accrue or be payable on accumulated, accrued and unpaid dividends. The Class E Preferred Stock is redeemable at the option of the Company at any time or from time to time, in whole or in part, for a redemption price payable solely in cash equal to the liquidation value of each share (including any accrued and unpaid dividends). There is no mandatory redemption requirement. In addition, the shares of Class E Preferred Stock may, at any time, at the option of the Company, be exchanged in whole for junior subordinated notes of the Company (the "Junior Exchange Notes"). The principal amount of the Junior Exchange Notes shall be equal to the liquidation value of each share (including accrued and unpaid dividends) on the exchange date. The Junior Exchange Notes will bear interest, payable annually, at a rate equal to the prevailing Fifteen Year Treasury Rate (as defined) plus 2.15% and will have a maturity date 15 years from the date of issuance. F-106 (continued) <PAGE> 126 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CLASS F SERIAL PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Class F Serial Preferred Stock (the "Class F Preferred Stock") in one or more series and to fix and state the designations, powers, preferences, qualifications, limitations, restrictions and relative rights of the shares of each such series. At any time that shares of any class or series of the above-described preferred stock (other than the Class F Preferred Stock) are issued and outstanding, the number of shares of Class F Preferred Stock of any series that may be issued shall not exceed the difference between five million (the number of Class F Preferred Stock currently authorized) and the sum of (i) the number of shares of all classes and series of the above-described preferred stock (other than the Class F Preferred Stock) issued and outstanding and (ii) the number of shares of all series of Class F Preferred Stock issued and outstanding, in each case at the time the resolution of the Board of Directors authorizing the issuance of shares of such series of Class F Preferred Stock is adopted. (B) COMMON STOCK GENERAL Liberty is authorized to issue 300,000,000 Class A shares and 100,000,000 Class B shares. Liberty had 87,515,378 Class A shares and 43,338,720 Class B shares outstanding at December 31, 1993, and 76,036,000 Class A shares and 43,340,320 Class B shares outstanding at December 31, 1992. The Class A common stock has one vote per share and the Class B common stock has ten votes per share. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock. STOCK OPTION The Company has an employment agreement with an officer (who is also a director). Pursuant to this agreement, such officer was granted an option to acquire 100,000 shares of Liberty Class B common stock at a purchase price of $256 per share (reflects actual shares issued). The employment agreement was amended and the option was exercised with cash and a $25,500,000 note. This note bears interest at 7.54% per annum. During October 1991, such officer tendered to the Company in partial payment of such note 800,000 shares of TCI F-107 (continued) <PAGE> 127 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Class B common stock, resulting in a net reduction of $12,195,000 in the amount payable under the note. The 100,000 shares issued by Liberty upon exercise of this option, together with all subsequent dividends and distributions thereon, including shares issued in the Stock Splits (collectively totaling 16,000,000 shares of Liberty Class B common stock and 200,000 shares of Class E Preferred Stock at December 31, 1993, the "Option Units"), are subject to repurchase by the Company under certain circumstances. The Company's repurchase right will terminate as to 20% of the Option Units per year, commencing March 28, 1992, and will terminate as to all of the Option Units in the event of death, disability or under certain other circumstances. On October 24, 1992, said officer of the Company entered into a letter agreement with respect to the timing and method of payment under the promissory note and the release of the 200,000 shares of Class E Preferred Stock from the collateral securing the promissory note. A payment of approximately $984,000 for all interest accruing during calendar 1993 (after giving effect to a discount at the rate of 7.54% per annum to reflect the time value of money received prior to the scheduled payment date) was made in March 1993. After giving effect to the payment and the terms of the letter agreement, the remaining principal balance on the note is approximately $14,500,000. The next scheduled payment will be on October 24, 1994 in the principal amount of approximately $4,300,000 plus interest accrued from December 31, 1993 to the payment date. STOCK PLAN The Company has a Stock Incentive Plan (the "Stock Plan") in order to provide a special incentive to officers and other persons. Under the Stock Plan, stock options, stock appreciation rights, restricted stock and other awards valued by reference to, or that are otherwise based on, the value of Class A common stock may be granted in respect to a maximum of 40,000,000 shares of Class A common stock. Shares to be delivered under the Stock Plan will be available from authorized but unissued shares of Class A common stock or from shares of Class A common stock reacquired by the Company. Shares of Class A common stock that are subject to options or other awards that terminate or expire unexercised will return to the pool of such shares available for grant under the Stock Plan. F-108 (continued) <PAGE> 128 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In June 1993, the Company granted an aggregate of 56,000 non-qualified stock options with stock appreciation rights to certain officers and key employees under the Stock Plan. Each option is exercisable for one share of Class A common stock at an exercise price of $19.08. The options vest in five equal annual installments commencing June 3, 1994 and expire in June 2003. Estimates of compensation relating to these stock options with stock appreciation rights have been recorded through December 31, 1993, but are subject to future adjustments based upon market value and, ultimately, on the final determination of market value when the rights are exercised. Stock Appreciation Rights The Company has granted to certain of its officers stock appreciation rights with respect to 2,240,000 shares of Liberty Class A common stock. These rights have an adjusted strike price of $0.80 per share, become exercisable and vest evenly over seven years. Stock appreciation rights expire on March 28, 2001. Estimates of compensation relating to these stock appreciation rights have been recorded through December 31, 1993, but are subject to future adjustment based upon market value and, ultimately, on the final determination of market value when the rights are exercised. On December 31, 1992, one of the Company's officers exercised stock appreciation rights with respect to 14,000 shares. Said officer was paid $166,425 (the difference between the market price and strike price on the date exercised). Stock appreciation rights with respect to 526,000 shares were exercised on October 29, 1993 and on November 2, 1993 stock appreciation rights with respect to 240,000 shares were exercised resulting in an aggregate payment of $21,541,200 (the difference between the market price and exercise price on the dates exercised) to the officers exercising such rights. In 1993, the President of HSN received stock appreciation rights with respect to 984,876 shares of HSN's common stock at an exercise price of $8.25 per share. These rights vest over a four year period and are exercisable until February 23, 2003. The stock appreciation rights will vest upon termination of employment other than for cause and will be exercisable for up to one year following the termination of employment. In the event of a change in ownership control of HSN, all unvested stock appreciation rights will vest immediately prior to the change in control and shall remain exercisable for a one year period. Stock appreciation rights not exercised will expire to the extent not exercised. These rights may be exercised for cash or, so long as HSN is a public company, for shares of HSN's common stock equal to the excess of the fair market value of each share of common stock over $8.25 at the exercise date. The stock appreciation rights also will vest in the event of death or disability. F-109 (continued) <PAGE> 129 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated compensation relating to these stock appreciation rights has been recorded through December 31, 1993, but is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised. (16) TRANSACTIONS WITH TCI AND OTHER RELATED PARTIES On December 30, 1991, TCI Liberty, Inc. ("TCIL"), a wholly-owned subsidiary of TCI, entered into a Commercial Paper Purchase Agreement with Liberty whereby Liberty could from time to time purchase short-term notes from TCIL of up to an aggregate amount of $100 million. TCIL borrowed $22,000,000 from Liberty on December 31, 1991, pursuant to the Commercial Paper Purchase Agreement. The full amount, including interest, was repaid on January 15, 1992. Interest rates on the short-term notes were determined by the parties by reference to prevailing money-market rates. This agreement was terminated on March 23, 1993. Certain subsidiaries of Liberty produce and/or distribute sports and other programming to cable television operators (including TCI) and others. Charges to TCI are based upon customary rates charged to others. Certain subsidiaries of Liberty purchase, at TCI's cost plus an administrative fee, certain pay television and other programming through a subsidiary of TCI. In addition, HSN pays a commission to TCI for merchandise sales to customers who are subscribers of TCI's cable systems. Aggregate commissions and charges to TCI were approximately $10,650,000, $3,290,000, $1,532,000 and $495,000 for the years ended December 31, 1993 and 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. On December 31, 1991, Liberty Program Investments, Inc, a wholly-owned subsidiary of the Company, purchased certain securities of QVC from TCI for approximately $28,339,000 in cash. The consideration for the QVC securities was based upon published prices. At the same time, Liberty Cable, Inc., a wholly-owned subsidiary of the Company, sold a certain note receivable from American TeleVenture Corporation ("ATV") to TCI Holdings, Inc. (a wholly-owned subsidiary of TCI) for $5,523,000 in cash, and LMC Cable AdNet II, a wholly-owned subsidiary of the Company, sold all of the common stock of Cable Television Advertising Group, Inc. ("CTAG") to TCI F-110 (continued) <PAGE> 130 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Development Corporation ("TCID"), a wholly-owned subsidiary of TCI, for $22,667,000 in cash. The only asset held by CTAG is a 49% general partnership interest in Cable AdNet Partners. The remaining 51% general partnership interest in Cable AdNet Partners is held by another subsidiary of TCID. The consideration for the ATV note was determined by reference to its face value, plus accrued interest. The ATV note bears interest at 2% above the prime rate. The consideration for the stock of CTAG was determined by reference to the price paid for the 51% general partnership interest in Cable AdNet Partners, which was acquired by an indirect, wholly-owned subsidiary of TCI from Cable AdNet, Inc., a subsidiary of Lenfest on November 25, 1991. At such date, Mr. H. F. Lenfest (a director of the Company) was President and Chief Executive Officer of Lenfest. Also, on December 31, 1991, an Exchange Agreement among TCI (and certain of its subsidiaries) and Liberty (and certain of its subsidiaries) was consummated. Pursuant to this Exchange Agreement, TCI received 69% of the stock of ATV, 2,024,063 shares of common stock of International Cablecasting Technologies, Inc., a release from an obligation to reimburse Liberty related to the repurchase of certain QVC stock, a release of the option with respect to Cencom Cable Associates, Inc. and a note in the amount of $4,322,000 issued by LMC Chicago Sports, Inc., a subsidiary of the Company. Liberty received a release from an obligation to provide two free months of Courtroom Television Network service, a 0.1% general partnership interest in US Cable of Northern Indiana, a 25% general partnership interest in Sports, an option to acquire an additional 25% general partnership interest in Sports, and $149,000 in cash. In the opinion of the respective managements of TCI and Liberty, the aggregate values of the assets exchanged were substantially equivalent. Further, the Exchange Agreement was approved by the respective Boards of Directors of TCI and Liberty. The foregoing related party transactions have been recorded based on historical cost. For acquisitions, the excess of the amount paid by Liberty over TCI's historical cost has been accounted for by the Company similar to a "preferential dividend" by deducting such amount from retained earnings. For dispositions, the excess of the amount paid by TCI over Liberty's historical cost has been accounted for as an increase in additional paid-in capital. In January 1992, the Company and TCI formed CCT, a general partnership created for the purpose of acquiring and operating cable television systems. The definitive partnership agreement was executed in March 1992. TCI and the Company each agreed to contribute certain non-cash assets and up to $25 million in cash as needed to fund mutually acceptable acquisitions. In June 1992, CCT acquired certain cable television F-111 (continued) <PAGE> 131 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assets in Texas from a third party for aggregate consideration of $15,175,000. Funds for the acquisition were borrowed by CCT ratably from its two partners. Pursuant to a Cable Television Management Agreement, a subsidiary of TCI provides management services for cable television systems owned by CCT. The subsidiary receives a fee equal to 3% of the gross cable television revenue of the partnership. On December 29, 1992, the Company and TCI, as the sole partners of CCT, agreed to amend the CCT General Partnership Agreement. Pursuant to the amendment, the contributions by the Company and TCI of non-cash assets (other than the contribution by the Company of its partnership interest in Greater Media of Western Oakland County Limited ("Greater Media")) to CCT by Liberty and TCI were rescinded, retroactive to the date of contribution. All economic and tax attributes were allocated entirely to Liberty with respect to all of the assets contributed by Liberty (other than the partnership interest in Greater Media, the allocations of which remained unchanged) and entirely to TCI with respect to the Class C Preferred Stock contributed by TCI, all effective from and after the date of contribution. TCI contributed to CCT a $10,590,000 promissory note as of the date of the contribution of the originally contributed assets. On December 31, 1992, the Company sold a note receivable from an affiliate to TCI for $36,300,000 in cash. A loss of $17,826,000 was recognized upon the sale. On March 26, 1993, Liberty and TCI and certain of their respective subsidiaries entered into a series of agreements regarding the repurchase by Liberty of certain shares of its common and preferred stock from TCI and the purchase by TCI of certain cable television investments from Liberty and on June 3, 1993, Liberty completed the transactions contemplated by said agreements. The first such agreement (the "Recapitalization Agreement") was between Liberty, TCIL and Tele-Communications of Colorado, Inc. ("TCIC") both of which are wholly owned subsidiaries of TCI. The Recapitalization Agreement provided for the Company's repurchase of 927,900 shares of Liberty Class A common stock owned by TCIL, and repurchase of all of the outstanding shares of the Class C Preferred Stock. Liberty paid an aggregate purchase price for the Class C Preferred Stock of approximately $175 million and approximately $19 million for the shares of Class A common stock. The aggregate price of approximately $194 million was satisfied by delivery of approximately $12 million in cash and four promissory notes totaling approximately $182 million (see note 11). The shares of Class A common stock sold by TCIL are part of those received upon conversion of the Class A Preferred Stock into 4,405,678 shares of Liberty Class A common stock and 55,070 shares of Class E Preferred Stock. F-112 (continued) <PAGE> 132 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with the Recapitalization Agreement, TCIC and LCP entered into an Option-Put Agreement (the "Option-Put Agreement") which was amended on November 30, 1993. Under the amended Option-Put Agreement, between June 30, 1994 and September 28, 1994, and between January 1, 1996 and January 31, 1996, TCIC will have the option to purchase LCP's interest in CCT and the Mile Hi Note for an amount equal to $77 million plus interest on such amount from June 3, 1993. Between April 1, 1995 and June 29, 1995, and between January 1, 1997 and January 31, 1997, LCP will have the right to require TCIC to purchase LCP's interest in CCT and the Mile Hi Note for an amount equal to $77 million plus interest on such amount from June 3, 1993. Also on June 3, 1993, Liberty and a subsidiary of TCI entered into the second such agreement (the "Purchase and Sale Agreement") pursuant to which a TCI subsidiary purchased from the Company a 16% limited partnership interest in Intermedia Partners from LCP and all of LCP's interest in a special allocation of income and gain of $7 million under the partnership agreement of Intermedia Partners, for a purchase price of approximately $9 million (which resulted in a loss in the Company's statement of operations of approximately $22 million). Also pursuant to which TCI has an option to purchase the Company's remaining 6% interest in Intermedia Partners prior to December 31, 1995 for approximately $3.6 million plus interest at 8% per annum from June 3, 1993 (which resulted in a provision for impairment of investment in the Company's statement of operations of approximately $8 million). The Company's obligation to sell such partnership interest and to grant such option were conditioned upon consummation of the transactions contemplated by the Recapitalization Agreement. In September 1993, Encore QE Programming Corp. ("QEPC"), a wholly owned subsidiary of Encore Media Corporation ("Encore"), a 90% owned subsidiary of Liberty, entered into a limited partnership agreement with TCI Starz, Inc. ("TCIS"), a wholly owned subsidiary of TCI, for the purpose of developing, operating and distributing STARZ!, a first-run movie premium programming service launched in 1994. QEPC is the general partner and TCIS is the limited partner. Losses are allocated 1% to QEPC and 99% to TCIS. Profits are allocated 1% to QEPC and 99% to TCIS until certain defined criteria are met. Subsequently, profits are allocated 20% to QEPC and 80% to TCIS. TCIS has the option, exercisable at any time and without payment of additional consideration, to convert its limited partnership interest to an 80% general partnership interest with QEPC's partnership interest simultaneously converting to a 20% limited partnership interest. In addition, during specified periods commencing April 1999 and April 2001, respectively, QEPC may require TCIS to purchase, or TCIS may require QEPC to sell, the partnership interest of QEPC in the partnership for a formula-based price. Encore manages the service and has agreed to provide the limited partnership with F-113 (continued) <PAGE> 133 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS certain programming under a programming agreement whereby the partnership will pay its pro-rata share of the total costs incurred by Encore for such programming. Encore will account for its interest in the partnership under the cost method. (17) FAIR VALUE OF FINANCIAL INSTRUMENTS CASH AND CASH EQUIVALENTS, TRADE AND OTHER RECEIVABLES, DUE TO/FROM TCI, PREPAID EXPENSES, ACCOUNTS PAYABLE, ACCRUED LIABILITIES, SALES RETURNS AND INCOME TAXES PAYABLE The carrying amount approximates fair value because of the short maturity of these instruments. DEBT AND DEBT DUE TCI The carrying amount approximates fair value. PREFERRED STOCKS, SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS The fair values of the Company's preferred stocks subject to mandatory redemption requirements were based on management's estimates. These estimates were made by reference to the market values of other similar publicly traded instruments. Neither independent external appraisals nor dealer quotes were obtained. The estimated fair value of the Company's preferred stocks subject to mandatory redemption at December 31, 1993 was $199,366,000. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (18) COMMITMENTS AND CONTINGENCIES In February of 1991, the Company entered into an agreement with certain of its stockholders which provides the Company the right upon the occurrence of a "call triggering event" to require such persons to sell the shares of Liberty common stock F-114 (continued) <PAGE> 134 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS owned by them, and would provide such persons the right upon the occurrence of a "put triggering event" to sell their shares of Liberty common stock, in a registered public offering or to one or more third parties selected by the Company. A "call triggering event" consists of the issuance or adoption of a decree by a governmental authority and the determination by an independent committee of the Board of Directors that divestiture by any or all of such persons of his or its Liberty common stock is necessary in order to comply with the decree or is in the best interest of the Company in light of material restrictions that would be imposed on the Company's business absent such divestiture. A "put triggering event" consists of the issuance or adoption of a decree by a governmental authority requiring any or all of such persons to divest his or its shares of Liberty common stock or TCI common stock or rendering such person's continued ownership thereof illegal or subject to fine or penalty or imposing material restrictions on such person's full rights of ownership of such shares, provided that one of the essential facts giving rise to such decree or that renders such decree applicable to such person is the dual ownership by such person of voting securities of both the Company and TCI. In each case, the Company would guarantee the sale price for certain of the shares to be sold. The Company believes that it would not be required to make any material payments in such event as the Company anticipates that the aggregate proceeds derived from any sale of such stock to the public or other third parties would approximate the guaranteed sales price, before giving effect to any required tax adjustment. The guaranteed sale price for shares of Liberty common stock that constitute "Covered Shares" (as defined) would be determined on the basis of the proportionate share that such shares represent of the fair market value of the Company on a going concern or liquidation value basis (whichever method yields a higher valuation), subject to an upward adjustment for taxes. If income taxes are payable by such persons with respect to such sales, the amount of the adjustment would be approximately $10.78 per share (assuming an effective tax rate of 37% based on Federal and state income tax rates in effect on December 31, 1993 and a sale price of $29-1/8 per share based on the last reported sale price for the Class A common stock on that date). In the aggregate, 41,162,880 shares of Liberty common stock are currently covered by the agreement. The Company believes that the likelihood of the occurrence of a put triggering event is remote. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"). In 1993, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. Such rate regulations became effective on September 1, 1993. The rate increase moratorium, which began on April 5, 1993, continues in effect through May 15, 1994. As a result of such actions, the Company's basic and tier service rates and its F-115 (continued) <PAGE> 135 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive "benchmark" rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the "benchmarks" were reduced as required by the 1993 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. Subsequent to September 1, 1993, any cable system charging basic cable rates that exceed the FCC's benchmark rate may be required to substantiate its rates by demonstrating its cost of providing basic cable services to subscribers. If, as a result of this process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received since September 1, 1993. The Company believes that it has complied with all provisions of the 1992 Cable Act, including its rate setting provisions. However, since the Company's rates for regulated services are subject to review, the Company may be subject to a refund liability. The amount of refunds, if any, which could be payable by the Company in the event that systems' rates are successfully challenged by franchising authorities is not currently estimable. The Company has long-term sports program rights contracts which require payments through 1998. Future payments by year are as follows (amounts in thousands): <TABLE> <S> <C> 1994 $ 15,345 1995 11,503 1996 8,580 1997 5,926 1998 1,300 </TABLE> Liberty leases business offices, has entered into pole rental agreements and transponder lease agreements, and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to approximately $22,515,000, $11,607,000, $2,977,000 and $844,000 for the years ended December 31, 1993 and 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991, respectively. F-116 (continued) <PAGE> 136 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands): <TABLE> <S> <C> 1994 $ 22,810 1995 20,029 1996 19,526 1997 19,296 1998 14,985 </TABLE> It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1994. The Company is obligated to pay fees for the license to exhibit certain qualifying films that are released theatrically by various motion picture studios through December 31, 2006 (the "Film License Obligations"). As of December 31, 1993, these agreements require minimum payments aggregating approximately $189 million. The aggregate amount of the Film License Obligations is not currently estimable because such amount is dependent upon the number of qualifying films produced by the motion picture studios, the amount of United States theatrical film rentals for such qualifying films, and certain other factors. Nevertheless, the Company's aggregate payments under the Film License Obligations could prove to be significant. (19) INFORMATION ABOUT LIBERTY'S OPERATIONS Liberty operates primarily in the United States in two industry segments, cable television systems ("Cable") and production and distribution of cable television programming services ("Programming"). Home shopping is a programming service which includes a retail function. Separate amounts have been provided for home shopping programming services to enhance the reader's understanding of the Company. Operating income is total revenue less operating costs and expenses which includes an allocation of corporate general and administrative expenses. Identifiable assets by industry are those assets used in Liberty's operations in each industry. Liberty has investments, accounted for under the equity method, which also operate in the United States in the Cable and Programming industries. The following is selected information about Liberty's operations for the years ended December 31, 1993 and 1992, the nine months ended December 31, 1991 and the three months ended March 31, 1991: F-117 (continued) <PAGE> 137 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> HOME LIBERTY: CORPORATE SHOPPING CABLE PROGRAMMING TOTAL --------- -------- -------- ----------- ----------- AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> <C> YEAR ENDED DECEMBER 31, 1993: Revenue $ -- 942,940 56,744 153,572 1,153,256 ======== ======== ======== ========== ========= Revenue from TCI $ -- -- -- 44,074 44,074 ======== ======== ======== ========== ========= Operating income (loss) $ (43,327) 15,975 9,834 16,615 (903) ======== ======== ======== ========== ========= Depreciation and amortization $ 164 24,029 11,169 13,907 49,269 ======== ======== ======== ========== ========= Capital expenditures, including acquisitions $ 426 13,156 8,374 3,520 25,476 ======== ======== ======== ========== ========= Identifiable assets $ 142,430 781,258 283,552 229,308 1,436,548 ======== ======== ======== ========== ========= YEAR ENDED DECEMBER 31, 1992: Revenue $ -- -- 21,549 134,964 156,513 ======== ======== ======== ========== ========= Revenue from TCI $ -- -- -- 42,834 42,834 ======== ======== ======== ========== ========= Operating income (loss) $ (14,337) -- 5,617 5,324 (3,396) ======== ======== ======== ========== ========= Depreciation and amortization $ 126 -- 3,406 12,014 15,546 ======== ======== ======== ========== ========= Capital expenditures, including acquisitions $ 37 -- 10,655 1,826 12,518 ======== ======== ======== ========== ========= Identifiable assets $ 199,846 61,536 355,372 213,433 830,187 ======== ======== ======== ========== ========= </TABLE> (continued) F-118 <PAGE> 138 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> HOME CORPORATE SHOPPING CABLE PROGRAMMING TOTAL --------- -------- -------- ----------- ------- AMOUNTS IN THOUSANDS <S> <C> <C> <C> <C> <C> LIBERTY CONTINUED: NINE MONTHS ENDED DECEMBER 31, 1991: Revenue $ -- -- 9,479 75,918 85,397 ======= ======= ======= ======= ======= Revenue from TCI $ -- -- -- 25,191 25,191 ======= ======= ======= ======= ======= Operating income (loss) $ (2,278) -- 2,273 790 785 ======= ======= ======= ======= ======= Depreciation and amortization $ 89 -- 1,511 8,992 10,632 ======= ======= ======= ======= ======= Capital expenditures, including acquisitions $ 65 -- 1,202 2,086 3,353 ======= ======= ======= ======= ======= Identifiable assets $104,658 45,291 284,432 305,463 739,844 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------- PREDECESSOR COMPANIES: THREE MONTHS ENDED MARCH 31, 1991: Revenue $ -- -- 2,981 18,427 21,408 ======= ======= ======= ======= ======= Revenue from TCI $ -- -- -- 3,879 3,879 ======= ======= ======= ======= ======= Operating income (loss) $ (3,023) -- 1,051 (6,066) (8,038) ======= ======= ======= ======= ======= Depreciation and amortization $ -- -- 563 3,430 3,993 ======= ======= ======= ======= ======= Capital expenditures, including acquisitions $ -- -- 196 649 845 ======= ======= ======= ======= ======= Identifiable assets $ 1,607 44,801 286,864 202,349 535,621 ======= ======= ======= ======= ======= </TABLE> (continued) F-119 <PAGE> 139 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) <TABLE> <CAPTION> 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- ------- ------- ------- AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA <S> <C> <C> <C> <C> 1993: Revenue $179,072 303,685 313,083 357,416 Operating income (loss) $ 2,089 (2,603) 1,302 (1,691) Gain on sale of investment $ 10,613 -- -- 21,359 Loss on transactions with TCI $ -- (30,296) -- -- Extraordinary item, net $ (1,792) (399) -- -- Net earnings (loss) $ 10,454 (18,016) 11,161 1,196 Net earnings (loss) attributable to common shareholders $ (441) (27,520) 5,429 (4,645) Primary and fully diluted earnings (loss) per common and common equivalent share $ 0.00 (0.21) 0.04 (0.04) </TABLE> (continued) F-120 <PAGE> 140 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) <TABLE> <CAPTION> 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- ------- ------- ------- AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA <S> <C> <C> <C> <C> 1992: Revenue $ 32,733 41,025 37,481 45,274 Operating income (loss) $ (4,344) 3,739 5,594 (8,385) Loss on transactions with TCI $ -- -- -- (17,826) Net earnings (loss): As previously reported $ (1,911) 7,993 13,926 (6,075) Adjustment to restate share of earnings (losses) of Mile Hi, Lenfest, and TKR (see notes 6 and 9) 1,295 1,355 1,323 1,293 Adjustment to restate interest income on the Mile Hi Note (see note 9) 915 1,349 1,186 1,216 Adjustment to revise/implement Statement No. 109 (2,675) 3,712 8,448 (10,966) ------- ------ ------ ------- As adjusted $ (2,376) 14,409 24,883 (14,532) ======= ====== ====== ======= Net earnings (loss) attributable to common shareholders: As previously reported $(10,807) (2,880) 2,967 (16,978) Adjustment to restate share of earnings (losses) of Mile Hi, Lenfest, and TKR (see notes 6 and 9) 1,295 1,355 1,323 1,293 Adjustment to restate interest income on the Mile Hi Note (see note 9) 915 1,349 1,186 1,216 Adjustment to revise/implement Statement No. 109 (2,675) 3,712 8,448 (10,966) ------- ------ ------ ------- As adjusted $(11,272) 3,536 13,924 (25,435) ======= ====== ====== ======= Primary and fully diluted earnings (loss) per common and common equivalent share: As previously reported $ (0.08) (0.02) 0.02 (0.14) Adjustment to restate share of earnings (losses) of Mile Hi, Lenfest, and TKR (see notes 6 and 9) 0.01 0.01 0.01 0.01 Adjustment to restate interest income on the Mile Hi Note (see note 9) 0.00 0.01 0.01 0.01 Adjustment to revise/implement Statement No. 109 (0.02) 0.03 0.07 (0.08) ------- ------ ------ ------- As adjusted $ (0.09) 0.03 0.11 (0.20) ======= ====== ====== ======= </TABLE> F-121 <PAGE> 141 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS LIBERTY MEDIA CORPORATION Under date of March 18, 1994, we reported on the consolidated balance sheets of Liberty Media Corporation and subsidiaries (Successor) as of December 31, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1993 and 1992 and the period from April 1, 1991 to December 31, 1991 (Successor Periods) and the consolidated statements of operations, stockholders' equity, and cash flows of "Liberty Media" (a combination of certain programming interests and cable television assets of Tele-Communications, Inc.) (Predecessor) for the period from January 1, 1991 to March 31, 1991 (Predecessor Period), as contained in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned Successor and Predecessor consolidated financial statements, we have also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, the related financial statement schedules, when considered in relation to the basic Successor and Predecessor consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 3 and 13 to the financial statements, the Companies changed their method of accounting for income taxes. /s/ KPMG Peat Marwick KPMG Peat Marwick Denver, Colorado March 18, 1994 F-122 <PAGE> 142 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Marketable Securities - Other Investments December 31, 1993 Schedule I <TABLE> <CAPTION> Number of common shares, units or principal Cost of Market Carrying Name of Issuer amounts issue value value -------------- ------------------ ------------ ------- --------- dollar amounts in thousands <S> <C> <C> <C> <C> BET Holdings, Inc. 3,663,200 $ 722 72,348 722 Silver King Communications, Inc. 61,630 -- 616 International Family Entertainment, Inc. 1,670,986 19,997 34,673 19,997 Video Jukebox Network, Inc. 1,203,464 5,091 3,911 5,091 The National Registry, Inc. 100,000 10,000 22,500 10,000 Silver King Communications, Inc. $ 131,000 131,000 132,303 132,303 International Family Entertainment, Inc. $ 45,000 45,000 138,000 46,457 Intermedia Partners -- 3,647 -- 3,647 Mark Twain Cablevision -- 2,001 2,001 2,001 ----------- ------- ------- 217,458 406,352 220,218 Tele-Communications, Inc. 6,525,721 104,011 209,785 104,011 ----------- ------- ------- $ 321,469 616,137 324,229 =========== ======= ======= </TABLE> F-123 <PAGE> 143 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Condensed Information as to the Financial Position of the Registrant Schedule III Page 1 of 3 <TABLE> <CAPTION> December 31, 1993 1992* --------------------------------- amounts in thousands <S> <C> <C> Assets ------ Cash $ 42,748 85,925 Investment in TCI 104,011 104,011 Investments in and advances to consolidated subsidiaries - eliminated upon consolidation 611,876 437,794 Property and equipment, at cost 588 95 Less accumulated depreciation 72 18 ----------- ------- 516 77 Other intangibles and other assets, at cost, net of amortization 699 677 ----------- ------- $ 759,850 628,484 =========== ======= Liabilitites and Stockholder's Equity Accrued liabilities $ 1,639 2,103 Accrued litigation settlements 13,000 -- Accrued compensation relating to stock appreciation rights 34,162 18,171 Due to TCI, including accrued interest payable 8,961 1,037 Deferred income taxes 12,758 23,161 Debt due TCI 181,596 -- ----------- ------- Total liabilities 252,116 44,472 Redeemable preferred stocks 155,237 155,261 Stockholders' equity (see detail on page II-23) 352,497 428,751 ----------- ------- $ 759,850 628,484 =========== ======= Guarantees (see Schedule VII) $ -- =========== </TABLE> * Restated - see notes 6, 9 and 13 to the consolidated financial statements. F-124 <PAGE> 144 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Condensed Information as to the Operations of the Registrant Schedule III Page 2 of 3 <TABLE> <CAPTION> Nine months Year ended Year ended ended December 31, December 31, December 31, 1993 1992* 1991* ------------- ------------ ------------ amounts in thousands <S> <C> <C> <C> Management costs reimbursed by subsidiaries $ 55,177 14,271 -- ----------- ------- ------- Operating income (expenses): Selling, general and administrative (6,734) (1,876) (790) Compensation relating to stock appreciation rights (37,532) (16,939) (1,398) Litigation settlements (7,475) -- -- Interest expense to TCI (8,903) -- -- Interest income, principally from consolidated subsidiaries 5,521 4,556 3,833 Depreciation and amortization (54) (12) (6) ----------- ------- ------- (55,177) (14,271) 1,639 ----------- ------- ------- Earnings from operations before share of earnings of consolidated subsidiaries and income taxes -- -- 1,639 Income tax benefit 10,403 6,719 1,578 ----------- ------- ------- Earnings from operations before share of earnings (losses) of consolidated subsidiaries 10,403 6,719 3,217 Share of earnings (losses) of consolidated subsidiaries (5,608) 15,665 37,104 ----------- ------- ------- Net earnings $ 4,795 22,384 40,321 =========== ======= ======= </TABLE> * Restated - see notes 6, 9 and 13 to the consolidated financial statements. F-125 <PAGE> 145 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Condensed Information as to the Cash Flows of the Registrant Schedule III Page 3 of 3 <TABLE> <CAPTION> Nine months Year ended Year ended ended December 31, December 31, December 31, 1993 1992* 1991* ------------- ------------ ------------ amounts in thousands <S> <C> <C> <C> Cash flows from operating activities: Earnings from operations before share of earnings (losses) of consolidated subsidiaries $ 10,403 6,719 3,217 Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 54 12 6 Deferred income taxes (10,403) (6,719) (1,578) Compensation relating to stock appreciation rights 37,532 16,939 1,398 Payment of compensation relating to stock appreciation rights (21,541) (166) -- Noncash interest and dividends -- (1,195) (204) Litigation settlements 7,475 -- -- Change in due to TCI, other than for commercial paper 7,924 168 869 Change in accrued liabilities (464) 1,608 495 ----------- ------- ------- Net cash provided by operating activities 30,980 17,366 4,203 ----------- ------- ------- Cash flows from investing activities: (Reduction) in or additional investments in and advances to consolidated subsidiaries, net (174,561) (6,654) 79,417 Capital expended for property and equipment and other assets, net (493) (29) (66) Purchase of commercial paper from TCI -- -- (22,004) Repayment for commercial paper from TCI -- 22,004 -- Other investing activities (22) 287 (555) ----------- ------- ------- Net cash provided (used) by investing activities (175,076) 15,608 56,792 ----------- ------- ------- Cash flows from financing activities: Cash paid for redemption of preferred stock (12,338) -- -- Dividends on preferred stock (9,743) -- -- Issuance of common stock 123,000 -- 100 Purchases and retirements of common stock -- (57,370) (774) ----------- ------- ------- Net cash provided (used) by financing activities 100,919 (57,370) (674) ----------- ------- ------- Increase (decrease) in cash (43,177) (24,396) 60,321 Cash at beginning of year 85,925 110,321 50,000 ----------- ------- ------- Cash at end of year $ 42,748 85,925 110,321 =========== ======= ======= Supplemental disclosure of cash flow information - Cash paid during the year for interest $ -- -- -- =========== ======= ======= </TABLE> See also note 5 to the consolidated financial statements. F-126 <PAGE> 146 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Indebtedness of Related Parties Schedule IV <TABLE> <CAPTION> Balance at Balance beginning at end Name of Person of period Additions Deductions of period -------------- --------- --------- ---------- --------- amounts in thousands <S> <C> <C> <C> <C> Liberty Year ended December 31, 1993 - Tele-Communications, Inc. $ 4,786 33,229 (38,015) -- ======== ====== ======= ====== Year ended December 31, 1992 - Tele-Communications, Inc. $ 26,055 39,604 (60,873) 4,786 ======== ====== ======= ====== Nine months ended December 31, 1991 - Tele-Communications, Inc. $ -- 44,382 (18,327) 26,055 ======== ====== ======= ====== Predecessor Companies Three months ended March 31, 1991 - Tele-Communications, Inc. $ 39,267 150 (39,417) -- ======== ====== ======= ====== </TABLE> Note - Columns which would have been answered "none" have been omitted. F-127 <PAGE> 147 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Guarantees of Securities of Other Issuers December 31, 1993 Schedule VII <TABLE> <CAPTION> Title of issue Name of issuer of securities of each class Total amount Nature guaranteed by person for of securities guaranteed and of which statement is filed guaranteed outstanding guarantee - --------------------------------------------- --------------- -------------- ------------- amounts in thousands <S> <C> <C> <C> Subsidiaries' guarantees: Sports program Contractual Sunshine Network Joint Venture rights contract $1,140 payments Sports program Contractual Prime Sports Network Upper Midwest rights contract 1,825 payments Principal and US Cable of Evangola, Limited Partnership Bank loan 8,875 interest ------ $11,840 ====== </TABLE> Note - Columns which would have been answered "none" have been omitted. F-128 <PAGE> 148 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Schedule VIII <TABLE> <CAPTION> Additions Deductions Balance Charged to Write-offs Balance beginning profit net of at end Description of period and loss recoveries Other of period - ------------------------- ---------- ---------- ---------- ------ --------- amounts in thousands <S> <C> <C> <C> <C> <C> Liberty Year ended December 31, 1993 Allowance for doubtful receivables - trade $ 2,404 3,786 (4,541) 1,383* 1,649 ======== ===== ====== ====== ===== Year ended December 31, 1992: Allowance for doubtful receivables - trade $ 750 2,717 (1,063) -- 2,404 ======== ===== ====== ====== ===== Nine months ended December 31, 1991: Allowance for doubtful receivables - trade $ 912 563 (725) -- 750 ======== ===== ====== ====== ===== Predecessor Companies Three months ended March 31, 1991: Allowance for doubtful receivables - trade $ 900 30 (18) -- 912 ======== ===== ====== ====== ===== </TABLE> * Allowance for doubtful accounts recorded in acquisition of HSN. F-129 <PAGE> 149 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Supplementary Statement of Operations Information Schedule X <TABLE> <CAPTION> Charged to expense -------------------------------------------------------------- Predecessor Liberty Companies --------------------------------------------- ------------- Nine months Three months Year ended Year ended ended ended December 31, December 31, December 31, March 31, 1993 1992 1991 1991 ------------ ------------ ------------ ------------- amounts in thousands <S> <C> <C> <C> <C> Maintenance and repairs $ 9,213 744 656 166 =========== ====== ===== ===== Amortization: Franchise costs $ 3,495 1,148 91 52 Excess cost over acquired net assets 6,639 110 104 6 Other intangibles 13,569 9,945 7,898 2,643 Other 608 528 261 46 ----------- ------ ----- ----- $ 24,311 11,731 8,354 2,747 =========== ====== ===== ===== Taxes, other than payroll and income $ 5,906 688 758 324 =========== ====== ===== ===== Advertising costs $ 18,426 7,299 1,660 729 =========== ====== ===== ===== Royalties $ 2,579 1,412 612 208 =========== ====== ===== ===== </TABLE> F-130 <PAGE> 150 STEVEN PRESSMAN & CO. CERTIFIED PUBLIC ACCOUNTANTS Members of: American Institute of CPA's Pennsylvania Institute of CPA's INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Lenfest Communications, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Lenfest Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income (loss), changes in stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lenfest Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note R to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". /s/ STEVEN PRESSMAN & CO. March 4, 1994 F-131 345 N. York Road / / Hatboro, Pennsylvania 19040-2045 / / 215-672-8880 <PAGE> 151 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 <TABLE> <CAPTION> 1993 1992 ---------- ---------- (Dollars in thousands) <S> <C> <C> ASSETS Cash and cash equivalents $ 2,716 $ 9,440 Marketable securities 3,349 6,830 Accounts receivable - trade and other (less allowance for doubtful accounts of $861 in 1993 and $1,287 in 1992) 13,479 10,823 Inventory 4,535 1,017 Prepaid expenses 6,651 6,430 Property and equipment 452,648 388,988 Less accumulated depreciation 241,705 201,433 ---------- ---------- 210,943 187,555 Property and equipment under capital leases 5,919 4,965 Less accumulated depreciation 1,779 1,295 ---------- ---------- 4,140 3,670 Investments in affiliates, accounted for under the equity method, and related receivables 22,545 4,262 Other investments, at cost, and related receivables 106,172 -- Goodwill, net of amortization 53,740 55,904 Deferred franchise costs, net of amortization 162,661 107,594 Other intangible assets, net of amortization 24,377 13,575 Deferred federal tax asset (net) 18,781 15,583 Other assets 1,920 2,050 ---------- ---------- $ 636,009 $ 424,733 ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. (continued) F-132 <PAGE> 152 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, (continued) December 31, 1993 and 1992 <TABLE> <CAPTION> 1993 1992 ---------- ---------- (Dollars in thousands) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Notes and mortgages payable $ 606,922 $ 401,132 Bond payable 67 434 Obligations under capital leases 5,403 4,472 Accounts payable and accrued expenses 25,960 23,265 Customer service prepayments 4,968 4,250 Deposits on converters 5,497 3,931 Deferred state tax liability (net) 12,812 12,912 Investment in Garden State Cablevision L.P. 26,239 18,499 ---------- ---------- TOTAL LIABILITIES 687,868 468,895 MINORITY INTEREST in equity of South Jersey Cablevision Associates 3,922 -- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock $.01 par value, 158,896 shares authorized, issued and outstanding 2 2 Additional paid-in capital 50,747 50,747 Accumulated deficit (106,530) (94,911) ---------- ---------- (55,781) (44,162) ---------- ---------- $ 636,009 $ 424,733 ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. F-133 <PAGE> 153 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) Years Ended December 31, 1993, 1992, and 1991 <TABLE> <CAPTION> 1993 1992 1991 ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> INCOME $ 213,240 $ 179,940 $ 161,365 OPERATING EXPENSES Service 16,254 14,342 14,295 Programming 51,783 43,388 36,832 Selling and marketing 6,411 5,814 5,034 General and administrative 43,332 35,641 34,233 Cost of sales - equipment 279 733 1,103 Depreciation 45,348 39,599 35,728 Amortization 19,847 16,593 15,868 ---------- ---------- ---------- 183,254 156,110 143,093 ---------- ---------- ---------- OPERATING INCOME 29,986 23,830 18,272 OTHER INCOME (EXPENSE) Interest expense (35,090) (32,563) (35,137) Equity in net (losses) of unconsolidated affiliates (8,068) (12,300) (18,343) Other income (expense) (1,347) (1,345) 6,427 ---------- ---------- ---------- (44,505) (46,208) (47,053) ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (14,519) (22,378) (28,781) INCOME TAX BENEFIT (EXPENSE) Current (400) -- -- Deferred 3,300 5,408 5,246 ---------- ---------- ---------- 2,900 5,408 5,246 ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS (11,619) (16,970) (23,535) DISCONTINUED OPERATIONS Income (loss) from operations of discontinued Cable AdNet Partners - less applicable income tax of $417 in 1991 -- -- 810 Gain on sale of Cable AdNet Partners - less applicable income tax of $6,575 in 1991 -- -- 12,893 ---------- ---------- ---------- -- -- 13,703 ---------- ---------- ---------- NET (LOSS) $ (11,619) $ (16,970) $ (9,832) ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes. F-134 <PAGE> 154 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 1991 ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> COMMON STOCK Balance at beginning of year $ 2 $ -- $ -- Retirement of Class A and Class B stock -- -- -- Issuance of new stock -- 2 -- ---------- ---------- ---------- BALANCE AT END OF YEAR 2 2 -- ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $ 50,747 $ 61,749 $ 61,749 Retirement of Class A stock held in treasury -- (11,000) -- Issuance of new stock -- (2) -- ---------- ---------- ---------- BALANCE AT END OF YEAR 50,747 50,747 61,749 ---------- ---------- ---------- ---------- ---------- ---------- ACCUMULATED DEFICIT Balance at beginning of year, as previously reported. $ (127,446) $ (107,016) $ (100,748) Adjustment for the cumulative effect on prior years of applying retroactively the new method of accounting for income taxes 32,535 29,075 32,639 ---------- ---------- ---------- Balance at beginning of year, as adjusted (94,911) (77,941) (68,109) Net loss for the year (11,619) (16,970) (9,832) ---------- ---------- ---------- BALANCE AT END OF YEAR $ (106,530) $ (94,911) $ (77,941) ---------- ---------- ---------- ---------- ---------- ---------- TREASURY STOCK Balance at beginning of year $ -- $ (11,000) $ (11,000) Retirement of Class A stock held in treasury -- 11,000 -- ---------- ---------- ---------- BALANCE AT END OF YEAR $ -- $ -- $ (11,000) ---------- ---------- ---------- ---------- ---------- ---------- TOTAL STOCKHOLDERS' $ (55,781) $ (44,162) $ (27,192) EQUITY (DEFICIT) ---------- ---------- ---------- ---------- ---------- ---------- </Table See accompanying notes. F-135 <PAGE> 155 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1993, 1992 and 1991 </TABLE> <TABLE> <CAPTION> 1993 1992 1991 ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $ (11,619) $ (16,970) $ (9,832) Adjustments to reconcile net (loss) to net cash provided by operating activities Depreciation and amortization 65,195 56,192 51,596 Net (gains) losses on sales of marketable securities (3,292) 36 (8,549) Deferred income tax (benefit) (3,300) (5,408) (5,246) Disposal of assets upon rebuild of cable systems 1,445 2,633 -- (Gain) on sale of property and equipment (1,150) (85) -- Equity in net losses of unconsolidated affiliates 8,068 12,300 18,343 (Income) from operations of discontinued Cable AdNet Partners -- -- (810) (Gain) on sale of Cable AdNet Partners -- -- (12,893) Stock dividend -- -- (673) Deferred interest on capital leases 49 74 79 Minority interest in net loss of South Jersey Cablevision Associates (78) -- -- Changes in operating assets and liabilities: Accounts receivable (2,219) (1,350) (542) Inventory (3,502) 237 759 Prepaid expenses 204 (2,641) (695) Other assets (278) (576) (387) Accounts payable and accrued expenses 2,516 4,157 6,199 Customer service prepayments 670 203 375 Deposits on converters 166 125 (8) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 52,875 48,927 37,716 </TABLE> See accompanying notes (continued) F-136 <PAGE> 156 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued) Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 1991 ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> CASH FLOWS FROM INVESTING ACTIVITIES Purchases of cable systems $ (80,557) $ (47,100) $ (5,523) Non-cable acquisitions -- (2,125) -- Purchases of property and equipment (45,584) (45,724) (33,477) Purchases of marketable securities (30,981) (14,805) (21,453) Purchases of other investments (15,200) -- -- Proceeds from sale of Cable AdNet Partners -- -- 24,083 Proceeds from sale of property and equipment 1,860 492 -- Proceeds from sales of marketable securities 37,744 10,327 38,517 Investments in unconsolidated affiliates (18,625) (50) (95) Distributions from unconsolidated affiliates 1,450 463 50 (Increase) in other intangible assets - investing (170) (554) (647) Loans and advances to unconsolidated affiliates (net) (1,436) (136) 152 ---------- ---------- ---------- NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES (151,499) (99,212) 1,607 CASH FLOWS FROM FINANCING ACTIVITIES Bond escrow funds Additions to and interest reinvestment -- (2,926) (1,943) Withdrawals for bond principal and interest payment -- 3,774 1,946 (Increase) in other intangible assets - financing (3,319) (19) (541) Increases in debt 187,590 61,806 -- Debt reduction Notes and mortgages (91,932) (13,362) (25,159) Bonds (367) (3,845) (1,925) Obligations under capital leases (72) (116) (456) ---------- ---------- ---------- NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES 91,900 45,312 (28,078) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH (6,724) (4,973) 11,245 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,440 14,413 3,168 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,716 $ 9,440 $ 14,413 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> See accompanying notes F-137 <PAGE> 157 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993, 1992 and 1991 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Lenfest Communications, Inc. and subsidiaries ("the Company") is presented to assist in understanding its financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements. Business Activities and Concentrations of Credit Risk The Company, through its cable subsidiaries, owns and operates various clusters of cable television systems located in the New Jersey and Pennsylvania suburbs of Philadelphia, Pennsylvania westward through Lancaster County, Pennsylvania, and in Oakland, California and Berkeley, California and other nearby municipalities in the East San Francisco Bay Area. In addition, the Company, through its non-cable subsidiaries, provides satellite delivered cross channel tune-in promotional services for cable television, microwave transmission of video, voice and data and is developing cable advertising and billing software and commercial insertion equipment which it intends to market. The Company's ability to collect the amounts due from customers is affected by economic fluctuations in these geographic areas and in the cable television industry generally. The Company maintains cash balances at several financial institutions located primarily in the Philadelphia and East San Francisco Bay Areas. Accounts at each institution are insured by either the Bank Insurance Fund or another institutional insurance fund up to $100,000 and $500,000, respectively. The Company maintains cash balances in excess of the insured amounts. Basis of Consolidation The consolidated financial statements include the accounts of Lenfest Communications, Inc. and those of all wholly-owned subsidiaries. In addition, effective April 2, 1993, the accounts of South Jersey Cablevision Associates, a newly formed partnership that is owned sixty percent (60%) by the Company, are also included. Significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all short-term debt securities purchased with an original maturity of three (3) months or less to be cash equivalents. Inventory Inventory is stated at the lower of cost or market on a first-in, first-out basis. Inventory consists of equipment sold by the Company's promotional and advertising subsidiaries. Property and Equipment Property and equipment are stated at cost. For the newly acquired systems or companies, the purchase price has been allocated to net assets on the basis of fair market values as determined by an independent appraiser. Depreciation is provided using the accelerated and straight line methods of depreciation for financial reporting purposes at rates based on estimated useful lives. For income tax purposes, recovery of capital costs for property and equipment is made using accelerated methods over statutory recovery periods. F-138 <PAGE> 158 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Expenditures for renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Property and Equipment Under Capital Leases Property and equipment capitalized under capital leases are amortized on the straight line method over the term of the leases or the estimated useful lives of the assets. Capitalization of Costs All costs properly attributable to capital items, including that portion of employees' compensation allocable to installation, engineering, design, construction and various other capital projects are capitalized. Installation income has been fully recognized. Deferred Franchise Costs, Goodwill and Other Intangible Assets Deferred franchise costs, goodwill and other intangible assets acquired in connection with the purchases of cable systems and other companies have been valued at acquisition cost on the basis of the allocation of the purchase price on a fair market value basis to net assets as determined by an independent appraiser. Additions to these assets are stated at cost. Other intangible assets consist of debt acquisiton costs, organization costs, covenants not to compete and software development costs in connection with software to be marketed. Goodwill represents the cost of acquired cable systems and companies in excess of amounts allocated to specific assets based on their fair market values. Deferred franchise costs are amortized on the straight-line method over the legal franchise lives, generally 10 to 20 years. Other intangible assets are being amortized on the straight-line method over their legal or estimated useful lives, generally ranging from 5 to 10 years. Goodwill is amortized on the straight-line method over 20 to 40 years. Income Taxes The Company files a consolidated Federal tax return. Investment and other tax credits are recognized under the flow-through method of accounting. The amount of available investment credit on property and equipment acquired after December 31, 1982 and prior to January 1, 1986 has been reduced by two percent (2%), in accordance with the 1982 Tax Act. Interest Rate Protection Agreements The amount to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. Restatement The 1992 and 1991 amounts have been restated because the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (see Note R). In addition, certain amounts have been reclassified for comparability with the 1993 presentation. NOTE B - RECAPITALIZATION AND OWNERSHIP On April 9, 1992, the Company approved a plan of recapitalization under which it converted each outstanding share of Class A and Class B common stock into one hundred (100) shares of newly created shares of $.01 par value common stock and retired the former classes of common stock, including the shares of treasury stock. As a result of the recapitalization, common stock increased by $2,000, treasury stock decreased by $11,000,000 and additional paid-in capital decreased by $11,002,000. F-139 <PAGE> 159 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Prior to the recapitalization, the outstanding number of shares (excluding treasury stock) was 1588.9655. H.F. Lenfest, his children and affiliated entities owned 827.5862 shares of Class A (52.083% of the total outstanding common stock). The outstanding 761.3793 shares of Class B (47.917% of the total outstanding common stock) were owned by a wholly-owned subsidiary of Liberty Media Corporation ("Liberty"). Liberty acquired the Class B shares from affiliates of Tele-Communications, Inc. ("TCI"). On March 28, 1991, TCI contributed the Class B stock to Liberty in connection with the spin off of Liberty fron TCI. Class A stock and Class B stock were identical in every respect except that Class A stock had 20 votes per share and Class B had one vote per share. On April 9, 1992, members of the Lenfest family and affiliated entities entered into agreements with Liberty to bring Liberty's ownership in the Company to fifty percent (50%). As part of these agreements, the two classes of stock were eliminated and were replaced with 158,896 shares of common stock with equal votes per share. The agreements further provide that for ten years from the date of the agreement, H.F. Lenfest has the right to continue as chief executive officer of the Company and that as long as H.F. Lenfest and his spouse serve as directors, the Lenfest family will have majority representation on the board of directors of the Company. NOTE C - SUPPLEMENTAL DISCLOSURE TO STATEMENT OF CASH FLOWS <TABLE> <CAPTION> 1993 1992 1991 --------- --------- --------- (Dollars in thousands) <S> <C> <C> <C> Cash paid during the year for: Interest $ 36,908 $ 31,472 $ 31,834 --------- --------- --------- --------- --------- --------- Income taxes - continuing operations $ 400 $ -- $ -- --------- --------- --------- --------- --------- --------- Income taxes - discontinued operations $ -- $ -- $ 130 --------- --------- --------- --------- --------- --------- </TABLE> Supplemental Schedules Relating to Acquisitions <TABLE> <CAPTION> 1993 1992 1991 --------- ------------------------- --------- Cable Non-cable Cable Cable Systems Subsidiaries Systems Systems --------- ------------ -------- --------- (Dollars in thousands) <S> <C> <C> <C> <C> Property and equipment $ 24,839 $ 213 $ 20,105 $ 3,890 Deferred franchise costs 69,988 -- 24,000 1,630 Intangible and other assets 10,518 1,912 2,995 Debt assumed (19,160) -- -- Liability assumed (1,628) -- -- Minority interest in partnership equity (4,000) -- -- --------- --------- -------- --------- $ 80,557 $ 2,125 $ 47,100 $ 5,520 --------- --------- -------- --------- --------- --------- -------- --------- </TABLE> <TABLE> <CAPTION> 1993 1992 1991 --------- --------- --------- (Dollars in thousands) <S> <C> <C> <C> Unrealized gains on marketable securities $ 12,739 $ 11,822 $ 3,700 --------- --------- --------- --------- --------- --------- </TABLE> F-140 <PAGE> 160 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Noncash Investing and Financing Transactions The Company's 1993 investment in Australis Media, Ltd. was financed by notes payable to a group of banks in the amount of $85,000,000 and by a promissory note to a principal stockholder of the Company in the amount of $5,972,000. In 1993, the Company refinanced $19,160,000 of debt assumed by South Jersey Cablevision Associates. In 1992, the Company financed the payment of $44,394,000 of maturing debt, (including a $30,000,000 bridge loan incurred in the acquisition of the Hershey, Pennsylvania cable TV system), $3,114,000 of interest and $2,280,000 of loan costs. The Company refinanced $100,000,000 of its long-term debt in 1991. During 1993, 1992 and 1991, the Company disposed of $307,000, $2,435,000 and $10,210,000, respectively, of fully depreciated plant in connection with the rebuild of certain of its systems. In addition, $661,000 of fully depreciated plant was destroyed in a fire loss in 1991. The Company retired $356,000 of fully depreciated equipment in 1992. In 1992, the Company retired its Class A and Class B common stock and issued new common stock in its place. The Company incurred additional capital lease obligations in the amount of $954,000 in 1993 and $948,000 in 1991. Additionally, the Company reclassified $1,595,000 of equipment under capital lease as property and equipment in 1991 at the conclusion of the lease obligations. The Company elected to receive stock valued at $673,000 instead of cash for its annual dividend from Turner Broadcasting System, Inc. in 1991. NOTE D - NEW BUSINESS AND ACQUISITIONS Cable Systems On August 20, 1993, the Company, through its subsidiary, Suburban Cable TV Co. Inc, acquired the assets of a cable television system serving a total of approximately 25,000 subscribers located in Norristown, Pennsylvania and surrounding areas. The acquisition was accounted for under the purchase method. The purchase price was $75,500,000. On May 28, 1993, the Company, through its newly formed subsidiary, Lenfest York, Inc., acquired 14.9% of the voting stock of Susquehanna Cable Co. ("Susquehanna"), a majority-owned subsidiary of Susquehanna Pfaltzgraff Co., and 17.75% of the voting stock of four of Susquehanna's subsidiaries for $11,000,000. On November 30, 1993, Lenfest York, Inc. acquired 17.75% of the voting stock of a fifth subsidiary of Susquehanna for $14,000,000. The Company's direct and indirect investment in each of the five subsidiaries ("Subsidiaries") aggregates 30%. The Company utilizes the equity method to account for its investment in the Subsidiaries and the cost method to account for its investment in Susquehanna. Susquehanna and Subsidiaries own and operate several cable systems serving a total of over 120,000 subscribers, the largest of which is located in York County, Pennsylvania and is contiguous to the Company's cable systems located in Lancaster County, Pennsylvania. The Company has the right of first refusal on any sale of stock of the Subsidiaries owned by Susquehanna and on any sale of cable television system assets owned by Susquehanna or Subsidiaries. In addition, after the fifth anniversary of the closing, the agreement provides that either the Company of Susquehanna can initiate a buy-sell transaction for all of the outstanding ownership interests in Susquehanna and Subsidiaries. F-141 <PAGE> 161 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) On April 2, 1993, the Company, through its newly formed subsidiary, Lenfest Atlantic, Inc., formed a general partnership named South Jersey Cablevision Associates ("South Jersey"). The Company made a capital contribution of $6,000,000 for a sixty percent (60%) general partnership interest. The remaining forty percent (40%) general partnership interest is held by CMS Cable Partnership ("CMS Cable") which had contributed the tangible and intangible assets of contiguous cable TV systems serving approximately 16,000 subscribers in southern New Jersey, having an appraised value of $29,322,200, working capital of $196,000, senior debt of $19,159,600 and liabilities of $162,600. Immediately after the partnership formation, South Jersey made distributions amounting to $6,196,000 to CMS Cable. A subsidiary of the Company manages South Jersey and is paid a management fee equal to five percent (5%) of revenue. The payment of the management fee is subordinated to the loan and may be paid currently to the extent permitted by the partnership lenders. On the fifth anniversary of closing, the Company has the right to purchase all of CMS Cable's remaining interest at the greater of fair market value or a specified minimum price. In 1992, the Company acquired the assets of five cable television systems serving a total of approximately 25,000 subscribers located in Hershey, Newtown and near West Chester, Pennsylvania. The acquisitions were accounted for under the purchase method. The aggregate purchase price was $47,100,000. In 1991, the Company acquired the assets of two cable television systems serving a total of approximately 2,700 subscribers located in Hopewell Township, New Jersey and Lancaster County, Pennsylvania. The acquisitions were accounted for under the purchase method. The aggregate purchase price was $5,523,000. International In December 1993, the Company, through its newly formed subsidiary, Lenfest Australia, Inc., acquired approximately 8.2% of the voting stock and of nonvoting debentures for a total equity interest of approximately 50.5% (49.1% on a fully-diluted basis) of Australis Media, Ltd. ("Australis"), a publicly traded Australian company for $90,972,000, which includes a reimbursement of $7,500,000 to H.P. Lenfest for his payment of deposits for a Pay TV license. In addition, the Company incurred transaction costs including loan placement fees of $1,501,000, which are included in the balance sheet under the caption, "other intangible assets". Australis holds one of two Australian commercial Pay TV Direct Broadcast Satellite licenses as well as a number of MDS licenses serving several major metropolitan areas of Australia. The Company accounts for the investment under the cost method. In April 1993, the Company, through its newly formed subsidiary, Lenfest International, Inc., formed L-TCI Associates (L-TCI), a general partnership with UA-France, Inc. ("UAF"), an indirect wholly-owned subsidiary of Tele-Communications, Inc. L-TCI was formed to subscribe to and acquire shares of stock in Videopole, a French cable television holding and management company that franchises, builds and operates cable television systems in medium to smaller communities (2,000 - 50,000 inhabitants) in France. In May 1993, L-TCI acquired 29% of the issued and outstanding stock of Videopole. The Company invested $4,860,000 to fund its pro-rata share of the L-TCI acquisition. The Company uses the investment-cost method to account for its investment since its indirect ownership in Videopole is 14.5%. In addition, L-TCI is obligated to make additional capital contributions pursuant to its stock subscription agreement. The Company's share of L-TCI's commitment amounts to 24,220,000, 12,905,000, 11,600,000 and 10,005,000 French francs in 1994-1997 respectively, which, as of the date of these statements, amounted to approximately $4,152,000, $2,212,000, $1,989,000 and $1,715,000, respectively. In addition, pursuant to the L-TCI partnership agreement, the Company is contingently liable for the UAF share of L-TCI's commitment in the above amounts for the years 1995-1997 should UAF fail to fund its share in any of these three years. F-142 <PAGE> 162 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Other On August 24, 1993, the Company, through its newly formed subsidiary, StarNet Interactive Entertainment, Inc., formed a partnership with CEA Investors Partnership II, Ltd. ("Investors") for the sole purpose of jointly holding a substantial equity interest in Video JukeBox Network, Inc. ("VJN"), a publicly-traded Florida corporation. The name of the partnership is StarNet/CEA II Partners ("Partners"). The Company contributed $3,305,808 for a fifty percent (50%) partnership interest and Investors contributed cash of $105,808 and 2,834,908 shares of VJN common stock valued at $3,200,000. On August 30, 1993, Partners acquired 2,014,520 shares of VJN common stock from New Vision Music for $1,611,616, 687,500 shares of newly issued VJN common stock for $550,000 and a convertible promissory note issued by VJN for $1,200,000, with interest accruing at the rate of prime plus 1%, with the note convertible at the rate of $.80 per share and accrued interest on the note at the rate of $1.25 per share. As of December 16, 1993, the $1,200,000 convertible promissory note was converted into 1,500,000 shares of VJN common stock and the related accrued interest of $24,855 was converted into 19,884 shares of VJN common stock. At December 31, 1993, Partners owned a total of 7,056,812 shares of VJN common stock, which represents direct ownership by Partners of approximately 41% of VJN's outstanding shares of common stock. In addition, Investors also controls irrevocable proxies in its favor on an additional 3,308,810 shares. Investors has agreed that it will vote the proxy shares in the same manner of Partners, thereby giving Partners and Investors voting control over approximately 60.2% of VJN voting stock. The Company utilizes the equity method to account for its indirect 20.5% investment in VJN. In connection with the above stock acquisitions, StarNet, Inc. ("StarNet"), a subsidiary of the Company, entered into consulting, management and service agreements with VJN, whereby StarNet is responsible for the day-to-day management and supervision of VJN and whereby StarNet will provide technology relating to a system for digital satellite distribution, headend storage and playback of discrete video segments. StarNet was compensated at the rate of $25,000 per month during the consulting period (August 24, 1993 to December 16, 1993). Under the management agreement (commenced December 16, 1993), StarNet shall be compensated at the rate of $300,000 per annum for the first year and no less than $150,000 per annum for the second and third years of the management agreement plus costs incurred by StarNet in developing the above technology. Under the service agreement, StarNet is providing analog uplink service and satellite capacity to VJN on Satcom C-4 for the delivery of VJN's programming service known as "The Box" for a fee of $200,000 per month. Upon conversation of The Box from analog to digital transmission, the monthly charge shall be reduced to $125,000 per month. StarNet shall also be entitled to receive a fee equal to $.02 per month per VJN subscriber who receive digital transmission. The term of the service agreement commenced on August 30, 1993 and ends on March 31, 1999. VJN, at its sole option, may defer the frist twelve months of payments due under the service agreement by the issuance of convertible promissory notes for such deferred amount, such notes bearing interest at prime plus one percent (1%). Payments on the outstanding balance of the notes commence on September 1, 1996, and are payable in 30 equal installments plus interest on each installment. StarNet has the option to convert all or any part of the principal or accrued interest of each note into VJN common stock at a price of $1.25 per share. At December 31, 1993, StarNet held four convertible promissory notes amounting to $800,000 which collectively had accrued interest of $23,000. In 1992, the Company acquired the assets related to the cable TV series division of LJ Development, Inc. and Unibase Data Entry, Inc., located in Salt Lake City, Utah. Included among the assets purchased are all rights and privileges to the development of traffic and billing software known as Traffic Pro 2000 and to the development of software for use in commercial insertion equipment known as the StarNet inserter. The acquisition was accounted for under the purchase method. An initial amount of $2,125,000 has been paid. Additional amounts were initially payable upon the achievement of certain "milestones" in the development of the software. However, these installments were not paid because the Company was not satisfied that the milestones were achieved. In 1993, LJ Development initiated legal proceedings in connection with the purchase agreement (see Note U). Also in 1993, the Company recorded a charge against income of $1,507,000 for the write-off of Traffic Pro 2000 capitalized software development costs (See Note T). F-143 <PAGE> 163 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE E -- PROPERTY AND EQUIPMENT The schedule of property and equipment at December 31, 1993 and 1992 as follows: <TABLE> <CAPTION> Estimated Useful Lives 1993 1992 in Years ---- ---- ------------ (Dollars in thousands) <S> <C> <C> <C> Land $ 4,456 $ 4,240 - Building and improvements 12,616 11,471 10-39 Cable distribution systems 401,192 341,243 5-12 Microwave equipment 20,897 20,939 7 Satellite communications equipment 989 647 7 Office equipment, furniture and fixtures 12,498 10,448 4-15 -------- -------- $452,648 $388,988 -------- -------- -------- -------- </TABLE> During 1993 and 1992, certain portions of the Company's cable systems were torn down and rebuilt. For the years ended December 31, 1993 and 1992, the net loss on the disposal of these assets was $1,445,000 and $2,633,000 and has been classified as other expense. NOTE F -- INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE CABLEVISION L.P. The Company, through several subsidiaries, owns non-controlling partnership interests in several general partnerships. Any subsidiary of the Company that is a general partner is, as such, liable, as a matter of partnership law, for all debts of such partnership in the event liabilities of that partnership were to exceed its assets. Investments and advances in affiliates accounted for under the equity method amounted to $22,545,000 and $4,262,000 at December 31, 1993 and 1992, respectively. Net losses recognized under the equity method for the years ended December 31, 1993, 1992 and 1991 were $8,068,000, $12,300,000 and $18,343,000, respectively. Under the equity method, the initial investments are recorded at cost. Subsequently, the carrying amount of the investments are adjusted to reflect the Company's share of net income or loss of the affiliates as they occur. Losses in excess of amounts recorded as investments on the Company's books have been offset against loans and advances to these unconsolidated affiliates to the extent they exist. The Company, through its subsidiary, Lenfest Jersey, Inc., owns a 39.995% limited partnership interest in Garden State Cablevision L.P. (Garden State), a cable company now serving over 190,000 subscribers in southern New Jersey. Under a consulting agreement, the Company advises Garden State on various operational and financial matters for a consulting fee equal to 2% of gross revenue. However, due to restrictions contained in Garden State's debt agreements, the payment of these fees has been deferred. The Company accounts for its investment in Garden State under the equity method. Under the terms of the limited partnership agreement, the Company is allocated 49.50% of Garden State's losses. In addition, the Company is required to make up its partner capital deficits upon the termination or liquidation of the Garden State partnership. Because of the requirement to make up capital deficits, the accompanying financial statements reflect equity in accumulated losses, net of related receivable, in excess of the initial investment in Garden State in the amount of $26,239,000 and $18,499,000 at December 31, 1993 and 1992. F-144 <PAGE> 164 LENFEST COMMUNICAITONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The Garden State Financial statements have been prepared assuming that Garden State will continue as a going concern. Garden State has begun requesting financing proposals to finance the scheduled 1994 buyout of the general partner as well as repayment of its senior debt and subordinated debt which become due in 1994. As of the date of the Company's financial statements, Garden State has not received a written commitment for the required financing and this raises substantial doubt about its ability to continue as a going concern. Garden State's financial statements do not include any adjustments that might result from the outcome of this uncertainty. Summarized unaudited financial information of Garden State, accounted for under the equity method, at December 31, 1993 and 1992, is as follows: <TABLE> <CAPTION> 1993 1992 ----------- ---------- (Dollars in thousands) <S> <C> <C> Financial Position - ------------------ Cash $ 5,215 $ 13,525 Accounts receivable, net 1,842 2,179 Prepaid expenses 270 157 Property and equipment, net 76,704 82,847 Other deferred assets, net 169,809 202,981 ---------- ---------- TOTAL ASSETS $ 253,840 $ 301,689 ---------- ---------- ---------- ---------- Debt $ 264,878 $ 299,406 Liabilities to the Company 5,208 3,870 Accounts payable and accrued expenses 23,230 18,647 Customer prepayments and deposits 1,009 964 Other liabilities 779 - Partners' equity (deficit) (41,264) (21,198) ---------- ---------- TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 253,840 $ 301,689 ---------- ---------- ---------- ---------- </TABLE> <TABLE> <CAPTION> 1993 1992 1991 ---------- ---------- ---------- (Dollars in thousands) <S> <C> <C> <C> Results of Operations - --------------------- Revenue $ 90,824 $ 84,877 $ 78,833 Operating expenses (38,014) (36,794) (36,818) Depreciation and amortization (47,682) (49,512) (49,068) ---------- ----------- ---------- OPERATING INCOME (LOSS) 5,128 (1,429) (7,053) Interest expense (20,904) (25,128) (31,272) Other expense (3,633) (3,395) (3,153) Effect of accounting change (657) - - ---------- ----------- ---------- NET LOSS $ (20,066) $ (29,952) $ (41,478) ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> F-145 <PAGE> 165 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Summarized unaudited financial information of affiliates other than Garden State, accounted for under the equity method, at December 31, 1993 and 1992, is as follows: 1993 1992 -------- -------- (Dollars in thousands) Financial Position - ------------------ Cash $ 5,052 $ 2,452 Accounts receivable, net 9,283 5,450 Prepaid expenses 1,194 537 Property and equipment, net 37,202 4,693 Other assets, net 24,611 3,832 -------- -------- TOTAL ASSETS $ 77,342 $ 16,964 -------- -------- -------- -------- Financial Position - ------------------ Liabilities to the Company $ 1,419 $ 1,352 Accounts payable and accrued expenses 19,197 3,053 Debt 14,268 -- Deferred tax liability 6,399 -- Payable to related party (not the Company) 60,422 -- Equity (24,363) 12,559 -------- -------- TOTAL LIABILITIES AND EQUITY $ 77,342 $ 16,964 -------- -------- -------- -------- 1993 1992 1991 -------- -------- -------- (Dollars in thousands) Results of Operations - --------------------- Revenue $ 81,073 $ 23,346 $ 20,043 Operating expenses (63,209) (18,661) (16,513) Depreciation and amortization (7,538) (1,282) (1,064) -------- -------- -------- OPERATING INCOME 10,326 3,403 2,466 Interest expense (4,495) (83) (95) Other income (expense) (3,270) (142) 23 -------- -------- -------- NET INCOME $ 2,561 $ 3,178 $ 2,394 -------- -------- -------- -------- -------- -------- F-146 <PAGE> 166 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The following table reflects the carrying value of the Company's investments, other than Garden State, accounted for under the equity method, including related receivables, as of December 31, 1993: (Dollars in thousands) Video JukeBox Network, Inc. ("VJN") (Note D) $ 3,969 Susquehanna Cable Co. Subsidiaries ("SCC Subs") (Note D) 14,005 Bay Cable Advertising ("BCA") 2,788 Cable Adcom ("Adcom") 451 Philadelphia Cable Advertising ("PCA") 329 MetroNet Communications ("MetroNet") 880 Other 123 ------- $22,545 CAH, Inc. (formerly Cable AdNet, Inc.), a subsidiary of the Company, owns a 41.667% general partnership interest in Bay Area Interconnect d/b/a Bay Cable Advertising, a cable advertising interconnect serving the San Francisco, California Area of Dominant Influence ("ADI"). Suburban Cable TV Co. Inc., a wholly-owned subsidiary of the Company, owns a 25% and a 20% general partnership interest in Cable Adcom and Greater Philadelphia Cable Interconnect d/b/a Philadelphia Advertising, respectively. These partnerships are cable advertising interconnects that serve the Harrisburg, Pennsylvania and Philadelphia, Pennsylvania ADI's. The Company's wholly-owned subsidiary, LenNet, Inc., owns a 50% general partnership interest in MetroNet Communications, a company that provides microwave transmissions of voice and data between two points of presence for its customers located throughout the United States. The following table reflects the Company's share of earnings or losses of Garden State and each of the aforementioned affiliates: 1993 1992 1991 -------- --------- -------- (Dollars in thousands) Results of Operations - --------------------- VJN $ (74) $ -- $ -- SCC Subs (857) -- -- Garden State (8,570) (13,552) (19,349) BCA 1,457 1,130 887 Adcom 153 137 113 PCA (36) 3 24 MetroNet 94 55 38 Other (235) (73) (56) ------- -------- -------- $(8,068) $(12,300) $(18,343) ------- -------- -------- ------- -------- -------- F-147 <PAGE> 167 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE G - OTHER INVESTMENTS Other investments, accounted for under the cost method, are summarized as follows: 1993 1992 -------- ------ (Dollars in thousands) Australis Media, Ltd.(a) $ 90,972 $ -- Susquehanna Cable Co., Inc.(b) 10,359 -- Videopole(c) 4,841 -- -------- ------ $106,172 $ -- -------- ------ -------- ------ (a) The Company's investment in the various classes of stock of this company is accounted for under the cost method. Although the Company's ownership approximates 50.5%, the cost method of accounting is considered appropriate because the Company's ownership represents less than 10% of the voting power and Australian regulations prohibit greater than 20% ownership in voting stock by one foreign investor. (b) The Company has 14.9% ownership of the voting stock of Susquehanna Cable Co. Inc. and accounts for this investment under the cost method. Susquehanna is an indirect subsidiary of Susquehanna Pfaltzgraff Co. and is the parent company of five cable operating subsidiaries, of which the Company has a direct ownership interest of the voting stock of 17.75%. The Company's investment in these subsidiaries are accounted for under the equity method because the Company's direct and indirect ownership interests in these subsidiaries approximate thirty percent(30%). (c) The Company has a fifty percent (50%) ownership in L-TCI Associates, a partnership, which owns 29% of the outstanding voting stock of Videopole, a French holding company which manages and owns numerous CATV subsidiaries in France. L-TCI Associates has no other activities. As a result, the Company has an indirect ownership of 14.5% in the stock of Videopole and accounts for this investment under the cost method. NOTE H - DISCONTINUED OPERATIONS On November 24, 1991, Cable Investment Properties, Inc., a subsidiary, sold its remaining fifty-one percent (51%) interest in Cable AdNet Partners (AdNet) to an affiliate of TCI. Previously, effective January 1, 1990, CAH, Inc. sold a forty-nine percent (49%) interest in AdNet to an affiliate of TCI. The sales represented the disposition of a major segment of the Company's cable advertising business. The selling price of the fifty-one percent (51%) interest, including post-closing adjustments, was $24,083,000 in 1991. The sales resulted in a gain in 1991 of $12,893,000 net of applicable income tax of $6,575,000 of which $130,000 was payable in 1991 and the balance representing a charge against deferred taxes. The consolidated financial statements and notes thereto have been restated to reflect continuing operations of the Company for the years ended December 31, 1991. The net operating results of AdNet and the net gain on the sale of the partnership interests are included in the consolidated statements of income (loss) under the caption "Discontinued Operations". F-148 <PAGE> 168 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The following is a summary of income (loss) from operations of the discontinued Cable AdNet Partners: Period from January 1, to November 24, 1991 ------------- (Dollars in thousands) Results of Operations - --------------------- Income $ 24,305 Operating expenses (19,490) Depreciation and amortization (4,020) -------- OPERATING INCOME 795 Interest expense (28) Other income 66 -------- NET INCOME $ 833 -------- -------- As Recorded by the Company - -------------------------- Equity in net income $ 425 Depreciation and amortization adjustment 802 Provision for income taxes (417) -------- $ 810 -------- -------- The net income separately reported by AdNet differs from the net income utilized by the Company to report income from discontinued operations. The difference is due to the Company recognizing depreciation and amortization on the assets it had contributed to the AdNet partnership based on the contributed assets historical costs. The AdNet partnership recorded depreciation and amortization on the contributed assets at their fair market value as of the inception date of the partnership. NOTE I - GOODWILL The excess of the purchase price paid over the acquired net assets has been allocated to goodwill. Accumulated amortization at December 31, 1993 was $16,374,000 and at December 31, 1992 was $13,632,000. F-149 <PAGE> 169 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE J - DEFERRED FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS A schedule of deferred franchise costs and other intangible assets and accumulated amortization at December 31, 1993 and 1992 is as follows: <TABLE> <CAPTION> December 31, 1993 ------------------------------------ Accumulated Amount Amortization Net -------- --------------- --------- (Dollars in thousands) <S> <C> <C> <C> Description - ----------- Deferred franchise costs $ 258,041 $ 95,380 $ 162,661 Organization, development, loan and bond issuanse costs, deferred lease costs, covenants not to compete, software development costs $ 29,325 $ 4,948 $ 24,377 </TABLE> <TABLE> <CAPTION> December 31, 1992 ------------------------------------ Accumulated Amount Amortization Net -------- --------------- --------- (Dollars in thousands) <S> <C> <C> <C> Description - ----------- Deferred franchise costs $ 187,919 $ 80,325 $ 107,594 Organization, development, loan and bond issuande costs, deferred lease costs, covenants not to compete, software development costs $ 16,557 $ 2,982 $ 13,575 </TABLE> NOTE K - MARKETABLE SECURITIES Marketable securities are shown in the balance sheet at the lower of aggregate cost or market value. Market values at December 31, 1993 and 1992, are as follows: 1993 1992 -------- -------- (Dollars in thousands) Aggregate cost $ 3,349 $ 6,830 Gross unrealized gain 12,739 11,822 -------- -------- Market value $ 16,088 $ 18,652 -------- -------- -------- -------- Net realized gains (losses) from the sale of marketable securities, in the amount of $3,292,000, $(36,000) and $8,549,000, are classified as other income (expense) in 1993, 1992 and 1991, respectively. The specific identificaiton method is used to determine the cost of each security at the time of sale. F-150 <PAGE> 170 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE L - NOTES, MORTGAGES AND BONDS PAYABLE Notes, mortgages and bonds payable consisted of the following at December 31, 1993 and 1992: <TABLE> <CAPTION> 1993 1992 --------- --------- (Dollars in thousands) <S> <C> <C> Notes payable to banks (a) $ 252,450 $ 76,200 Notes payable to banks (b) -- 67,500 10.15% senior promissory notes due September 1, 2000 (c) 97,000 107,000 10.69% senior promissory notes due May 15, 1998 (d) 47,000 50,000 9.93% senior promissory notes due September 30, 2001 (e) 100,000 100,000 Notes payable to banks (f) 85,000 -- Notes payable to banks (g) 19,500 -- Promissory note payable to stockholder (h) 5,972 -- Mortgage payable (i) -- 432 --------- --------- Notes and mortgages payable 606,922 401,132 Bond payable (j) 67 434 --------- --------- $ 606,989 $ 401,566 --------- --------- --------- --------- </TABLE> (a) The credit agreement related to these notes are with a group consisting of several banks dated August 28, 1992, amended and restated as of August 18, 1993, provides up to $260,000,000 of borrowings. The credit agreement provides for three facilities: Facility A - a reducing revolving credit facility in an aggregate principal amount not to exceed $83,750,000 to fund acquisitions, investments, capital expenditures and working capital needs. Facility B - a $120,000,000 term loan facility to refinance an existing loan and intercompany debt and provide funds for acquisitions and general corporate purposes. Facility C - a $56,250,000 term loan facility used to refinance another loan. The interest rate on all loans made under the three facilities is based upon the agen bank's base rate plus 1/8% - 3/4% or the Euro-rate plus 1 1/8% - 1 3/4%. The level of borrowing margin is based upon the Company's and certain of its subsidiaries leverage ratio. The Company also pays a commitment fee of 3/8% per annum on the average daily unused portion of the Facility A commitment and a commitment fee of 1/2% on the average daily unused portion of the Facility C commitment. In addition, the Company incurred facility fees and other costs amounting to $2,280,000. These costs have been deferred and are being amortized over the term of the credit agreement. The Facility A commitment reduces quarterly commencing June 30, 1995 and terminates March 31, 2001. The Facility B and Facility C term loans require quarterly payments of principal commencing June 30, 1995 and have final maturity of March 31, 2001. Interest is payable quarterly in arrears. The effective interest rates at December 31, 1993 and 1992 were 4.877% and 4.935%, respectively. F-151 <PAGE> 171 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) (b) These notes payable related to a revolving credit facility agreement with a group consisting of several international banks dated January 20, 1989. In December 1993, the credit facility was refinanced in the amount of $56,250,000 per Facility C of the credit facility explained in (a) above. The effective interest rate at December 31, 1992 was 4.188%. (c) These notes are payable to a group consisting of several insurance companies. The notes are payable in annual installments, with the final payment due September 1, 2000. Interest is at the fixed rate of 10.15% per annum, payable quarterly. (d) These notes are payable to an insurance company and to its assignees. The notes are payable in annual installments, with the final payment due May 15, 1998. Interest is at a fixed rate of 10.69% per annum, payable quarterly. (e) These notes are payable to a group consisting of several insurance companies. The notes are scheduled to be repaid starting September 30, 1995, with the final payment due September 30, 2001. Interest is at the fixed rate of 9.93%, per annum, payable semi-annually. (f) The credit agreement related to these notes are with a group consisting of several banks dated November 16, 1993, which provides up to $85,000,000 of borrowings. The credit agreement provided the financing for the Company's subsidiary, Lenfest Australia, Inc., investment in Australis Media, Ltd., a publicly traded corporation that is the holder of the Australian Pay Television license known as License "B", to repay a portion of the deposit on License "B", funded by H.F. Lenfest, and fund transactional fees and expenses. Prior to November 30, 1994, the Company has the option to choose to pay interest based upon the agent bank's base rate plus 1 1/8% - 1 3/4% on the earlier of the last day of the Euro-rate interest period or quarterly. After November 30, 1994, the Company shall pay interest at a per annum rate equal to the sum of the Base Rate plus 2% and, on the first day of each calendar month thereafter, the per annum interest rate shall increase by an additional one percent (1%). The level of borrowing margin is based upon the Company's and certain of its subsidiaries leverage ratio. The Company incurred facility fees of $1,501,000. These costs have been deferred and are being amortized over the term of the credit agreement. In addition, the Company pays an administrative agency fee of $25,000 per annum to the agent bank. The credit facility terminates on July 1, 1995. The above debt agreements place certain financial restriction on the Company and restricted subsidiaries which, among others, require meeting certain ratios relating to interest coverage and principal coverage. (g) These notes are payable by the Company's sixty percent (60%) owned subsidiary, South Jersey Cablevision Associates, to two banks, pursuant to a credit agreement dated April 2, 1993. The agreement provides for a revolving and term loan not to exceed $20,000,000 for a period of one year at which time the outstanding balance under the revolving loan converts to a loan to be repaid in 24 consecutive quarterly installments commencing June 30, 1994, and maturing March 31, 2000. The loan is secured by the partnership interests and by the real and personal property of South Jersey including franchises, contracts, licenses and any lease assignments with landlord waivers. Interest is payable quarterly based upon the agent bank's base rate plus 3/8% - 1 3/8% or LIBOR plus 1 1/2% - 2 1/2%. The level of borrowing margin is based upon South Jersey's leverage ratio. In addition, South Jersey paid a facility fee of $200,000 and is required to enter into interest rate protection agreements of a duration of at least 2 years whereby in respect of a notional principle amount equal to at least 50% of the then outstanding principal amount of the notes. The credit agreement places certain financial restriction on South Jersey which, among others, require meeting certain ratios relating to interest coverage and principal coverage. F-152 <PAGE> 172 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) (h) This note is payable to a principal stockholder who advanced $5,972,000 in connection with the Company's subsidiary, Lenfest Australia, Inc., investment in Australis Media, Ltd. The note bears interest at 4.8125%, payable quarterly. The maturity date of the note is the first to occur of March 31, 1994 or demand. (i) This mortgage is in connection with the purchase of an office and warehouse building. The balance was paid off on March 1, 1993. (j) This bond is held by PNC Bank and was issued through the Berks County (Pa) Industrial Development Authority. The bond is payable monthly with principal payments of $33,333 plus interest at the rate of seventy percent (70%) of the prime rate in effect from time to time. The effective interest rate at December 31, 1993 and 1992 was 4.2%. These bonds were paid in full in January 1994. Certain assets of Suburban Cable TV Co. Inc. were pledged as collateral. Maturities of notes, mortgage and bonds payable are as follows: <TABLE> <CAPTION> (Dollars in thousands) Year Ending December 31, ------------------------ <S> <C> 1994 $ 24,477 1995 139,995 1996 69,069 1997 76,617 1998 84,667 Thereafter 212,164 -------- $606,989 -------- -------- </TABLE> The Company has entered into interest rate cap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At December 31, 1993, the Company had outstanding an interest rate cap agreement with a commercial bank, having a notional principal amount of $50,000,000. This agreement effectively changes the Company's interest rate exposure on $50,000,000 of its floating rate debt to a maximum LIBOR rate of eight percent (8%) plus applicable level of borrowing margin. The interest rate cap agreement terminates on November 28, 1994. Likewise, the Company's subsidiary, South Jersey Cablevision Associates also entered into an interest rate cap agreement with a commercial bank, having a notional principal amount of $10,000,000. This agreement effectively changes South Jersey's interest rate exposure on $10,000,000 of its floating rate debt to a maximum LIBOR rate of seven percent (7%) plus applicable level of borrowing margin. South Jersey's interest rate cap agreement terminates on August 30, 1995. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate cap agreement. However, the Company does not anticipate nonperformance by the counterparties. In addition, the Company has entered into an interest rate swap agreement with a commercial bank, having a notional principal amount of $50,000,000. This agreement effectively decreases the Company's fixed rate interest expense on $50,000,000 of its senior promissory notes when LIBOR is less than 6% and increases the effective interest expense when LIBOR exceeds 6%. For the years ended December 31, 1993 and 1992, the interest rate swap agreement decreased the Company's effective interest expense by $1,347,000 and $695,000. The agreement expires March 31, 1994. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the counterparty, Mellon Bank N.A. F-153 <PAGE> 173 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE M - LEASES The Company has entered into four leases for office and warehouse space from a principal stockholder of Lenfest Communications, Inc. The leases are classified as capital leases. At December 31, 1993, three of the leases provide for an aggregate minimum monthly payment of $45,000. On each anniversary date of these three leases, the monthly payment will increase by a minimum of 6%. At December 31, 1993, the minimum monthly payment of the fourth lease is $21,000. On each anniversary date of the fourth lease, the minimum monthly payment will increase by $957. For the years ended December 31, 1992, 1991 and 1990, interest expense in the amounts of $49,000, $74,000 and $79,000 in excess of the minimum monthly payments has been accrued and added to obligations under capital leases. The Company has entered into various capital lease agreements. The agreements are for the financing of equipment. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases and, accordingly, they are recorded in the Company's assets and liabilities. Future minimum lease payments under all capital leases and non-cancelable operating leases with initial terms of one year or more consisted of the following at December 31, 1993: Capital Capital Leases - Leases - Principal Unrelated Operating Stockholder Parties Leases ----------- --------- --------- (Dollars in thousands) 1994 $ 759 $ 98 $ 5,346 1995 801 2 5,021 1996 845 -- 4,729 1997 891 -- 2,916 1998 938 -- 2,210 1999-2003 5,486 -- 737 2004-2006 2,219 -- 80 -------- ------ -------- TOTAL MINIMUM LEASE PAYMENTS 11,939 100 $ 21,039 -------- -------- LESS AMOUNT REPRESENTING INTEREST (6,606) (30) -------- ------ REPRESENT VALUE OF MINIMUM LEASE PAYMENTS $ 5,333 $ 70 -------- ------ -------- ------ F-154 <PAGE> 174 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) Property and equipment under capitalized leases at December 31, 1993 and 1992 are summarized as follows: 1993 1992 ------- ------ (Dollars in thousands) Buildings -- related party $5,132 $4,178 Converters 672 672 Computer 105 105 Office equipment 10 10 ------ ------ $5,919 $4,965 ====== ====== Amortization of leased assets is included in depreciation expense. Rental expense for all operating leases, principally office and warehouse facilities, pole rent and satellite transponder, amounted to $6,697,000, $4,973,000 and $4,977,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Included in these amounts are rental payments under operating leases to a principal stockholder for office and warehouse space of $77,000 in 1991. In addition, the Company made total payments to a principal stockholder for buildings under capitalized leases of $755,000, $593,000 and $483,000 in 1993, 1992 and 1991, respectively. In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum operating lease commitments will not be less than the amount shown for 1994. In June 1989, the Company entered into a four-year agreement with GE American Communications, Inc. requiring monthly payments of $160,000 to lease a transponder on a communications satellite designated at Satcom C-4. The lease commenced on January 1, 1993, the commercial operational date. The Company has an option to renew the satellite service agreement for a first renewal term of four (4) years at $160,000 per month and and a second renewal term of four (4) years at $170,000 per month. On September 20, 1991, the Company entered into a six-year satellite service agreement with GE American Communications, Inc. requiring monthly payments of $162,500 to lease a second transponder on the Satcom C-4 communications satellite. The lease payments commenced on March 31, 1993. The Company has an option to renew the satellite service agreement for a term of six (6) years at $170,000 per month. NOTE N -- FRANCHISES The Company's operating cable television subsidiaries hold various CATV franchises and, in connection therewith, are obligated to pay franchise fees based on certain gross revenues. For the year ended December 31, 1993, franchise fees in the amount of $7,454,000 will be paid. For the years ended December 31, 1992 and 1991, franchise fees in the amount of $6,136,000 and $5,123,000 were paid. F-155 <PAGE> 175 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE O -- RESEARCH AND DEVELOPMENT The Company, through its subsidiaries StarNet Development, Inc., StarNet, Inc. and NuStar, incurred research and development costs of $2,053,000 and $2,364,000 for the years ended December 31, 1993 and 1992, respectively, in connection with the development of new equipment and computer software. These costs have been included with programming expenses on the accompanying consolidated statements of income (loss). NOTE P -- EMPLOYEE HEALTH BENEFIT PLAN On February 1, 1984, the Company established the Lenfest Group Employee Health Benefit Plan (a trust), which provides health insurance for the employees of most of its subsidiaries and affiliates. This trust is organized under Internal Revenue Code Section 501(c)(9) -- Voluntary Employees Beneficiary Association (VEBA). Benefits are prefunded by contributions from each particpating subsidiary. Insurance expense is recognized as benefits are incurred. The Company does not provide postretirement benefits to its employees. Therefore, Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, does not have an impact on the Company's financial statements. NOTE Q -- 401(K) PLAN The Company provides a 401(k) profit sharing plan. The Company matches the entire amount contributed by an employee up to five percent (5%) of their salary. For the years ended December 31, 1993, 1992 and 1991, the Company matched $652,000, $433,000 and $421,000, of contributions, respectively. NOTE R -- COPORATE INCOME TAXES Income Taxes In 1993, the Company changed its method of accounting for income taxes to conform to the requirements of Financial Accounting Standards Board Statement (SFAS) No. 109, "Accounting for Income Taxes". The adoption of SFAS 109 changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Differences between financial reporting and tax bases arise most frequently from differences in timing of income and expense recognition and as a result of business acquisitions. The change in accounting method has been applied retroactively to January 1, 1989 and the prior years financial statements have been restated. Upon restatement, the Company's accumulated deficit decreased by $32,535,000 and $29,075,000 at December 31, 1992 and 1991, respectively, and net loss decreased by $3,460,000 and increased by $3,564,000 for the years ended December 31, 1992 and 1991, respectively. F-156 <PAGE> 176 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The provision for income tax benefit (expense) consists of the following components: 1993 1992 1991 -------- -------- -------- (Dollars in thousands) Current Federal $ (300) $ -- $ -- State (100) -- -- -------- -------- -------- (400) -- -- Deferred Federal 3,200 5,066 6,213 State 100 342 (967) -------- -------- -------- 3,300 5,408 5,246 -------- -------- -------- $ 2,900 $ 5,408 $ 5,246 -------- -------- -------- -------- -------- -------- The categories of temporary differences that give rise to deferred tax assets and liabilities are as follows: <TABLE> <CAPTION> Federal State ---------------------------- ----------------------------- 1993 1992 1993 1992 --------- --------- --------- --------- (Dollars in thousands) <S> <C> <C> <C> <C> Deferred Tax Assets: Allowance for doubtful accounts $ 263 $ 392 $ 98 $ 135 Net operating loss carryforward 53,172 50,144 960 1,107 Investments and other tax credits 2,377 2,138 249 - --------- --------- --------- --------- Gross Deferred Tax Asset 55,812 52,674 1,307 1,242 Deferred Tax Liabilities: Property and equipment, principally due to differences in depreciation (12,734) (12,115) (4,985) (4,650) Investments in affiliates, principally due to differences in taxable income (5,914) (4,976) (1,741) (1,416) Property and equipment and intangible assets arising from purchase accounting adjustments (18,005) (19,699) (7,393) (8,088) --------- --------- --------- --------- Gross Deferred Tax Liability (36,653) (36,790) (14,119) (14,154) --------- --------- --------- --------- Net deferred tax asset (liability) before valuation allowance 19,159 15,884 (12,812) (12,912) Valuation allowance (378) (301) -- -- --------- --------- --------- --------- Net Deferred Tax Asset (Liability) $ 18,781 $ 15,583 $ (12,812) $ (12,912) --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> Total income tax expense differs from the amounts computed by applying the U.S. Federal income tax rate of 34% for 1993, 1992, and 1991 to loss before income taxes and discontinued operations primarily from nondeductible amortization on goodwill and certain other intangibles. Provision for state income taxes, charitable contributions expected to expire unused and differences in losses for tax purposes on the disposition of assets. The Company has provided a valuation allowance for investment tax credits that the Company believes will expire unused. F-157 <PAGE> 177 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The Company has a net operating loss carryforward of approximately $157,000,000 on a tax reporting basis. The carryforward will begin to expire in 2001, if not utilized. The Company has available unused general business tax credits, after reduction required under the Tax Reform Act of 1986, of approximately $1,947,000 for carryover to subsequent years. These expire as follows: Year Ending December 31, ------------------------ 1994 $ 148,000 1995 98,000 1996 129,000 1997 166,000 1998 252,000 1999-2005 1,154,000 ----------- $ 1,947,000 ----------- ----------- NOTE S - CARRIED INTERESTS Carried interests are potential equity interests in a subsidiary of the Company, not earned at the time of issuance. They are earned only upon the recoupment of investment and advances, plus a stipulated interest factor, by the Company and all its subsidiaries. As of December 31, 1993, carried interests have been granted to employees of StarNet Development, Inc., StarNet, Inc., and Stockdale Productions, Inc. These carried interests have not been earned and, therefore, no expense was recorded. NOTE T-OTHER INCOME (EXPENSE) The schedules of other income (expense) for the years ended December 31, 1993, 1992 and 1991 are as follows: 1993 1992 1991 -------- -------- -------- (Dollars in thousands) Provision for litigation settlement (See Note U) $ (4,348) $ -- $ -- Gane (loss) on sales of marketable securities 3,292 (36) 8,549 Interest income 598 421 641 Dividend income 34 28 677 Gain on sale of property 1,150 85 -- (Loss) on disposal of assets upon rebuild of cable systems (1,445) (2,633) -- Miscellaneous income (expense) 58 790 575 Ad Valorem tax reassessment 821 -- (2,515) CMS loan gurantee -- -- (1,500) Traffic Pro 2000 costs (1,507) -- -- -------- -------- -------- $ (1,347) $ (1,345) $ 6,427 -------- -------- -------- -------- -------- -------- F-158 <PAGE> 178 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) As mentioned in Note D, the Company, through its subsidiary, StarNet Development, Inc. ("SDI") acquired the assets related to the cable TV services division of LJ Development, Inc. and Unibase Data Entry, Inc. Included in the assets were all rights and privileges to the development of traffic and billing sofware known as Traffic Pro 2000. Included in the acquisition of these assets by SDI was capitalized software development costs of $1,265,000 net of 1992 amortization of $31,000. In 1993, SDI incurred additional capitalized software development costs of $242,000. In January 1994, the Company responded to pressure from its customer base to port the Traffic Pro 2000 over a more flexible operating system Therefore, the Company decided to reformat the Traffic Pro 2000 programs to make it easier to use and more widely accepted. As a result, the Company has recorded as a charge against income all software development costs that we acquired or capitalized. This charge amounts to $1,507,000 for the year ended December 31, 1993 The Company, through its subsidiary, LenComm, Inc., was reassessed for prior years' ad valorem taxes, namely California Business Personal Property and Possessory Interest taxes. The Company contested the reassessment and, in 1993, received a reduction in the amount of the reassessments. The reassessed taxes are payable in installments over five years. In 1991, the Company made a $1,500,000 payment to a principal stockholder to reimburse him for his loss incurred from personal advances to Creative Management Systems, Inc. (CMS), a Toms River, New Jersey company that provides subscriber billing software and services to the Company's cable subsidiaries. At the time of the advances, management determined that it would be a substantial burden and expense to change systems and, therefore, had agreed to hold the stockholder harmless from any loss or liability arising out of his advances to CMS. As a result of negotiations with Electronic Data Systems Corporation (EDS), a Texas corporation, EDS agreed to purchase CMS and to continue to provide the CMS subscriber billing and software services to the Company. In addition, EDS agrees to pay the Company a royalty equal to $0.01 per month, per royalty subscriber, as defined in an agreement between the Company and EDS, over a six year period commencing June 1, 1992. EDS agrees that the total of such royalty payments will not be less than $1,300,000 during the six year period. As of December 31, 1993, cumulative royalty payments received were less than $2,000. NOTE U - COMMITMENTS AND CONTINGENCIES On November 12, 1993, the Company entered into a letter of intent with Raystay Co. ("Raystay"), an owner and operator of cable TV systems serving over 40,000 subscribers in Cumberland, Franklin and Lycoming counties, Pennsylvania, Maryland and West Virginia. The letter of intent provides that the Company shall invest $4,125,000 in Raystay for a 20% ownership of newly issued common stock. In addition, the Company shall purchase from existing Raystay shareholders no more that 25% equity interest for an amount not exceed $5,126,250 and should the Company not be able to purchse a minimum 10% from existing shareholders, Raystay shall sell additional newly issued common stock to provide the Company with a minimum 30% interest. Raystay shall grant the Company the right to first refusal on any newly issued stock and on any sale of cable television system assets. The Company shall not sell all or any part of its stock in Raystay without first offering such stock to Raystay or its shareholders. Other Raystay shareholders may not sell any Raystay stock without first offering such stock to the Company. The Company shall assume management control of Raystay no later that May 1, 1999. Effective September 30, 2002, either the Company or all other Raystay stockholders may initiate a buy-sell offer. On December 14, 1993, the United States government filed a civil action alleging false filings of copyright royalty statements with the Register of Copyrights of the United States. The complaint alleges that the Company misreported its subscriber rates to the copyright office and underpaid copyright royalty fees. The Company is discussing a possible settlement of all civil claims. The accompanying financial statements include an accrual for the possible settlement amount in the balance sheet under the caption "accounts payable and accrued expenses". In the statement of income, the Company has classified $4,348,000 relating to potential prior year copyright fee liability as "other expense" and $652,000 relating to potential 1993 liability as general and administrative expense. F-159 <PAGE> 179 LENFEST COMMUNICATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) On August 16, 1993, LJ Development, Inc. ("LJ") (See Note T) served a complaint against StarNet Development, Inc. ("SDI"), a subsidiary of the Company. In the complaint, LJ seeks $1,000,000 in damages plus attorney's fees and costs for an alleged breach of an Asset Purchase Agreement. On October 29, 1993, SDI answered LJ's complaint and filed a counter-claim against LJ and a third party complains against an affiliated company and an employee. The counter claim and third party complaint filed by SDI seek $1,000,000 in damages plus attorney's fees and costs for fraud and misrepresentation. The claims asserted against SDI and SDI's claims against LJ involve SDI's purchase of computer software called Traffic Pro 2000 and other assets from LJ Development. The parties have commenced discovery. No trial date has been set. Management intends to vigorously defend against the claims for relief brought by LJ and to vigorously prosecute its claims against LJ. The Company's subsidiary, Lenfest West, Inc. d/b/a Cable Oakland was named in a purported class action alleging that the charges imposed by Cable Oakland for delinquent payments from subscribers are or were illegally high. Plaintiffs have done little to prosecute this action other than obtain routine discovery, although plaintiffs' counsel also represents plaintiffs in a similar class action against another cable operator which is scheduled to go to trail in 1994. Management is preparing to defend this case vigorously. A preliminary estimate of the maximum potential liability of Cable Oakland is $2,500,000 in damages plus the plaintiffs' attorneys' fees and litigation costs. The Company's subsidiary, LenComm, Inc. d/b/a Bay Cablevision was named in a breach of contract action brought by a contractor against Bay Cablevision. Bay Cablevision prevailed at the trail court and this case is on appeal. Should the Court of Appeals reverse and send the case back to the trail court, Bay Cablevision may face potintial liability in excess of $1,000,000. A division of the Company's subsidiary, MicroNet, Inc., did not collect sales tax on the sales of its services in Texas. The Texas Comptroller's auditor determined a sales tax deficiency and proposed the civil fraud penalty. The customers of MicroNet, Inc. have assumed responsibility for the tax, left open the question of liability, if any, for penalties, and undertook prosecution of the tax dispute with the Comptroller, on behalf of MircoNet, Inc. The case is begin set for an administrative hearing before an Administrative Law Judge in the Texas Comptroller's office. The Internal Revenue Servic has completed the examination of the Company's Federal income tax returns for the years ended December 31, 1988, 1989, 1990 and 1991. The Company received a Revenue Agent's report dated June 28, 1993, in connection with the audit. The only adjustment proposed in the report was the disallowance of the deduction for franchise amortization. The report proposed a deficiency in the Company's Federal income tax in the amount of $182,371 for the year ended December 31, 1991. The Company is contesting the proposed deficiency and the case is currently at the Appeals Office of the Regional Commissioner's Office. Management believes that in light of recent court decisions involving the same issued settled in favor of the taxpayers, the Company will be able to negotiate a favorable settlement of this issue. The Company has also been named as a defendant in various legal proceedings arising in the ordinary course of business. In the opinion of management, the ultimate amount of liablity in excess of the amount which has been accrued in connection with copyright royalty fees with respect to the above actions, will not materially affect the financial position of the Company. As mentioned in Note D, the Company is obligated to purchase additional shares of stock valued at a total of 58,730,00 French francs (approximately $10,068,000) in Videopole for the years 1994-1997 and may be contingently liable for up to 34,510,000 French francs (approximately $5,916,000) in the years 1995-1997. The Company's future commitment in dollars is subject to changes in the exchange rate. F-160 <PAGE> 180 LENEFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) NOTE V - RELATED PARTY TRANSACTIONS The Company has entered into an agreement whereby Satellite Services, Inc., an affiliate of Tele-Communications, Inc. (TCI) a former shareholder and a former parent company of Liberty Media Corporation, will provide certain cable television programming to the Company. This agreement provides the Company with programming services at a rate which is not more than the Company could obtain independently. For the years ended December 31, 1993, 1992 and 1991, the Company recorded programming expenses of $26,166,000, $25,573,000 and 22,809,000, respectively, under this agreement. The Company, through its subsidiary, NuStar, generates revenue from cross channel tune-in promotional services for cable television from affiliates of TCI. For the years ended December 31, 1993, 1992 and 1991, the Company has generated revenue of $1,561,000, $1,602,000, and $1,279,000, respectively, from affiliates of TCI. The Company has entered into various leasing arrangements with a principal stockholder for office and warehouse facilities. See Note M - Leases. In addition, the Company has a promissory note payable to the same principal stockholder. See Note L - Notes, Mortgages and Bonds Payable. NOTE W - SEGMENT INFORMATION The Company operates primarily in the cable television industry. Certain subsidiaries of the Company operate in other industries which provide microwave transmission and promotional, cable advertising traffic and billing services. <TABLE> <CAPTION> Cable Other Total ----------- ---------- ----------- (Dollars in thousands) <S> <C> <C> <C> Year Ended December 31, 1993 - ---------------------------- Revenue $ 197,648 $ 15,592 $ 213,240 ----------- ---------- ----------- Operating income (loss) 39,476 (9,490) 29,986 ----------- ---------- ----------- Depreciation and amortization 60,662 4,533 65,195 ----------- ---------- ----------- Capital expenditures, including acquisitions 117,394 33,535 150,929 ----------- ---------- ----------- Identifiable assets 477,010 158,999 636,009 ----------- ---------- ----------- Year Ended December 31, 1992 - ---------------------------- Revenue $ 166,081 $ 13,859 $ 179,940 ----------- ---------- ----------- Operating income (loss) 32,032 (8,202) 23,830 ----------- ---------- ----------- Depreciation and amortization 51,417 4,775 56,192 ----------- ---------- ----------- Capital expenditures, including 90,563 4,386 94,949 acquisitions ----------- ---------- ----------- Identifiable assets 365,246 59,487 424,733 ----------- ---------- ----------- </TABLE> F-161 <PAGE> 181 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) <TABLE> <CAPTION> Cable Other Total ----------- ----------- ----------- (Dollars in thousands) <S> <C> <C> <C> Year Ended December 31, 1991 - ---------------------------- Revenue $ 148,985 $ 12,380 $ 161,365 ----------- ----------- ----------- Operating income (loss) 27,649 (9,377) 18,272 ----------- ----------- ----------- Depreciation and amortization 46,156 5,440 51,596 ----------- ----------- ----------- Capital expenditures, including acquisitions 34,699 5,249 39,948 ----------- ----------- ----------- Identifiable assets 327,628 51,503 379,131 ----------- ----------- ----------- </TABLE> NOTE X - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents, Accounts Receivable, Prepaid Expenses, Accounts Payable, Accrued Expenses, Customer Service Prepayments and Deposits on Converters The carrying amount approximates fair market value because of the short maturity of those instruments Marketable Securities The fair market values of securities are estimated based on quoted market prices for those investments. Long-term Investments The fair values of some investments are estimated based on quoted market prices for those or similar investments. For two investments acquired in 1993 (Videopole and Susquehanna and its subsidiaries) for which there are no quoted market prices, the Company believes that the carrying amount approximates fair value because of the recent nature of these transactions. Long-term Debt The carrying amount approximates fair value. Interest Rate Swap Agreement The value represents the estimated amount the Company would receive to terminate the agreement. F-162 <PAGE> 182 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued) The estimated fair values of the Company's financial instruments as of December 31, 1993 are as follows: Carrying Fair Amount Value -------- -------- (Dollars in thousands) Marketable securities $ 3,349 $ 16,088 Long-term investments 100,200 134,043 Interest rate swap agreement -- 300 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. NOTE Y- SUBSEQUENT EVENTS On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competiton Act of 1992 which substantially expanded federal and local regulations of the cable communication industry. Effective September 1993, the Federal Communications Commission (FCC) adopted comprehensive rate regulations including an interim freeze on regulated rates. Under these regulations, cable operators must base their rates for basic service either on FCC "benchmarks" or "cost of service" standards. On February 22, 1994, the FCC scrapped existing rate setting benchmarks replacing them with new benchmarks aimed at rolling cable rates back an average of seventeen percent (17%) from rates charged in September 1992, versus ten percent (10%) under the system announced last September. Regulations explaining the new benchmark rates are expected to be released in March or April 1994. Management is currently evaluating the impact of such principles and regulations on the Company's service income. Pursuant to a letter of intent dated March 4, 1994, between the Company and Tele-Communications, Inc. ("TCI"), the Company has agreed to exchange the assets of its cable TV systems serving approximately 116,500 subscribers in the East San Francisco Bay area and its 41.667% partnership interest in or the Company's share of the assets of Bay Cable Advertisitng for the Wilmington, Delaware and surrounding area cable TV system serving approximately 125,600 subscribers, owned by a subsidiary of TCI. The Company and TCI agree to structure the transaction in such a way that to the greatest extent possible the transfer of the Wilmington system for the Company's systems will qualify as a tax-free exchange of like kind assets under Section 1031 of the Internal Revenue Code. In addition to the above consideration, the Company shall pay to TCI a total cash consideration of $12,500,000. F-163 <PAGE> 183 STEVEN PRESSMAN & CO. Members of: Certified Public Accountants American Institute of CPA's Pennsylvania Institute of CPA's INDEPENDENT AUDITORS' REPORT ON SCHEDULES To the Board of Directors and Stockholders Lenfest Communications, Inc. and Subsidiaries: We have audited in accordance with generally accepted auditing standards, the consolidated balance sheets of Lenfest Communications, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income (loss), changes in stockholder's equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1993, as included in the annual report on Form 10-K of Liberty Media Corporation for the year 1993 and have issued our report thereon dated March 4, 1994. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules V, VI, VIII and X. These financial statement schedules are the responsibility of the Company's management. Our resopnsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statement taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ STEVEN PRESSMAN & CO. March 4, 1994 F-164 345 N. York Road / / Hatboro, Pennsylvania 19040-2045 / / 215-672-8880 <PAGE> 184 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE V - PROPERTY AND EQUIPMENT Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Column A Column B Column C Column D Column E Column F - ----------------------------------- --------------- --------------- --------------- --------------- --------------- Balance at Other Balance Beginning Additions Changes at end of Year at Cost Retirements Add (Deduct) of Year --------------- --------------- --------------- --------------- --------------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Classification - -------------- FOR THE YEAR ENDED DECEMBER 31, 1993: Land $ 4,240 $ 389 $ (173) $ -- $ 4,456 Building and improvements 11,471 1,291 (146) -- 12,616 Cable distribution systems 341,243 64,527 (5,365) -- 400,405 Microwave equipment 20,939 1,479 (734) -- 21,684 Satellite communications equipment 647 351 (9) -- 989 Office equipment, furniture and fixtures 10,448 2,388 (338) -- 12,498 Property and equipment under capital leases 4,965 954 -- -- 5,919 ------------ ------------ ------------ ------------ ------------ $ 393,953 $ 71,379 $ (6,765) $ -- $ 458,567 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1992: Land $ 4,063 $ 177 $ -- $ -- $ 4,240 Building and improvements 10,451 1,020 -- -- 11,471 Cable distribution systems 290,477 61,122 (10,356) -- 341,243 Microwave equipment 20,221 1,300 (582) -- 20,939 Satellite communications equipment 327 320 -- -- 647 Office equipment, furniture and fixtures 8,476 2,103 (131) -- 10,448 Property and equipment under capital leases 4,965 -- -- -- 4,965 ------------ ------------ ------------ ------------ ------------ $ 338,980 $ 66,042 $ (11,069) $ -- $ 393,953 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1991: Land $ 3,997 $ 66 $ -- $ -- $ 4,063 Building and improvements 10,000 451 -- -- 10,451 Cable distribution systems 266,761 33,409 (10,871) 1,178 290,477 Microwave equipment 17,914 2,307 -- -- 20,221 Satellite communications equipment 327 -- -- -- 327 Office equipment, furniture and fixtures 7,196 864 -- 416 8,476 Property and equipment under capital leases 5,611 948 -- (1,594) 4,965 ------------ ------------ ------------ ------------ ------------ $ 311,806 $ 38,045 $ (10,871) $ -- $ 338,980 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> F-165 <PAGE> 185 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Column A Column B Column C Column D Column E Column E - ------------------------------ ------------ ------------ ------------ ------------ ------------ Additions Balance at Charged Other Balance Beginning to Cost Changes at end of Year and Expenses Retirements Add (Deduct) of Year ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> Classification - -------------- FOR THE YEAR ENDED DECEMBER 31, 1993: Building and improvements $ 1,655 $ 449 $ (15) $ -- $ 2,089 Cable distribution systems 181,580 39,974 (3,851) -- 217,703 Microwave equipment 10,982 2,566 (459) -- 13,089 Satellite communications equipment 305 165 (2) -- 468 Office equipment, furniture and fixtures 6,911 1,710 (265) -- 8,356 Property and equipment under capital leases 1,295 484 -- -- 1,779 ------------ ------------ ------------ ------------ ------------ $ 202,728 $ 45,348 $ (4,592) $ -- $ 243,484 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1992: Building and improvements $ 1,275 $ 380 $ -- $ -- $ 1,655 Cable distribution systems 155,341 34,004 (7,765) -- 181,580 Microwave equipment 7,758 3,376 (152) -- 10,982 Satellite communications equipment 222 83 -- -- 305 Office equipment, furniture and fixtures 5,670 1,372 (131) -- 6,911 Property and equipment under capital leases 911 384 -- -- 1,295 ------------ ------------ ------------ ------------ ------------ $ 171,177 $ 39,599 $ (8,048) $ -- $ 202,728 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1991: Building and improvements $ 913 $ 362 $ -- $ -- $ 1,275 Cable distribution systems 135,468 29,580 (10,885) 1,178 155,341 Microwave equipment 3,682 4,076 -- -- 7,758 Satellite communications equipment 180 42 -- -- 222 Office equipment, furniture and fixtures 4,167 1,087 -- 416 5,670 Property and equipment under capital leases 1,924 581 -- (1,594) 911 ------------ ------------ ------------ ------------ ------------ $ 146,334 $ 35,728 $ (10,885) $ -- $ 171,177 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> F-166 <PAGE> 186 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Column A Column B Column C Column D Column E - ------------------------------ ------------ ------------ ------------ ------------ Additions Balance at Charged to Balance Beginning Cost and at end of Year Expenses Deductions of Year ------------ ------------ ------------ ------------ (Dollars in thousands) <S> <C> <C> <C> <C> FOR THE YEAR ENDED DECEMBER 31, 1993: Allowance for doubtful accounts $ 1,287 $ 3,182 $ (3,608) $ 861 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1992: Allowance for doubtful accounts $ 1,268 $ 2,239 $ (2,220) $ 1,287 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 1991: Allowance for doubtful accounts $ 1,454 $ 2,761 $ (2,947) $ 1,268 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> F-167 <PAGE> 187 LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) INFORMATION Years Ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Column A Column B - -------- -------- Item Charged to Costs and Expenses - ---- ----------------------------- 1993 1992 1991 ------------ ------------ ------------ (Dollars in thousands) <S> <C> <C> <C> Maintenance and repairs $ 1,925 $ 1,440 $ 1,417 ------------ ------------ ------------ ------------ ------------ ------------ Amortization Franchise costs $ 15,055 $ 12,338 $ 12,530 Other 4,792 4,255 3,338 ------------ ------------ ------------ $ 19,847 $ 16,593 $ 15,868 ------------ ------------ ------------ ------------ ------------ ------------ Advertising costs $ 1,530 $ 1,908 $ 1,176 ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> Amounts for taxes, other than payroll and income taxes and royalties are not presented since these amounts are less than one percent (1%) of total revenue. F-168 <PAGE> 188 INDEPENDENT AUDITORS' REPORT The Partners The Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc.: We have audited the accompanying combined balance sheets of The Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc. as of December 31, 1993 and 1992, and the related combined statements of earnings, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1993. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of The Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc. as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in notes 1 and 9 to the combined financial statements, the Partnerships changed their method of accounting for income taxes for their corporate subsidiaries in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". /s/ KPMG Peat Marwick KPMG Peat Marwick Princeton, New Jersey January 28, 1994 F-169 <PAGE> 189 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Combined Balance Sheets December 31, 1993 and 1992 <TABLE> <CAPTION> 1993 1992 ------------- ----------- <S> <C> <C> Assets ------ Cash $ 2,033,000 2,027,000 Accounts receivable (note 3) 6,281,000 5,226,000 Less allowance for doubtful accounts 447,000 425,000 ------------- ----------- 5,834,000 4,801,000 ------------- ----------- Investment in TCI-TKR LP (note 4) 225,670,000 231,523,000 Investment in securities, at cost (note 4) 7,890,000 7,890,000 Property and equipment (note 5 and 10) 248,067,000 231,575,000 Less accumulated depreciation and amortization 131,439,000 112,981,000 ------------- ----------- 116,628,000 118,594,000 ------------- ----------- Franchise costs (note 10) 166,727,000 166,452,000 Less accumulated amortization 33,796,000 29,878,000 ------------- ----------- 132,931,000 136,574,000 ------------- ----------- Other assets, net 5,089,000 2,511,000 ------------- ----------- $ 496,075,000 503,920,000 ------------- ----------- ------------- ----------- Liabilities and Partners' Capital --------------------------------- Debt to banks (note 7) 298,000,000 328,000,000 Accounts payable and accrued expenses 14,301,000 11,599,000 Subscriber advance payments 2,354,000 2,643,000 Deferred income taxes (note 9) 20,744,000 20,205,000 Due to Tele-Communications, Inc. (note 6) 3,456,000 3,582,000 Notes payable - Knight-Ridder Investment Company (note 6) 71,258,000 71,258,000 ------------- ----------- Total liabilities 410,113,000 437,287,000 ------------- ----------- Partners' capital: Country Cable Co. 42,981,000 33,316,500 Knight-Ridder Cablevision, Inc. 42,981,000 33,316,500 ------------- ----------- Total partners' capital 85,962,000 66,633,000 Commitments (note 11). ------------- ----------- $ 496,075,000 503,920,000 ------------- ----------- ------------- ----------- </TABLE> See accompanying notes to combined financial statements. F-170 <PAGE> 190 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Combined Statements of Earnings Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 1991 ------------ ----------- ----------- <S> <C> <C> <C> Revenues: Basic service $ 99,345,000 94,461,000 81,698,000 Pay service 38,801,000 35,291,000 36,790,000 Other (including affiliate amounts of $3,514,000, $3,394,000 and $3,048,000) (note 6) 14,361,000 12,587,000 11,584,000 ------------ ----------- ----------- 152,507,000 142,339,000 130,072,000 ------------ ----------- ----------- Operating costs and expenses: Operation (including affiliate amounts of $23,124,000, $21,592,000 and $19,690,000) (note 6) 42,808,000 41,448,000 38,024,000 Selling, general and administrative 35,442,000 30,485,000 28,926,000 Depreciation 19,264,000 18,834,000 17,959,000 Amortization 3,925,000 4,185,000 3,819,000 ------------ ----------- ----------- 101,439,000 94,952,000 88,728,000 ------------ ----------- ----------- Operating income 51,068,000 47,387,000 41,344,000 Other inocme (expense): Interest expense (including affiliate amounts of $2,349,000, $2,877,000 and $4,609,000) (notes 6 and 7) (23,677,000) (27,084,000) (34,688,000) Interest income 1,000 15,000 9,000 Dividend income (note 4) 94,000 67,000 601,000 Other (31,000) 16,000 -- Share of loss related to TCI-TKR LP (note 4) (5,853,000) (97,000) -- ------------ ----------- ----------- (29,466,000) (27,083,000) (34,078,000) ------------ ----------- ----------- Income before income tax expense (benefit) 21,602,000 20,304,000 7,266,000 Income tax expense (benefit) (note 9) 2,273,000 589,000 (16,000) ------------ ----------- ----------- Net income $ 19,329,000 19,715,000 7,282,000 ------------ ----------- ----------- ------------ ----------- ----------- </TABLE> See accompanying notes to combined financial statements. F-171 <PAGE> 191 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Combined Statements of Changes in Partners' Capital Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> Knight-Ridder Country Cablevision, Cable Co. Inc. Total ------------ ------------- ---------- <S> <C> <C> <C> Balance, December 31, 1990: As previously reported $ 19,961,000 19,961,000 39,922,000 Cumulative effect of change in accounting for income taxes at this date (note 9) (143,000) (143,000) (286,000) ------------ ---------- ---------- As restated 19,818,000 19,818,000 39,636,000 Net income 3,641,000 3,641,000 7,282,000 ------------ ---------- ---------- Balance, December 31, 1991 23,459,000 23,459,000 46,918,000 Net income 9,857,500 9,857,500 19,715,000 ------------ ---------- ---------- Balance, December 31, 1992 33,316,500 33,316,500 66,633,000 Net income 9,664,500 9,664,500 19,329,000 ------------ ---------- ---------- Balance, December 31, 1993 $ 42,981,000 42,981,000 85,962,000 ------------ ---------- ---------- ------------ ---------- ---------- </TABLE> See accompanying notes to combined financial statements. F-172 <PAGE> 192 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Combined Statements of Cash Flows Years ended December 31, 1993, 1992 and 1991 <TABLE> <CAPTION> 1993 1992 1991 ------------ ----------- ----------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 19,329,000 19,715,000 7,282,000 Adjustements to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,189,000 23,019,000 21,778,000 Stock dividend income -- -- (164,000) Share of loss related to TCI-TKR LP 5,853,000 97,000 -- Loss from sale of equipment -- 8,000 -- Deferred income tax expense (benefit) 539,000 241,000 (102,000) Changes in operating assets and libilities, net of the effect from acquisition of cable television system: Increase in accounts receivable, net (1,033,000) (1,019,000) (813,000) Increase in other assets (2,585,000) (46,000) (152,000) Increase (decrease) in accounts payable and accrued expenses 2,702,000 (3,869,000) (4,806,000) Increase (decrease) in subscriber advance payments (289,000) (118,000) 328,000 Increase (decrease) in due to Tele-Communications, Inc. (126,000) (1,529,000) 1,066,000 ------------ ----------- ----------- Net cash provided by operating activities 47,579,000 36,499,000 24,417,000 ------------ ----------- ----------- Cash flows from investing activities: Purchase of investments -- -- (247,000) Additions to franchise costs (275,000) (174,000) (370,000) Property and equipment additions (17,298,000) (14,662,000) (19,033,000) Payment for acquisition of cable television systems -- (3,100,000) (4,320,000) Proceeds from sale of equipment -- 5,000 -- ------------ ----------- ----------- Net cash used in investing activities (17,573,000) (17,931,000) (23,970,000) ------------ ----------- ----------- Cash flows from financing activities: Payments on debt to banks (328,000,000) (24,000,000) (25,000,000) Proceeds from debt to banks 298,000,000 4,000,000 25,000,000 ------------ ----------- ----------- Net cash used in financing activities (30,000,000) (20,000,000) -- ------------ ----------- ----------- Net increase (decrease) in cash 6,000 (1,432,000) 447,000 Cash, beginning of year 2,027,000 3,459,000 3,012,000 ------------ ----------- ----------- Cash, end of year $ 2,033,000 2,027,000 3,459,000 ------------ ----------- ----------- ------------ ----------- ----------- </TABLE> See accompany notes to combined financial statements. F-173 <PAGE> 193 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements December 31, 1993, 1992 and 1991 (1) Organization and Summary of Significant Accounting Policies Principles of combination and organization: The combined financial statements of The Cable Partnerships of Country Cable Co. (Country Cable) and Knight-Ridder Cablevision, Inc. (KRC) (the Partnerships) include the consolidated financial statements of TKR Cable Company and subsidiaries (TKR) and the financial statements of TKR Cable Partners (TKRCP) (formerly SCI Cable Partners). TKR and TKRCP represent the two cable partnerships jointly owned and managed by Country Cable and KRC. The combined financial statements of the Partnerships include the accounts of the six cable television systems wholly-owned by TKR, along with its three wholly-owned corporate subsidiaries. TKR Cable Company of Wildwood, Inc. (Wildwood), TKR Cable Company of Ramapo, Inc. (Ramapo), and TKR Cable Company of Warwick, Inc. (Warwick). All significant intercompany transactions have been eliminated in combination and consolidation. The General Partners of the Partnerships - Country Cable, an indirect wholly-owned subsidiary of Liberty Media Corporation, a related party to Tele-Communications, Inc. (TCI), and KRC, a subsidiary of Knight-Ridder, Inc. (KRI), share equally in the profits and losses of the Partnership. TKR was organized on January 18, 1982 to engage in the acquisition, development, operation and expansion of cable television systems and obtaining franchises thereon. TKRCP was organized on November 1, 1988 to acquire and hold a 30% limited partnership interest in TCI TKR Limited Partnership (TCI-TKR LP), formerly TKR-Storer Limited Partnership, a Colorado limited partnership formed between TKRCP and TCI TKR, Inc. (TCI-TKR), formerly TCI Storer, Inc. TCI-TKR is a wholly-owned subsidiary of TCI and holder of a 70% general partnership interest in TCI-TKR LP. Through December 2, 1992, TCI-TKR LP owned 50% of the common stock of SCI Holdings, Inc. (SCI), the parent company of Storer Communications, Inc. (Storer). On December 2, 1992, SCI completed a split-off transaction (the Split-Off) in which the net assets of SCI were divided approximately equally between (i) TCI-TKR LP and (ii) a wholly-owned subsidiary of Comcast Corporation (Comcast). Prior to the Split-Off, each of TCI-TKR LP and Comcast held a 50% ownership interest in SCI. The Split-Off, which was structured primarily to permit refinancing of substantially all of the publicly held debt of SCI and the preferred stock of SCI's wholly-owned subsidiary. Storer, was effected by the distribution of approximately 50% of the net assets of SCI to three holding companies formed by TCI-TKR LP (collectively, the Holding Companies). In the Split-Off, such Holding Companies acquire 100% of the outstanding capital stock of certain indirectly wholly- owned subsidiaries of SCI. As a result of the Holding Companies' acquisition of such SCI subsidiaries, the Holding Companies are engaged in the ownership and operation of cable television systems located in Alabama, Florida, Kentucky, Georgia, and Texas. (Continued) F-174 <PAGE> 194 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (1) Organization and Summary of Significant Accounting Policies, cont. The Internal Revenue Service has issued private letter rulings concerning the Federal income tax consequences of the Split-Off (the IRS Rulings). The IRS Rulings provide, among other things, that, based upon certain representations contained in the rulings, neither income nor gain for Federal income tax purposes will be recognized as a result of the distribution of stock of the subsidiaries to the Holding Companies and certain other departing Storer subsidiaries in connection with the Split-Off. Property and equipment: Land is carried at cost and property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is provided on the straight-line basis over the estimated useful lives of the respective assets which range from five to fifteen years for distribution systems and five to forty years for support equipment and buildings. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases or estimated useful lives, whichever is shorter. Interest costs, if deemed material, are capitalized in connection with cable systems under active development or construction. There were no capitalized interest costs in 1993 and 1992 and there were $320,000 of capitalized interest costs in 1991. Repair and maintenance costs are charged to operations and renewals and additions are capitalized when incurred. When TKR disposes of property through ordinary retirements, sales or other dispositions, it charges the original cost and cost of removal of such property to accumulated depreciation, net of salvage value, if any. Gains or losses incurred in connection with the sale or disposition of TKR assets are only recognized in connection with the sale of properties in their entirety. Initial hook-up and installation costs are capitalized and amortized on a straight-line basis over a five-year period. All other costs incurred including costs incurred with respect to reconnects and disconnects and initial marketing and direct selling costs, are expenses as incurred. (Continued) F-175 <PAGE> 195 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (1) Organization and Summary of Significant Accounting Policies, cont. Franchise costs: TKR defers costs incurred applicable to the petition for the award of specific franchises until a determination of the outcome of such petition can be made. Costs incurred relating to successful franchises are capitalized and amortized on a straight-line basis over a forty-year period. Costs relating to unsuccessful franchise applications or applications anticipated to be unsuccessful are expenses during the period of such determination. Costs related to successful franchise renewals are capitalized and amortized over the life of the new franchise. Franchise costs incurred as a result of the acquisition of cable television systems represent the difference between the cost of cable television systems acquired and the amounts assigned to their tangible assets based on the estimated fair market value of such assets, as determined by independent consultants. Such franchise costs are also amortized on a straight-line basis over a forty-year period. Income taxes: In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (FAS 109) "Accounting for Income Taxes". FAS 1009 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liability are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Partnerships adopted FAS 109 in 1993 for the three wholly-owned corporate subsidiaries of TKR and have applied the provisions of FAS 109 retroactively to September 1, 1987, the date on which the first corporate subsidiary was acquired. Beginning partners' capital as of January 1, 1991 has been retroactively adjusted to account for the cumulative effect of the change in the method of accounting for income taxes since September 1, 1987. Reclassification: Certain amounts contained in the 1992 and 1991 combined financial statement have been reclassified to conform to the 1993 presentation. (Continued) F-176 <PAGE> 196 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (2) Supplemental Disclosures to Combined Statements of Cash Flows - Cash Flow Information and Noncash Investing and Financial Activities Cash paid for interest aggregated $24,100,000, $28,916,000 and $38,929,000 in 1993, 1992 and 1991, respectively. Cash paid for income taxes aggregated $1,436,000, $460,000 and $84,000 in 1993, 1992 and 1991, respectively. In 1993, TKR wrote off certain fully depreciated equipment with an original cost of approximately $806,000, which amount was charged to accumulated depreciation. In 1991, TKR wrote off certain equipment with an original cost of approximately $6,376,000, which amount was charged to accumulated depreciation. (3) Accounts Receivable Accounts receivable as of December 31, 1993 and 1992 are summarized as follows: 1993 1992 ------------ --------- Trade receivables $ 3,889,000 3,370,000 Other receivables (primarily advertising receivables) 2,392,000 1,856,000 ------------ --------- $ 6,281,000 5,226,000 ------------ --------- ------------ --------- (4) Investments Investment in TCI-TKR LP: In November 1988, TKRCP acquired a 30% limited partnership interest in TCI-TKR LP for approximately $231,620,000. On the same date, TCI-TKR LP purchased 50% of SCI. As a result of this transaction, TKRCP indirectly owned 15% of SCI and maintained no significant influence or direct involvement in the management of SCI. Prior to the Split-Off and the related formation of the Holding Companies by TCI-TKR LP, TKRCP recorded its interest in TCI-TKR LP under the cost method of accounting. Subsequent to the Split-Off, TKRCP has recorded its limited partnership interest in TCI-TKR LP under the equity method of accounting. The difference between the cost of the limited partnership interest in TCI-TKR LP and the net assets of TCI-TKR LP at December 2, 1992 is being amortized on a straight-line basis over 30 years. (Continued) F-177 <PAGE> 197 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (4) Investments, cont. Period to the Split-Off, one of the subsidiaries acquired by one of the Holding Companies received from SCI certain preferred stock issued by TCI Southeast, Inc. (TCI Southeast), an indirect wholly-owned subsidiary of TCI. Such preferred stock (the Southeast Preferred stock) together with accrued and unpaid dividends, aggregated $394,368,000 at December 31, 1993. Because TCI-TKR LP and TCI Southeast are under the common control of TCI, the investment in the Southeast Preferred Stock and accrued dividends is reflected as a deduction from the aforementioned holding company's equity. TKRCP's share of losses for the year ended December 31, 1993 and the one month ended December 31, 1992 is summarized as follows: <TABLE> <CAPTION> 1993 1992 -------------- -------- <S> <C> <C> 30% of TCI-TKR LP's net loss $ (11,171,000) (402,000) 30% of dividends on Southeast Preferred Stock, net of income tax effect 8,040,000 532,000 Amortization of difference between cost of investment and net assets at December 2, 1992 ($81,652,000) (2,722,000) (227,000) -------------- -------- $ (5,853,000) (97,000) -------------- -------- -------------- -------- </TABLE> As a result of the aforementioned transaction, TKRCP's investment in TCI-TKR amounted to $225,670,000 and $231,523,000 as of December 31, 1993 and 1992, respectively. (Continued) F-178 <PAGE> 198 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (4) Investments, cont. Summarized consolidated balance sheet data of TCI-TKR LP as of December 31, 1993 and 1992 is as follows: 1993 1992 -------------- ------------- Cash $ 3,420,000 698,000 Receivable and prepaids 22,461,000 19,676,000 Property and equipment, net 448,252,000 439,032,000 Franchise cost, net 1,213,209,000 1,254,877,000 Other assets 22,534,000 24,124,000 -------------- ------------- $1,709,876,000 1,738,407,000 -------------- ------------- -------------- ------------- Payables and accruals $ 57,787,000 42,070,000 Debt, including intercompany 1,114,634,000 1,103,621,000 Deferred income taxes 407,110,000 399,756,000 Other liabilities 35,454,000 31,471,000 Partners' capital 489,259,000 498,556,000 Investment in Southeast Preferred Stock (394,368,000) (337,067,000) -------------- ------------- $1,709,876,000 1,738,407,000 -------------- ------------- -------------- ------------- Summarized consolidated results of operations data of TCI-TKR LP for the year ended December 31, 1993 and the one month ended December 31, 1992 is as follows: 1993 1992 ------------- ----------- Revenue $ 341,643,000 26,684,000 Operating, selling, general and administrative expenses (190,535,000) (14,999,000) Depreciation and amortization (109,377,000) (8,420,000) ------------- ----------- Operating income 41,731,000 3,265,000 Interest expense (79,090,000) (7,078,000) Other, net 122,000 2,474,000 ------------- ----------- Net loss $ (37,237,000) (1,339,000) ------------- ----------- ------------- ----------- (Continued) F-179 <PAGE> 199 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (4) Investments, cont. Investments in securities: TKR has the following investments in Turner Broadcasting Systems, Inc. ("TBS") as of December 31, 1993 and 1992, which are accounted for under the cost method: <TABLE> <CAPTION> 1993 1992 ------------------------------ ------------------------------ Shares Amount Shares Amount ---------- ------------ ---------- ------------ <S> <C> <C> <C> <C> TBS Class C convertible preferred stock 147,529 $ 2,650,000 147,529 $ 2,650,000 TBS Class B common stock 453,838 5,240,000 453,838 5,240,000 ------------ ------------ $ 7,890,000 $ 7,890,000 ------------ ------------ ------------ ------------ </TABLE> The TBS Class C convertible preferred stock is convertible into six shares of TBS Class B common stock. The TBS Class B common stock is publicly traded, while the TBS Class C convertible preferred stock is not. As of December 31, 1993, based on the trading price of the TBS Class B common stock and the convertible feature of the TBS Class C convertible preferred stock, TKR's investments in the TBS Class B common stock and TBS Class C convertible preferred stock had market values of approximately $12,241,000 and $23,900,000, respectively. Dividend income recognized on the TBS stock amounted to $94,000 in 1993, $67,000 in 1992 and $601,000 in 1991. (5) Property and Equipment Property and equipment as of December 31, 1993 and 1992 are summarized as follows: <TABLE> <CAPTION> 1993 1992 --------------- ----------- <S> <C> <C> Land $ 1,313,000 1,313,000 Distribution systems 224,571,000 211,527,000 Support equipment and buildings 22,183,000 18,735,000 --------------- ----------- $ 248,067,000 231,575,000 --------------- ----------- --------------- ----------- </TABLE> (Continued) F-180 <PAGE> 200 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (6) Transactions with Related Parties In accordance with the formation of TKRCP in November 1988, TKRCP assumed TKR's $25,882,000 subordinated note payable to Knight-Ridder Investment Company (KRIC), a wholly-owned subsidiary of KRI. This note payable was subsequently reassumed by TKR in July 1993 and is scheduled to mature in April 2002. Interest on this note payable to KRIC is payable quarterly at the lower of the KRIC commercial paper rate (3.3%, 3.4% and 6.1% at December 31, 1993, 1992 and 1991, respectively) or the current prime rate (6.0%, 6.0% and 6.5% at December 31, 1993, 1992 and 1991, respectively). To assist in the funding of the TCI-TKR LP investment (note 4), TKRCP borrowed an additional $45,376,000 from KRIC in 1988 in the form of a subordinated note. This note was also assumed by TKR in July 1993 and is scheduled to mature in April 2002. This note requires quarterly interest payments at the KRIC commercial paper rate and prohibits repayment of the principal balance before maturity. Interest expense incurred by the Partnerships as a result of the aforementioned transactions with KRIC aggregated $2,349,000, $2,877,000 and $4,609,000 in 1993, 1992 and 1991, respectively. TKR has entered into an agreement with TCI whereby TKR purchases certain subscriber-related services from TCI at TCI's actual cost of such services. Such services, consisting primarily of certain pay and basic television services, aggregated $23,124,000, $21,592,000 and $19,690,000 in 1993, 1992 and 1991, respectively. In 1989, TKRCP began managing certain cable television systems of Storer. These cable television systems were subsequently distributed on December 2, 1992 to two holding companies formed by TCI-TKR LP. In July, 1993, management of these cable television systems was transferred to TKR. In accordance with the management agreement with those systems, the Partnerships received a management fee equal to 3.5% of the systems's revenues. In 1993, 1992 and 1991, management fees resulting from this agreement aggregated $3,514,000, $3,294,000 and $3,048,000, respectively. (Continued) F-181 <PAGE> 201 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (7) Debt to Banks Debt to banks aggregated $298,000,000 at December 31, 1993. This debt consists of a $350,000,000 unsecured revolving credit facility executed by TKR on July 15, 1993 with Chemical Banking Corporation as agent and Chase Manhattan Bank and Toronto Dominion Bank as co-agents and funded by a consortium of banks. The proceeds of this credit facility were used to repay amounts previously outstanding under TKRCP's revolving credit facility. The revolving credit facility's maximum commitment will be gradually reduced in increasing quarterly increments commencing March 31, 1995 in amounts ranging from 1.875% to 8.5% of the $350,000,000 maximum commitment level through its March 31, 2001 termination date. TKR may make partial prepayments in multiplies of either $500,000 or $1,000,000, depending on the interest rate option selected by TKR. TKR has the option to permanently reduce the commitment level, but only in the initial amount of $5,000,000 and in multiples of $1,000,000 thereafter. The interest rate on borrowings under this facility are subject to selection by TKR and are based on either the alternate base rate (the higher of the agent bank's prime rate, certificate of deposit-based rate plus 1% or the Federal funds rate plus 1/2%), the Eurodollar rate or the certificate deposit-based rate, all plus an applicable margins. The applicable margin is determined, based upon the maintenance of a certain debt to cash flow ratios. Interest rates, including applicable margins, incurred during 1993 under this credit facility ranged from 6.44% to 4.13%. In addition, if the three month LIBOR rate plus the applicable margin exceeds 8% for thirty consecutive days and the TKR's debt to cash flow ratio is greater than 4.0 to 1.0, then the credit facility requires that TKR enter into an interest rate protection agreement for 50% of the then outstanding borrowings. The revolving credit facility requires an annual commitment fee, payable quarterly in arrears, at the rate .375% of the average daily amount of the available commitment. In addition, TKR paid a one-time facility fee of $2,880,000 upon closing of the revolving credit facility and is obligated to pay the agent of the credit facility an annual fee of $125,000 through 2001. The most significant debt covenants of this credit facility limit additional borrowings, sales of assets and additional investments. In addition, TKR has agreed to maintain certain defined debt to cash flow, cash flow to debt service and cash flow to interest expense ratios. (Continued) F-182 <PAGE> 202 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (7) Debt to Banks, cont. The minimum mandatory principal repayments required as of December 31, 1993 based upon the current level of indebtedness under this credit facility are as follows: 1996 $ 12,750,000 1997 45,500,000 1998 56,000,000 1999 70,000,000 2000 84,000,000 2001 29,750,000 -------------- $ 298,000,000 -------------- -------------- Debt to banks aggregated $328,000,000 as of December 31, 1992. This debt, which was repaid in July 1993 with the proceeds of the aforementioned $350,000,000 revolving credit facility executed by TKR, consisted of a revolving line of credit facility executed on November 2, 1988 and provided for borrowings by TKRCP in an amount not to exceed $360,000,000, funded by a consortium of banks, with Chemical Banking Corporation (CBC) as agent. Interest rates, including applicable margins, incurred during 1993, 1992 and 1991 on this credit facility ranged from 6.90% to 4.13%, 6.21% to 4.35% and 9.42% to 6.46%, respectively. The revolving line of credit agreement required an annual commitment fee, payable quarterly, at the rate of .375% of the average daily amount of the available commitment. TKRCP entered into an interest rate exchange agreement in June 1989 with two banks pursuant to which it paid, quarterly, a fixed rate of 8.54% on the notional principal amount of $100,000,000 in exchange for which it would receive 90 day LIBOR payments on a like amount. The effect of the exchange was to fix interest rates on $100,000,000 of borrowings through June 1994. In July 1993, this agreement was transferred to TKR. (Continued) F-183 <PAGE> 203 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (7) Debt to Banks, cont. In September 1989, TKRCP, in exchange for $220,000, granted CBC an option to require the Partnership to pay a fixed rate of 8.35% on a notional principal amount of $100,000,000 in exchange for receiving LIBOR payments from CBC for a three year period on a like amount. In December 1989, CBC exercised the option and the Partnership entered into the interest rate exchange agreement. On January 24, 1990, CBC terminated the agreement in exchange for a cash payment to the TKRCP of $710,000. Such amount was deferred and amortized over the original three-year term of the swap agreement as a reduction of interest expenses, which amount aggregated $237,000 per year for 1992 and 1991. (8) Employee Benefit Plan TKR has a profit sharing plan (the Plan) which covers substantially all qualified employees. TKR makes discretionary contributions to the Plan each year, as determined by TKR's Management Committee, from any available TKR profits, as defined. TKR's contributions to the Plan aggregated $1,289,000, $1,153,000 and $1,028,000 in 1993, 1992 and 1991, respectively. TKR also has a 401(k) savings plan (the 401(k) Plan) which is available to all qualified employees. Employees may elect to contribute a portion of their wages to the 401(k) Plan, subject to certain limitations. TKR is not required to contribute a matching percentage contribution; however, TKR did contribute a portion of the employees' contribution up to a maximum of 3%, which matching contributions aggregated approximately $415,000, $332,000 and $271,000 in 1993, 1992 and 1991, respectively. (9) Income Taxes No provision for income taxes has been recorded in the accompanying combined financial statements for the Partnerships, except as explained below with respect to operations of TKR's wholly-owned corporate subsidiaries. The results of operations of the Partnerships are reported in the respective Federal and state income tax return of Country Cable and KRC. (Continued) F-184 <PAGE> 204 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (9) Income Taxes, cont As discussed in note 1, the Partnerships adopted FAS 109 in 1993 for TKR's corporate subsidiaries and have applied the provisions of FAS 109 retroactively to September 1, 1987, the date on which the first corporate subsidiary was acquired. Beginning partners' capital as of January 1, 1991 has been retroactively adjusted to account for the cumulative effect of the change in the method of accounting for income taxes since September 1, 1987. The combined financial statements for the years ended December 31, 1992 and 1991 have been restated to comply with the provisions of FAS 109. The following summarizes the impact of applying FAS 109 on operating income and net income for the years ended December 31, 1992 and 1991: <TABLE> <CAPTION> 1992 1991 ---------------------------- -------------------------- Operating Net Operating Net income income income income ------------ ---------- ---------- --------- <S> <C> <C> <C> <C> As previously reported $ 48,189,000 19,150,000 42,146,000 7,130,000 Effect of FAS 109 (802,000) 205,000 (802,000) 152,000 ------------ ---------- ---------- --------- As restated $ 47,387,000 19,715,000 41,344,000 7,282,000 ------------ ---------- ---------- --------- ------------ ---------- ---------- --------- </TABLE> Components of the provision for income taxes (benefit) for Ramapo, Wildwood and Warwick are as follows: <TABLE> <CAPTION> 1993 1992 1991 ---------- ------- -------- <S> <C> <C> <C> Current: Federal $1,233,000 348,000 86,000 State 501,000 -- -- ---------- ------- -------- 1,734,000 348,000 86,000 ---------- ------- -------- Deferred: Federal 698,000 218,000 (92,000) State (159,000) 23,000 (10,000) ---------- ------- -------- 539,000 241,000 (102,000) ---------- ------- -------- $2,273,000 589,000 (16,000) ---------- ------- -------- ---------- ------- -------- </TABLE> (Continued) F-185 <PAGE> 205 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (9) Income Taxes, cont The actual provision (benefit) for income taxes for 1993, 1992 and 1991 differs from the expected income tax provision (computed by applying the U.S. corporate income tax rate of 34% to income before provision for income taxes) as follow: <TABLE> <CAPTION> 1993 1992 1991 ----------- ---------- ---------- <S> <C> <C> <C> Computed "expected" income tax provision $ 7,345,000 6,903,000 2,470,000 Income from partnerships included in combined income included in Partners' income tax returns (6,133,000) (6,437,000) (2,707,000) State income taxes (benefit), net of Federal income tax effect 226,000 15,000 (7,000) Amortization of franchise costs not deductible 189,000 189,000 189,000 Other, net 646,000 (81,000) 39,000 ----------- ---------- ---------- $ 2,273,000 589,000 (16,000) ----------- ---------- ---------- ----------- ---------- ---------- </TABLE> The effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1993 and 1992 are presented below: <TABLE> <CAPTION> 1993 1992 ------------ ----------- <S> <C> <C> Deferred tax assets: Net operating loss carryforwards $ 266,000 965,000 Investment tax credit carryforwards 766,000 1,155,000 Alternative minimum tax credit carryforwards 836,000 443,000 ------------ ----------- Total gross deferred tax assets 1,868,000 2,563,000 ------------ ----------- Less valuation allowance -- -- ------------ ----------- Net deferred tax assets 1,868,000 2,563,000 ------------ ----------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation (7,098,000) (7,188,000) Franchise costs, principally due to differences in amortization (15,094,000) (15,580,000) Other (420,000) -- ------------ ----------- Total gross deferred tax liabilities (22,612,000) (22,768,000) ------------ ----------- Net deferred tax liablitiy $(20,744,000) (20,205,000) ------------ ----------- ------------ ----------- </TABLE> (Continued) F-186 <PAGE> 206 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (9) Income Taxes, cont. At December 31, 1993, Ramapo, Wildwood and Warwick have approximately $664,000 available in net operating loss carryforwards and approximately $766,000 in investment tax credit carryforwards for income tax reporting purposes. Such carryforwards expire through the year 2008. (10) Acquisitions In march 1991, TKR acquired The Hills, a New Jersey satellite master antenna television business (SMATV), for approximately $4,320,000. The acquisition of The Hills was accounted for under the purchase method of accounting whereby the results of operations of the acquired business have been included in the combined statement of earnings of the Partnerships since the acquisition date. The total purchase price was allocated to purchased franchise costs ($1,195,000) and property and equipment ($3,125,000). Such amounts were allocated based on their estimated fair value. In January 1992, TKR acquired the Clearview System, a New Jersey satellite master antenna television business (SMATV), for approximately $3,100,000. The acquisition of the Clearview System was accounted for under the purchase method of accounting whereby the results of operations of the acquired business have been included in the combined statement of earnings of the Partnerships since the acquisition date. The total purchase price was allocated to purchased franchise costs ($900,000), property and equipment ($2,170,000) and other assets ($30,000). Such amounts were allocated based on their estimated fair value. (11) Commitments TKR has entered into certain pole rental agreements with various utility companies which can be terminated on minimum notice. Rental payments under such lease agreements aggregated $1,065,000, $1,161,000 and $882,000 in 1993, 1992 and 1991, respectively. TKR leases certain facilities and real property under noncancellable leases with original terms varying from one to ten years. Rental expense under such leases aggregated $1,762,000, $1,562,000 and $1,334,000 in 1993, 1992 and 1991, respectively. Certain rental payments will be adjusted in the future in accordance with changes in the consumer price index. (Continued) F-187 <PAGE> 207 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (11) Commitments, cont. Minimum annual rental commitments for the next five years for all noncancellable leases as of December 31, 1993 are as follows: <TABLE> <S> <C> 1994 $1,519,000 1995 1,225,000 1996 1,160,000 1997 931,000 1998 910,000 ---------- ---------- </TABLE> (12) Disclosure About Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (FAS 107), requires that the Partnerships disclose estimated fair values of their financial instruments. Fair value estimates, methods and assumptions are set forth below for the Partnerships' financial instruments: Cash, accounts receivable, accounts payable and accrued expenses and subscriber advance payments: The carrying amounts approximates fair value because of the short maturity of the instruments. Investments in securities: The fair value of TKR's investment in TBS is based on quoted market prices for the securities (note 4). Due to Tele-Communications, Inc. and notes payable -- Knight-Rider Investment Company: It is not practical to estimate the fair value of these liabilities due to their related party nature. Debt to banks: The carrying account of this debt approximates fair value due to the variable rate nature of this instrument. (Continued) F-188 <PAGE> 208 THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Notes to Combined Financial Statements, Continued (12) Disclosure About Fair Value of Financial Instruments, cont. Interest rate swap agreement: The fair value of the interest rate swap agreement was obtained from a dealer quote. This value represents the estimated amount TKR would pay to terminate the agreement. The estimated fair value of the Partnerships' financial instruments related to debt to banks and interest rate swap agreement as of December 31, 1993 are summarized as follows: Carrying Estimated amount fair value ------------ ----------- Debt to banks $298,000,000 298,000,000 Interest rate swap agreement (in a payment position) -- (1,632,000) ------------ ----------- ------------ ----------- F-189 <PAGE> 209 INDEPENDENT AUDITORS' REPORT The Partners The Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc.: Under date of January 28, 1994, we reported on the combined balance sheets of The Cable Partnerships of Country Cable Co. and Knight-Ridder Cablevision, Inc. as of December 31, 1993 and 1992, and the related combined statements of earnings, changes in partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1993, as included in the annual report on Form 10-K of Liberty Media Corporation for the year 1993. In connection with our audits of the aforementioned combined financial statements, we also audited the related financial statement schedules IV, VIII and X. These financial statement schedules are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, the related financial statement schedules, when considered in relation to the basic combined financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in notes 1 and 9 to the combined financial statements, the Partnerships changed their method of accounting for income taxes for their corporate subsidiaries. /s/ KPMG Peat Marwick KPMG Peat Marwick Princeton, New Jersey January 28, 1994 F-190 <PAGE> 210 SCHEDULE IV THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Indebtedness to Related Parties Years ended December 31, 1993, 1992 and 1991 Balance at Indebtedness of Balance beginning ---------------------- at end Related Party of year Additions Deductions of year ------------- ---------- --------- ---------- ---------- Year ended December 31, 1993: Due to Tele-Communications, Inc. $ 3,582,000 23,124,000 23,250,000 3,456,000 Notes payable - Knight-Ridder Investment Company 71,258,000 -- -- 71,258,000 ----------- ---------- ---------- ---------- $74,840,000 23,124,000 23,250,000 74,714,000 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Year ended December 31, 1992: Due to Tele-Communications, Inc. $ 5,111,000 21,592,000 23,121,000 3,582,000 Notes payable - Knight-Ridder Investment Company 71,258,000 -- -- 71,258,000 ----------- ---------- ---------- ---------- $76,369,000 21,592,000 23,121,000 74,840,000 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Year ended December 31, 1991: Due to Tele-Communications, Inc. $ 4,045,000 19,690,000 18,624,000 5,111,000 Notes payable - Knight-Ridder Investment Company 71,258,000 -- -- 71,258,000 ----------- ---------- ---------- ---------- $75,303,000 19,690,000 18,624,000 76,369,000 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- F-191 <PAGE> 211 SCHEDULE VIII THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Valuation and Qualifying Accounts Years ended December 31, 1993, 1992 and 1991 Additions Deductions --------- ---------- Balance at Charge to Write-offs, Balance beginning profit net of at end Description of year and loss recoveries of year ----------- ---------- --------- ---------- ---------- Year ended December 31, 1993: Allowance for doubtful accounts $ 425,000 1,169,000 (1,147,000) 447,000 --------- --------- ---------- ---------- --------- --------- ---------- ---------- Year ended December 31, 1992: Allowance for doubtful accounts $ 446,000 1,063,000 (1,084,000) 425,000 --------- --------- ---------- ---------- --------- --------- ---------- ---------- Year ended December 31, 1991: Allowance for doubtful accounts $ 437,000 1,748,000 (1,739,000) 446,000 --------- --------- ---------- ---------- --------- --------- ---------- ---------- F-192 <PAGE> 212 SCHEDULE X THE CABLE PARTNERSHIPS OF COUNTRY CABLE CO. AND KNIGHT-RIDDER CABLEVISION, INC. Supplementary Income Statement Information Years ended December 31, 1993, 1992 and 1991 Charged to costs and expenses ---------------------------------- Item 1993 1992 1991 ---- ---------- --------- --------- Maintenance and repairs $1,166,000 996,000 1,127,000 Depreciation and amortization of intangible assets, preoperating costs and similar deferrals: Amortization of franchise costs and 3,925,000 4,185,000 3,819,000 other assets Taxes, other than payroll and income taxes: Property 713,000 697,000 624,000 Royalties/copyright fees 963,000 922,000 858,000 Advertising costs 3,902,000 3,710,000 3,909,000 ---------- --------- --------- ---------- --------- --------- F-193 <PAGE> 213 ARTHUR ANDERSON & CO. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Columbia Associates, L.P.: We have audited the accompanying consolidated balance sheets of Columbia Associates, L.P. (a Delaware Limited Partnership) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, partners' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Columbia Associates, L.P. as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in coformity with generally accepted accounting principles. As explained in Note 3 to the consolidated financial statements, effective January 1, 1993, the Partnership changed its method of accounting for income taxes. /s/ ARTHUR ANDERSON Stamford, Connecticut, February 25, 1994 F-194 <PAGE> 214 COLUMBIA ASSOCIATES, L.P. CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1993 AND 1992 (000'S) 1993 1992 -------- -------- ASSETS ------ CASH $ 2,785 $ 4,213 -------- -------- SUBSCRIBER RECEIVABLES, net of allowance for doubtful accounts of $661 and $438 in 1993 ans 1992, respectively 1,741 1,247 -------- -------- INVESTMENT IN CABLE TELEVISION SYSTEMS (Note 3 and 4): Property, plant and equipment, at cost 223,856 208,074 Less- Accumulated depreciation (91,288) (75,859) -------- -------- 123,568 132,215 Franchising costs, net of accumulated amortization of $53,882 and $46,095 in 1993 and 1992, respectively 29,977 37,983 Goodwill and other intangible assets, net of accumulated amortization of $41,462 and $36,574 in 1993 and 1992, respectively 18,273 23,853 -------- -------- Total investment in cable television systems 180,818 194,051 -------- -------- DEFERRED INCOME TAXES (Notes 3 and 6) 531 -- OTHER ASSETS, net 6,400 6,083 -------- -------- $192,275 $206,099 -------- -------- -------- -------- LIABILITIES AND PARTNERS' DEFICIT --------------------------------- LIABILITIES: Debt (Note 5) $227,000 $227,500 Accounts payable and accrued expenses 10,196 10,008 Subscriber advance payments and deposits 1,413 1,356 Deferred income taxes (Note 3 and 6) -- 6,486 Due to Managing General Partner (Note 9) 555 531 -------- -------- Total liabilities 239,164 245,881 -------- -------- MINORITY INTEREST (Note 1) 311 330 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 8) PARTNERS' DEFICIT (47,200) (40,110) -------- -------- $192,275 $206,090 -------- -------- -------- -------- The accompanying notes to consolidated financial statements are an integral part of these statements. F-195 <PAGE> 215 COLUMBIA ASSOCIATES, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (000'S) 1993 1992 1991 -------- --------- --------- REVENUES $ 95,725 $ 86,832 $ 79,174 -------- --------- --------- EXPENSES: Service costs 32,561 30,280 28,192 Selling, general and administrative 17,997 16,320 15,143 Depreciation and amortization (Note 3 and 4) 35,591 35,227 32,782 Loss on disposal of equipment, net 2,081 1,525 4,057 Management fees and expenses (Note 9) 4,990 4,415 3,971 -------- --------- --------- Total expenses 93,220 87,767 84,145 -------- --------- --------- Operating income (loss) 2,505 (935) (4,971) -------- --------- --------- INTEREST EXPENSE, NET (Note 3 and 5) 16,529 18,588 20,832 MINORITY INTEREST (Note 1) 29 17 (4,115) -------- --------- --------- LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (14,053) (19,540) (21,688) INCOME TAX EXPENSE (BENEFIT) (Note 3 and 6) (1,124) 3,678 (1,337) -------- --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (12,880) (23,218) (20,351) CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 3) (5,843) -- -- -------- --------- --------- NET LOSS $ (7,086) $ (23,218) $ (20,351) -------- --------- --------- -------- --------- --------- The accompanying notes to consolidated financial statements are an integral part of these statements. F-196 <PAGE> 216 COLUMBIA ASSOCIATES, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (000'S) Limited General Partners Partners Total -------- --------- --------- PARTNERS' EQUITY, at December 31, 1990 $ 3,421 $ 34 $ 3,455 Net loss (20,147) (204) (20,351) -------- ----- -------- PARTNERS' DEFICIT, at December 31, 1991 (16,726) (170) (16,896) Net loss (22,986) (232) (23,218) -------- ----- -------- PARTNERS' DEFICIT, at December 31, 1992 (39,712) (402) (40,114) Net loss (7,016) (70) (7,086) -------- ----- -------- PARTNERS' DEFICIT, at December 31, 1993 $(46,728) $(472) $(47,200) -------- ----- -------- -------- ----- -------- The accompanying notes to consolidated financial statements are an integral part of these statements. F-197 <PAGE> 217 COLUMBIA ASSOCIATES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (000'S) 1993 1992 1991 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (7,086) $ (23,218) $ (25,351) --------- --------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of accounting change (5,843) -- -- Depreciation and amortization 35,591 35,227 32,282 Loss on disposal of equipment, net 2,081 1,525 4,157 Deferred income tax expense (benefit) (1,174) 3,678 (1,337) Change in assets and liabilities- Net change in subscriber receivables, due from/to managing general partner, other assets, accounts payable and accrued expenses, subscriber advance payments and deposits and minority interest (948) (2,070) (3,462) --------- --------- --------- Total adjustments 29,707 38,360 32,340 --------- --------- --------- Net cash provided by operating activities 22,621 15,142 11,689 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of additional interest in cable television system -- (5,000) -- Increase in investment in existing cable television systems (24,736) (32,861) (25,920) Proceeds from sale of equipment 682 1,448 371 --------- --------- --------- Net cash used in investing activities (24,054) (36,413) (25,549) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New borrowings 258,000 260,100 210,800 Repayment of debt (258,500) (237,100) (196,371) --------- --------- --------- Net cash provided by financing activities (500) 23,000 14,429 --------- --------- --------- Net increase (decrease) in cash (1,933) 1,729 569 CASH, beginning of year 4,718 2,989 2,420 --------- --------- --------- CASH, end of year $ 2,785 $ 4,718 $ 2,989 --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid (net of amount capitalized) $ 12,438 $ 18,419 $ 22,564 --------- --------- --------- --------- --------- --------- The accompanying notes to consolidated financial statements are an integral part of these statements F-198 <PAGE> 218 COLUMBIA ASSOCIATES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1992 AND 1991 (All Dollar Amounts in Thousands) (1) Partnership Organization: Columbia Associates, L.P. (the "Partnership") is a limited partnership which was formed on March 7, 1985, under the laws of the State of Delaware and which operates under the terms of the Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"), dated as of June 2, 1992. The Partnership will continue until March 1, 1995 unless previously dissolved in accordance with the terms of the Partnership Agreement. The accompanying consolidated financial statements include the accounts of the Partnership and its subsidiaries and consolidated partnerships. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. In 1988, the Partnership entered into a partnership, Columbia Cable of Oregon (the "Oregon Partnership"), with three of its partners (one of whom is a general partner) to acquire all of the stock of Tidel Communications, Inc. ("Tidel"). At that time, Tidel operated a cable television system, Willamette Cable TV, Inc. ("Willamette"), in Washington County, Oregon. Effective December 31, 1990, Tidel was merged into Willamette (the separate existence of Tidel ceased), and Willamette continued as the surviving corporation. Through May 1992, the Partnership owned approximately 51% of the Oregon Partnership. In June 1992, the Partnership paid $5,000,000, which it recorded as goodwill, to acquire approximately 29% of the Oregon Partnership from one of its limited partners, bringing the Partnership's ownership to 80%. The goodwill from this transaction is being amortized over 10 years. The accompanying consolidated financial statements include the accounts of the Oregon Partnership. Since 1991, the Partnership has been recording 100% of the loss of the Oregon Partnership. (2) Cable Regulation: On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "Act") which, among other things, will expand governmental regulation of rates for basic and other cable services. Regulations and interpretations are still being promulgated by the FCC. The Partnership is currently unable to predict the ultimate outcome of the proposed cable regulations or the effect on its future operating cash flows and debt agreements. The Partnership believes it is in compliance in all material respects with the provision of the Act and current regulations. F-199 <PAGE> 219 (3) Significant Accounting Policies: Net income (loss) allocation - The Partnership's net income or loss is allocated to the general act limited partners in accordance with the terms of the Partnership Agreement. This monthly allocation is based on the ratio in which the number of units owned (as defined) by each of the partners, on the first day of each calendar month, relates to the total number of units owned by all partners as of that date. The net loss from operations in 1993, 1992 and 1991 has been allocated 1% to the managing general partner and 99% to the other general partner and the limited partners. Net income from operations will be allocated 1% to the managing general partner and 99% to the other general partner and the limited partners to the extent of previous allocations for net loss from operations and certain other allocations (as defined). Thereafter, net income from operations is allocated 40% to the managing general partner and 60% to the other general partner and the limited partners. Property, plant and equipment - Property, plant and equipment is recorded at purchased cost, together with labor and indirect labor costs amounting to approximately $2,013, $2,020 and $1,733 in 1993, 1992 and 1991, respectively. During 1993, 1992 and 1991, the Partnership capitalized $255, $308 and $265, respectively, for interest related to system rebuilds. Intangible Assets - Franchise costs are amortized over the remaining franchise life, while goodwill is amortized over 9 to 10 years and other intangible assets (primarily subscriber lists) are amortized over the average period that a subscriber is expected to remain connected to the cable system. Amortization of franchise costs, goodwill and other intangible assets was as follows: 1993 1992 1991 ------ ------ ------ Franchise cost $8,032 $8,014 $8,050 Goodwill 3,970 3,757 3,470 Other intangible assets 1,708 3,411 3,108 Income taxes - The partners are required to report their share of Partnership income or loss in their respective income tax returns. The amounts reported as taxable income or loss to the partners differ in certain respects from financial statement amounts due to different reporting methods principally relating to depreciation and amortization. F-200 <PAGE> 220 Effective January 1, 1993, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," for Willamette. SFAS No. 109 replaces SFAS No. 96, the accounting standard for income taxes that the Partnership had followed for the years ended December 31, 1992 and 1991. On January 1, 1993, in accordance with SFAS No. 109, Willamette recorded a cumulative effect of a change in accounting principle to reduce Willamette's deferred tax liability by $5,843. The income tax provision (benefits recorded in the accompanying consolidated financial statements pertains to Willamette. Deferred income taxes are provided based upon enacted tax rates which would apply during the period taxes become payable and deferred tax assets or liabilities are subsequently adjusted for changes in future tax rates when they are enacted. Deferred taxes arise because certain transactions affect the determination of net income for financial reporting purposes in one period and determination of taxable income for tax return purpose in a different period. In accordance with SFAS No. 96, a deferred income tax liability was established to recognize the future tax consequences of the temporary differences between the values assigned to the then Tidel assets and the tax bases of those assets at their acquisition date. Such liability increased goodwill by $15,097 at the acquisition date. (4) Property, Plant and Equipment: As of December 31, 1993 and 1992, property, plant and equipment consisted of: 1993 1992 -------- -------- Cable systems and equipment $208,040 $193,161 Land, buildings and imporvements 8,513 7,827 Vehicles 3,710 3,583 Furniture and fixtures 3,593 3,503 -------- -------- $223,856 $208,074 -------- -------- -------- -------- Depreciation is calculated on a straight-line basis over the following useful lives: Cable systems and equipment 5 to 12 years Buildings and improvements 15 to 20 years Vehicles 5 years Furniture and fixtures 5 to 10 years In 1993, 1992 and 1991, the Partnership invested approximately $4,923, $12,051 and $8,308, respectively, to replace existing cable systems and equipment. As a result, the Partnership recorded a loss in 1993, 1992 and 1991 on the disposal of the existing cable systems and equipment of approximately $2,138, $2,973 and $3,752, respectively, which was include in loss on disposal of equipment, net. F-201 <PAGE> 221 (5) Debt: Under the terms of the Second Amended and Restated Credit Agreement, dated as of June 2, 1992 and amended as of November 19, 1992, (the "Credit Agreement") with thirteen banks, the Partnership may borrow up to $235,000 until December 30, 1994. The total amount of the available borrowings decreases by a specified percentage each year until September 29, 2000, when it must be repaid in full. The interest on such borrowings is determined at the Partnership's option based on the price rate, LIBOR, or the certificate of deposit rate (as defined) and is affected by certain defined financial ratios of the Partnership. At December 31, 1993, interest rates on borrowings were as follows: Principal Borrowed Interest Rate ------------------ ----------------------- $ 12,000 LIBOR (3.50) plus 1.75% 14,200 LIBOR (3.56) plus 1.75% 55,000 LIBOR (3.56) plus 1.75% 64,800 LIBOR (3.56) plus 1.75% 55,500 LIBOR (3.81) plus 1.75% 25,500 LIBOR (3.81) plus 1.75% -------- $227,000 -------- -------- At December 31, 1992, the outstanding borrowings under the Credit Agreement were $227,500, and the effective interest rates ranged from 5.63% to 6.13%. The provisions of the Credit Agreement stipulate, among other things, limitations on borrowings, investments and distributions to partners as well as require the maintenance of certain financial ratios. All of the Partnership's assets are pledged under the Credit Agreement, and the payment of management fees and expenses is subordinated to the borrowings and interest under the Credit Agreement. The maturities of the debt outstanding under the Partnership's Credit Agreement as of December 31, 1993, for the next five years and thereafter are as follows: 1994 $ -- 1995 17,850 1996 25,850 1997 36,425 1998 45,825 Thereafter 101,050 -------- $227,000 -------- -------- F-202 <PAGE> 222 The Partnership has entered into interest rate exchange agreements with two of the banks participating in the Credit Agreement to fix the cost of borrowing on portions of the above debt as follows: Amount Maturity Interest Rate ------- ------------------ ------------- $45,000 September 27, 1995 7.21% $80,000 January 24, 1995 5.98% The Partnership's liability if the other parties fail to perform under these agreements would be limited to the impact of variable interest rate fluctuations. If the Partnership terminated these interest rate exchange agreements on December 31, 1993, the cost would be approximately $4,362. The Company has entered into two option agreements, which are only exercisable in January 1995, to fix the cost of $80,000 of debt from the period January 1995 to January 1997 at 8.00%. (6) Income taxes: Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured for income tax purposes for Willamette. Deferred income taxes have been reduced by the tax effect of the available net operating loss carryforwards to the extent that deferred tax liabilities are expected to reverse during the statutory carryforward periods. The components of the income tax expense (benefit) are as follows: 1993 1992 1991 ------- ------ ------- Federal deferred $ (972) $3,053 $(1,107) State deferred (202) 625 (230) ------- ------ ------- Total deferred $(1,174) $3,678 $(1,337) ------- ------ ------- ------- ------ ------- The total income tax expense (benefit) varies from the federal statutory tax expense (benefit) due to certain partnership losses which flow directly to the individual partners' tax returns, state taxes, goodwill amortization and, in 1992, due to the provision to increase the deferred income tax liability, as discussed below. The Partnership's 1992 acquisition of approximately 29% of the Oregon Partnership and 1992 ownership changes in the Partnership resulted in Willamette becoming subject to limitations under IRC Section 382 on the amount of the net operating loss carryforward that can be utilized for income tax purposes in future years. The effect of this annual limitation, in the amount of $2,027, required a 1992 provision to increase the deferred tax liability. F-203 <PAGE> 223 At December 31, 1993, Willamette has net operating loss carryforwards for federal income tax purposes, subject to Internal Revenue Service review of $29,855 which expire in the years 2002 through 2007. For financial reporting purposes, the net operating loss carryforwards have been reduced by $29,333, which is the amount allowable in accordance with SFAS No. 109 and after applying the IRC Section 382 limitations. At December 31, 1993, Willamette has recorded a deferred tax asset related to these loss carryforwards as the Company believes it is "more likely than not" that they will be utilized during the carryforward period. The deferred tax asset consists primarily of the utilization of net operating loss carryforwards offset by "temporary differences" related to depreciation and amortization. The remaining financial reporting loss carryforward of $522 can only be utilized to offset income generated from recognized "built-in gains" resulting from the future sale of any of Willamette's assets held as of the date of the change of ownership. (7) Salary Deferral Plan: The Partnership established a salary deferral plan ("the Plan") in accordance with Internal Revenue Code Section 401(K), as amended, in 1989. The Plan provides for dicretionary and matching contributions by the Partnership on behalf of participating employees. Discretionary and matching contributions totaled approximately $571, $629 and $555 in 1993, 1992 and 1991, respectively. (8) Commitments: Under various lease and rental agreements, the Partnership had rental expense of approximately $193, $192 and $190 in 1993, 1992 and 1991, respectively. Future minimum annual payments under these agreements are as follows: 1994 $134 1995 84 1996 66 1997 43 1998 25 Thereafter 125 In addition, the Partnership rents access to utility poles in its operations generally under short-term, but recurring, agreements. Total rental expense for utility poles was $400, $406 and $372 in 1993, 1992 and 1991, respectively. The Partnership also has outstanding letters of credit of $20 and $378 at December 31, 1993 and 1992, respectively. (9) Related Party Transactions: The Partnership is required to pay an annual management fee to its managing general partner under the terms of the Partnership Agreement. This management fee is equal to the greater of 1% of total capital contributions (as difined) of 5% of net revenues (as defined) of the Partnership, except for the Oregon Partnership which pays 3% of gross revenues (as defined). Management fees amounted to $3,900, $3,500 and $3,162 in 1993, 1992 and 1991, respectively. F-204 <PAGE> 224 Management expenses of $1,090, $915 and $809 in 1993, 1992 and 1991, respectively, are expenses incurred by the managing general partner that are attributable to the operations of the Partnership. The Partnership incurred legal fees of $55, $302 and $49 in 1993, 1992 and 1991, respectively, from the law firms of certain limited partners. The Partnership paid $14,997, $14,163 and $12,919 for programing services in 1993, 1992 and 1991, respectively, to a related party. F-205 <PAGE> 225 ARTHUR ANDERSEN & CO. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Columbia Associates, L.P.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Columbia Associates, L.P. included in this Form 10-K and have issued our report thereon dated February 25, 1994. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedules are the responsibility of the Partnership's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN Stamford, Connecticut, February 25, 1994 F-206 <PAGE> 226 SCHEDULE V COLUMBIA ASSOCIATES, L.P. PROPERTY, PLANT AND EQUIPMENT (000'S) <TABLE> <CAPTION> Other Charges Balance at Additions Add Balance Classification Beginning At Cost Retirements (Deduct) At End - -------------- --------- --------- ----------- -------- --------- <S> <C> <C> <C> <C> <C> For the year ended December 31, 1991 Cable systems and equipment $ 155,520 $ 24,049 $ (9,315) $ (702) $ 169,552 Land, buildings and improvements 6,726 276 -- 619 7,621 Vehicles 2,947 527 (158) 3,316 Furniture and fixtures 2,220 1,004 -- 83 3,307 --------- --------- -------- -------- --------- Total 167,413 25,856 (9,473) -- 183,796 --------- --------- -------- -------- --------- --------- --------- -------- -------- --------- For the year ended December 31, 1992 Cable systems and equipment 169,552 31,617 (8,000) (8) 193,161 Land, buildings and improvements 7,621 421 (221) 6 7,827 Vehicles 3,316 368 (101) -- 3,583 Furniture and fixtures 3,307 219 (25) 2 3,503 --------- --------- -------- -------- --------- Total 183,796 32,625 (8,347) -- 208,074 --------- --------- -------- -------- --------- --------- --------- -------- -------- --------- For the year ended December 31, 1993 Cable systems and equipment 193,161 23,771 (8,386) (506) 208,040 Land, buildings and improvements 7,827 694 (6) (2) 8,513 Vehicles 3,583 448 (321) -- 3,710 Furniture and fixtures 3,503 271 (181) -- 3,593 --------- --------- -------- -------- --------- Total $ 208,074 $ 25,184 $ (8,894) $ (508) $ 223,856 --------- --------- -------- -------- --------- --------- --------- -------- -------- --------- </TABLE> F-207 <PAGE> 227 SCHEDULE VI COLUMBIA ASSOCIATES, L.P. ACCUMULATED DEPRECIATION OF PROPERTY PLANT AND EQUIPMENT (000's) <TABLE> <CAPTION> Other Charges Balance at Additions Add Balance Classification Beginning At Cost Retirements (Deduct) At End - -------------- --------- --------- ----------- -------- --------- <S> <C> <C> <C> <C> <C> For the year ended December 31, 1991 Cable systems and equipment $ (44,862) $ (16,683) $ 4,770 $ -- $ (56,775) Buildings and improvements (826) (246) -- -- (1,072) Vehicles (1,327) (569) 147 -- (1,749) Furniture and fixtures (1,148) (425) -- -- (1,573) --------- --------- --------- -------- --------- Total (48,163) (17,923) 4,917 -- (61,169) --------- --------- --------- -------- --------- --------- --------- --------- -------- --------- For the year ended December 31, 1992 Cable systems and equipment (56,775) (18,674) 5,183 -- (70,266) Buildings and improvements (1,072) (273) 33 -- (1,312) Vehicles (1,749) (564) 101 -- (2,212) Furniture and fixtures (1,573) (520) 24 -- (2,069) --------- --------- --------- -------- --------- Total (61,169) (20,031) 5,341 -- (75,859) --------- --------- --------- -------- --------- --------- --------- --------- -------- --------- For the year ended December 31, 1993 Cable systems and equipment (70,266) (20,142) 5,576 17 (84,815) Buildings and improvements (1,312) (280) 6 -- (1,586) Vehicles (2,212) (563) 292 -- (2,483) Furniture and fixtures (2,069) (511) 176 -- (2,404) --------- --------- --------- -------- --------- Total $ (75,859) $ (21,496) $ 6,050 $ 17 $ (91,288) --------- --------- --------- -------- --------- --------- --------- --------- -------- --------- </TABLE> F-208 <PAGE> 228 SCHEDULE X COLUMBIA ASSOCIATES, L.P. SCHEDULE OF SUPPLEMENTARY INCOME STATEMENT INFORMATION (000's) Charged to Cost and Expenses Year Ended December 31, ----------------------------------------- Item 1993 1992 1991 - ---- ------- ------- ------- Depreciation $21,496 $20,044 $17,923 Amortization 14,095 15,183 14,859 Advertising 2,526 2,054 1,679 Taxes, other than payroll and income taxes 1,831 1,714 1,719 F-209 <PAGE> 229 INDEPENDENT AUDITORS' REPORT THE PARTNERS SPORTSCHANNEL CHICAGO ASSOCIATES: We have audited the accompanying balance sheets for SportsChannel Chicago Associates (a general partnership) as of December 31, 1993 and 1992, and the related statements of income, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audits of the financial statements, we also audited the attached Schedule VIII and Schedule X, Valuation and Qualifying Accounts and Supplementary Income Statement Information, respectively. These financial statements and financial statement schedules are the responsibility of the partnership's managment. Our responsiblity is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SportsChannel Chicago Associates at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the attached schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick KPMG Peat Marwick Jericho, New York March 4, 1994 F-210 <PAGE> 230 SPORTSCHANNEL CHICAGO ASSOCIATES (A GENERAL PARTNERSHIP) BALANCE SHEETS December 31, 1993 and 1992 1993 1992 ----------- ----------- ASSETS - ------ Current Assets: Cash and cash equivalents $ 5,206,000 $ 2,836,000 Trade accounts receivable (less allowance for doubtful accounts of $299,000 and $359,000) 1,740,000 1,191,000 Trade accounts receivable-affiliates 6,130,000 5,559,000 Other receivables 510,000 529,000 Prepaid expenses and other current assets 489,000 703,000 ----------- ----------- Total current assets 14,075,000 10,818,000 Property and equipment, net 3,218,000 3,352,000 ----------- ----------- $17,293,000 $14,170,000 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- Current liabilities: Accounts payable $ 970,000 $ 927,000 Accrued contractual expense 1,143,000 961,000 Accrued payroll and related benefits 577,000 750,000 Other accrued expenses 250,000 291,000 Accounts payable-affiliates, net 472,000 614,000 ----------- ----------- Total current liabilities 3,412,000 3,543,000 Commitments Partners' capital 13,881,000 10,627,000 ----------- ----------- $17,293,000 $14,170,000 ----------- ----------- ----------- ----------- See accompanying notes to financial statements. F-211 <PAGE> 231 SPORTSCHANNEL CHICAGO ASSOCIATES (A GENERAL PARTNERSHIP) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 <TABLE> <CAPTION> 1993 1992 1991 ----------- ----------- ----------- <S> <C> <C> <C> Revenues (including affiliate amounts of $10,178,000, $9,341,000 and $4,691,000) $40,220,000 $37,227,000 $30,818,000 ----------- ----------- ----------- Operating Expenses: Technical (including affiliate amounts of $3,728,000, $3,489,000 and $3,234,000) 22,034,000 21,269,000 18,826,000 Selling, general and administrative (including affiliate amounts of $1,928,000, $1,873,000 and $1,724,000) 4,671,000 4,802,000 4,065,000 Depreciation and amortization 776,000 746,000 512,000 ----------- ----------- ----------- 27,481,000 26,817,000 23,403,000 ----------- ----------- ----------- Operating income 12,739,000 10,410,000 7,415,000 ----------- ----------- ----------- Other income (expense): Interest income 66,000 84,000 180,000 Interest expense -- (52,000) -- Miscellaneous, net (51,000) (16,000) (13,000) ----------- ----------- ----------- 15,000 16,000 167,000 ----------- ----------- ----------- Net income $12,754,000 $10,426,000 $ 7,582,000 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> See accompanying notes to the financial statements F-212 <PAGE> 232 SPORTSCHANNEL CHICAGO ASSOCIATES (A GENERAL PARTNERSHIP) STATEMENTS OF PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 <TABLE> <CAPTION> SCPCHP NBC LIBERTY TOTAL ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Balance, January 1, 1991 $ 4,867,000 $ 4,867,000 $ -- $ 9,734,000 Sale of partnership interest (1,137,000) (1,137,000) 2,274,000 -- Net income 3,328,000 3,328,000 926,000 7,582,000 Distributions (3,420,000) (3,420,000) (775,000) (7,615,000) ----------- ----------- ----------- ----------- Balance, December 31, 1991 3,638,000 3,638,000 2,425,000 9,701,000 Sale of partnership interest (1,201,000) (1,202,000) 2,403,000 -- Net income 3,539,000 3,539,000 3,348,000 10,426,000 Distributions (3,314,000) (3,313,000) (2,873,000) (9,500,000) ----------- ----------- ----------- ----------- Balance, December 31, 1992 2,662,000 2,662,000 5,303,000 10,627,000 Sale of partnership interest (6,000) (6,000) 12,000 -- Net income 3,189,000 3,189,000 6,376,000 12,754,000 Distributions (2,375,000) (2,375,000) (4,750,000) (9,500,000) ----------- ----------- ----------- ----------- Balance, December 31, 1993 $ 3,470,000 $ 3,470,000 $ 6,941,000 $13,881,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> See accompanying notes to financial statements. F-213 <PAGE> 233 SPORTSCHANNEL CHICAGO ASSOCIATES (A General Partnership) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 <TABLE> <CAPTION> 1993 1992 1991 ----------- ----------- ----------- <S> <C> <C> <C> Cash flows from operating activities: Net income $12,754,000 $10,426,000 $ 7,582,000 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 776,000 746,000 512,000 Changes in assets and liabilities: Trade accounts receivable (549,000) 351,000 794,000 Trade accounts receivable -- affiliates (571,000) (1,772,000) (1,585,000) Other receivables 19,000 (6,000) (140,000) Other receivables -- affiliates -- 68,000 32,000 Prepaid expenses and other current assets 214,000 (229,000) 171,000 Accounts payable and accrued liabilities 11,000 664,000 174,000 Accounts payable -- affiliates (142,000) (65,000) 642,000 ----------- ----------- ----------- Total adjustments (242,000) (243,000) 600,000 ----------- ----------- ----------- Net cash provided by operating activities 12,512,000 10,183,000 8,182,000 ----------- ----------- ----------- Cash flows used by investing activities: Capital expenditures (642,000) (471,000) (1,847,000) ----------- ----------- ----------- Cash flows used by financing activities: Partners' capital distributions (9,500,000) (9,500,000) (7,615,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,370,000 212,000 (1,280,000) Cash and cash equivalents at beginning of year 2,836,000 2,624,000 3,904,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 5,206,000 $ 2,836,000 $ 2,624,000 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> See accompanying notes to financial statements. F-214 <PAGE> 234 SPORTSCHANNEL CHICAGO ASSOCIATES (A General Partnership) NOTES TO FINANCIAL STATEMENTS 1. The Company SportsChannel Chicago Associates ("the Company") is a general partnership organized as of January 1, 1984 under the provisions of the New York State Partnership Law to produce and distribute certain programming to the pay television industry. In accordance with the partnership agreement, as amended, the partnership will terminate on July 1, 2090 unless earlier termination occurs as provided in the partnership agreement. Prior to July 1, 1991, a subsidiary of the National Broadcasting Company, Inc. ("NBC") and SportsChannel Prism/Chicago Holding Partnership ("SCPCHP") each held a 50% interest in the Company. SCPCHP, the managing general partner of the Company, is 66.67% owned by Rainbow Programming Holdings, Inc. ("RPH") and 33.33% owned by Rainbow Program Enterprises ("RPE"). RPH is wholly-owned and RPE is indirectly substantially wholly-owned by Cablevision Systems Corporation ("CSC"). On July 1, 1991, SCPCHC and NBC each sold a 12.5% interest in the Company to TCI Sports Investments, Inc. ("TCISI"), a subsidiary of Tele-Communications, Inc. ("TCI"). TCISI had the option until July 1994, to purchase from each of NBC and SCPCHP an additional 12.5% general partnership interest in the Company. TCISI's interest in the Company was transferred to Liberty Media Corporation ("Liberty"), an affiliate, in 1992. On October 2, 1992, SCPCHC and NBC each sold a 12.45% interest in the Company to Liberty. Subsequent to the sale, the Company was 25.05% owned by SCPCHC, 25.05% owned by NBC, and 49.9% owned by Liberty. On January 22, 1993, Liberty exercised the remainder of its option to purchase an additional .1% interest in the Company equally from both SCPCHP and NBC. Accordingly, Liberty now has a 50% ownership interest while SCPCHP and NBC each have a 25% interest in the Company. 2. Summary of Significant Accounting Policies Revenue Recognition The Company recognizes subscriber revenue as programming services are provided to cable television companies ("Cable Affiliates"). Advertising revenue is recognized when commercials are telecast. The Company's Cable Affiliates are located principally in Illinois. Six Cable Affiliates individually represent greater than 5% of the Company's 1993 revenues. At December 31, 1993, five Cable Affiliates individually accounted for greater than 5% of the accounts receivable balance. Property and Equipment Property and equipment are carried at cost and depreciated on the straight-line basis over the estimated useful lives of the assets or, with respect to leasehold improvements, amortized over the lesser of the lease term or the assets' useful lives. F-215 <PAGE> 235 SPORTSCHANNEL CHICAGO ASSOCIATES (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 2. Summary of Significant Accounting Policies (continued) Income Taxes The Company operates as a general partnership; accordingly, its taxable income or loss is included in the tax returns of the individual partners and no provision for income taxes is made on the books of the Company. Cash Flows The Company considers temporary cash investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company made cash payments of interest expense of $52,000, $0 and $0 for the periods ended December 31, 1993, 1992 and 1991, respectively. 3. Property and Equipment Property and equipment consist of the following: <TABLE> <CAPTION> December 31, ------------------------------ Estimated 1993 1992 Useful Lives ---------- ---------- ------------ <S> <C> <C> <C> Program, service and test equipment $4,392,000 $3,920,000 5 to 8 years Microwave equipment 548,000 391,000 8 years Furniture and fixtures 225,000 212,000 8 years Leasehold improvements 346,000 346,000 Life of lease ---------- ---------- 5,511,000 4,869,000 Less accumulated depreciation and amortization 2,293,000 1,517,000 ---------- ---------- $3,218,000 $3,352,000 ---------- ---------- ---------- ---------- </TABLE> 4. Leases The Company leases certain space under long-term operating lease agreements which expire at various dates through 2002. Rent expense for the years ended December 31, 1993, 1992 and 1991 was approximately $145,000, $179,000 and $327,000, respectively. The following is a schedule of future minimum payments for operating leases (with initial or remaining terms in excess of one year) as of December 31, 1993: <TABLE> <CAPTION> Years Ending December 31, ------------------------- <S> <C> 1994 $ 305,000 1995 314,000 1996 324,000 1997 334,000 1998 346,000 Thereafter 613,000 ---------- Total minimum lease payments $2,236,000 ---------- ---------- </TABLE> F-216 <PAGE> 236 SPORTSCHANNEL CHICAGO ASSOCIATES (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 5. Affiliate Transactions The Company distributes certain programming to the cable television industry under contracts called affiliation agreements. For the years ended December 31, 1993, 1992 and 1991, approximately $10,178,000, $9,341,000 and $4,691,000, respectively, of the revenues of the Company were earned under affiliation agreements with companies owned or managed by CSC or TCI. RPH provides the Company with certain administrative services at its cost. The Company was charged approximately $1,294,000, $1,236,000 and $1,175,000 for the years ended December 31, 1993, 1992 and 1991, respectively, for such services. SportsChannel Associates, an affiliate of the Company, provides additional administrative services to the Company. The Company was charged approximately $137,000, $88,000 and $80,000 during the years ended December 31, 1993, 1992 and 1991, respectively, for these services. Rainbow Network Communications, an affiliate of the Company, provides certain transmission and production services to the Company. The Company was charged approximately $759,000, $791,000 and $949,000 for the years ended December 31, 1993, 1992 and 1991, respectively, for these services. Prime SportsChannel Networks (SportsChannel America Associates prior to 1993), an affiliate of the Company, provides certain programming to the Company. The Company was charged approximately $502,000, $783,000 and $580,000 during the years ended December 31, 1993, 1992 and 1991, respectively, for this programming. The Company has an arrangement with an affiliated company to provide advertising services to the Company in exchange for a fee of 18% (5% for barter transactions) of the gross revenue, net of agency commissions, from advertising sold by this affiliate. Fees earned by this affiliate on advertising revenues amounted to approximately $2,467,000, $1,915,000 and $1,705,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The Company leases certain office facilities and equipment on a month to month basis from an affiliate. Rent expense incurred for the years ended December 31, 1993, 1992 and 1991 amounted to $497,000, $549,000 and $469,000, respectively. 6. Pension Plan CSC, with its affiliates, including the Company, maintained a defined contribution pension plan covering substantially all of the Company's and its employees. The Company contributed 3% of eligible employees' annual compensation (as defined), and employees could voluntarily contribute up to 10% of their annual compensation. Employee contributions were fully vested. Employer contributions become vested in years three through seven. The cost associated with this plan was approximately $42,000 and $27,000 for the years ended December 31, 1992 and 1991, respectively. F-217 <PAGE> 237 SPORTSCHANNEL CHICAGO ASSOCIATES (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 6. Pension Plan (continued) Effective January 1, 1993, the Board of Directors of CSC approved the adoption of an amended and restated plan (the "Plan"), in part to permit participants to make contributions to the Plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(K) of the Internal Revenue Code, and to introduce new investment options under the Plan. The Company contributes 1-1/2% of eligible employees' annual compensation, as defined, to the defined contribution portion of the Plan (the "Pension Plan") and an equivalent amount to the Section 401(K) portion of the Plan (the "Savings Plan"). Employees may voluntarily contribute up to 15% of eligible compensation, subject to certain restrictions, to the Savings Plan, with an additional matching contribution by the Company of 1/4 of 1% for each 1% contributed by the employee, up to a maximum contribution by the Company of 1/2 of 1% of eligible base pay. Employee contributions are fully vested as are employer base contributions to the Savings plan. Employer contributions to the Pension Plan and matching contributions to the Savings Plan become vested in years three through seven. The cost associated with this amended plan for the year ended December 31, 1993 was $58,000. The Company does not provide any postretirement benefits to its employees. 7. Commitments The Company has entered into long-term agreements with SportsVision of Chicago, a company that represents several professional sports teams and others which provide the Company with exclusive pay telecast rights to live sporting events. The approximate aggregate contractual payments as of December 31, 1993 under these agreements are as follows: <TABLE> <CAPTION> Years Ending December 31, ------------------------- <S> <C> 1994 $ 9,117,000 1995 10,347,000 1996 10,365,000 1997 10,179,000 1998 10,187,000 Thereafter 7,596,000 ----------- $57,791,000 =========== </TABLE> F-218 <PAGE> 238 SPORTSCHANNEL CHICAGO ASSOCIATES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) <TABLE> <CAPTION> Additions Balance at ------------------------------------ Beginning Charged to Costs Charged to Deductions- Balance at of Period and Expenses Other Accounts Write-Offs End of Period ---------- ---------------- -------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Year Ended December 31, 1993 Allowance for doubtful accounts . . . . . . $359 $ -- $ -- $ (60) $299 ---- ---- ---- ----- ---- ---- ---- ---- ----- ---- Year Ended December 31, 1992 Allowance for doubtful accounts . . . . . . $435 $124 $ -- $(200) $359 ---- ---- ---- ----- ---- ---- ---- ---- ----- ---- Year Ended December 31, 1991 Allowance for doubtful accounts . . . . . . $207 $263 $ -- $ (35) $430 ---- ---- ---- ----- ---- ---- ---- ---- ----- ---- </TABLE> F-219 <PAGE> 239 SPORTSCHANNEL CHICAGO ASSOCIATES SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION (Dollars in thousands) <TABLE> <CAPTION> Charged to Costs and Expenses ---------------------------------------------------- Year Year Year Ended Ended Ended December 31, December 31, December 31, 1993 1992 1991 ------------ ------------ ------------ <S> <C> <C> <C> Maintenance and repairs . . . . . . . . . . . . . $ 6 $ 9 $ 7 ------ ------ ------ ------ ------ ------ Taxes, other than payroll and income taxes . . . . N/A N/A N/A Advertising . . . . . . . . . . . . . . . . . . . $1,131 $ 998 $1,381 ------ ------ ------ ------ ------ ------ Amortization of intangible assets . . . . . . . . N/A N/A N/A Royalties . . . . . . . . . . . . . . . . . . . . $ 96 $ 90 $ 75 ------ ------ ------ ------ ------ ------ </TABLE> F-220 <PAGE> 240 INDEPENDENT AUDITORS' REPORT The Partners American Movie Classics Company: We have audited the accompanying balance sheets of American Movie Classics Company (a general partnership) as of December 31, 1993 and 1992, and the related statements of income, partners' capital (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1993. In connection with our audits of the financial statements, we also audited the attached Schedule VIII and Schedule X, Valuation and Qualifying Accounts and Supplementary Income Statement Information, respectively. These financial statements and financial statement schedules are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Movie Classics Company at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the attached schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick KPMG Peat Marwick Jericho, New York March 4, 1994 F-221 <PAGE> 241 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) BALANCE SHEETS December 31, 1993 and 1992 (Dollars in thousands) <TABLE> <CAPTION> ASSETS 1993 1992 - ------ -------- -------- <S> <C> <C> Current assets: Cash and cash equivalents $ 9,030 $ 333 Trade accounts receivable (less allowance for doubtful accounts of $2,677 and $1,148) 9,151 5,823 Trade accounts receivable-affiliates 3,720 3,014 Prepaid expenses and other current assets 278 315 Feature film inventory 19,230 22,197 -------- -------- Total current assets 41,409 31,682 Prperty and equipment, net 1,106 957 Long-term feature film inventory 89,021 52,470 Film and program agreements (less accumulated amortization of $7,171 and $6,148) -- 1,023 Affiliation agreements (less accumulated amortization of $3,267 and $2,799) -- 468 Deferred financing costs (less accumulated amortization of $213 and $71) 640 782 Deferred transmission costs (less accumulated amortization of $87 and $4 in 1992) 913 996 -------- -------- $133,089 $ 88,378 -------- -------- -------- -------- LIABILITIES AND PARTNERS' DEFICIENCY - ------------------------------------ Current Liabilities: Bank debt-current $ 3,025 $ 7,975 Accounts payable 561 343 Accrued licensing fees 3,969 3,595 Accrued payroll and related benefits 1,901 1,496 Accrued management fees 807 943 Other accrued expenses 4,183 2,624 Accounts payable-affiliates 2,527 2,347 Accrued feature film rights payable 26,157 22,490 -------- -------- Total current liabilities 43,130 41,813 Bank debt-long term 44,000 50,025 Long-term feature film rights payable 73,940 47,146 -------- -------- Total liablities 161,070 138,984 Commitments and contingencies Partners' deficiency (27,981) (50,606) -------- -------- $133,089 $ 88,378 -------- -------- -------- -------- </TABLE> See accompanying notes to financial statements F-222 <PAGE> 242 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) STATEMENTS OF INCOME Years Ended December 31, 1993, 1992 and 1991 (Dollars in thousands) <TABLE> <CAPTION> 1993 1992 1991 ------- ------- ------- <S> <C> <C> <C> Revenues (including affiliate amounts of $21,582, $17,577 and $24,664) $87,618 $69,715 $62,980 ------- ------- ------- Operating expenses: Technical (including affiliate amounts of $4,139, $3,309 and $4,407) 34,884 29,048 23,671 Selling, general and administrative (including affiliate amounts of $5,547, $4,480 and $4,456 25,093 21,532 20,093 Depreciation and amortization 1,791 1,728 1,727 ------- ------- ------- 61,768 52,308 45,491 ------- ------- ------- Operating income 25,850 17,407 17,489 ------- ------- ------- Other income (expense): Interest income 190 170 567 Interest expense (3,294) (1,884) (277) Miscellaneous, net (121) (17) (21) ------- ------- ------- (3,225) (1,731) 269 ------- ------- ------- Net income $22,625 $15,676 $17,758 ------- ------- ------- ------- ------- ------- </TABLE> See accompanying notes to financial statements F-223 <PAGE> 243 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) STATEMENTS OF PARTNERS' CAPITAL (DEFICIENCY) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands) <TABLE> <CAPTION> RPE LIBERTY NBC TOTAL -------- -------- -------- -------- <S> <C> <C> <C> <C> Balance, January 1, 1991 $ 9,521 $ 11,039 $ -- $ 20,560 Sale of partnership interest (5,345) -- 5,345 -- Net income 5,024 8,879 3,855 17,758 Distributions (6,650) (13,300) (6,650) (26,600) -------- -------- -------- -------- Balance, December 31, 1991 2,550 6,618 2,550 11,718 Net income 3,919 7,838 3,919 15,676 Distributions (19,500) (39,000) (19,500) (78,000) -------- -------- -------- -------- Balance, December 31, 1992 (13,031) (24,544) (13,031) (50,606) Net Income 5,656 11,313 5,656 22,625 -------- -------- -------- -------- Balance, December 31, 1993 $ (7,375) $(13,231) $ (7,375) $(27,981) -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> See accompanying notes to financial statements F-224 <PAGE> 244 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 <TABLE> <Captiion> 1993 1992 1991 -------- -------- -------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 22,625 $ 15,676 $ 17,758 -------- -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,791 1,728 1,727 Amortization of discount on notes payable -- -- 238 Amortization of deferred financing costs 142 71 -- Amortization of deferred transmission costs 83 4 -- Changes in assets and liabilities: Trade accounts receivable (3,328) (1,814) 1,054 Trade accounts receivable-affiliates (706) 1,722 (1,602) Prepaid expenses and other current assets 37 (6) (226) Feature film inventory (33,584) (29,326) 5,245 Deferred transmission costs -- (500) (500) Deposits and other assets -- -- 93 Accounts payable and accrued liabilities 2,420 (603) 283 Accounts payable-affiliates 180 932 (2) Feature film rights payable 30,461 30,478 (7,854) -------- -------- -------- Total adjustments (2,504) 2,686 (1,544) -------- -------- -------- Net cas provided by operating activities 20,121 18,362 16,214 -------- -------- -------- Cash flows used by investing activities: Capital expenditures (449) (506) (202) -------- -------- -------- Cash flows from financing activities: Partners's capital distributions -- (78,000) (26,600) Repayment of bank debt and notes payable (16,975) (8,000) (1,628) Proceeds from bank debt 6,000 66,000 -- Additions to deferred financing costs -- (853) -- -------- -------- -------- Net cash used in financing activities (10,975) (20,853) (28,228) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 8,697 (2,997) (12,216) Cash and cash equivalents at beginning of year 333 3,330 15,546 -------- -------- -------- Cash and cash equivalents at end of year $ 9,030 $ 333 $ 3,330 -------- -------- -------- -------- -------- -------- </TABLE> See accompanying notes to financial statements. F-225 <PAGE> 245 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS 1. The Company American Movie Classics Company ("the Company") is a general partnership organized as of January 1, 1987, under the provisions of the New York State Partnership Law to produce, market and distribute the American Movie Classics service (the "Service") to the pay television industry. The partnership will terminate January 1, 2086 unless earlier termination occurs as provided for in the partnership agreement. The general partners of the Company are Rainbow Program Enterprises ("RPE"), a limited partnership, a subsidiary of the National Braodcasting Company, Inc. ("NBC") and Liberty Media, Inc. ("Liberty"). RPE is indirectly substantially wholly-owned by Rainbow Programming Holdings, inc. ("RPH"). RPH is wholly-owned by Cablevision Systems Corporation ("CSC"). The Company is 50% owned by Liberty and 25% owned each by RPE and NBC, with RPE being the managing general partner. The partnership agreement of the Company contains a provision allowing any partner to commence a buy-sell procedure by establishing a stated value for the Company's partnership interests. On August 2, 1993, RPE received a notice from Liberty initiating the buy-sell procedure and setting a stated value of $390 million, subject to certain working capital adjustments, for all of the partnership interests in the Company, including the debt associated with such interests. Liberty also valued at $5 million (subject to the same buy-sell procedure) the transmission services and production facility agreement dated January 1, 1987 between Rainbow Network Communications and the partnership and all management and consulting fee obligations of the partnership existing at the closing. On September 16, 1993, RPE notified its partners that it had elected to purchase Liberty's 50% interest in the Company. The consummation of the purchase of Liberty's 50% interest in the Company is subject to a number of conditions and is expected to occur in 1994. The purchase of Liberty's interest in the partnership will trigger a clause in Liberty's affiliation agreement that states that continued affiliation with the Company will only be required for an additional three year period commencing with the sale date. The Company is in the process of developing a new programming service named Romance Classics which will operate as a separate division. This service, which is scheduled to launch in February, 1995, will provide additional cable television programming featuring films with a romantic theme. F-226 <PAGE> 246 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 2. Summary of Significant Accounting Policies Film Telecast Rights The Company accounts for telecast rights of feature film inventory in accordance with Financial Accounting Standards Board Statement No. 63, "Financial Reporting by Broadcasters" ("FAS 63"). Accordingly, rights acquired under license agreements along with the related obligations are recorded at the contract value. Costs are amortized based on either a per subscriber cost for each airing or on the straight-line method based upon the intended number of days to be aired. Film telecast rights expected to be amortized within one year are classified as current assets while contract amounts payable within one year are classified as current liabilities. The balance sheet at December 31, 1992 has been adjusted to reflect the classification of film telecast rights and the related obligation in accordance with FAS 63. Previously, the total amount of rights costs and the corresponding total liability were classified as a current asset or liability, respectively, when a film or group of films first became available for airing. The effect of this adjustment was to decrease current assets by $5,096,000 and decrease current liabilities by $2,443,000 at December 31, 1992. Amounts payable during the five years subsequent to December 31, 1993 related to the feature film rights amount to $26,157,000 in 1994, $12,042,000 in 1995, $7,978,000 in 1996, $6,749,000 in 1997, and $6,934,000 in 1998. Property and Equipment Property and equipment are carried at cost and depreciated on the straight-line basis over the estimated useful lives of the assets or, with respect to leasehold improvements, amortized over the lesser of the lease term or the assets' useful lives. Film, Program and Affiliation Agreements Costs previously allocated to film, program and affiliation agreements were amortized on the straight-line basis over a seven-year period. Deferred Financing Costs Costs incurred in obtaining debt are deferred and amortized, on the straight-line basis, over the life of the related debt. F-227 <PAGE> 247 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 2. Summary of Significant Accounting Policies (continued) Deferred Transmission Costs Deferred transmission costs represent prepayments required to secure satellite transponder space on a new satellite and are being amortized to technical expense over the projected life (approximately 12 years) of the satellite (See Note 5). Income Taxes The Company operates as a general partnership; accordingly, its taxable income or loss is included in the tax returns of the individual partners, and no provision for income taxes is made on the books of the Company. Revenue Recognition The Company recognizes revenues when programming services are provided to cable television systems ("Cable Affiliates") or other pay television operators. The Company's Cable Affiliates are located throughout the United States. One Cable Affiliate individually represents greater than 5% of the Company's 1993 revenues. At December 31, 1993, one Cable Affiliate individually accounted for greater than 5% of the accounts receivable balance. Cash Flows The Company considers temporary cash investments with original maturities of three months or less at the time of purchase to be cash equivalents. During the years ended December 31, 1993, 1992 and 1991, the Company paid cash interest expense of $3,290,000, $1,520,000 and $277,000, respectively. 3. Property and Equipment Property and equipment consist of the following: December 31, ------------------------- Estimated 1993 1992 Useful Lives ---------- ---------- ------------ Origination equipment $ 732,000 $ 596,000 7 years Machinery and equipment 790,000 647,000 5 to 8 years Furniture and fixtures 535,000 461,000 3 to 8 years Leasehold improvements 446,000 350,000 Life of lease ---------- ---------- 2,503,000 2,054,000 Less accumulated depreciation and amortization 1,397,000 1,097,000 ---------- ---------- $1,106,000 $ 957,000 ---------- ---------- ---------- ---------- F-228 <PAGE> 248 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 4. Bank Debt On June 26, 1992, the Company entered into a loan agreement (the "Loan Agreement") with a group of banks (with the Toronto Dominion Bank as Lead Bank). The Loan Agreement, which permits maximum borrowings of $70,000,000 and matures on June 30, 1998, is comprised of a $55,000,000 term loan and a $15,000,000 revolver. At December 31, 1993, there were no borrowings under the revolver and an outstanding balance of $47,025,000 under the term loan. Borrowings under the Loan Agreement bear interest at varying rates above the Lead Bank's base, CD or LIBOR rate depending on the ratio of debt to cash flow, as defined in the Loan Agreement. The Company has entered into an interest rate swap agreement on a notional amount of $20,000,000 under which the Company pays a fixed rate and receives a variable rate. The interest rate swap agreement expires on October 6, 1997. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement; however, the Company does not anticipate nonperformance by the counterparties. At December 31, 1993 and 1992, the weighted average interest rate on bank indebtedness approximated 5.60% and 5.76%, respectively. The Company incurred approximately $853,000 of costs in connection with the Loan Agreement. Substantially all of the assets of the Company have been pledged to secure the borrowings under the Loan Agreement. Amounts payable during the five years subsequent to December 31, 1993 under the Loan Agreement amount to $3,025,000 in 1994, $7,975,000 in 1995, $16,995,000 in 1996, $12,980,000 in 1997 and $6,050,000 in 1998, plus any amounts outstanding under the Revolver. The Loan Agreement contains various restrictive covenants with which the Company was in compliance at December 31, 1993. During 1992, substantially all of the bank loan proceeds were distributed to the partners on the basis of their respective ownership percentage interests, thereby resulting in a partners' capital deficiency at December 31, 1993 and 1992. 5. Affiliate Transactions The Company provides programming to the pay television industry under contracts called affiliation agreements. Revenues earned under affiliation agreements with companies owned or affiliated with CSC and Liberty for the years ended December 31, 1993, 1992 and 1991, were approximately $21,582,000, $17,577,000 and $24,664,000, respectively. Such revenue amounts are calculated at varying rates per the contract agreements. F-229 <PAGE> 249 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 5. Affiliate Transactions (continued) The Company has agreements, which expire in 1997, with CSC and Liberty for these companies to provide management services. Each of the agreements provide for the payment, in addition to expense reimbursement, of a fee equal to 1.75% of the Company's gross revenues, as defined. Pursuant to the terms of these agreements, the Company was charged management fees of $2,958,000, $2,456,000 and $2,232,000 in 1993, 1992 and 1991, respectively. Rainbow Network Communications ("RNC"), an affiliate of the Company, provides certain transmission and production services to the Company. The Company was charged approximately $4,421,000, $3,552,000 and $4,626,000 in 1993, 1992 and 1991, respectively, for these services. In addition, to secure transponder space on a new satellite that would transmit the Service, the Company made pre-launch payments of $500,000 each in 1992 and 1991. The payments were made to RNC who leases the transponder space directly from the supplier. The satellite was successfully launched in late 1992. Liberty, as part of the buy-sell procedure, has offered to terminate the management service agreement with the Compnay and the transmission services and production facilities agreement for $5 million. RPH provides the Company with certain administrative services. The Company was charged approximately $2,449,000, $2,093,000 and $2,007,000 in 1993, 1992 and 1991, respectively, for these services. The Company provides certain administrative, creative and production services to various affiliates. For the years ended December 31, 1993, 1992 and 1991, $927,000, $1,061,000 and $793,000, respectively, was charged to such affiliates for these services. Various affiliates provide the Company with certain administrative, creative and production services and office facilities. The Company was charged approximately $785,000, $749,000 and $791,000, for the years ended December 31, 1993, 1992 and 1991, respectively, for these services. 6. Pension Plan CSC with its affiliates, including the Company, maintained a defined contribution pension plan covering substantially all of the Company's and its' affiliates' employees. The Compnay contributed 3% of eligible employees' annual compensation (as defined), and employees could voluntarily contribute up to 10% of their annual compensation. The cost associated with this plan was approximately $94,000 and $76,000 for the years ended December 31, 1992 and 1991, respectively. F-230 <PAGE> 250 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 6. Pension Plan (continued) Effective January 1, 1993, the Board of Directors of Cablevision approved the adoption of an amended and restated Pension and 401(K) Savings plan (the "Plan"), in part to permit participants to make contributions to the Plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(K) of the Internal Revenue Code, and to introduce new investment options under the Plan. The Company contributes 1-1/2% of eligible employees' annual compensation, as defined, to the defined contribution portion of the Plan (the "Pension Plan") and an equivalent amount to the Section 401(K) portion of the Plan (the "Savings Plan"). Employees may voluntarily contribute up to 15% of eligible compensation, subject to certain restrictions, to the Savings Plan, with an additional matching contribution by the Company of 1/4 of 1% for each 1% contributed by the employee, up to a maximum contribution by the Company of 1/2 of 1% of eligible base pay. Employee contributions are fully vested as are employer base contributions to the Savings Plan. Employer contributions to the Pension Plan and matching contributions to the Savings Plan become vested in years three through seven. The cost associated with this amended plan was approximately $120,000 for the year ended December 31, 1993. The Company does not provide any postretirement benefits to its employees. 7. Leases The Company leases certain facilities under operating lease agreements which expire at various dates through 1995. Total rent expense paid to third parties amounted to approximately $110,000, $131,000 and $106,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The following is a schedule of future minimum payments for operating leases as of December 31, 1993: <TABLE> <CAPTION> Years Ended December 31, - ----------------------------- <S> <C> 1994 $ 74,000 1995 38,000 -------- Total minimum lease payments $112,000 -------- -------- </TABLE> F-231 <PAGE> 251 AMERICAN MOVIE CLASSICS COMPANY (A General Partnership) NOTES TO FINANCIAL STATEMENTS (Continued) 8. Legal Matters Broadcast Music, Inc. ("BMI"), an organization which licenses the performance of the musical compositions of its affiliated composers, authors and publishers, has alleged that the Company and certain of its affiliates need a license to exhibit programs containing musical compositions in BMI's catalog and that continued use requires a license. The Company had a license from BMI through 1989. On June 24, 1992, the Company and BMI entered into a written license agreement covering the period January 1, 1990 through June 30, 1993 which agreement was extended thru June 30, 1994 by amendment to the license agreement. The American Society of Composers, Authors and Publishers (ASCAP), another organization which licenses the performance of the musical compositions of its members, has also alleged that the Company and certain of its affiliates need a license to exhibit programs containing musical compositions in its catalog and that continued use requires a license. The subject of the fees to be paid to ASCAP and the manner in which they will be paid has been submitted to a Federal Rate Court in New York and is still pending. By submitting the matter to the Federal Rate Court, the Company and certain of its affiliates have been licensed by ASCAP for periods subsequent to July 25, 1989. An interim fee was set by the Federal Rate Court at $0.15 per viewing subscriber per year for periods subsequent to March 6, 1989. The Company believes this rate was set by the Court in error and should have been set at 0.3% of gross revenues. ASCAP has agreed to payment based on 0.3%. The interim fee is subject to adjustment when a final decision is reached by the Federal Rate Court. In addition, ASCAP has sought payments for license fees for part or all of the period from January 1, 1986 to March 6, 1989. SESAC, another organization which licenses the performance of the musical compositions of its members, has alleged that the Company has exhibited programs containing musical compositions in its catalog. The Company and SESAC have reached agreement on programming containing SESAC music pursuant to which the Company will pay $60,000, of which $30,000 will be allocated to other affiliates, in consideration of a release for musical composition in SESAC's catalog used by the Company and its' affiliates. Management does not believe the outcome of these matters will have a material adverse effect on the financial position of the Company. F-232 <PAGE> 252 AMERICAN MOVIE CLASSICS COMPANY SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) <TABLE> <CAPTION> Additions Balance at --------------------------------- Beginning Charged to Costs Charged to Deductions- Balance at of Period and Expenses Other Accounts Write-Offs End of Period ---------- ---------------- -------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Year Ended December 31, 1993 Allowance for doubtful accounts ... $1,148 $1,672 $ -- $(143) $ 2,677 ---------- ------- ------- ----------- ------------- ---------- ------- ------- ----------- ------------- Year Ended December 31, 1992 Allowance for doubtful accounts ... $1,115 $ 411 $ -- $(378) $ 1,148 ---------- ------- ------- ----------- ------------- ---------- ------- ------- ----------- ------------- Year Ended December 31, 1991 Allowance for doubtful accounts ... $ 494 $ 644 $ -- $ (23) $ 1,115 ---------- ------- ------- ----------- ------------- ---------- ------- ------- ----------- ------------- </TABLE> F-233 <PAGE> 253 AMERICAN MOVIE CLASSICS COMPANY SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION (Dollars in thousands) <TABLE> <CAPTION> Charged to Costs and Expenses ------------------------------------------ Year Ended Year Ended Year Ended December 31, December 31, December 31, 1993 1992 1991 ------------ ------------ ------------ <S> <C> <C> <C> Advertising............................................... $ 10,113 $ 10,303 $ 9,539 -------- -------- -------- -------- -------- -------- Amortization of Intangible Assets: Film and program agreements............................. $ 10,023 $ 1,025 $ 1,025 Affiliation agreements.................................. 468 466 466 -------- -------- -------- $ 1,491 $ 1,491 $ 1,491 -------- -------- -------- -------- -------- -------- Royalties................................................. $ 884 $ 702 $ 638 -------- -------- -------- -------- -------- -------- </TABLE> F-234 <PAGE> 254 (ERNST & YOUNG LOGO) 787 Seventh Avenue Phone 212 773 3000 New York, New York 10019 Report of Independent Auditors The Partners Kansas City Cable Partners Kansas City, Missouri We have audited the accompanying balance sheets of Kansas City Cable Partners (a Partnership) as of December 31, 1993 and 1992, and the related statements of operations and accumulated earnings, partners' (deficit) capital, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Cable Partners at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG ERNST & YOUNG March 11, 1994 F-235 <PAGE> 255 Kansas City Cable Partners (A Partnership) Balance Sheets <TABLE> <CAPTION> December 31, ------------------------------ 1993 1992 ------------- ------------ <S> <C> <C> Assets Cash and short-term investments (Note 2) $ 677,345 $ 1,489,081 Restricted cash (Note 5) 2,800,000 -- Accounts receivable, less allowance for doubtful accounts of $893,273 in 1993 and $806,854 in 1992 2,193,186 1,574,851 Note receivable from Liberty Cable of Missouri, Inc. (Note 4) -- 61,391,079 Prepaid expenses and other 183,699 173,909 Investments (Note 6) 493,940 -- Property, plant and equipment, less accumulated depreciation of $59,735,214 in 1993 and $53,605,149 in 1992 (Note 2) 49,219,336 51,874,426 Franchise costs, less accumulated amortization of $22,890,707 in 1993 and $20,383,395 in 1992 42,693,175 44,939,085 Debt issuance costs 1,325,763 1,503,058 ------------- ------------ Total assets $ 99,586,444 $162,945,489 ------------- ------------ ------------- ------------ Liabilities and partners' (deficit) capital Accounts payable $ 1,321,583 $ 867,638 Accrued liabilities(a) 7,042,330 7,039,802 Subscribers' advance payments and deposits 1,089,709 1,278,998 Debt (Note 7) 149,500,000 73,000,000 Advances from partners 62,898 235,499 Partners' (deficit) capital (Note 1): Partners' contributions 52,000,000 52,000,000 Distributions in excess of earnings (111,430,076 -- Accumulated earnings -- 28,523,552 ------------- ------------ Total partners' (deficit) capital (59,430,076) 80,523,552 ------------- ------------ Total liabilities and partners' (deficit) capital $ 99,586,444 $162,945,489 ------------- ------------ ------------- ------------ </TABLE> (a) Includes accrued liabilities with related parties of $962,096 in 1993 and $1,462,224 in 1992 (Note 3). See Accompanying notes. F-236 <PAGE> 256 Kansas City Cable Partners (A Partnership) Statements of Operations and Accumulated Earnings <TABLE> <CAPTION> Year ended December 31 ----------------------------------------- 1993 1992 1991 ----------- ----------- ----------- <S> <C> <C> <C> Revenue: Service(a) $63,922,119 $58,948,719 $55,290,136 Connection and other 6,787,375 5,700,995 4,629,061 ----------- ----------- ----------- Total Revenue 70,709,494 64,649,714 59,919,197 ----------- ----------- ----------- Expenses: Operating and origination(a) (Note 3) 23,851,245 23,204,518 23,727,608 Selling, general and administrative(a) (Note 3) 13,414,601 11,895,662 10,559,624 Depreciation and amortization 11,626,299 11,497,646 10,919,795 ----------- ----------- ----------- Total expenses 48,892,145 46,597,826 45,207,027 ----------- ----------- ----------- Operating income 21,817,349 18,051,888 14,712,170 Interest expense 4,461,349 2,991,544 2,602,317 Other income (expense) (a) (Note 6) 2,844,246 1,324,886 (13,849) ----------- ----------- ----------- Net income 20,200,246 16,385,230 12,096,004 Accumulated earnings at beginning of year 28,523,552 12,138,322 42,318 Partners' distributions (48,723,798) -- -- ----------- ----------- ----------- Accumulated earnings at end of year $ -- $28,523,552 $12,138,322 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> (a) Includes the following income (expenses) resulting from transactions with related parties for the year ended December 31: <TABLE> <CAPTION> 1993 1992 1991 ----------- ----------- ----------- <S> <C> <C> <C> Service revenue $ 499,652 $ -- $ -- Operating and origination (6,783,752) (6,743,203) (6,521,529) Selling, general, and administrative (2,467,910) (2,249,959) (2,088,157) Interest income 1,783,202 1,391,079 -- </TABLE> See accompanying notes. F-237 <PAGE> 257 Kansas City Cable Partners (A Partnership) Statements of Partners' (Deficit) Capital Years ended December 31, 1993, 1992, and 1991 <TABLE> <CAPTION> Time Liberty Cable Warner Inc. of Missouri, Affiliates Inc. Total ----------- ------------- ------------ <S> <C> <C> <C> Balance at January 1, 1991 $ 26,021,159 $ 26,021,159 $ 52,042,318 Net income 6,048,002 6,048,002 12,096,004 ------------ ------------- ------------ Balance at December 31, 1991 32,069,161 32,069,161 64,138,322 Net income 8,192,615 8,192,615 16,385,230 ------------ ------------- ------------ Balance at December 31, 1992 40,261,776 40,261,776 80,523,552 Net income 10,100,123 10,100,123 20,200,246 Distributions to partners (80,076,937) (80,076,937) (160,153,874) ------------ ------------- ------------ Balance at December 31, 1993 $(29,715,038) $ (29,715,038) $(59,430,076) ------------ ------------- ------------ ------------ ------------- ------------ </TABLE> See accompanying notes. F-238 <PAGE> 258 Kansas City Cable Partners (A Partnership) Statements of Cash Flows <TABLE> <CAPTION> Year ended December 31 ------------------------------------------ 1993 1992 1991 ------------ ----------- ----------- <S> <C> <C> <C> Operating activities Net income $ 20,200,246 $16,385,230 $12,096,004 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,626,299 11,497,646 10,919,795 (Gain)/loss on disposal of property, plant and equipment (1,101,344) 112,342 64,245 Amortization of debt issuance costs included in interest expense 177,294 120,680 9,152 Interest income included as an addition to note receivable from Liberty Cable of Missouri, Inc. -- (1,391,079) -- Changes in operating assets and liabilities: Accounts receivable and prepaid expenses and other (628,125) 148,389 (338,760) Accounts payable, accrued liabilities and subscribers' advance payments and deposits 267,184 (103,591) 1,204,686 ------------ ----------- ----------- Net cash provided by operating activities 30,541,554 26,769,617 23,955,122 Investing activities Note receivable from Liberty Cable of Missouri, Inc. 60,000,000 (60,000,000) -- Purchases of property, plant and equipment (6,119,287) (7,568,175) (11,241,139) Proceeds from disposal of property, plant and equipment 1,500,000 295,026 45,970 Increase in restricted cash (2,800,000) -- -- Additions to franchise costs (261,402) (59,274) (6,867) ------------ ----------- ----------- Net cash provided by (used in) investing activities 52,319,311 (67,332,423) (11,202,036) Financing activities Increase in debt issuance costs -- (1,591,705) -- Proceeds from issuance of debt 95,000,000 83,000,000 -- Payments on debt (18,500,000) (42,250,000) (10,950,000) Distributions to partners (160,000,000) -- -- Change in advances from partners (172,601) 36,155 226,634 ------------ ----------- ----------- Net cash provided by (used in) financing activities (83,672,601) 39,194,450 (10,723,366) ------------ ----------- ----------- </TABLE> F-239 <PAGE> 259 Kansas City Cable Partners (A Partnership) Statements of Cash Flows (continued) <TABLE> <CAPTION> Year ended December 31 ------------------------------------------ 1993 1992 1991 ------------ ----------- ----------- <S> <C> <C> <C> Net increase (decrease) in cash and short-term investments $ (811,736) $(1,368,356) $ 2,029,720 Cash and short-term investments at beginning of year 1,489,081 2,857,437 827,717 ------------ ----------- ----------- Cash and short-term investments at end of year $ 677,345 $ 1,489,081 $ 2,857,437 ------------ ----------- ----------- ------------ ----------- ----------- Supplemental disclosure of cash flow information Cash paid during the year for interest $ 4,010,679 $ 2,501,512 $ 2,688,488 ------------ ----------- ----------- ------------ ----------- ----------- </TABLE> See accompanying notes. F-240 <PAGE> 260 Kansas City Partners (A Partnership) Notes to Financial Statements December 31, 1993 1. Description of Business Kansas City Cable Partners ("the Partnership"), a general partnership, is principally engaged in the cable television business. Such operations consist primarily of selling video programming which is distributed to subscribers for a monthly fee through a network of coaxial and fiber-optic cables. The Partnership operates in the metropolitan areas of Kansas City, Kansas and Kansas City, Missouri and the surrounding areas under non-exclusive franchise agreements. The Partnership is owned 49% by American Cablevision of Kansas City, Inc. ("ACKC"), a subsidiary of American Television and Communications Corporation ("ATC"), 50% by Liberty Cable of Missouri, Inc. ("LCM"), a wholly-owned subsidiary of Liberty Media Corporation ("Liberty Media"), and 1% by Time Warner Entertainment Company, L.P. ("TWE"). In October 1991, Time Warner Inc. ("Time Warner") entered into an agreement to form a limited partnership, TWE, with subsidiaries of Toshiba Corporation ("Toshiba") and ITOCHU Corporation ("ITOCHU"). On June 30, 1992, Time Warner subsidiaries contributed substantially all assets of the filmed entertainment, HBO programming, and cable businesses and certain other assets to TWE, subject to certain liabilities. In lieu of contributing certain assets to TWE, including ATC's interest in KCCP, certain Time Warner subsidiaries agreed to pay TWE an amount equal to the net cash flow generated by such assets. On September 15, 1993, a wholly-owned subsidiary of US West, Inc. ("USW") was admitted as an additional limited partner. As a result of the USW transaction, the subsidiaries of USW, Toshiba, and ITOCHU hold pro-rata priority capital and residual equity partnership interests of 25.51%, 5.61%, and 5.61%, respectively, in TWE. The subsidiaries of Time Warner in the aggregate hold pro-rata priority capital and residual equity partnership interests of 63.27% in TWE. In conjunction with the formation of TWE, Time Warner combined its two formerly separate cable operations, formerly administered by ATC and Warner Cable Communications Inc., as a single unit, Time Warner Cable ("TWC"). F-241 <PAGE> 261 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continued) 2. Significant Accounting Policies Cash and Short-term Investments Cash and short-term investments consist of short term, highly liquid investments which are readily convertible into cash and have original maturities of three months or less: Property, Plant and Equipment Property, plant and equipment consist of the following: <TABLE> <CAPTION> 1993 1992 ------------ ------------ <S> <C> <C> Land and buildings $ 8,876,717 $ 8,824,156 Distribution system 89,959,196 88,167,844 Vehicles and other equipment 7,831,597 7,307,981 Construction in progress 2,287,040 1,179,594 ------------ ------------ 108,954,550 105,479,575 Less accumulated depreciation (59,735,214) (53,605,149) ------------ ------------ $ 49,219,336 $ 51,874,426 ------------ ------------ ------------ ------------ </TABLE> Property, plant and equipment have been recorded at cost. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows: <TABLE> <S> <C> Buildings and improvements 5-20 years Distribution system 4-15 years Vehicles and other equipment 3-10 years </TABLE> Franchise Costs Franchises have been recorded at cost. Amortization of franchise costs is provided on the straight-line basis over a combination of the remaining lives of the franchise or 40 years. F-242 <PAGE> 262 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continued) 2. Significant Accounting Policies (continued) Debt Issuance Costs Debt issuance costs relate to costs incurred in obtaining debt financing. Amortization of such debt issuance costs is being provided over the term of the related debt agreement. Income Taxes The Partnership is not subject to federal income tax. Any income or loss for tax purposes is included in the tax return of the partners. Reclassifications Certain reclassifications have been made to the 1992 and 1991 financial statements to conform with the 1993 financial statement presentation. 3. Related Party Transactions The statements of operations and accumulated earnings include charges for programming and promotional services provided by affiliates of TWE and Liberty Media/Telecommunications, Inc. ("TCT"). These charges are based on customary rates. In addition, the Partnership has an agreement with TWC under which TWC manages the activities of the Partnership. In return for these services, the Partnership has agreed to pay TWC 3.5% of monthly gross revenues. In addition, for the years ended December 31, 1993 and 1992, the Partnership recognized $1,783,202 and $1,391,079, respectively of interest income from the Liberty Media note receivable (see Note 4). Interest was charged at rates equivalent to those incurred by the Partnership under the terms of its credit agreement (see Note 7). Advances from partners bear interest at 2% over the prime rate. F-243 <PAGE> 263 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continues) 4. Distributions to Partners During 1992, the Partnership executed a $60,000,000 promissory note agreement with LCM. Interest accrued on the unpaid principal balance at rates equivalent to those incurred by the Partnership under the terms of its credit agreement. The note was secured by a portion of LCM's interest in the Partnership. On September 14, 1993, the Partnership distributed to its partners the right, title, and interest in assets with a net book value of $153,874. On October 1, 1993, the Partnership distributed $78,174,281 to ACKC, $1,825,719 to TWE and $80,000,000 to LCM. The outstanding note receivable from LCM, together with $3,174,281 of accrued interest, was repaid from the portion of the distribution made to LCM. 5. Restricted Cash In 1993, the franchise authority representing the city of Kansas City, Kansas alleged that the Partnership was deficient in its payment of franchise fees. Although the Partnership contends that the franchise fees paid are in accordance with the franchise agreement, it deposited in escrow $2,800,000 with the United States District Court for the District of Kansas representing the estimated maximum amount that might be claimed by the Kansas City, Kansas franchise authority. Resolution of this issue is pending court mediation (see Note 10). 6. Investment in Kansas City Fiber Network L.P. In 1993, the Partnership and a wholly-owned subsidiary formed Kansas City Fiber Network, L.P. ("KCFN"), a partnership for the purpose of transporting voice, data and video signals on behalf of commercial and institutional customers, principally through a high capacity fiber optic network in the Kansas City Metropolitan Area. The Partnership subsequently sold a fifty percent interest in KCFN to TeleCable KFN Holdings Corp. for $1,500,000 and recognized a gain of approximately $980,000 from this sale. F-244 <PAGE> 264 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continued) 7. Debt Debt consists of the following: <TABLE> <CAPTION> 1993 1992 ----------- ---------- <S> <C> <C> Prime loan, weighted average interest rate of 6% at December 31, 1993 $ 500,000 $ -- Revolving credit, weighted average interest rates of 4.7% and 4.8% at December 31, 1993 and 1992, respectively 4,000,000 13,000,000 Term loans, weighted average interest rate of 4.6% and 4.8% at December 31, 1993 and 1992, respectively 145,000,000 60,000,000 ------------ ----------- $149,500,000 $73,000,000 ------------ ----------- ------------ ----------- </TABLE> On June 26, 1992, the Partnership executed a credit agreement with a group of banks providing for revolving and term loans through December 31, 2000. The maximum available loan amounts under the revolving and term loans are $45,000,000 and $145,000,000, respectively. The maximum available loan amount of the revolving loan is reduced to $40,000,000 on December 31, 1998 and $30,000,000 on December 31, 1999. The unpaid principal balance under the term loans is payable in quarterly installments commencing March 31, 1994. Such quarterly installments are based upon the outstanding principal balance and aggregate prepayments made as of that date, as defined in the credit agreement. Based on the balance outstanding at December 31, 1993, aggregate future maturities for the term loan are as follows: 1994 -- $6,000,000; 1995 -- $9,500,000; 1996 -- $15,000,000; 1997 -- $28,000,000; 1998 -- $34,000,000 and thereafter -- $52,500,000. Funds available under the credit agreement may be used for permitted distributions and advances to the partners, as defined in the credit agreement, to repay existing indebtedness and for other general purposes. Permitted distributions to the partners, as defined in the credit agreement, may not exceed an aggregate amount of $160,000,000 and are subject to certain limitations. The credit agreement substantially restricts the Partnership's ability to pledge its property, plant and equipment or create additional liens and prohibits the Partnership from incurring additional senior indebtedness in excess of $5,000,000 except for subordinated debt to affiliates. The credit agreement also limits the type of investments the Partnership may make, sets limits on debt to cash flow ratios, requires certain minimum debt service ratios and restricts payments to partners based on cash flow measurements. F-245 <PAGE> 265 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continued) 8. Commitments and Contingencies Future minimum rental payments required under noncancelable operating leases are summarized as follows: Total Rental Year ended December 31 Commitment --------------------------------- ------------ 1994 $120,083 1995 70,794 1996 50,914 1997 12,286 1998 3,105 Thereafter 3,128 -------- $260,310 -------- -------- Rental expense for all operating leases, principally pole attachment fees and office space, aggregated $809,656, $801,515 and $994,453 for the years ended December 31, 1993, 1992 and 1991, respectively. In addition, on October 15, 1993 the Partnership entered into a retransmission agreement with a certain network affiliate whereby the Partnership agreed to purchase a nominal amount of commercial advertising in 1994, 1995 and 1996. 9. Pension Plans The Partnership participates in a noncontributory defined benefit pension plan, the Time Warner Cable Pension Plan (the "Plan"), which is maintained by a committee appointed by the Board of Directors of Time Warner, and covers substantially all employees. Benefits under the Plan are determined based on formulas which reflect employees' years of service and compensation levels during their employment period. Total pension cost was $300,323, $184,716 and $132,038 for the years ended December 31, 1993, 1992 and 1991, respectively. F-246 <PAGE> 266 Kansas City Cable Partners (A Partnership) Notes to Financial Statements (continued) 9. Pension Plans (continued) The Partnership also participates in a defined contribution plan, the TWC Employees Stock Savings Plan (the "Savings Plan"), which is administered by a committee appointed by the Board of Directors of Time Warner, and covers substantially all employees. The Partnership's contributions to the Savings Plan can amount to up to 6.67 percent of an employee's eligible compensation during the plan year. The Board of Representatives of TWE has the right in any year to set the maximum amount of the Partnership's contribution. Defined contribution plan expense totaled $231,277, $212,724 and $171,201 for the years ended December 31, 1993, 1992 and 1991, respectively. 10. Subsequent Events The Partnership's franchise agreements with the cities of Kansas City, Kansas and Kansas City, Missouri expired in November 1993, and February 1994, respectively. The Partnership is currently operating under extension agreements and renewal negotiations are ongoing. The Partnership anticipates that the Kansas City, Kansas franchise will be renewed pending mediation of the alleged deficiency in franchise fees described in Note 5 while the renewal for the Kansas City, Missouri franchise is forthcoming. On January 4, 1994, ACKC transferred its remaining 49% interest in the Partnership to ATC, and on that same day, ATC transferred the same interest to TWE. On January 31, 1994, Liberty Media and TCI entered into a definitive agreement providing for a combination of the two companies. The transaction is subject to the approval of both sets of shareholders as well as various regulatory approvals and other customary conditions. It is anticipated that the closing will take place during the second quarter of 1994. On February 22, 1994, the Federal Communications Commission issued a statement indicating its adoption of revised rate regulation rules relating to the implementation of the Cable Television Consumer Protection and Competition Act of 1992. Since the actual regulations have not been issued, a reasonable estimate of their effect cannot be determined at this time. F-247 <PAGE> 267 Schedule V -- Property, Plant and Equipment Kansas City Cable Partners <TABLE> <CAPTION> Balance at Balance at Beginning Additions Retirements End of of Year at Cost or Sales Year ------------ ----------- ----------- ------------ <S> <C> <C> <C> <C> Year ended December 31, 1993: Land and buildings $ 8,824,156 $ 52,561 $ 8,876,717 Distribution system 88,167,844 4,224,879 $ 2,433,527 89,959,196 Vehicles and other equipment 7,307,981 734,401 210,785 7,831,597 Construction in progress 1,179,594 1,107,446 2,287,040 ------------ ----------- ----------- ------------ $105,479,575 $ 6,119,287 $ 2,644,312 $108,954,550 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ Year ended December 31, 1992: Land and buildings $ 8,833,323 $ 9,167 $ 8,824,156 Distribution system 80,973,505 $ 7,645,235 450,896 88,167,844 Vehicles and other equipment 7,014,953 402,276 109,248 7,307,981 Construction in progress 1,658,930 (479,336) 1,179,594 ------------ ----------- ----------- ------------ $ 98,480,711 $ 7,568,175 $ 569,311 $105,479,575 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ Year ended December 31, 1991: Land and buildings $ 2,611,709 $ 6,221,614 $ 8,833,323 Distribution system 76,107,784 5,297,577 $ 431,856 80,973,505 Vehicles and other equipment 5,851,743 1,348,490 185,280 7,014,953 Construction in progress 3,285,472 (1,626,542) 1,658,930 ------------ ----------- ----------- ------------ $ 87,856,708 $11,241,139 $ 617,136 $ 98,480,711 ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------ </TABLE> F-248 <PAGE> 268 Schedule VI -- Accumulated Depreciation of Property Plant and Equipment Kansas City Cable Partners <TABLE> <CAPTION> Additions Balance at Charged to Balance at Beginning Costs and Retirements End of of year Expenses or Sales Year ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> Year ended December 31, 1993: Buildings $ 1,222,656 $ 340,768 $ 1,563,424 Distribution system 47,669,316 7,981,350 $2,848,305 52,802,361 Vehicles and other equipment 4,713,177 865,502 209,250 5,369,429 ----------- ---------- ---------- ----------- $53,605,149 $9,187,620 $3,057,555 $59,735,214 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Year ended December 31, 1992: Buildings $ 879,773 $ 343,153 $ 270 $ 1,222,656 Distribution system 40,036,648 7,713,197 80,529 47,669,316 Vehicles and other equipment 3,926,411 867,910 81,144 4,713,177 ----------- ---------- ---------- ----------- $44,842,832 $8,924,260 $ 161,943 $53,605,149 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Year ended December 31, 1991: Buildings $ 681,252 $ 198,521 $ 879,773 Distribution system 33,208,470 7,156,319 $ 328,141 40,036,648 Vehicles and other equipment 3,306,850 798,341 178,780 3,926,411 ----------- ---------- ---------- ----------- $37,196,572 $8,153,181 $ 506,921 $44,842,832 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- </TABLE> F-249 <PAGE> 269 Schedule VIII -- Valuation and Qualifying Accounts Kansas City Cable Partners <TABLE> <CAPTION> Balance at Charged to Balance at Beginning Costs and End of of Year Expenses Deductions Year --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Year ended December 31, 1993: Deducted from asset accounts: Allowance for doubtful accounts $ 806,854 $ 970,953 $ 884,534(A) $ 893,273 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Year ended December 31, 1992: Deducted from asset accounts: Allowance for doubtful accounts $ 452,878 $1,219,939 $ 865,963(A) $ 806,854 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Year ended December 31, 1991: Deducted from asset accounts: Allowance for doubtful accounts $ 731,651 $ 731,803 $1,010,576(A) $ 452,878 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- </TABLE> (A) Amounts written off against assets. F-250 <PAGE> 270 Schedule X -- Supplementary Income Statement Information Kansas City Cable Partners <TABLE> <CAPTION> Charged to Costs and Expenses ---------------------------------------- Year ended December 31 ---------------------------------------- Item 1993 1992 1991 - ------------------------------------------------------- ---------- ---------- ---------- <S> <C> <C> <C> Maintenance and repairs $1,376,966 $1,090,979 $1,087,051 ---------- ---------- ---------- ---------- ---------- ---------- Amortization of franchise and deferred debt issuance costs $2,507,312 $2,573,386 $2,766,614 ---------- ---------- ---------- ---------- ---------- ---------- Taxes, other than payroll and income taxes $ 727,692 $ 694,178 $ 557,004 ---------- ---------- ---------- ---------- ---------- ---------- Advertising costs $ 896,379 $ 944,616 $ 845,601 ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> Note: Amounts for royalties are not shown since such amounts were less than one percent of revenues. F-251 <PAGE> 271 Independent Auditors' Report The Board of Directors and Shareholders QVC, Inc.: We have audited the consolidated financial statements of QVC, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QVC, Inc. and subsidiaries as of January 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in notes 1 and 13 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. /s/ KPMG Peat Marwick KPMG Peat Marwick Philadelphia, Pennsylvania March 4, 1994 F-252 <PAGE> 272 QVC, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) <TABLE> <CAPTION> January 31, -------------------- 1994 1993 -------- -------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents............................................ $ 15,873 $ 4,279 Accounts receivable, less allowance for doubtful accounts of $52,759 in 1994 and $21,316 in 1993 (Note 2).............................. 183,162 97,008 Inventories.......................................................... 148,208 118,712 Deferred taxes (Note 13)............................................. 59,749 10,680 Prepaid expenses..................................................... 5,536 3,716 -------- -------- Total current assets.............................................. 412,528 234,395 Property, plant and equipment (Note 3)................................. 80,579 72,863 Cable television distribution rights (Note 4).......................... 99,579 115,248 Other assets (Note 5).................................................. 33,664 9,028 Excess of cost over acquired net assets, less accumulated amortization of $43,551 in 1994 and $33,710 in 1993............................... 251,810 268,161 -------- -------- Total assets.................................................... $878,160 $699,695 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt (Note 7)........................ $ 3,114 $ 24,073 Account payable-trade................................................ 81,594 51,622 Accrued liabilities (Note 6)......................................... 225,989 151,358 -------- -------- Total current liabilities....................................... 310,697 227,053 Long-term debt, less current maturities (Note 7)....................... 7,044 7,586 -------- -------- Total liabilities............................................... 317,741 234,639 -------- -------- Commitments and contingencies (Notes 8 and 14) Shareholders' equity (Notes 9 and 10): Convertible Preferred Stock, par value $.10.......................... 56 93 Common Stock, par value $.01......................................... 399 357 Additional paid-in capital........................................... 446,027 409,970 Retained earnings.................................................... 113,937 54,636 -------- -------- Total shareholders' equity...................................... 560,419 465,056 -------- -------- Total liabilities and shareholders' equity...................... $878,160 $699,695 -------- -------- -------- -------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-253 <PAGE> 273 QVC, INC. AND SUBSIDIARIES Consolidated Statements of Operations (in thousands, except per share data) <TABLE> <CAPTION> Fiscal Year ---------------------------------- 1993 1992 1991 --------- --------- -------- <S> <C> <C> <C> Net revenue............................................... $1,222,104 $1,070,587 $921,804 Cost of goods sold........................................ 723,175 621,840 534,650 --------- --------- -------- Gross profit.............................................. 498,929 448,747 387,154 --------- --------- -------- Operating expenses: Variable costs.......................................... 171,242 160,420 145,348 General and administrative.............................. 132,743 123,604 110,747 Depreciation............................................ 16,682 17,105 16,679 Amortization of intangible assets....................... 26,019 29,402 29,983 --------- --------- -------- 346,686 330,549 302,757 --------- --------- -------- Operating income.......................................... 152,243 118,198 84,397 --------- --------- -------- Other income (expense): Costs of Paramount tender offer (Note 16)............... (34,800) -- -- Losses from joint ventures (Note 5)..................... (11,432) -- -- Interest expense........................................ (1,590) (18,364) (38,979) Interest income......................................... 10,865 8,834 7,480 --------- --------- -------- (36,957) (9,530) (31,499) --------- --------- -------- Income before income taxes, extraordinary item and cumulative effect of a change in accounting principle... 115,286 108,668 52,898 Income tax provision (Note 13)............................ (59,975) (52,080) (31,165) --------- --------- -------- Income before extraordinary item and cumulative effect of a change in accounting principle........................ 55,311 56,588 21,733 Extraordinary item -- loss on extinguishment of debt, net of tax benefit (Note 5)................................. -- (1,496) (2,108) Cumulative effect of a change in accounting for income taxes (Note 13)......................................... 3,990 -- -- --------- --------- -------- Net income................................................ $ 59,301 $ 55,092 $ 19,625 --------- --------- -------- --------- --------- -------- Income per share (Note 11): Primary: Income before extraordinary item and cumulative effect of a change in accounting principle......... $ 1.10 $ 1.32 $ .68 Extraordinary item, net of tax benefit............... -- (.03) (.07) Cumulative effect of a change in accounting for income taxes....................................... .08 -- -- --------- --------- -------- Net income........................................... $ 1.18 $ 1.29 $ .61 --------- --------- -------- --------- --------- -------- Fully diluted: Income before extraordinary item and cumulative effect of a change in accounting principle......... $ 1.10 $ 1.27 $ .67 Extraordinary item, net of tax benefit............... -- (.03) (.06) Cumulative effect of a change in accounting for income taxes....................................... .08 -- -- --------- --------- -------- Net income........................................... $ 1.18 $ 1.24 $ .61 --------- --------- -------- --------- --------- -------- Weighted average number of common and common equivalent shares used in computing income per share: Primary................................................. 50,062 43,890 31,959 --------- --------- -------- --------- --------- -------- Fully diluted........................................... 50,205 45,386 38,313 --------- --------- -------- --------- --------- -------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-254 <PAGE> 274 QVC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> Fiscal Year ------------------------------------ 1993 1992 1991 -------- --------- --------- <S> <C> <C> <C> Cash flows from operating activities: Net income............................................. $ 59,301 $ 55,092 $ 19,625 Adjustments for non-cash items included in net income: Cumulative effect of a change in accounting for income taxes...................................... (3,990) -- -- Loss on extinguishment of debt...................... -- 2,720 3,838 Losses from joint ventures.......................... 11,432 -- -- Depreciation........................................ 16,682 17,105 16,679 Amortization of intangible assets................... 26,019 29,420 29,983 Grant of executive stock award...................... -- 4,869 -- Provision for income taxes not requiring a cash outlay............................................ 3,366 20,275 15,800 Interest incurred but not paid...................... -- 96 9,199 Issuance of Common Stock under Standby Equity Agreement......................................... -- -- 614 Losses on termination of capitalized lease and sales of fixed assets................................... 190 90 464 Changes in other non-current assets.................... (3,458) 5,303 642 Effects of changes in working capital items (Note 15)................................................. (36,239) (33,557) 40,107 -------- --------- --------- Net cash provided by operating activities.............. 73,303 101,413 136,951 -------- --------- --------- Cash flows from investing activities: Capital expenditures................................... (24,588) (21,137) (11,870) Investments in and advances to joint ventures.......... (22,626) -- -- Proceeds from sales of property, plant and equipment... -- 28 9,010 Adjustments to purchase price of CVN Companies, Inc. ............................................... -- 5 (230) Changes in other non-current assets.................... (347) (494) 330 -------- --------- --------- Net cash used in investing activities.................. (47,561) (21,598) (2,760) -------- --------- --------- Cash flows from financing activities: Payments under Senior term loan........................ (21,000) (135,297) (128,101) Principal payments under capitalized leases, mortgages and other debt...................................... (502) (5,300) (12,905) Borrowings under revolving credit facilities........... 20,000 -- 40,414 Payments against revolving credit facilities........... (20,000) -- (40,414) Proceeds from exercise of stock options and other...... 1,169 16,687 891 Net proceeds from sale of Common Stock................. -- -- 51,082 Proceeds from exercise of warrants..................... 6,185 11,570 -- Payment of unsecured note payable...................... -- -- (31,444) -------- --------- --------- Net cash used in financing activities.................. (14,148) (112,340) (120,477) -------- --------- --------- Net increase (decrease) in cash and cash equivalents..... 11,594 (32,525) 13,714 Cash and cash equivalents at beginning of year........... 4,279 36,804 23,090 -------- --------- --------- Cash and cash equivalents at end of year................. $ 15,873 $ 4,279 $ 36,804 -------- --------- --------- -------- --------- --------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-255 <PAGE> 275 QVC, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) <TABLE> <CAPTION> Convertible Additional Retained Preferred Common Paid-in Earnings Treasury Stock Stock Capital (Deflock) Stock Total ----------- ------ ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance January 31, 1991.............................. $ 125 $176 $228,628 $(20,081) $ (68) $208,780 Net income for year................................. -- -- -- 19,625 -- 19,625 Income tax benefit resulting from certain capital stock transactions................................ -- -- 11,500 -- -- 11,500 Proceeds from the exercise of employee stock options........................................... -- -- 893 -- -- 893 Issuance of Common Stock under Standby Equity Agreement......................................... -- 1 613 -- -- 614 Excess of value assigned over amount received for Series B Convertible Preferred Stock.............. -- -- (239) -- -- (239) Issuance of shares of Common Stock and warrants in lieu of cash interest payments.................... -- 2 2,998 -- -- 3,000 Purchases of Treasury Stock......................... -- -- -- -- (2) (2) Net proceeds from public offering of Common Stock... -- 37 51,045 -- -- 51,082 Common Stock exchanged to retire unsecured note payable........................................... -- 23 31,422 -- -- 31,445 Conversion of shares................................ (11) 11 -- -- -- -- Adjustments to warrants exchanged and Common Stock issued in connection with the CVN acquisition..... -- -- (912) -- -- (912) ----- ----- -------- -------- -------- -------- Balance January 31, 1992.............................. 114 250 325,948 (456) (70) 325,786 ----- ----- -------- -------- -------- -------- Net income for year................................. -- -- -- 55,092 -- 55,092 Income tax benefit resulting from capital stock transactions, exercise of stock options and net operating loss carryforward....................... -- -- 22,312 -- -- 22,312 Proceeds from the exercise of employee stock options........................................... -- 13 16,708 -- (31) 16,680 Proceeds from exercise of warrants.................. -- 11 11,559 -- -- 11,570 Grant of executive stock award...................... -- 2 4,367 -- -- 4,869 Convertible subordinated note exchanged for Common Stock, net of unamortized debt placement fees of $1,260............................................ -- 17 28,723 -- -- 28,740 Common Stock issued in warrant exchange offer (Note 10)............................................... -- 68 91,394 -- (91,462) -- Conversion of shares................................ (20) 20 -- -- -- -- Purchases of Treasury Stock......................... -- -- -- -- (3) (3) Retirement of Treasury Stock........................ (1) (24) (91,541) -- 91,566 -- ----- ----- -------- -------- -------- -------- Balance January 31, 1993.............................. 93 357 409,970 54,636 -- 465,056 ----- ----- -------- -------- -------- -------- Net income for year................................. -- -- -- 59,301 -- 59,301 Income tax benefit resulting from cumulative effect of a change in accounting for income taxes........ -- -- 27,053 -- -- 27,053 Income tax benefits resulting from exercise of stock options........................................... -- -- 1,655 -- -- 1,655 Proceeds from the exercise of employee stock options........................................... -- 1 1,168 -- -- 1,169 Proceeds from exercise of warrants.................. -- 4 6,181 -- -- 6,185 Conversion of shares................................ (37) 37 -- -- -- -- ----- ----- -------- -------- -------- -------- Balance January 31, 1994.............................. $ 56 $399 $446,027 $113,937 $ -- $560,419 ----- ----- -------- -------- -------- -------- ----- ----- -------- -------- -------- -------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-256 <PAGE> 276 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation. The consolidated financial statements include the accounts of the Company and all subsidiaries. Investments in the Company's joint ventures (50% or less owned) are accounted for under the equity method. All significant intercompany accounts and transactions are eliminated in consolidation. Fiscal year. The Company's fiscal year ends on January 31. Fiscal years are designated in the financial statements and notes by the calendar year in which the fiscal year commences. Cash and cash equivalents. All highly-liquid debt instruments purchased with a maturity of three months or less are classified as cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair value of those assets. Inventories. Inventories, consisting primarily of products held for sale, are stated at the lower of cost or market. Cost is determined by the average cost method which approximates the first-in, first-out method. Property, plant and equipment. The cost of property, plant and equipment is capitalized and depreciated over their estimated useful lives using the straight-line method. When assets are sold or retired, the cost and accumulated depreciation are removed from the accounts and any gain or loss is included in income. The cost of maintenance and repairs is charged to expense as incurred. Excess of cost over acquired net assets. The excess of cost over acquired net assets is amortized over thirty years using the straight-line method. Translation of foreign currencies. All balance sheet items for foreign operations are translated at the current exchange rate as of the balance sheet date, and income and expense items are translated at average currency exchange rates for the year. Exchange gains and losses resulting from foreign currency transactions are included in losses from joint ventures. Net sales and returns. Revenue is recognized at time of shipment to customers. The Company's policy is to allow customers to return merchandise for full credit up to thirty days after date of shipment. An allowance for returned merchandise is provided as a percentage of sales based on historical experience. The return provision was approximately 21, 19, and 18 percent of sales in fiscal 1993, 1992 and 1991, respectively. F-257 <PAGE> 277 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Capitalization of start-up costs. The Company capitalizes all direct incremental costs incurred prior to operations for new broadcast ventures. These costs are amortized over a period of eighteen months starting at the commencement of broadcast operations. Income taxes. Effective February 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The cumulative effect of the change in the method of accounting for income taxes was included in the first quarter of 1993 Consolidated Statements of Operations and Shareholders' Equity. Prior years' financial statements were not restated. Under the assets and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company previously used the asset and liability method under SFAS 96. Under the asset and liability method of SFAS 96, deferred tax assets and liabilities were recognized for all events that had been recognized in the financial statements. Under SFAS 96, the future tax consequences of recovering assets or settling liabilities at their financial statement carrying amounts were considered in calculating deferred taxes. Generally, SFAS 96 prohibited consideration of any other future events in calculating deferred taxes. Note 2 -- ACCOUNTS RECEIVABLES The Company has an agreement with an unrelated third party which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit card. The Company sold accounts receivable at face value of $418.2 million, $392.7 million and $290.4 million under this agreement in fiscal 1993, 1992 and 1991, respectively. The Company remains obligated to repurchase uncollectible accounts pursuant to the recourse provisions of the agreement and is required to maintain a specified percentage of all outstanding receivables transferred under the program as a deposit with the third party to secure its obligations under the agreement. The Company is required to pay certain finance and servicing fees which are offset by finance charges on customer account balances. The net amount of this finance charge income is included as interest income and is comprised of the following (in millions): <TABLE> <CAPTION> FISCAL YEAR ------------------------- 1993 1992 1991 ----- ----- ----- <S> <C> <C> <C> Finance charges on customer account balances................ $26.2 $23.2 $20.0 ----- ----- ----- Funding fees................................................ 8.7 8.1 7.7 Service fees................................................ 10.5 9.5 9.4 ----- ----- ----- 19.2 17.6 17.1 ----- ----- ----- Net finance income.......................................... $ 7.0 $ 5.6 $ 2.9 ----- ----- ----- ----- ----- ----- </TABLE> F-258 <PAGE> 278 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 2 -- ACCOUNTS RECEIVABLE -- (Continued) The uncollected balances of accounts receivable sold under this program are $201.2 million and $180.3 million at January 31, 1994 and 1993, respectively, of which $170.1 million and $71.5 million represent deposits under the agreement and are included in accounts receivable. The total reserve balances maintained for the repurchase of uncollectible accounts are $55.7 million and $42.6 million at January 31, 1994 and 1993, respectively. Approximately $8.6 million and $25.7 million of the reserve balances are included in accrued liabilities at January 31, 1994 and 1993, respectively; the remaining balances are included with allowance for doubtful accounts. Receivables sold under this agreement are considered financial instruments with off-balance sheet risk as defined in Statement of Financial Accounting Standards No. 105. Note 3 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: <TABLE> <CAPTION> January 31, -------------------- Estimated 1994 1993 Useful Life -------- -------- ------------ (in thousands) <S> <C> <C> <C> Land............................................... $ 3,977 $ 3,228 -- Buildings and improvements......................... 50,627 45,385 20-30 years Furniture and other equipment...................... 33,866 30,246 3-8 years Broadcast equipment................................ 8,942 12,478 5-7 years Computer equipment and software.................... 20,005 18,047 3-5 years Construction in progress........................... 1,684 482 -- -------- -------- 119,101 109,866 Less -- accumulated depreciation................... (38,522) (37,003) -------- -------- Net property, plant and equipment.................. $ 80,579 $ 72,863 -------- -------- -------- -------- </TABLE> In July 1993, the Company completed construction of a 50,000 square foot telecommunications center in Chesapeake, Virginia for a total cost of approximately $6.9 million. This new telecommunications center replaced a facility that was leased. Note 4 -- CABLE TELEVISION DISTRIBUTION RIGHTS Cable television distribution rights consist of the following: <TABLE> <CAPTION> January 31, --------------------- 1994 1993 -------- -------- (in thousands) <S> <C> <C> Cable television distribution rights........................... $162,142 $166,082 Less -- accumulated amortization............................... (62,563) (50,834) -------- -------- Net cable television distribution rights....................... $ 99,579 $115,248 -------- -------- -------- -------- </TABLE> The amounts assigned to cable television distribution rights arose principally from excess fair values assigned, as determined by independent appraisals, to Convertible Preferred Stock issued to cable system operators in exchange for distribution agreements. F-259 <PAGE> 279 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 4 -- CABLE TELEVISION DISTRIBUTION RIGHTS -- (Continued) Cable television distribution rights are amortized by the straight-line method over the lives of the individual agreements. The remaining weighted average life for all cable television distribution rights is approximately 10 years at January 31, 1994. Note 5 -- OTHER ASSETS Other assets consist of the following: <TABLE> <CAPTION> January 31, -------------------- 1994 1993 ------- -------- (in thousands) <S> <C> <C> Deferred taxes (Note 13)........................................ $17,265 $ 7,120 Investments in and advances to joint ventures, net of accumulated losses 11,194 -- Start-up costs 3,459 -- Satellite transponder rights.................................... 1,000 1,000 Debt placement fees............................................. 162 15,292 Other........................................................... 1,072 1,475 ------- -------- 34,152 24,887 Less -- accumulated amortization................................ (488) (15,859) ------- -------- Net other assets................................................ $33,664 $ 9,028 ------- -------- ------- -------- </TABLE> During fiscal 1993, the Company established electronic retailing program service in England ("QVC -- The Shopping Channel") and Mexico ("CVC"), through joint venture agreements with British Sky Broadcasting Limited and Grupo Televisa, S.A. de C.V., respectively. The joint venture in England began broadcasting on October 1, 1993 and the joint venture in Mexico began broadcasting on November 15, 1993. The joint venture agreement in England requires, among other things, that the Company provide all funding to the joint venture until it is profitable. The Company will then recover all prior funding, before any profits are shared. Accordingly, for 1993, the Company has included 100% of the loss on operations of this venture in the Consolidated Statements of Operations. The operating results of the joint venture in Mexico are shared equally by the partners. Summarized financial information for "QVC -- The Shopping Channel" and "CVC" on a 100% basis as of and for the period ended January 31, 1994 follows (unaudited -- in thousands): <TABLE> <CAPTION> QVC -- The Shopping Channel CVC ---------------- ------- <S> <C> <C> Current assets.......................................... $ 5,608 $ 9,687 Property, plant and equipment, net...................... 1,645 1,665 Unamortized start-up costs.............................. 2,205 1,650 Current liabilities..................................... 4,181 9,507 Net revenue............................................. 2,994 2,316 Gross profit............................................ 514 248 Loss.................................................... (8,943) (3,606) </TABLE> In fiscal 1993, the Company also entered a joint venture with Tribune Entertainment Company and Regal Communications to form QRT Enterprises ("QRT"). QRT produces and syndicates "Can We Shop" with Joan Rivers, which commenced broadcasting January 17, 1994. "Can We Shop" is a F-260 <PAGE> 280 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 5 -- OTHER ASSETS -- (Continued) one-hour, Monday through Friday television show through which merchandise is sold. The Company's one-third share of QRT's operating loss amounted to $386,000 in 1993. In fiscal 1993, the Company made a $3.8 million investment in Friday Holdings, L.P., a limited partnership. The limited partnership's purpose is to establish or acquire businesses in the communications field and to develop information products. The Company's one-third share of Friday Holdings' operating loss amounted to $300,000 in 1993. During the year, the Company also capitalized $3.5 million in costs relating to Q2, a new televised shopping/programming service, scheduled to be launched in the spring of 1994 in the United States. The capitalized start-up costs will be amortized over eighteen months starting at the commencement of broadcast operations. Debt placement fees on the Senior term loan arising out of the CVN acquisition have been amortized over the expected life of the debt using the effective interest rate method. On March 5, 1993, the Company retired the Senior term loan. Debt placement fees of $15.1 million associated with the Senior term loan were fully amortized and the cost and accumulated amortization were removed from the accounts. During fiscal 1992, the Company prepaid $86.3 million of the Senior term loan. As a result, the amortization of debt placement fees of $2.7 million was accelerated and reported as an extraordinary loss of $1.5 million, net of $1.2 million income tax benefit. During fiscal 1991, the Company prepaid $98.1 million of the Senior term loan, and the amortization of debt placement fees of $3.8 million was accelerated and reported as an extraordinary loss of $2.1 million, net of $1.7 million income tax benefit. Note 6 -- ACCRUED LIABILITIES Accrued liabilities consist of the following: <TABLE> <CAPTION> January 31, ------------------- 1994 1993 -------- -------- (in thousands) <S> <C> <C> Income taxes (Note 13)........................................... $ 80,879 $ 25,889 Reserve for uncollectible accounts under revolving credit program (Note 2)....................................................... 8,636 25,699 Non-inventory accounts payable................................... 35,452 26,418 Accrued compensation and benefits................................ 13,996 13,035 Sales and other taxes............................................ 11,324 12,079 Allowance for sales returns...................................... 17,787 11,344 Other............................................................ 57,915 36,894 -------- -------- $225,989 $151,358 -------- -------- -------- -------- </TABLE> F-261 <PAGE> 281 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 7 -- LONG-TERM DEBT Aggregate amounts of outstanding long-term debt consist of the following: <TABLE> <CAPTION> January 31, -------------------- 1994 1993 ------- -------- (in thousands) <S> <C> <C> 10.4% Mortgage notes payable in monthly installments until 1998.......................................................... $10,158 $ 10,659 Senior term loan................................................ -- 21,000 ------- -------- 10,158 31,659 Less -- current portion......................................... (3,114) (24,073) ------- -------- $ 7,044 $ 7,586 ------- -------- ------- -------- </TABLE> The Company has a $60.0 million bank revolving credit facility to finance operations as well as to fund letters of credit for merchandise purchases. Interest on outstanding amounts under this agreement is payable at the bank's prime rate or other interest rate options. A commitment fee of .25% is payable on the unused portion of the revolving credit facility. The credit agreement requires the Company to maintain certain ratios for total liabilities to shareholders' equity and for coverage of fixed charges. The Company borrowed $20.0 million under the facility in March 1993 and retired the remaining balance on the Senior term loan. All amounts borrowed under the facility were repaid from net cash provided by operating activities during the first quarter of 1993. Outstanding letters of credit totaled approximately $7.8 million at January 31, 1994. The interest rate on the outstanding balance of the Senior term loan was 4.4% at January 31, 1993. Maturities of the 10.4% mortgage notes payable for the five years subsequent to January 31, 1994 are $3,114,000 in 1994; $601,000 in 1995; $666,000 in 1966; $739,000 in 1997 and $5,038,000 in 1998. Note 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS Future minimum payments under all non-cancellable operating leases and transponder service agreements with initial terms of one year or more at January 31, 1994 consist of the following (in thousands): <TABLE> <CAPTION> Fiscal Year ----------- <S> <C> 1994............................................................... $ 8,029 1995............................................................... 6,405 1996............................................................... 5,450 1997............................................................... 5,173 1998............................................................... 5,287 Thereafter......................................................... 34,001 ------- Total.................................................... $64,345 ------- ------- </TABLE> Expense for operating leases, principally for data processing equipment and facilities, and for transponder service agreements amounted to $11,280,000, $12,895,000 and $13,047,000 in fiscal years 1993, 1992 and 1991, respectively. In November 1992, the Company started to transmit the QVC program on a protected, non-preemptible transponder on the C-4 Satellite at a monthly cost that averages $224,000 over the term of the twelve-year agreement. F-262 <PAGE> 282 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS -- (Continued) In December 1992, the Company started to transmit The QVC Fashion Channel on a protected non-preemptible transponder on the C-3 Satellite at a cost of $205,000 per month over the term of the twelve-year agreement. Note 9 -- CAPITAL STOCK The Company has 175,000,000 shares of Common Stock authorized. There were 39,895,447 shares outstanding at January 31, 1994 and 35,734,062 shares outstanding at January 31, 1993. The reasons for the increase in the number of shares of Common Stock outstanding were the conversion of Convertible Preferred Stock (3,659,040), the exercise of warrants (408,908) and the exercise of employee stock options (93,437). The following table summarizes the convertible preferred shares at January 31, 1994 and 1993 (in thousands): <TABLE> <CAPTION> Shares Shares Authorized Outstanding Par Value ----------------- ----------- ----------- 1994 and 1993 1994 1993 1994 1993 ----------------- --- --- --- --- <S> <C> <C> <C> <C> <C> Series A................................. 10 -- -- $-- $-- Series B................................. 1,000 28 55 3 6 Series C................................. 1,000 531 788 53 79 Series D................................. 300 1 83 -- 8 --- --- $56 $93 --- --- --- --- </TABLE> The shares of Convertible Preferred Stock were issued to cable system operators in connection with their signing or extending cable television distribution agreements in prior years. Convertibility. Each share of Series B, Series C and Series D Convertible Preferred Stock is convertible into ten shares of Common Stock. Voting Rights. The holders of the Common Stock are empowered to elect two directors of the Company as a class. The holders of each class of stock are entitled to cast one vote per share for the election of the remaining directors of the Company. Liquidation. Upon the dissolution and liquidation of the Company, the assets remaining after the payment of all debts and liabilities of the Company shall be distributed first to the holders of the Series B Convertible Preferred Stock at $10.00 per share. To the extent available, the holders of Series C Convertible Preferred Stock will then receive $10.00 per share followed by Series D Convertible Preferred Stock holders at $15.00 per share. The balance, if any, will be paid to the holders of the Common Stock share-for-share. F-263 <PAGE> 283 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 10 -- STOCK OPTIONS, WARRANTS AND AWARDS The following table summarizes shares of Common Stock reserved for issuance for outstanding stock options and warrants: <TABLE> <CAPTION> Average Exercise Price January 31, at January 31, ----------------------- --------------- 1994 1993 1994 1993 Expiration Date ---------- ---------- ------ ------ --------------- <S> <C> <C> <C> <C> <C> Qualified stock options............... 1,751,800 1,717,462 $30.56 $28.94 11/1996-01/2004 Non-qualified stock options........... 6,275,500 6,279,600 32.83 32.33 04/2000-07/2003 Warrants issued in connection with 1987 debt financing................. 310,000 310,000 10.00 10.00 04/1994 Warrants issued in connection with Convertible subordinated debt....... 1,600,000 1,600,000 17.49 17.49 10/1995 Warrants exchanged for CVN Series 2 Warrants............................ -- 408,908 -- 15.13 -- Warrants issued with Common Stock in lieu of cash interest expense....... 100,000 100,000 13.35 13.35 04/1996-10/1996 ---------- ---------- Total reserved shares....... 10,037,300 10,415,970 ---------- ---------- ---------- ---------- </TABLE> The Company has Incentive Stock Option Plans ("ISO Plans") under which options may be granted to key managerial employees to purchase up to 10,300,000 shares of Common Stock. The ISO Plans are administered by the Executive Compensation Committee appointed by the Company's Board of Directors. The Committee has the authority to determine optionees, the number of shares to be covered by each option and certain other terms and conditions of the grant. The ISO Plans require that the exercise price of options be equal to or greater than the fair market value of the stock at the time of grant, and the term of any option cannot exceed ten years. Options issued under the 1990 Non-Qualified Stock Option Plan and the 1993 Qualified Stock Option Plan vest ratably over four years, commencing one year from the date of the grant of the option, and qualified and non-qualified options under all other ISO Plans, except where noted below, vest ratably over three years, commencing on the date of grant. In connection with obtaining a portion of the proposed financing for the cash tender offer for Paramount Communications Inc. (Note 16), the Company granted BellSouth Corporation, Advance Publications, Inc. and Cox Enterprises, Inc. options to purchase an aggregate of 14.3 million shares of Common Stock at $60.00 per share. The options were granted at the termination of the QVC/Paramount tender offer on February 15, 1994 and are exercisable until the later of August 15, 1994 or ten business days after stockholders of the Company vote with respect to such grant of options. On December 9, 1992, the Company and two of its principal shareholders (Comcast Corporation and Liberty Media Corporation) announced an agreement pursuant to which Mr. Barry Diller would become Chairman of the Board and Chief Executive Officer. In connection with this agreement, the Company granted Mr. Diller 160,000 shares of Common Stock. The value of the shares on the date of grant ($4.9 million) was charged to general and administrative expense in fiscal 1992. Also in connection with this agreement, the Company granted to Mr. Diller stock options covering 6,000,000 shares of Common Stock. All of the options have a five-year term. One-half of these options ("base options") has an exercise price of $30.43; the other one-half ("scaled options") has an exercise price equal to $30.43 per share increased by 13 percent per annum until December 9, 1994 and thereafter by 15 percent per annum compounded annually. The exercise price on any unexercised scaled options increases annually. One-half of the base options and one-half of the scaled options became exercisable F-264 <PAGE> 284 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 10 -- STOCK OPTIONS, WARRANTS AND AWARDS -- (Continued) December 9, 1993 and the balance become exercisable December 9, 1994. The exercise date can be accelerated upon certain events. In August 1991, the Company granted to Mr. Joseph M. Segel, then Chairman and Chief Executive Officer, non-qualified stock options covering 600,000 shares of Common Stock at an exercise price of $15.90. One-half of these options vested on the first anniversary of the date of grant and the balance was to vest on the second anniversary of the date of grant. On December 9, 1992, the Board of Directors and the Executive Compensation Committee approved the acceleration of the vesting of the second half of these options to December 1992, in order to allow Mr. Segel to realize their value in 1992. The Board and the Executive Compensation Committee also accelerated an additional 50,000 options under ISO Plans for Mr. Segel that were scheduled to vest in 1993 and 1994. On December 9, 1992, the Board agreed to enter into a consulting and severance arrangement with Mr. Segel whereby he would serve as a consultant to the Company for a period of ten years after his retirement in January 1993 at an annual salary of $240,000 and, as incentive to Mr. Segel to accept employment as a consultant, granted to Mr. Segel, pursuant to the 1992 Qualified Incentive Stock Option Plan, 100,000 options to purchase shares of Common Stock, exercisable at $30.43 per share. These options vest ratably over a period of five years. The present value of the ten-year consulting and severance arrangement with Mr. Segel of $2.2 million was expensed in fiscal 1992. The Board also approved entering three-year (five-year in the case of Michael C. Boyd, former President of the Company) employment agreements for nine senior Company executives, pursuant to which, among other things, the executives would be entitled to compensation at their current salaries and eligible for bonus and incentive compensation programs as may be maintained from time to time during the term of the agreement. As incentive to enter into the employment agreements, the Board granted to these executives, pursuant to the 1992 Stock Option Plan, an aggregate 1,450,000 options to purchase Common Stock exercisable at $30.43 per share. Options granted under the 1992 Stock Option Plan vest ratably over three years (five years in the case of Mr. Boyd). In February 1994, Mr. Boyd retired from the Company and entered into a consulting agreement. Accordingly, the present value of his employment agreement of $1.3 million was expensed in fiscal 1993. F-265 <PAGE> 285 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 10 -- STOCK OPTIONS, WARRANTS AND AWARDS -- (Continued) A summary of changes in outstanding options under the ISO Plans is as follows: <TABLE> <CAPTION> Non-qualified Option Qualified Option Shares Shares ------------------------- ------------------------- Outstanding Exercisable Outstanding Exercisable Price Range ----------- ----------- ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> Balance at January 31, 1991.......... 590,112 504,737 630,000 85,000 $ 5.00-$17.25 Granted.............................. 5,000 1,250 607,500 -- 12.13- 15.90 Cancelled............................ (26,500) (19,000) (11,000) (1,375) 5.00- 16.00 Became exercisable................... -- 49,625 -- 144,875 5.00- 16.00 Exercised............................ (65,825) (65,825) (26,000) (26,000) 5.00- 13.00 ---------- ----------- ----------- ----------- ------------- Balance at January 31, 1992.......... 502,787 470,787 1,200,500 202,500 5.00- 17.25 Granted.............................. 1,582,000 351,167 6,010,000 -- 19.00- 38.86 Cancelled............................ (1,750) (1,750) (11,000) (3,500) 5.00- 16.00 Became exercisable................... -- 29,500 -- 796,375 5.00- 16.00 Exercised............................ (365,575) (365,575) (919,900) (919,900) 5.00- 17.25 ---------- ----------- ----------- ----------- ------------- Balance at January 31, 1993.......... 1,717,462 484,129 6,279,600 75,475 5.00- 38.86 Granted.............................. 106,000 1,250 50,000 -- 39.88- 70.75 Cancelled............................ (5,575) (5,575) (26,750) (3,000) 5.00- 23.25 Became exercisable................... -- 370,416 -- 3,095,250 5.00- 34.39 Exercised............................ (66,087) (66,087) (27,350) (27,350) 5.00- 23.25 ---------- ---------- ---------- ----------- ------------- Balance at January 31, 1994.......... 1,751,800 784,133 6,275,500 3,140,375 $ 5.00-$70.75 ---------- ---------- ---------- ----------- ------------- ---------- ---------- ---------- ----------- ------------- </TABLE> In December, 1992, the Company offered to exchange warrants into shares of Common Stock equivalent in value to the difference between the warrant exercise price and the market price ($37.75) at the time of the offer. Warrants that would have been exercisable for 7,061,005 shares were extinguished in this offer and the Company issued 4,367,690 net shares of Common Stock. The warrant holders were able to effect the exchange several ways. The net effect on the number of shares of Common Stock outstanding after the exchange was the same. A total of 3,893,962 warrants was exercised by delivering to the Company 1,424,404 previously issued shares of Common Stock valued at the market price ($37.75). A total of 2,492,017 warrants was exercised for $37,692,000, the proceeds of which were used to purchase from the warrant holders 998,457 shares of Common Stock at market. A total of 675,026 warrants was exchanged for 404,572 shares of Common Stock with an aggregate value equal to the difference between the market price and the exercise price. Warrant holders of an aggregate 2,418,908 shares declined the offer. Since this warrant exchange was treated as a non-cash financing transaction, it is not reflected on the Consolidated Statements of Cash Flows. F-266 <PAGE> 286 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 11 -- INCOME PER SHARE The Company computes income per share using the modified treasury stock method. The following table presents the information needed to compute net income per share for fiscal years 1993, 1992 and 1991 (in thousands, except per share data): <TABLE> <CAPTION> 1993 1992 1991 ----------------- ----------------- ----------------- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Income: Income before extraordinary item and cumulative effect of a change in accounting principle................... $55,311 $55,311 $56,588 $56,588 $21,733 $21,733 Add -- Imputed income from interest savings, net of tax, on assumed retirement of debt with remaining proceeds from assumed exercise of warrants and options................... -- -- 1,452 1,239 -- 3,896 ------- ------- ------- ------- ------- ------- Adjusted income before extraordinary item and cumulative effect of a change in accounting principle................... 55,311 55,311 58,040 57,827 21,733 25,629 Extraordinary item -- loss on extinguishment of debt, net of tax benefit................................ -- -- (1,496) (1,496) (2,108) (2,108) Cumulative effect of a change in accounting for income taxes............ 3,990 3,990 -- -- -- -- ------- ------- ------- ------- ------- ------- Adjusted net income...................... $59,301 $59,301 $56,544 $56,331 $19,625 $23,521 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Shares: Weighted average number of common shares outstanding............................ 37,845 37,845 27,885 27,885 19,750 19,750 Add -- Common equivalent shares assuming conversion of Series B, C and D Convertible Preferred Stock............ 7,387 7,387 10,340 10,340 12,209 12,209 Add -- Common equivalent shares assuming conversion of subordinated note at beginning of fiscal year............... -- -- -- 1,280 -- 1,704 Add -- Common shares assumed to be outstanding from exercise of warrants and options............................ 10,184 10,180 12,812 10,517 -- 11,925 Less -- Assumed purchase of Common Stock from proceeds of exercise of warrants and options............................ (5,354) (5,207) (7,147) (4,636) -- (7,275) ------- ------- ------- ------- ------- ------- 50,062 50,205 43,890 45,386 31,959 38,313 ------- ------- ------- ------- ------- ------- Income per share: ------- ------- ------- ------- ------- ------- Income before extraordinary item and cumulative effect of a change in accounting principle................... $ 1.10 $ 1.10 $ 1.32 $ 1.27 $ .68 $ .67 Extraordinary item, net of tax benefit... -- -- (.03) (.03) (.07) (.06) Cumulative effect of a change in accounting for income taxes............ .08 .08 -- -- -- -- ------- ------- ------- ------- ------- ------- Net income............................... $ 1.18 $ 1.18 $ 1.29 $ 1.24 $ .61 $ .61 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> F-267 <PAGE> 287 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 11 -- INCOME PER SHARE -- (Continued) Pro forma net income per share On a pro forma basis, net income for fiscal 1991 would have been $22.9 million, or $.64 per share, assuming the Company's October 1991 public offering of Common Stock and the related retirement of long-term debt as well as the exchange of Common Stock with Liberty Media Corporation in satisfaction of one- half of the unsecured note payable occurred as of the beginning of the year. The pro forma computation assumes adjustments have been made to interest expense attributable to the reduction of the long-term debt, net of income tax effect. It also assumes that the shares issued in connection with the public offering and the exchange were outstanding from the beginning of the period. Note 12 -- RETIREMENT AND SAVINGS PLANS The Company has a defined contribution Employee Retirement Plan which covers substantially all of the Company's employees after completion of one year of service. The Company's contribution under the Plan is equal to 3.0% of eligible employees' salaries. The costs of this Plan charged to expenses were $2,202,000, $2,177,000, and $1,664,000 in fiscal years 1993, 1992 and 1991, respectively. In addition, the Company sponsors a 401(k) Savings Plan which permits employees to make contributions to the Savings Plan on a pre-tax salary reduction basis in accordance with the Internal Revenue Code. Substantially all full-time employees are eligible to participate after completion of one year of service. The Company matches a portion of the voluntary employee contributions. The costs of this Savings Plan charged to expenses were $2,053,000, $1,501,000, and $812,000 in fiscal years 1993, 1992 and 1991, respectively. Note 13 -- INCOME TAXES Effective February 1, 1993, the Company changed its method of accounting for income taxes as required by SFAS 109. The cumulative effect of this change in accounting was to increase the net income of the first quarter of fiscal 1993 by approximately $4.0 million, which is reported separately in the Consolidated Statements of Operations. Prior year's financial statements have not been restated to reflect the provisions of SFAS 109. The provision for income taxes consists of the following (in thousands): <TABLE> <CAPTION> Fiscal Year --------------------------------- 1993 1992 1991 -------- -------- ------- <S> <C> <C> <C> Current Federal........................................... $ 66,366 $ 49,770 $19,394 State............................................. 21,710 19,810 11,771 -------- -------- ------- Total............................................. 88,076 69,580 31,165 -------- -------- ------- Deferred Federal........................................... (23,159) (17,500) -- State............................................. (4,942) -- -- -------- -------- ------- Total............................................. (28,101) (17,500) -- -------- -------- ------- Total provision..................................... $ 59,975 $ 52,080 $31,165 -------- -------- ------- -------- -------- ------- </TABLE> F-268 <PAGE> 288 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 13 -- INCOME TAXES -- (Continued) Total income tax expense differs from the amounts computed by applying the U.S. federal income tax rate of 35.0% for fiscal 1993 and 34.0% for fiscal 1992 and 1991 to income before income taxes and extraordinary item as follows: <TABLE> <CAPTION> Fiscal Year ---------------------- 1993 1992 1991 ---- ---- ---- <S> <C> <C> <C> Provision at statutory rate.................................... 35.0% 34.0% 34.0% State income taxes, net of federal tax benefit................. 14.5 12.0 14.7 Amortization of intangibles not deductible for tax purposes.... 3.0 3.2 6.7 Net operating loss carryforward................................ -- -- (1.2) Other.......................................................... (.5) (1.3) 4.7 ---- ---- ---- Total income tax expense....................................... 52.0% 47.9% 58.9% ---- ---- ---- ---- ---- ---- </TABLE> Deferred income taxes reflect the net effects of temporary differences between the value of assets and liabilities and their tax bases and the benefit of existing net operating loss carryforwards. Significant components of the net deferred tax assets of January 31, 1994 and 1993 follow (in thousands): <TABLE> <CAPTION> JANUARY 31, --------------------- 1994 1993 -------- -------- <S> <C> <C> Deferred tax assets: Accounts receivable, principally due to the allowance for doubtful accounts and related reserves for uncollectible accounts under the Company's revolving credit program..... $ 25,715 $ 15,985 Inventories, principally due to obsolescence reserves and additional costs of inventories for tax purposes pursuant to the Tax Reform Act of 1986............................. 7,497 6,801 Allowance for sales returns.................................. 7,625 3,857 Executive stock award........................................ -- 1,655 Costs associated with the terminated Paramount tender offer..................................................... 14,964 -- Costs associated with cable television distribution rights... 26,619 2,813 Other........................................................ 7,061 (363) -------- -------- Total gross deferred tax assets.............................. 89,481 30,748 Less: Valuation allowance.................................... (12,467) -- Less -- amounts not recognized due to SFAS 96 limitations on carrybacks of future net deductible amounts and carryforwards of alternative minimum tax credits.......... -- (12,948) -------- -------- Net deferred tax assets...................................... $ 77,014 $ 17,800 -------- -------- -------- -------- </TABLE> Of the total net additional deferred tax asset recorded at the time of the adoption of SFAS 109, approximately $27.0 million was credited to additional paid-in capital and approximately $6.5 million was credited to the excess of cost over acquired net assets. The net increase in the deferred tax asset during fiscal 1993 differs from the deferred benefit component of the current year's tax provision primarily due to the recognition of a portion of the net operating loss carryforwards. F-269 <PAGE> 289 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 13 -- INCOME TAXES -- (Continued) Deferred tax assets were not recorded as of January 31, 1993 for state income tax purposes since the Company's income is principally allocable to states that do not permit carrybacks that would give rise to refundable taxes. In addition, no deferred tax assets were recorded for federal or state tax purposes in fiscal 1991 since refundable taxes could not be generated from carrying back future net deductible amounts under the requirements of SFAS 96. The increase in the deferred tax asset for fiscal 1992 differs from the deferred benefit component of the current year tax provision because portions of the deferred tax provision recorded were allocated to additional paid-in capital or the excess of cost over acquired net assets. The valuation allowance for deferred tax assets as of February 1, 1993 was $12.2 million. The net change in the valuation allowance for fiscal 1993 was an increase of $255,000. Approximately $6.0 million of the valuation allowance will result in a credit to additional paid-in capital when it becomes more likely than not that certain deductions associated with cable television distribution rights will be realizable. The following table summarizes the nature of certain tax benefits realized that reduced taxes payable but were not credited to the tax provision (in thousands): <TABLE> <CAPTION> Excess of cost over Additional paid-in acquired net capital assets ------------------ ----------------- Source of Tax Benefit 1993 1992 1993 1992 - ------------------------------------------------------- ------ ------- ------ ------ <S> <C> <C> <C> <C> Exercise of employee stock options..................... $1,655 $12,366 $ -- $ -- Net operating loss carryforward and other deductions arising from equity transactions..................... -- 6,967 -- -- Realization of tax benefits associated with temporary differences in CVN acquisition....................... -- -- 6,510 5,086 Alternative minimum tax credit carryforward generated from equity related deductions....................... -- 2,979 -- -- ------ ------- ------ ------ $1,655 $22,312 $6,510 $5,086 ------ ------- ------ ------ ------ ------- ------ ------ </TABLE> In 1993, the tax benefits realized from net operating loss carryforwards of $6.6 million reduced taxes payable and were credited to deferred tax assets. As of January 31, 1994, the Company has a net operating loss carryforward of $634,000 available to reduce future federal taxable income. There are no other credits or loss carryforwards available as of the end of fiscal 1993. Note 14 -- LITIGATION In July 1993, Shop Televison Network, Inc. ("STN"), J.C. Penney Company, Inc. ("JCP"), JCPenney Televison Shopping Channel, Inc. ("JCPTV"), Michael Rosen and the Company settled the litigation that STN had brought in the Superior Court of the State of California for the County of Los Angeles in 1991, in connection with the negotiation and execution of an agreement dated May 16, 1991, between the Company and JCPTV. The settlement required dismissal of all pending litigation between the parties, payment of approximately $8.8 million to STN, and repurchase by STN of all its shares held by JCP for an agreed price. JCPTV and the Company agreed to divide the settlement payment to STN between them, with the Company being responsible for the payment of approximately $3.8 million of such settlement payment. This amount was included as a charge in general and administrative expenses in the second quarter of fiscal 1993. F-270 <PAGE> 290 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 14 -- LITIGATION -- (Continued) In July 1993, the Company was joined as a defendant in actions filed in state and federal court in Delaware by certain shareholders of Home Shopping Network, Inc. ("HSN") against HSN, Liberty Media Corporation ("Liberty"), Liberty Program Investments, Inc., RMS Limited Partnership ("RMS"), and certain individual directors and officers of HSN. The actions challenge Liberty's purchase of HSN Class A and Class B Common Stock from RMS, Liberty's tender offer for 15.0 million shares of HSN Common Stock as well as the Company's July 12, 1993 letter proposal to HSN to combine HSN and the Company in a stock- for-stock transaction (the "Proposed HSN Merger"). The actions allege that the Company aided and abetted breaches of fiduciary duties in connection with the Proposed HSN Merger, as well as violations of certain regulations of the Securities Exchange Act. Plaintiffs seek class certification, declaratory and injunctive relief, compensatory damages, counsel fees, interest and costs. Management believes that the allegations against the Company in these shareholder lawsuits are unfounded and intends to defend against such actions vigorously. On November 5, 1993, the Company and HSN announced their mutual agreement to terminate negotiations on the Proposed HSN Merger. The Company's time to respond to the complaint in the state action was extended indefinitely. In March, 1994, the Company filed a motion to dismiss the complaint in the federal action. The parties are currently engaged in settlement discussions. In September 1993, Viacom International Inc. ("Viacom International"), a subsidiary of Viacom Inc. ("Viacom"), brought an action against the Company, Tele-Communications, Inc., Liberty, Satellite Services, Inc., Encore Media Corp., and Netlink USA, challenging the Company's September 20, 1993 proposal to Paramount Communications Inc. ("Paramount") to combine Paramount and the Company in a cash and stock-for-stock exchange. Viacom International amended its complaint in November, 1993, adding Comcast Corporation ("Comcast") as an additional defendant. The Company filed an answer to the amended complaint on November 19, 1993. Comcast was subsequently dismissed as a defendant. Management believes that the allegations against the Company in Viacom International's action are unfounded and intends to defend against such action vigorously. On February 15, 1994, the Company terminated its tender offer for 50.1% of Paramount Common Stock. In October 1993, the Company commenced legal action in the Delaware Chancery Court against Viacom, Paramount and certain Paramount directors for breach of fiduciary duties in failing to give fair treatment to the Company's merger proposal while granting undue advantages to Viacom's merger proposal. The Company sought to compel Paramount's board to give the two merger proposals equal consideration and also sought to invalidate certain "lockup" agreements and share purchase options given by Paramount to Viacom. Following a hearing, the Court, on November 24, 1993, granted the Company's motion for a preliminary injunction against Paramount's poison pill rights plan and certain other anti-takeover mechanisms being used to preclude the Paramount shareholders from accepting the Company's cash tender offer for approximately 50.1% of Paramount's shares. On appeal by Paramount and Viacom, the Delaware Supreme court affirmed the injunction granted by the Delaware Chancery Court on December 9, 1993, and issued a formal opinion in support of its ruling on February 4, 1994. On December 21, 1993, Viacom filed a motion to dismiss the Company's complaint against it. On February 15, 1994, the Company terminated its tender offer for Paramount's Common Stock. The Company has also been named as a defendant in various legal proceedings arising in the ordinary course of business. Although the outcome of these matters cannot be determined, in the opinion of management, disposition of these proceedings will not have a material effect on the Company's financial position. F-271 <PAGE> 291 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 15 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS An analysis of changes in working capital items follows (in thousands): <TABLE> <CAPTION> Fiscal Year --------------------------------- 1993 1992 1991 -------- -------- ------- <S> <C> <C> <C> Increase in accounts receivable..................... $(86,154) $(29,029) $(6,006) Increase in inventories............................. (29,496) (9,784) (8,428) Increase in deferred taxes.......................... (24,389) (10,680) -- Increase in prepaid expenses........................ (1,820) (450) (732) Increase in accounts payable--trade................. 29,972 11,312 7,245 Increase in accrued liabilities 75,648 5,074 48,028 -------- -------- ------- $(36,239) $(33,557) $40,107 -------- -------- ------- -------- -------- ------- Supplemental cash flow information: Interest paid $ 1,369 $ 20,512 $30,397 Income taxes paid 31,841 37,944 1,351 </TABLE> In fiscal year 1993, the Company did not enter into any non-cash financing transactions. In fiscal years 1992 and 1991, the following non-cash financing transactions were entered into by the Company (dollars in thousands). <TABLE> <S> <C> 1992 Issuance of 1,704,546 shares of Common Stock in prepayment of Convertible subordinated note, net of $1,260 debt placement fees..................... $28,740 Exercise of 3,893,962 warrants through deliverance of 1,424,404 shares of Common Stock at market value............................................. 53,771 Exercise of 2,492,017 warrants for $37,692 with simultaneous repurchase of 998,457 shares of Common Stock at market value........................... 37,692 Issuance of 404,572 shares of Common Stock in exchange for 675,026 warrants, representing the aggregate difference between the market price and the exercise price................................................... 15,273 Exercise of stock options through deliverance of 800 shares of Common Stock at market value.......................................................... 31 1991 Issuance of an aggregate of 243,522 shares of Common Stock and 100,000 warrants to Comcast Financial Corporation in lieu of cash interest expense.................................................................. $ 3,000 Issuance of 75,075 shares of Common Stock to the Standby Investors in consideration for signing the Standby Equity Agreement................... 614 Issuance of 2,269,552 shares of Common Stock to Liberty Media Corporation in exchange for one-half of the outstanding balance of an unsecured note payable.................................................................. 31,445 Adjustment to the number of shares of Common Stock assumed issued to holders of certain CVN Series 2 Warrants from 3,377,949 to 3,410,843 (at market value)............................................................ 526 Adjustment to the number of new QVC Warrants assumed exchanged for certain CVN Series 2 Warrants from 6,822,767 to 6,469,913 (value based on an independent appraisal)................................................... (1,438) </TABLE> F-272 <PAGE> 292 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) NOTE 16 -- PARAMOUNT TENDER OFFER On October 27, 1993, the Company made an $80.00 cash tender offer for 50.1 percent of the outstanding common shares of Paramount. This tender offer was amended several times during the bidding process against Viacom for Paramount. On February 1, 1994, the Company amended its cash tender offer to $104 per share. The Company offered approximately $6.4 billion in cash for 61.7 million Paramount common shares. The proposed cash tender offer would have been funded through a $3.25 billion bank loan commitment and proposed capital contributions to the Company of $1.5 billion from BellSouth Corporation and $0.5 billion each from Advance Publications, Cox Enterprises and Comcast Corporation. On February 15, 1994, Paramount notified the Company that Viacom received the minimum condition in its tender offer and had delivered to Paramount a completion certificate pursuant to the bidding procedures. Accordingly, the Company terminated its tender offer for 50.1 percent of the Common Stock of Paramount. The costs incurred on the tender offer, comprised principally of bank fees and legal and advisory fees, totaled $34.8 million which were expensed in the fourth quarter of 1993. The $3.25 billion bank loan commitment expired on February 15, 1994 upon the termination of the tender offer. Note 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands, except as to per share data) <TABLE> <CAPTION> Fiscal 1993 First Second Third Fourth - --------------------------------------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> Net revenue........................................ $273,232 $262,438 $313,945 $372,489 Gross profit....................................... 113,773 107,938 128,902 148,316 Income before income taxes and cumulative effect of a change in accounting principle(1).............. 34,546 26,137 42,732 11,871 Income tax provision............................... (16,925) (12,810) (21,215) (9,025) Income before cumulative effect of a change in accounting principle............................. 17,621 13,327 21,517 2,846 Cumulative effect of a change in accounting principle(2)..................................... 3,990 -- -- -- Net income......................................... 21,611 13,327 21,517 2,846 Income per share(3): Primary Income before cumulative effect of a change in accounting principle........................ .36 .26 .42 .06 Net income.................................... .44 .26 .42 .06 </TABLE> <TABLE> <CAPTION> Fiscal 1992 First Second Third Fourth - --------------------------------------------------- -------- -------- -------- -------- <S> <C> <C> <C> <C> Net revenue........................................ $233,168 $221,253 $274,332 $341,834 Gross profit....................................... 100,354 94,259 115,501 138,633 Income before income taxes and extraordinary item............................................. 22,917 15,905 31,468 38,378 Income tax provision............................... (11,425) (7,190) (15,105) (18,360) Income before extraordinary item................... 11,492 8,715 16,363 20,018 Extraordinary item, net of tax benefit(4).......... (348) -- -- (1,148) Net income......................................... 11,144 8,715 16,363 18,870 Income per share(5)(6): Primary Income before extraordinary item.............. .29 .22 .40 .44 Net income.................................... .28 .22 .40 .42 Fully-diluted Income before extraordinary item.............. .29 .22 .40 .42 Net income.................................... .28 .22 .40 .40 </TABLE> - --------------- (1) Fourth quarter amount includes a charge of $34.8 million related to the Paramount tender offer (Note 16). (2) Amount represents the cumulative effect of adopting SFAS 109. F-273 <PAGE> 293 QVC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Note 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- (Continued) (in thousands, except as to per share data) (3) Fully diluted earnings per share for all periods are not presented since they are the same as the primary earnings per share. (4) Amounts represent accelerated amortization of debt placement fees, net of income tax benefits, due to prepayments of the Senior term loan (Note 5). (5) The sum of the quarterly per share amounts does not equal the annual amount due to the substantial changes in the number of shares throughout the year. (6) In the fourth quarter of fiscal 1992, the modified treasury stock method of computing earnings per share resulted in a fully-diluted computation with a lower amount than the primary computation. This is due primarily to using the year-end closing share price for the fully-diluted computation versus the average share price for the fourth quarter. The year-end closing price was $40.50 versus a fourth quarter average of $32.92. F-274 <PAGE> 294 Schedule II QVC, INC. AND SUBSIDIARIES AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (in thousands) <TABLE> <CAPTION> Balance at Balance Deductions End of Period at ------------------------ ------------------ Beginning Amounts Amounts Net Name of Debtor of Period Additions Collected Written-off Current Current - ------------------------------------- --------- --------- --------- ----------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Year Ended January 31, 1992 Peter Barton, unsecured 8% note receivable due on demand........ $ 98 $ 6 $ -- $ -- $ 104 $ -- ----- ----- ----- ----- ----- ----- Year Ended January 31, 1993 Peter Barton, unsecured 8% note receivable due on demand........ $ 104 $ -- $ 104 $ -- $ -- $ -- ----- ----- ----- ----- ----- ----- Year Ended January 31, 1994 Candice Carpenter, unsecured, prime plus one percent note receivable due in installments until May 31, 1998........................ $ -- $ 257 $ -- $ -- $ 257 $ -- ----- ----- ----- ----- ----- ----- </TABLE> F-275 <PAGE> 295 Schedule VIII QVC, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands) <TABLE> <CAPTION> Balance Additions Additions at Charged to Charged to Balance Beginning Costs and Other at End of Description of Period Expenses Accounts Deductions Other Period - ------------------------------- --------- ---------- ---------- -------- -------- --------- <S> <C> <C> <C> <C> <C> <C> Allowance for doubtful accounts: Year ended January 31, 1992...................... $ 8,214 $ 14,501 $ -- $ (7,260)(A) $ -- $15,455 Year ended January 31, 1993...................... $15,455 $ 17,506 $1,250(C) $(12,895)(A) $ -- $21,316 Year ended January 31, 1994...................... $21,316 $ 24,765 $ -- $ (7,971)(A) $ 14,649 $52,759 Inventory obsolescence reserve: Year ended January 31, 1992...................... $ 8,387 $ 16,465 $ -- $(12,141)(B) $ -- $12,711 Year ended January 31, 1993...................... $12,711 $ 17,809 $ -- $(14,312)(B) $ -- $16,208 Year ended January 31, 1994...................... $16,208 $ 20,000 $ -- $(21,186)(B) $ -- $15,022 Reserve for uncollectible accounts under revolving credit program: Year ended January 31, 1992...................... $11,769 $ 14,175 $ -- $ (5,970)(A) $ -- $19,974 Year ended January 31, 1993...................... $19,974 $ 10,159 $ -- $ (4,434)(A) $ -- $25,699 Year ended January 31, 1994...................... $25,699 $ -- $ -- $ (2,414)(A) $(14,649)(D) $ 8,636 </TABLE> - --------------- (A) Accounts written-off as uncollectible, net of recoveries. (B) Written-off as obsolete. (C) Reserve for interest on note receivable transferred from accrued liabilities. (D) Transfer to allowance for doubtful accounts. F-276 <PAGE> 296 Schedule X QVC, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (in thousands) <TABLE> <CAPTION> Charged to Item Costs and Expenses ---- ------------------ <S> <C> Advertising costs: Year ended January 31, 1992....................................... $ 35,407 Year ended January 31, 1993....................................... $ 33,419 Year ended January 31, 1994....................................... $ 28,172 </TABLE> F-277 <PAGE> 297 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Assets March 31, December 31, 1994 1993 ------------ ------------ amounts in thousands <S> <C> <C> Cash and cash equivalents $ 98,377 91,305 Trade and other receivables 64,679 57,458 Less allowance for doubtful receivables 3,012 3,032 ------------ --------- 61,667 54,426 ------------ --------- Inventories, net 104,661 112,005 Prepaid expenses 31,311 25,210 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 161,565 151,540 Other investments, at cost, and related receivables (note 5) 286,750 220,218 Investment in Tele-Communications, Inc. ("TCI") common stock (note 6) 104,011 104,011 Property and equipment, at cost: Land 21,662 21,662 Cable distribution systems 88,203 87,437 Support equipment and buildings 122,372 124,727 Computer and broadcast equipment 62,019 61,820 ------------ --------- 294,256 295,646 Less accumulated depreciation 43,015 39,968 ------------ --------- 251,241 255,678 ------------ --------- Franchise costs 142,796 142,789 Less accumulated amortization 6,329 5,351 ------------ --------- 136,467 137,438 ------------ --------- Excess cost over acquired net assets 255,842 255,842 Less accumulated amortization 11,607 9,818 ------------ --------- 244,235 246,024 ------------ --------- Other intangibles 97,105 96,873 Less accumulated amortization 68,447 65,895 ------------ --------- 28,658 30,978 ------------ --------- Other assets, at cost, net of amortization 7,667 7,715 ------------ --------- $ 1,516,610 1,436,548 ============ ========= </TABLE> (continued) F-278 <PAGE> 298 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Liabilities and Stockholders' Equity March 31, December 31, 1994 1993 ------------ ------------ amounts in thousands <S> <C> <C> Accounts payable $ 87,557 99,680 Accrued liabilities 80,706 82,716 Accrued litigation settlements 27,450 29,000 Film licenses payable 19,058 13,850 Due to TCI, including accrued interest payable (notes 7 and 10) 24,086 17,874 Accrued compensation relating to stock appreciation rights (note 9) 26,694 36,996 Income taxes payable 31,056 24,624 Debt (notes 7 and 11) 260,283 260,180 Debt to TCI (notes 7 and 11) 185,918 185,918 Deferred income taxes 33,248 1,653 Other liabilities 2,693 1,585 ------------ --------- Total liabilities 778,749 754,076 ------------ --------- Minority interests in equity of consolidated subsidiaries (note 8) 182,408 174,738 Preferred stock subject to mandatory redemption requirements (including accreted dividends) (note 11) Class B Redeemable Exchangeable Preferred Stock, $.01 par value. 135,394 132,652 Class D Redeemable Voting Preferred Stock, $.01 par value. 23,133 22,585 ------------ --------- 158,527 155,237 ------------ --------- Stockholders' equity (notes 5, 9 and 12): Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value. 17 17 Class A common stock, $1 par value. 87,515 87,515 Class B common stock, $1 par value. 43,339 43,339 Additional paid-in capital 228,593 236,126 Retained earnings 7,839 -- Unrealized holding gains for available-for-sale securities 44,392 -- Note receivable from related party (14,769) (14,500) ------------ --------- 396,926 352,497 ------------ --------- Commitments and contingencies (notes 4, 7 and 12) $ 1,516,610 1,436,548 ============ ========= </TABLE> See accompanying notes to consolidated financial statements. F-279 <PAGE> 299 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three months ended March 31, ---------------------- 1994 1993 -------- ------- amounts in thousands <S> <C> <C> Revenue: Net sales from home shopping services $274,215 135,781 From TCI (note 10) 11,720 11,234 From cable and programming services 49,145 32,057 -------- ------- 335,080 179,072 -------- ------- Cost of sales, operating costs and expenses: Cost of sales 175,270 85,369 Operating 51,403 34,811 Selling, general and administrative 75,381 39,480 Charges by TCI (note 10) 3,399 1,365 Compensation relating to stock appreciation rights (note 9) -- 8,078 Adjustment to compensation relating to stock appreciation rights (note 9) (10,302) -- Depreciation 7,262 4,050 Amortization 5,513 3,830 -------- ------- 307,926 176,983 -------- ------- Operating income 27,154 2,089 Other income (expense): Interest expense to TCI (5,270) (669) Other interest expense (3,820) (4,175) Interest income from TCI 926 439 Dividend and interest income, primarily from affiliates 5,287 4,973 Gain on sale of investment -- 10,613 Provision for impairment of investment (2,233) -- Share of earnings of affiliates, net 9,137 7,153 Minority interests in earnings of consolidated subsidiaries (4,033) (35) Other, net 61 (2,412) -------- ------- Earnings before income taxes and extraordinary item 27,209 17,976 Income tax expense (13,567) (5,730) -------- ------- Earnings before extraordinary item 13,642 12,246 Extraordinary item-loss on early extinguishment of debt, net of taxes -- (1,792) -------- ------- Net earnings 13,642 10,454 Dividend requirement on preferred stocks (5,803) (10,895) -------- ------- Net earnings (loss) attributable to common shareholders $ 7,839 (441) ======== ======= Earnings (loss) per share: Net earnings attributable to common shareholders before extraordinary item $ 0.06 0.01 Extraordinary item, net -- (0.01) -------- ------- Net earnings (loss) attributable to common shareholders $ 0.06 0.00 ======== ======= </TABLE> See accompanying notes to consolidated financial statements. F-280 <PAGE> 300 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Preferred Stock Common stock Additional --------- ----------------- paid-in Retained Class E Class A Class B capital earnings --------- ------- ------- ---------- -------- amounts in thousands <S> <C> <C> <C> <C> <C> BALANCE AT JANUARY 1, 1994 $ 17 87,515 43,339 236,126 - Dividends, including accretion, on all classes of preferred stock - - - - (5,803) Dividends on preferred stock subject to mandatory redemption requirement - - - 2,513 - Cash dividend on preferred stock - - - (10,046) - Unrealized holding gains for available-for-sale securities - - - - - Accrued interest on note receivable from related party (note 9) - - - - - Net earnings - - - - 13,642 --------- ------ ------ ------- ------ BALANCE AT MARCH 31, 1994 $ 17 87,515 43,339 228,593 7,839 ========= ====== ====== ======= ====== </TABLE> <TABLE> <CAPTION> Unrealized Note holding receivable Total gains for from stock- available-for sale related holders' securities party equity ------------------ ---------- -------- amounts in thousands <S> <C> <C> <C> BALANCE AT JANUARY 1, 1994 - (14,500) 352,497 Dividends, including accretion, on all classes of preferred stock - - (5,803) Dividends on preferred stock subject to mandatory redemption requirement - - 2,513 Cash dividend on preferred stock - - (10,046) Unrealized holding gains for available-for-sale securities 44,392 - 44,392 Accrued interest on note receivable from related party (note 9) - (269) (269) Net earnings - - 13,642 ------ ------- ------- BALANCE AT MARCH 31, 1994 44,392 (14,769) 396,926 ====== ======= ======= </TABLE> See accompanying notes to consolidated financial statements. F-281 <PAGE> 301 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three months ended March 31, ------------------------ 1994 1993 ---- ---- amounts in thousands (see note 3) <S> <C> <C> Cash flows from operating activities: Net earnings $ 13,642 10,454 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 12,775 7,880 Compensation relating to stock appreciation rights -- 8,078 Adjustment to compensation relating to stock appreciation rights (10,302) -- Share of earnings of affiliates, net (9,137) (7,153) Deferred income tax expense 5,524 3,311 Minority interests in earnings 4,033 35 Noncash interest income (1,249) -- Provision for impairment of investment 2,233 -- Payment of litigation settlements (1,550) -- Payment of premium received upon redemption of preferred stock investment -- 8,248 Loss on early extinguishment of debt, net of tax -- 1,792 Gain on sale of investment -- (10,613) Other noncash charges 1,070 335 Changes in operating assets and liabilities, net of effect of acquisitions: Change in receivables (7,241) (1,358) Change in inventories 7,344 7,625 Change in due to/from TCI 6,212 4,096 Change in prepaid expenses (6,101) (3,434) Change in payables and accruals (2,325) (5,088) --------- --------- Net cash provided by operating activities 14,928 24,208 --------- --------- </TABLE> (continued) F-282 <PAGE> 302 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three months ended March 31, ------------------------ 1994 1993 --------- -------- amounts in thousands (see note 3) <S> <C> <C> Cash flows from investing activities: Cash paid for acquisitions $ -- (150,255) Capital expended for property and equipment (4,995) (7,808) Additional investments in and loans to affiliates and others (7,044) (5,403) Return of capital from affiliates 2,040 1,000 Collections on loans to affiliates and others 5,814 1,797 Cash received on redemption of preferred stock investment -- 104,336 Proceeds from disposition of assets -- 12,600 Other investing activities, net 2,893 2,796 --------- -------- Net cash used by investing activities (1,292) (40,937) --------- -------- Cash flows from financing activities: Borrowings of debt -- 236,362 Repayments of debt (65) (135,393) Dividends on preferred stock (10,046) (9,743) Contributions by minority shareholders of subsidiary 3,947 4,041 Distribution to minority partner of subsidiary (400) -- --------- -------- Net cash (used) provided by financing activities (6,564) 95,267 --------- -------- Net increase in cash and cash equivalents 7,072 78,538 Cash and cash equivalents at beginning of period 91,305 96,253 --------- -------- Cash and cash equivalents at end of period $ 98,377 174,791 ========= ======== </TABLE> See accompanying notes to consolidated financial statements. F-283 <PAGE> 303 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1994 (UNAUDITED) ________________________________________________________________________________ (1) GENERAL The accompanying consolidated financial statements include the accounts of Liberty Media Corporation, those of all majority-owned subsidiaries and entities for which there is a controlling voting interest ("Liberty" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. On January 27, 1994, Liberty and TCI entered into a definitive merger agreement (the "Merger Agreement"). Under the Merger Agreement, the transaction will be structured as a tax-free exchange of shares of Class A and Class B common stock of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company ("TCI/Liberty"). TCI stockholders will receive one share of TCI/Liberty common stock for each of their shares. Liberty common stockholders will receive 0.975 of a share of TCI/Liberty common stock for each of their shares. Holders of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock (the "Class E Preferred Stock") will receive one share of a substantially identical class of voting preferred stock of TCI/Liberty for each of their shares. The transaction is subject to the approval of both sets of shareholders as well as various regulatory approvals and other customary conditions. Subject to timely receipt of such approvals, which cannot be assured, it is anticipated the closing of such transaction will take place during 1994. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjuncti