<PAGE>
As Filed with the Securities and Exchange Commission on June 22, 1995
Registration No. 33-59657
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------
TELE-COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 4841 84-1260157
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
5619 DTC Parkway
Englewood, Colorado 80111-3000
(303) 267-5500
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------------
Stephen M. Brett, Esq.
Tele-Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
(303) 267-5500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
---------------------------
Copy to:
C. Michael Watson, Esq.
Baker & Botts, L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
(713) 229-1234
---------------------------
Approximate Date of Commencement of Proposed Sale of the Securities to the
Public: As soon as practicable after approval by stockholders.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
TELE-COMMUNICATIONS, INC.
Cross Reference Sheet Between Items in Form S-4 and Proxy Statement/Prospectus
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
ITEM FORM S-4 CAPTION HEADING IN PROXY STATEMENT/PROSPECTUS
===================================================================================================================================
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
Item 1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus.......................................................... Cross Reference Sheet; Pages one through four of
the Proxy Statement/Prospectus
Item 2. Inside Front and Outside Back Cover Pages of Prospectus............. Table of Contents; Available Information;
Incorporation of Certain Documents by Reference
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information......................................................... Summary Comparison of Terms of Existing Common
Stock with TCI Group Common Stock and Liberty
Media Group Common Stock under the Liberty Media
Group Stock Proposal; Proxy Statement/Prospectus
Summary; Risk Factors and Other Special
Considerations
Item 4. Terms of the Transaction............................................ Summary Comparison of Terms of Existing Common
Stock with TCI Group Common Stock and Liberty
Media Group Common Stock under the Liberty Media
Group Stock Proposal; Proxy Statement/Prospectus
Summary; The Liberty Media Group Stock Proposal
Item 5. Pro Forma Financial Information..................................... Available Information; Incorporation of Certain
Documents by Reference; Financial Information
(Appendix IV)
Item 6. Material Contracts with the Company Being Acquired.................. *
Item 7. Additional Information Required for Reoffering by Persons and
Parties Deemed to be Underwriters................................... *
Item 8. Interests of Named Experts and Counsel.............................. Legal Matters; Experts
Item 9. Disclosure of Commission Position on Indemnification of
Securities Act Liabilities.......................................... *
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Information with Respect to S-3 Registrants......................... Available Information; Incorporation of Certain
Documents by Reference; Financial Information
(Appendix IV)
Item 11. Incorporation of Certain Information by Reference................... Available Information; Incorporation of Certain
Documents by Reference
Item 12. Information with Respect to S-2 or S-3 Registrants.................. *
Item 13. Incorporation of Certain Information by Reference................... *
Item 14. Information with Respect to Registrants Other than S-3 or
S-2 Registrants..................................................... *
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15. Information with Respect to S-3 Companies........................... *
Item 16. Information with Respect to S-2 or S-3 Companies.................... *
Item 17. Information with Respect to Companies Other than S-3 or S-2
Companies........................................................... *
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Consents or Authorizations are to
be Solicited........................................................ Pages one through seven of the Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by Reference;
Proxy Statement/Prospectus Summary; The Annual
Meeting; Election of Directors; The Liberty Media
Group Stock Proposal; Voting Securities and
Principal Holders Thereof; Management of the
Company; Stockholders' Proposals
Item 19. Information if Proxies, Consents or Authorizations are not to
be Solicited or in an Exchange Offer................................ *
</TABLE>
___________________
* Omitted because inapplicable or answer is in the negative.
<PAGE>
TELE-COMMUNICATIONS, INC.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111
(303) 267-5500
[Date]
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
Tele-Communications, Inc. (the "Company"), which will be held at [place] on July
27, 1995 starting at [time]. A notice of the annual meeting, a proxy card and a
proxy statement/prospectus containing important information about the matters to
be acted upon at the annual meeting are enclosed.
At the annual meeting, you will be asked to consider and vote upon the
Liberty Media Group Stock Proposal, which would authorize two new series of the
Company's common stock to be designated Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock (collectively, the "Liberty
Media Group Common Stock"). The Liberty Media Group Common Stock is intended to
reflect the separate performance of the newly created "Liberty Media Group",
which consists of the Company's businesses that are engaged in two principal
lines of business: (i) production, acquisition and distribution through all
available formats and media of branded entertainment, educational and
informational programming and software including multimedia products and (ii)
electronic retailing, direct marketing, advertising sales relating to
programming services, infomercials and transaction processing. A total of
750,000,000 shares of Series A Liberty Media Group Common Stock and 75,000,000
shares of Series B Liberty Media Group Common Stock would be authorized under
the Liberty Media Group Stock Proposal. Promptly following approval of the
Liberty Media Group Stock Proposal, the Company will distribute one-fourth of
one share of Series A Liberty Media Group Common Stock on each outstanding share
of Class A Common Stock and one-fourth of one share of Series B Liberty Media
Group Common Stock on each outstanding share of Class B Common Stock. The
Liberty Media Group Common Stock issuable in connection with such distribution
would be intended to represent 100% of the equity value of the Company
attributable to the Liberty Media Group. Upon effectiveness of the Liberty Media
Group Stock Proposal, the existing Class A Common Stock and Class B Common Stock
will be redesignated into two new series of common stock to be called Series A
TCI Group Common Stock and Series B TCI Group Common Stock, respectively
(collectively, the "TCI Group Common Stock"), and will represent the Company's
businesses and assets not included in the Liberty Media Group, including the
Company's domestic cable and telephony distribution and communications business,
international cable, telephony and programming business and technology/venture
capital business (the "TCI Group").
The Liberty Media Group Stock Proposal is intended to provide investors
with separate securities reflecting the performance of the TCI Group and the
Liberty Media Group, while at the same time enabling the Company's businesses to
preserve the benefits of being part of a consolidated enterprise. The Liberty
Media Group Stock Proposal will permit separate market valuations of the TCI
Group Common Stock and the Liberty Media Group Common Stock,
<PAGE>
which the Board of Directors believes should result in greater market
recognition of the value of each Group. The Liberty Media Group Stock Proposal
is also intended to provide the Company greater flexibility with regard to
raising capital and making acquisitions and investments, including strategic
partnering transactions, with equity securities specifically related to each
Group.
It is important to note that holders of both TCI Group Common Stock and
Liberty Media Group Common Stock would be common stockholders of the Company and
would be subject to risks associated with an investment in the Company and all
of its businesses, assets and liabilities. The Company can provide no assurance
as to the degree to which the market price of the Liberty Media Group Common
Stock will reflect the separate performance of the Liberty Media Group or as to
the impact of the proposal on the market price of the TCI Group Common Stock. In
addition, implementation of the Liberty Media Group Stock Proposal will, to an
extent, make the capital structure of the Company more complex and may give rise
to occasions when the interests of the holders of TCI Group Common Stock and the
holders of Liberty Media Group Common Stock may diverge or appear to diverge.
The Board of Directors has unanimously approved the Liberty Media Group
Stock Proposal, believes its adoption is in the best interests of the Company
and its stockholders and recommends that the stockholders vote in favor of the
proposal.
In addition to the Liberty Media Group Stock Proposal, you will be asked at
the annual meeting to consider and vote upon (i) the election of three directors
of the Company to hold office until the 1998 Annual Meeting of Stockholders or
until their successors are elected and qualified, (ii) the approval of an
increase in the number of authorized shares of Class A Common Stock (which would
be redesignated Series A TCI Group Common Stock under the Liberty Media Group
Stock Proposal) from 1,100,000,000 to 1,750,000,000 and the number of authorized
shares of Series Preferred Stock from 10,000,000 to 50,000,000, (iii) the
approval of the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option
Plan and (iv) such other business as may properly come before the annual
meeting.
Whether or not you are personally able to attend the annual meeting, please
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action will not limit your right to
vote in person if you wish to attend the annual meeting and vote personally.
Sincerely yours,
Bob Magness
Chairman of the Board
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS................................... i
PROXY STATEMENT/PROSPECTUS................................................. 1
AVAILABLE INFORMATION...................................................... 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 9
SUMMARY COMPARISON OF TERMS OF EXISTING COMMON STOCK
WITH TCI GROUP COMMON STOCK AND LIBERTY MEDIA GROUP COMMON STOCK
UNDER THE LIBERTY MEDIA GROUP STOCK PROPOSAL.............................. 11
PROXY STATEMENT/PROSPECTUS SUMMARY......................................... 19
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS.............................. 37
THE ANNUAL MEETING......................................................... 52
ELECTION OF DIRECTORS...................................................... 54
THE LIBERTY MEDIA GROUP STOCK PROPOSAL..................................... 57
General................................................................... 57
Background and Reasons for the Liberty Media Group Stock Proposal......... 59
Recommendation of the Board of Directors.................................. 64
Management and Allocation Policies........................................ 64
Description of TCI Group Common Stock and Liberty Media Group Common
Stock.................................................................... 71
No Initial Inter-Group Interest........................................... 92
Dividend Policy........................................................... 96
Stock Transfer Agent and Registrar........................................ 96
Inclusion in Nasdaq National Market....................................... 96
Financial Advisors........................................................ 96
No Dissenters' Rights..................................................... 97
Certain Federal Income Tax Considerations................................. 97
Effects on Convertible Securities......................................... 101
Adjustments Under Stock Incentive Plan and Director Stock Option Plan..... 101
Future Issuances Pursuant to Stock Incentive Plan and Director Stock
Option Plan.............................................................. 102
Issuance of Series F Preferred Stock...................................... 103
DESCRIPTION OF BUSINESS OF LIBERTY MEDIA GROUP............................. 106
THE INCREASED AUTHORIZATION PROPOSAL....................................... 141
THE DIRECTOR STOCK OPTION PLAN PROPOSAL.................................... 143
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................ 147
MANAGEMENT OF THE COMPANY.................................................. 154
ANTI-TAKEOVER CONSIDERATIONS............................................... 172
DESCRIPTION OF EXISTING COMMON STOCK AND OTHER CAPITAL STOCK............... 176
LEGAL MATTERS.............................................................. 183
INDEPENDENT AUDITORS....................................................... 184
EXPERTS.................................................................... 184
STOCKHOLDERS' PROPOSALS.................................................... 186
APPENDIX I - Glossary of Certain Defined Terms............................. I-1
APPENDIX II - Illustration of Certain Terms................................ II-1
APPENDIX III-A - Proposed Amendments to the Restated Certificate
of Incorporation (Implementing the Liberty Media Group Stock Proposal). III-A-1
APPENDIX III-B - Proposed Amendments to the Restated Certificate
of Incorporation (Implementing the Increased Authorization Proposal)... III-B-1
APPENDIX IV - Financial Information........................................ IV-1
Index..................................................................... IV-1
Tele-Communications, Inc. ................................................ IV-3
Liberty Media Group..................................................... IV-114
TCI Group............................................................... IV-184
Liberty Media Corporation............................................... IV-279
APPENDIX V - Tele-Communications, Inc. 1994 Nonemployee Director Stock
Option Plan................................................................ V-1
</TABLE>
<PAGE>
TELE-COMMUNICATIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on July 27, 1995
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (including
any adjournment or postponement thereof, the "Annual Meeting") of Tele-
Communications, Inc., a Delaware corporation (the "Company"), will be held at
[place], starting at [time], local time, on July 27, 1995, for the following
purposes:
1. To elect three directors of the Company to hold office until the 1998
Annual Meeting of Stockholders or until their successors are elected and
qualified.
2. To consider and vote upon a proposal (the "Liberty Media Group Stock
Proposal") to adopt amendments to the Company's Restated Certificate of
Incorporation which would (a) provide for the Company's Common Stock, par value
$1.00 per share, to be divided into four series and for an increase of
825,000,000 in the number of authorized shares so that the Common Stock would
consist of: (i) 750,000,000 newly authorized shares designated Series A Liberty
Media Group Common Stock, (ii) 75,000,000 newly authorized shares designated
Series B Liberty Media Group Common Stock, (iii) 1,100,000,000 shares of Series
A TCI Group Common Stock created by redesignation of the Company's previously
authorized Class A Common Stock, par value $1.00 per share (including
redesignation of outstanding shares), and (iv) 150,000,000 shares of Series B
TCI Group Common Stock created by redesignation of the Company's previously
authorized Class B Common Stock, par value $1.00 per share (including
redesignation of outstanding shares), and (b) provide for the voting powers and
relative, participating, optional and other special rights and qualifications,
limitations and restrictions of each of the four series.
3. To consider and vote upon a proposal (the "Increased Authorization
Proposal") to adopt amendments to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of Class A Common
Stock, par value $1.00 per share (which would be redesignated Series A TCI Group
Common Stock if the Liberty Media Group Stock Proposal is adopted), from
1,100,000,000 to 1,750,000,000 and the number of authorized shares of Series
Preferred Stock, par value $.01 per share, from 10,000,000 to 50,000,000 and to
clarify that the rights, powers and preferences of any series of the Series
Preferred Stock may differ in any respect from those of any other series thereof
(except as limited by the rights of any outstanding class or series of preferred
stock).
4. To consider and vote upon a proposal (the "Director Stock Option Plan
Proposal") to approve the Tele-Communications, Inc. 1994 Nonemployee Director
Stock Option Plan.
5. To transact such other business as may properly come before the Annual
Meeting.
Holders of record of the Company's Class A Common Stock, Class B Common
Stock, Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock (the
"Class B Preferred Stock") and Convertible Preferred Stock, Series C (the
"Series C Preferred Stock") at the close of business on June 9, 1995, the record
date for the Annual Meeting, will be entitled to notice of the Annual Meeting.
Holders of record of the Class A Common Stock, the Class B
i
<PAGE>
Common Stock, the Class B Preferred Stock and the Series C Preferred Stock at
the close of business on the record date will be entitled to vote together as a
single class in the election of directors, and holders of record of the Class A
Common Stock, the Class B Common Stock and the Series C Preferred Stock at the
close of business on the record date will be entitled to vote together as a
single class on the Liberty Media Group Stock Proposal, the Increased
Authorization Proposal and the Director Stock Option Plan Proposal. In addition,
holders of record of the Class A Common Stock and holders of record of the Class
B Common Stock will each be entitled to vote as a separate class on the Liberty
Media Group Stock Proposal.
To assure that your interests will be represented at the Annual Meeting,
regardless of whether you plan to attend in person, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed return
envelope, which requires no postage if mailed in the United States. This action
will not limit your right to vote in person if you wish to attend the Annual
Meeting and vote personally.
The Company's Annual Report to Stockholders, including financial
statements, for the year ended December 31, 1994 accompanies the proxy materials
being mailed to all stockholders. The Annual Report is not a part of this proxy
solicitation material.
By Order of the Board of Directors
Stephen M. Brett
Secretary
Englewood, Colorado
June [__], 1995
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU INTEND
TO BE PRESENT AT THE ANNUAL MEETING.
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
Subject to Completion, dated June 22, 1995
TELE-COMMUNICATIONS, INC.
Terrace Tower II, 5619 DTC Parkway
Englewood, Colorado 80111
PROXY STATEMENT/PROSPECTUS
For Annual Meeting of Stockholders to be held July 27, 1995
This Proxy Statement/Prospectus is being furnished to stockholders of Tele-
Communications, Inc., a Delaware corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company for use at
the annual meeting of the stockholders of the Company, or any adjournment or
postponement thereof (the "Annual Meeting").
At the Annual Meeting, the stockholders of the Company will be asked to
consider and vote upon the following:
(i) the election of three directors of the Company to hold office until
the 1998 Annual Meeting of Stockholders or until their successors are
elected and qualified,
(ii) a proposal (the "Liberty Media Group Stock Proposal") which would
provide for the Company's Common Stock, par value $1.00 per share
(the "Common Stock"), to be divided into four series and for an
increase of 825,000,000 in the number of authorized shares so that
the Common Stock would consist of:
(a) 750,000,000 newly authorized shares designated Series A Liberty
Media Group Common Stock (the "Series A Liberty Media Group
Common Stock"),
(b) 75,000,000 newly authorized shares designated Series B Liberty
Media Group Common Stock (the "Series B Liberty Media Group
Common Stock", and collectively with the Series A Liberty Media
Group Common Stock, the "Liberty Media Group Common Stock"),
(c) 1,100,000,000 shares of Series A TCI Group Common Stock (the
"Series A TCI Group Common Stock") created by redesignation of
the Company's previously authorized Class A Common Stock, par
value $1.00 per share (the "Class A Common Stock") (including
redesignation of outstanding shares), and
<PAGE>
(d) 150,000,000 shares of Series B TCI Group Common Stock (the
"Series B TCI Group Common Stock", and collectively with the
Series A TCI Group Common Stock, the "TCI Group Common Stock")
created by redesignation of the Company's previously authorized
Class B Common Stock, par value $1.00 per share (the "Class B
Common Stock") (including redesignation of outstanding shares),
(iii) a proposal (the "Increased Authorization Proposal") to approve an
increase in the number of authorized shares of Class A Common Stock
(which would be redesignated Series A TCI Group Common Stock under
the Liberty Media Group Stock Proposal) from 1,100,000,000 to
1,750,000,000 and the number of authorized shares of Series Preferred
Stock, par value $.01 per share (the "Series Preferred Stock"), from
10,000,000 to 50,000,000 and to clarify that the rights, powers and
preferences of any series of the Series Preferred Stock may differ in
any respect from those of any other series thereof (except as limited
by the rights of any outstanding class or series of preferred stock),
(iv) a proposal (the "Director Stock Option Plan Proposal") to approve the
Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan
(the "Director Stock Option Plan") and
(v) such other business as may properly come before the Annual Meeting.
The Liberty Media Group Common Stock is intended to reflect the separate
performance of the newly created "Liberty Media Group". The Liberty Media Group
consists of the Company's businesses that are engaged in two principal lines of
business: (i) production, acquisition and distribution through all available
formats and media of branded entertainment, educational and informational
programming and software including multimedia products and (ii) electronic
retailing, direct marketing, advertising sales relating to programming services,
infomercials and transaction processing. The Liberty Media Group was formed
following the August 1994 combination of the businesses of Liberty Media
Corporation ("LMC") and the Company's predecessor, Tele-Communications, Inc.
("Old TCI"), and consists primarily of the programming interests previously held
by LMC and Old TCI's programming interests (consisting primarily of
substantially all of Old TCI's interests in Turner Broadcasting System, Inc. and
Discovery Communications, Inc.).
Following the Annual Meeting the Company will, subject to the receipt of
stockholder approval, file amendments to its Restated Certificate of
Incorporation (the "Charter") which will implement the Liberty Media Group Stock
Proposal and the Increased Authorization Proposal. The Charter, as amended
following the Annual Meeting to reflect those proposals approved by stockholders
at the Annual Meeting, is referred to herein as the "Amended Charter".
-2-
<PAGE>
Subject to the approval by the stockholders of the Liberty Media Group
Stock Proposal, the Board of Directors has adopted resolutions declaring a
distribution (the "Distribution") of one-fourth of one share of Series A Liberty
Media Group Common Stock on each outstanding share of Class A Common Stock
(which will be redesignated Series A TCI Group Common Stock) and one-fourth of
one share of Series B Liberty Media Group Common Stock on each outstanding share
of Class B Common Stock (which will be redesignated Series B TCI Group Common
Stock), in each case to holders of record on the record date for the
Distribution, which will be the day following the effective date of the Amended
Charter. The Series A Liberty Media Group Common Stock and the Series B Liberty
Media Group Common Stock issuable in connection with the Distribution will be
intended to reflect 100% of the equity value of the Company attributable to the
Liberty Media Group. Following the Distribution, additional authorized shares
of Liberty Media Group Common Stock could be issued from time to time at the
discretion of the Board of Directors. See "The Liberty Media Group Stock
Proposal--General".
After the issuance of Liberty Media Group Common Stock in the Distribution,
it is intended that the Series A TCI Group Common Stock and Series B TCI Group
Common Stock will reflect the performance of the businesses and assets of the
Company not included in the Liberty Media Group, including the Company's
domestic cable and telephony distribution and communications business,
international cable, telephony and programming business and technology/venture
capital business, as well as any equity value of the Company attributable to the
Liberty Media Group that, at any relevant time in the future, is not represented
by outstanding Liberty Media Group Common Stock (an "Inter-Group Interest"). For
convenience, the businesses of the Company not attributed to the Liberty Media
Group, together with any subsequently created Inter-Group Interest, are
sometimes referred to herein as the "TCI Group". Immediately following the
Distribution, there will be no Inter-Group Interest. An Inter-Group Interest
would be created only if a subsequent transfer of cash or other property from
the TCI Group to the Liberty Media Group is specifically designated by the Board
of Directors of the Company as being made to create an Inter-Group Interest (in
contrast to transfers made for other consideration such as transfers as loans or
in purchase and sale transactions) or if shares of Liberty Media Group Common
Stock cease to be outstanding following their purchase with funds attributable
to the TCI Group. The Liberty Media Group and the TCI Group are sometimes
hereinafter referred to individually as a "Group" and collectively as the
"Groups".
It is intended that the Liberty Media Group Stock Proposal, in addition to
allowing greater market recognition of the value of each Group, will provide the
Company greater flexibility with regard to raising capital and making
acquisitions and investments, including strategic partnering transactions. At
the same time, the Liberty Media Group Stock Proposal will enable the Company's
businesses to preserve the benefits of being part of a consolidated enterprise.
Following the Distribution, the Company will report the results of the
Liberty Media Group and the TCI Group separately so long as the Liberty Media
Group Common Stock is outstanding (in addition to reporting the Company's
consolidated results), thereby giving investors an opportunity to gain a better
understanding of the respective businesses.
-3-
<PAGE>
Implementation of the Liberty Media Group Stock Proposal will afford investors
an opportunity to invest in TCI Group Common Stock or Liberty Media Group Common
Stock, depending on their investment objectives. Although the Company will
separately report financial information of each Group, the implementation of the
Liberty Media Group Stock Proposal will not result in any transfer of assets or
liabilities of the Company or any of its subsidiaries or affect the rights of
holders of debt of the Company or any of its subsidiaries.
Holders of TCI Group Common Stock and of Liberty Media Group Common Stock
will be common stockholders of the Company and will be subject to risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. Financial effects arising from either Group that affect the
Company's consolidated results of operations or financial condition could affect
the combined results of operations and financial condition of both Groups or the
market price of the TCI Group Common Stock or the Liberty Media Group Common
Stock. See "Risk Factors and Other Special Considerations" for a discussion of
certain factors that should be considered in connection with the Liberty Media
Group Stock Proposal.
The Liberty Media Group Stock Proposal provides that any dividends on the
TCI Group Common Stock will be paid only out of the lesser of assets of the
Company legally available therefor and the TCI Group Available Dividend Amount
(a defined term intended to be similar to the amount that would be legally
available for the payment of dividends on the TCI Group Common Stock under the
Delaware General Corporation Law (the "DGCL") if the TCI Group were a separate
Delaware corporation) and only if equivalent per share dividends are
concurrently paid on both the Series A TCI Group Common Stock and the Series B
TCI Group Common Stock. Similarly, any dividends on the Liberty Media Group
Common Stock will be paid only out of the lesser of assets of the Company
legally available therefor and the Liberty Media Group Available Dividend Amount
(a defined term intended to be similar to the amount that would be legally
available for the payment of dividends on the Liberty Media Group Common Stock
under the DGCL if the Liberty Media Group were a separate Delaware corporation)
and only if equivalent per share dividends are concurrently paid on both the
Series A Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock. For this purpose, equivalent per share dividends include, in the
case of distributions of certain securities, distributions of securities having
relative voting rights and differences in certain related rights not greater
than the corresponding differences between the two series with respect to which
the distribution is being made. The Board of Directors will (subject to the
foregoing provisions) have the authority to declare and pay dividends on the TCI
Group Common Stock and the Liberty Media Group Common Stock in equal or unequal
amounts, notwithstanding the relationship between the TCI Group Available
Dividend Amount and the Liberty Media Group Available Dividend Amount, the
respective amounts of prior dividends declared on, or liquidation rights of, the
TCI Group Common Stock or the Liberty Media Group Common Stock or any other
factor. The Company has never paid cash dividends on its Class A Common Stock or
Class B Common Stock, and the Board of Directors does not anticipate that cash
dividends on the TCI Group Common Stock or the Liberty Media Group Common Stock
will be paid in the foreseeable future. Any decision to pay dividends in the
future will depend on the financial condition, results of operations and
business requirements of the Company as
-4-
<PAGE>
a whole. In making a determination as to the allocation of any future dividends
among the TCI Group Common Stock and the Liberty Media Group Common Stock, the
Board of Directors expects to follow a policy under which it will consider,
among other factors, the relative financial condition, results of operations and
business requirements of the respective Groups. See "The Liberty Media Group
Stock Proposal -- Description of TCI Group Common Stock and Liberty Media Group
Common Stock -- Dividends" and "-- Share Distributions".
The Liberty Media Group Common Stock will generally vote together with the
TCI Group Common Stock as a single class, with the Series A Liberty Media Group
Common Stock having one vote per share and the Series B Liberty Media Group
Common Stock having ten votes per share. The Class A Common Stock and Class B
Common Stock (redesignated Series A TCI Group Common Stock and Series B TCI
Group Common Stock, respectively) will continue to have one vote per share and
ten votes per share, respectively. See "The Liberty Media Group Stock Proposal
- -- Description of TCI Group Common Stock and Liberty Media Group Common Stock --
Voting Rights".
If the Company disposes of all or substantially all of the properties and
assets of the Liberty Media Group (i.e. 80% or more on a current market value
basis), other than in a transaction in which the Company receives primarily
equity securities of an entity engaged or proposing to engage primarily in a
similar or complementary business and other than in connection with the
disposition of all or substantially all of the properties and assets of the
Company, the Company is required, at its option, either to (i) distribute to
holders of the Liberty Media Group Common Stock an amount in cash and/or
securities or other property equal to their proportionate interest in the net
proceeds of such disposition, either by special dividend or by redemption of all
or part of the outstanding shares of Liberty Media Group Common Stock, or (ii)
convert each outstanding share of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock into a number (or fraction) of shares
of Series A TCI Group Common Stock or Series B TCI Group Common Stock,
respectively, equal in each case to 110% of the average daily ratio over a ten-
trading day period beginning on the 16th Trading Day after consummation of the
disposition transaction of the market value of one share of Series A Liberty
Media Group Common Stock to the market value of one share of Series A TCI Group
Common Stock. See "The Liberty Media Group Stock Proposal -- Description of TCI
Group Common Stock and Liberty Media Group Common Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock".
The Company may, in the sole discretion of its Board of Directors, elect at
any time to convert each outstanding share of Liberty Media Group Common Stock
into a number (or fraction) of shares of TCI Group Common Stock equal to the
ratio of the value (as determined on the basis of appraisals performed by
investment banking firms) of one share of Liberty Media Group Common Stock to
the average market value over a 20-trading day period prior to the date such
appraisal process is initiated of one share of Series A TCI Group Common Stock.
In such a case, shares of Series A Liberty Media Group Common Stock would be
converted into Series A TCI Group Common Stock and shares of Series B Liberty
Media Group Common Stock would be converted into Series B TCI Group Common
Stock. See "The Liberty Media Group
-5-
<PAGE>
Stock Proposal -- Description of TCI Group Common Stock and Liberty Media Group
Common Stock -- Conversion and Redemption -- Conversion at the Option of the
Company".
The Company could at any time, in the sole discretion of its Board of
Directors, redeem (without premium) all outstanding shares of Liberty Media
Group Common Stock in exchange for an equivalent proportionate interest in the
outstanding shares of any one or more wholly-owned subsidiaries that hold all of
the assets and liabilities attributed to the Liberty Media Group. In such a
case, the Board of Directors could elect to distribute, with respect to each
such subsidiary, either a single class of subsidiary stock or two classes of
subsidiary stock having relative voting rights and differences in certain
related rights not greater than the corresponding differences between the Series
A Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock. See "The Liberty Media Group Stock Proposal -- Description of TCI Group
Common Stock and Liberty Media Group Common Stock -- Conversion and Redemption
- -- Redemption in Exchange for Stock of Subsidiary".
The rights of holders of the TCI Group Common Stock upon liquidation
of the Company will be based on the average daily ratio over a 20-trading day
period prior to announcement of the liquidation event of the aggregate market
capitalization of the TCI Group Common Stock to the aggregate market
capitalization of the TCI Group Common Stock and the Liberty Media Group Common
Stock, with the Series A TCI Group Common Stock and the Series B TCI Group
Common Stock participating equally on a share-for-share basis. The rights of
holders of the Liberty Media Group Common Stock upon liquidation of the Company
will be based on the average daily ratio over a 20-trading day period prior to
announcement of the liquidation event of the aggregate market capitalization of
the Liberty Media Group Common Stock to the aggregate market capitalization of
the TCI Group Common Stock and the Liberty Media Group Common Stock, with the
Series A Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock participating equally on a share-for-share basis. See "The Liberty
Media Group Stock Proposal -- Description of TCI Group Common Stock and Liberty
Media Group Common Stock -- Liquidation Rights".
The Series A Liberty Media Group Common Stock and the Series B Liberty
Media Group Common Stock have been approved for inclusion in the Nasdaq National
Market under the symbols "LBTYA" and "LBTYB", respectively. Shares of Series A
TCI Group Common Stock and Series B TCI Group Common Stock will continue to be
included in the Nasdaq National Market under the symbols "TCOMA" and "TCOMB",
respectively. See "The Liberty Media Group Stock Proposal -- Inclusion in Nasdaq
National Market".
The Board of Directors has unanimously approved the Liberty Media Group
Stock Proposal and recommends that stockholders vote FOR the Proposal.
Under the DGCL, stockholders of the Company do not have dissenters rights
in connection with the Liberty Media Group Stock Proposal.
-6-
<PAGE>
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the stockholders of the Company on or about [date].
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is [date].
-7-
<PAGE>
The Company was incorporated in 1994 under the name "TCI/Liberty Holding
Company" for the purpose of combining the businesses of the Company's
predecessor, Tele-Communications, Inc. (renamed "TCI Communications, Inc." and
referred to herein as "TCIC" or "Old TCI"), and Liberty Media Corporation
("LMC"). On August 4, 1994 the mergers (the "Old TCI/LMC Combination") of Old
TCI and LMC with separate wholly-owned subsidiaries of the Company were
consummated and each of Old TCI and LMC became wholly-owned subsidiaries of the
Company. In connection with the Old TCI/LMC Combination, the Company changed its
name to Tele-Communications, Inc. and Old TCI changed its name to TCI
Communications, Inc. In connection with the Business Line Restructuring
described under the caption "The Liberty Media Group Stock Proposal--Background
and Reasons for the Liberty Media Group Stock Proposal--The Business Line
Restructuring", LMC changed its name to "TCI Cable Investments, Inc." ("TCI
Cable Investments") and LMC's and substantially all of TCIC's programming assets
were transferred to a newly-formed corporation named "Liberty Media Corporation"
(referred to herein as "Liberty"). Unless the context indicates otherwise, as
used in this Proxy Statement/Prospectus the term "Company" means, on and after
August 4, 1994, Tele-Communications, Inc. (formerly named "TCI/Liberty Holding
Company") and, before August 4, 1994, TCIC (formerly named "Tele-Communications,
Inc."), and their respective consolidated subsidiaries.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at
the following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), covering shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock to be
distributed in connection with the Liberty Media Group Stock Proposal to holders
of outstanding shares of Class A Common Stock and Class B Common Stock and the
shares of Series A TCI Group Common Stock and Series B TCI Group Common Stock
created by redesignation of the outstanding shares of Class A Common Stock and
Class B Common Stock. This Proxy Statement/Prospectus, which also constitutes
the Prospectus of the Company filed as a part of the Registration Statement,
does not include all of the information set forth in the Registration Statement,
as permitted by the rules and regulations of the Commission. The Registration
Statement, including any amendments, schedules and exhibits filed or
incorporated by reference as a part thereof, is available for inspection and
copying as set forth above. Statements contained in this Proxy
Statement/Prospectus or in any
-8-
<PAGE>
document incorporated herein by reference as to the contents of any contract or
other document referred to herein or therein are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, and
each such statement shall be deemed qualified in its entirety by such reference.
No person has been authorized to give any information or make any
representation other than those contained or incorporated by reference in this
Proxy Statement/Prospectus, and, if given or made, such information or
representation must not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy the securities covered by this Proxy Statement/Prospectus or a
solicitation of a proxy in any jurisdiction where, or to or from any person to
whom, it is unlawful to make such offer, solicitation of an offer or proxy
solicitation in such jurisdiction. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of securities made hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof or that the information
contained or incorporated by reference herein is correct as of any time
subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
under the Exchange Act (Commission File No. 0-20421) are incorporated herein by
reference: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, as amended by Form 10-K/A (Amendment No. 1), (ii) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and
(iii) the Company's Current Reports on Form 8-K dated August 26, 1994, January
23, 1995, February 3, 1995, as amended by Form 8-K/A, February 13, 1995,
February 15, 1995, April 6, 1995, April 20, 1995, as amended by Form 8-K/A, and
May 4, 1995, as amended by Form 8-K/A.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to the Annual Meeting shall be deemed to be incorporated by reference into
this Proxy Statement/Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document that is or is deemed to be
incorporated by reference herein) modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded. All information
appearing in this Proxy Statement/Prospectus is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in the
documents incorporated herein by reference.
-9-
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, FROM
STEPHEN M. BRETT, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, TELE-
COMMUNICATIONS, INC., TERRACE TOWER II, 5619 DTC PARKWAY, ENGLEWOOD, COLORADO
80111 (TELEPHONE 303-267-5500). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY [DATE].
--------------------------------------------
If you require additional copies of the Proxy Statement/Prospectus or the
Proxy Card, please contact Georgeson & Company Inc. at (800) 223-2064 (toll
free).
-10-
<PAGE>
SUMMARY COMPARISON OF TERMS OF EXISTING COMMON STOCK
WITH TCI GROUP COMMON STOCK AND LIBERTY MEDIA GROUP COMMON STOCK
UNDER THE LIBERTY MEDIA GROUP STOCK PROPOSAL
The following summary is intended only to highlight certain of the
terms of the Company's existing Class A Common Stock and Class B Common Stock
under the Company's Charter as currently in effect and the terms of the TCI
Group Common Stock and the Liberty Media Group Common Stock under the Amended
Charter. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere in this Proxy
Statement/Prospectus, the Appendices hereto and the documents incorporated by
reference or otherwise referred to herein. See "Proxy Statement/Prospectus
Summary", "Risk Factors and Other Special Considerations" and "The Liberty Media
Group Stock Proposal-Description of TCI Group Common Stock and Liberty Media
Group Common Stock". Unless otherwise defined herein, capitalized terms used in
this summary have the respective meanings ascribed to them elsewhere in this
Proxy Statement/Prospectus. See Appendix I-Glossary of Certain Defined Terms.
Stockholders are urged to read carefully this Proxy Statement/Prospectus and the
Appendices hereto in their entirety.
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Businesses: All businesses of the Company. The TCI Group consists of The Liberty Media Group
the Company's businesses and consists of the Company's
assets not included in the businesses that are engaged in
Liberty Media Group, two principal lines of
including domestic cable and business: (i) production,
telephony distribution and acquisition and distribution
communications, through all available
international cable, formats and media of branded
telephony and programming entertainment, educational
and technology/venture and informational
capital. The TCI Group will programming and software
also include any including multimedia
subsequently created Inter- products and (ii) electronic
Group Interest in the retailing, direct marketing,
Liberty Media Group. The advertising sales relating
Company could determine to to programming services,
pursue future business infomercials and transaction
opportunities through one processing. The Company
Group instead of the other could determine to pursue
Group, or jointly through future business
both Groups. The Company opportunities through one
currently intends to Group instead of the other
allocate future programming Group, or jointly through
business opportunities in both Groups. The Company
markets outside the United currently intends to
States between the TCI Group allocate future programming
(through International) and business opportunities in
the Liberty Media Group as markets outside the United
described under "The Liberty States between the TCI Group
Media Group Stock Proposal - (through International) and
Management and Allocation the Liberty Media Group as
Policies". described under "The Liberty
Media Group Stock Proposal -
Management and Allocation
Policies".
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Businesses The TCI Group Common Stock The Liberty Media Group
(Cont'd): is intended to reflect the Common Stock is intended to
separate performance of the reflect the separate
TCI Group. However, holders performance of the Liberty
of TCI Group Common Stock Media Group. However,
will continue to be subject holders of Liberty Media
to risks associated with an Group Common Stock will be
investment in the Company subject to risks associated
and all of its businesses, with an investment in the
assets and liabilities. Company and all of its
There is no assurance as to businesses, assets and
the degree to which the liabilities. There is no
market value of the TCI assurance as to the degree
Group Common Stock will to which the market value
reflect the separate of the Liberty Media Group
performance of the TCI Common Stock will reflect
Group. the separate performance of
the Liberty Media Group.
Dividends: The Company has never paid The Company's current The Company's current
cash dividends on its Class policy of paying no cash policy of paying no cash
A Common Stock or Class B dividends on Common Stock dividends on Common Stock
Common Stock, and the would also apply to the TCI would also apply to the
Company's current policy is Group Common Stock. Liberty Media Group Common
to pay no cash dividends on Stock.
Class A Common Stock or
Class B Common Stock.
Dividends are payable out Dividends are payable out Dividends are payable out
of the assets of the of the lesser of assets of of the lesser of assets of
Company legally available the Company legally the Company legally
for dividends. If dividends available therefor and the available therefor and the
on the Class A Common Stock TCI Group Available Liberty Media Group
or Class B Common Stock are Dividend Amount. If Available Dividend Amount.
paid, they will be dividends on the TCI Group If dividends on the Liberty
concurrently paid on both Common Stock are paid, Media Group Common Stock
the Class A Common Stock equivalent per share are paid, equivalent per
and the Class B Common dividends will be share dividends will be
Stock in equal per share concurrently paid on both concurrently paid on both
amounts. Share the Series A TCI Group the Series A Liberty Media
distributions consisting of Common Stock and the Series Group Common Stock and the
Class A Common Stock or B TCI Group Common Stock. Series B Liberty Media
Class B Common Stock may be For this purpose, Group Common Stock. For
made either on the basis of equivalent per share this purpose, equivalent
an identical distribution dividends include, in the per share dividends
to the holders of Class A case of distributions of include, in the case of
Common Stock and Class B certain securities distributions of certain
Common Stock or on the (including stock dividends securities (including stock
basis of equal per share consisting of any series of dividends consisting of
distributions of Class A Common Stock), either Liberty Media Group Common
Common Stock to the holders distributions of identical Stock), either
of Class A Common Stock and securities or distributions distributions of identical
Class B Common Stock to the of securities having securities or distributions
holders of Class B Common relative voting rights and of securities having
Stock. differences in certain relative voting rights and
related rights not greater differences in certain
than the corresponding related rights not greater
differences between the
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Dividends (Cont'd): Series A TCI Group Common than the corresponding
Stock and the Series B TCI differences between the
Group Common Stock. Series A Liberty Media
Group Common Stock and the
Series B Liberty Media
Group Common Stock.
Subject to the foregoing Subject to the foregoing
provisions, dividends may provisions, dividends may
be declared and paid on the be declared and paid on the
TCI Group Common Stock TCI Group Common Stock
and/or the Liberty Media and/or the Liberty Media
Group Common Stock in equal Group Common Stock in equal
or unequal amounts, or unequal amounts,
notwithstanding the notwithstanding the
relationship between the relationship between the
TCI Group Available TCI Group Available
Dividend Amount and the Dividend Amount and the
Liberty Media Group Liberty Media Group
Available Dividend Amount, Available Dividend Amount,
the respective amounts of the respective amounts of
prior dividends paid on, or prior dividends paid on, or
liquidation rights of, the liquidation rights of, the
TCI Group Common Stock or TCI Group Common Stock or
the Liberty Media Group the Liberty Media Group
Common Stock or any other Common Stock or any other
factor. factor.
Any decision to pay Any decision to pay
dividends in the future dividends in the future
will depend on the will depend on the
financial condition, financial condition,
results of operations and results of operations and
business requirements of business requirements of
the Company as a whole. In the Company as a whole. In
making a determination as making a determination as
to the allocation of any to the allocation of any
future dividends among the future dividends among the
TCI Group Common Stock and TCI Group Common Stock and
the Liberty Media Group the Liberty Media Group
Common Stock, the Board of Common Stock, the Board of
Directors expects to follow Directors expects to follow
a policy under which it a policy under which it
will consider, among other will consider, among other
factors, the relative factors, the relative
financial condition, financial condition,
results of operations and results of operations and
business requirements of business requirements of
the respective Groups. the respective Groups.
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Dividend,
Redemption and
Conversion Rights
applicable on
Disposition of
Liberty Media
Group Assets: None. No provisions comparable to If the Company disposes of
the dividend, redemption all or substantially all of
and conversion rights of the properties and assets
the Liberty Media Group of the Liberty Media Group
Common Stock will apply in (i.e. 80% or more on a
the case of the disposition current market value
of all or substantially all basis), other than in a
of the properties and transaction in which the
assets of the TCI Group. Company receives primarily
equity securities of an
entity engaged or proposing
to engage primarily in a
similar or complementary
business and other than in
connection with the
disposition of all or
substantially all of the
properties and assets of
the Company, the Company is
required, at its option,
either to (i) distribute to
holders of the Liberty
Media Group Common Stock an
amount in cash and/or
securities or other
property equal to their
proportionate interest in
the Net Proceeds of such
disposition, either by
special dividend or by
redemption of all or part
of the outstanding shares
of Liberty Media Group
Common Stock, or (ii)
convert each outstanding
share of Series A Liberty
Media Group Common Stock
and Series B Liberty Media
Group Common Stock into a
number (or fraction) of
shares of Series A TCI
Group Common Stock or
Series B TCI Group Common
Stock, respectively, equal
in each case to 110% of the
average daily ratio over
the ten-trading day period
beginning on the 16th
trading day after
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Dividend,
Redemption and
Conversion Rights
applicable on
Disposition of
Group Assets
(Cont'd): consummation of the
transaction of the Market
Value of one share of
Series A Liberty Media
Group Common Stock to the
Market Value of one share
of Series A TCI Group
Common Stock. The
proportionate interest in
the Net Proceeds of a
disposition that would be
distributed to holders of
Liberty Media Group Common
Stock would be based on (a)
in the case of a special
dividend or partial
redemption following the
disposition of less than
all of the properties and
assets of the Liberty Media
Group, the Outstanding
Interest Fraction (a
measure of the percentage
interest in the Liberty
Media Group represented by
outstanding shares of
Liberty Media Group Common
Stock), or (b) in the case
of a complete redemption
following the disposition
of all of the properties and
assets of the Liberty Media
Group, the Adjusted
Outstanding Interest
Fraction (a similar measure
that differs in that it
takes into account the
dilutive effect of certain
convertible securities and
certain contractual
obligations to issue shares).
Such a partial redemption
could be effected pro rata
among the holders of such
shares or by such other
method as may be determined
by the Board of Directors
to be equitable.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Conversion at
Option of Holder: Shares of Class B Common Shares of Series B TCI Shares of Series B Liberty
Stock are convertible at Group Common Stock will be Media Group Common Stock
any time at the option of convertible at any time at will be convertible at any
the holder only into the the option of the holder time at the option of the
same number of shares of only into the same number holder only into the same
Class A Common Stock. of shares of Series A TCI number of shares of Series
Group Common Stock. A Liberty Media Group
Common Stock.
Conversion at
Option of
Company: None. None. The Company may, in the
sole discretion of its
Board of Directors, elect
at any time to convert each
outstanding share of
Liberty Media Group Common
Stock into a number (or
fraction) of shares of TCI
Group Common Stock equal to
the ratio of the value (as
determined on the basis of
appraisals performed by
investment banking firms)
of one share of Liberty
Media Group Common Stock to
the average Market Value
over the 20-trading day
period prior to the date
such appraisal process is
initiated of one share of
Series A TCI Group Common
Stock. In such a case,
shares of Series A Liberty
Media Group Common Stock
would be converted into
Series A TCI Group Common
Stock and shares of Series
B Liberty Media Group
Common Stock would be
converted into Series B TCI
Group Common Stock.
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Redemption in
Exchange for Stock
of Subsidiary: None. None. The Company could at any time, in the
sole discretion of its Board of
Directors, redeem (without premium) all
outstanding shares of Liberty Media
Group Common Stock in exchange for a
proportionate interest in the
outstanding shares of any one or more
wholly-owned subsidiaries that hold all
of the assets and liabilities attributed
to the Liberty Media Group. The
percentage of the total outstanding
stock of the subsidiary or subsidiaries
that is distributable in the redemption
would be based on the Adjusted
Outstanding Interest Fraction. In such a
case, the Board of Directors could elect
to distribute, with respect to each such
subsidiary, either a single class of
subsidiary stock or two classes of
subsidiary stock having relative voting
rights and differences in certain
related rights not greater than the
corresponding differences between the
Series A Liberty Media Group Common
Stock and the Series B Liberty Media
Group Common Stock.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group Stock Proposal
--------------------------------------------------------------
Existing TCI Group Liberty Media Group
Common Stock Common Stock Common Stock
------------ ------------ ------------
<S> <C> <C> <C>
Voting Rights: The Class A Common Stock is The Series A TCI Group The Series A Liberty Media
entitled to one vote per Common Stock will be Group Common Stock will be
share and the Class B entitled to one vote per entitled to one vote per
Common Stock is entitled to share and the Series B TCI share and the Series B
ten votes per share, voting Group Common Stock will be Liberty Media Group Common
as one class with any entitled to ten votes per Stock will be entitled to
preferred stock entitled to share, voting as one class ten votes per share, voting
vote, except to the extent with the Liberty Media as one class with the TCI
separate class or series Group Common Stock and any Group Common Stock and any
votes are required by law preferred stock entitled to preferred stock entitled to
or the Charter. vote, except to the extent vote, except to the extent
separate class or series separate class or series
votes are required by law votes are required by law
or the Amended Charter. The or the Amended Charter. The
Amended Charter does not Amended Charter does not
provide for any rights for provide for any rights for
the TCI Group Common Stock the Liberty Media Group
to vote separately from the Common Stock to vote
Liberty Media Group Common separately from the TCI
Stock. Group Common Stock.
Liquidation: Holders of shares of Class Holders of shares of Series Holders of shares of Series
A Common Stock and Class B A TCI Group Common Stock A Liberty Media Group
Common Stock are entitled and Series B TCI Group Common Stock and Series B
to share (on an equal per Common Stock will be Liberty Media Group Common
share basis) the funds of entitled to share (on an Stock will be entitled to
the Company remaining for equal per share basis) a share (on an equal per
distribution to its common portion of the funds of the share basis) a portion of
stockholders. Company remaining for the funds of the Company
distribution to its common remaining for distribution
stockholders based on the to its common stockholders
average daily ratio over a based on the average daily
period of 20 trading days ratio over a period of 20
prior to the announcement trading days prior to the
of the liquidation event of announcement of the
the aggregate Market liquidation event of the
Capitalization of the TCI aggregate Market
Group Common Stock to the Capitalization of the
aggregate Market Liberty Media Group Common
Capitalization of the TCI Stock to the aggregate
Group Common Stock and the Market Capitalization of
Liberty Media Group Common the TCI Group Common Stock
Stock. and the Liberty Media Group
Common Stock.
Inclusion in Nasdaq
National Market: Nasdaq National Market Nasdaq National Market Nasdaq National Market
under the symbols under the symbols "TCOMA" under the symbols "LBTYA"
"TCOMA" and "TCOMB". and "TCOMB". and "LBTYB".
</TABLE>
-18-
<PAGE>
PROXY STATEMENT/PROSPECTUS SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. See "Summary Comparison of Terms of Existing Common Stock
with TCI Group Common Stock and Liberty Media Group Common Stock under the
Liberty Media Group Stock Proposal", "Risk Factors and Other Special
Considerations" and "The Liberty Media Group Stock Proposal". Unless otherwise
defined herein, capitalized terms used in this summary have the meanings
ascribed to them elsewhere in this Proxy Statement/Prospectus. See Appendix
I--Glossary of Certain Defined Terms. Stockholders are urged to carefully read
this Proxy Statement/Prospectus and the Appendices hereto in their entirety.
The Company
On August 4, 1994, the Old TCI/LMC Combination was consummated whereby, in
a tax free exchange, shares of Class A and Class B common stock of both Old TCI
and LMC and preferred stock of LMC were exchanged for like shares of the
Company. Old TCI shareholders received one share of Common Stock for each of
their common shares. LMC common shareholders received 0.975 of a share of Common
Stock for each of their common shares. Holders of LMC's publicly traded series
of preferred stock received in exchange for each such share one share of the
Company's Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock,
par value $.01 per share (the "Class B Preferred Stock"), having rights and
preferences substantially identical to the LMC preferred stock exchanged.
In the fourth quarter of 1994, the Company's businesses were reorganized
(the "Business Line Restructuring") into four divisions, each of which conducts
its business through one or more direct wholly owned subsidiaries of the
Company. The four divisions and the subsidiaries through which each operates its
business are as follows: Domestic Cable and Communications--TCIC and TCI Cable
Investments; Programming--Liberty; International Cable and Programming--Tele-
Communications International, Inc. ("International"); and Technology/Venture
Capital--TCI Technology Ventures, Inc. ("TCI Technology").
Since the early 1950's, the Company and its predecessors, through their
subsidiaries and affiliates, have been principally engaged in the construction,
acquisition, ownership and operation of cable television systems and, more
recently, in the provision of satellite delivered programming services to
various distribution media, principally cable television systems. The Company
has become involved, as an investor and developer, in new television and
telecommunications ventures and technologies. The Company is a Delaware
corporation, and its executive offices are located at Terrace Tower II, 5619 DTC
Parkway, Englewood, Colorado 80111-3000. Its telephone number at that address is
(303) 267-5500.
Liberty Media Group
The Liberty Media Group, which conducts its businesses through Liberty and
Liberty's subsidiaries and affiliates, is primarily engaged in two principal
lines of business: (i) production, acquisition and distribution through all
available formats and media of branded
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entertainment, educational and informational programming and software including
multimedia products and (ii) electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction processing.
The Liberty Media Group has interests in numerous domestic programming
businesses, some of which also distribute programming services internationally,
including Turner Broadcasting System, Inc. ("TBS"); Discovery Communications,
Inc. ("Discovery"); Home Shopping Network Inc. ("HSN"); QVC, Inc. ("QVC");
Encore Media Corporation ("Encore"); BET Holdings, Inc.; International Family
Entertainment, Inc. ("IFE"); E! Entertainment Television; a minority interest in
the partnership that distributes the STARZ! premium movie service; and five
national and 15 regional sports networks. The Liberty Media Group, through its
wholly owned subsidiary Netlink USA ("Netlink"), is also a provider of
programming packages to home satellite dish owners. At March 31, 1995, Netlink
provided service to approximately 451,000 subscribers. Prior to the Old TCI/LMC
Combination, LMC was engaged in the cable television industry as an operator of
cable television systems and as a provider of satellite-delivered video
entertainment, information and home shopping programming services to various
video distribution media, principally cable television systems. In the Business
Line Restructuring, substantially all of the programming assets held by LMC and
certain programming assets held by TCIC and its consolidated subsidiaries
(primarily interests in TBS and Discovery) were transferred to Liberty. LMC, the
assets of which then consisted primarily of interests in cable television
systems, changed its name to TCI Cable Investments, Inc. In order to take
advantage of the strong name identification developed by "Liberty Media", the
Company decided to continue use of the "Liberty Media" name to identify its
programming business.
TCI Group
Domestic Cable and Communications. The business activities of the TCI
Group's Domestic Cable and Communications division are conducted primarily
through TCIC and also through TCI Cable Investments and through their respective
subsidiaries and affiliates. Based on the number of basic subscribers, the TCI
Group is the largest provider of cable television services in the United States.
At March 31, 1995, the TCI Group owned cable television systems serving
approximately 12.1 million basic cable subscribers throughout the continental
United States and Hawaii. The TCI Group also has an investment in Primestar
Partners, a direct broadcast satellite service, and at March 31, 1995, the TCI
Group had approximately 150,000 Primestar Partners subscribers. In addition, the
TCI Group also has a majority interest in the partnership that distributes the
STARZ! premium movie service.
Subsidiaries of TCIC, Comcast Corporation ("Comcast"), Cox Communications,
Inc. ("Cox") and Sprint Corporation ("Sprint") have formed a series of
partnerships (collectively, the "Telephony Joint Venture") to engage in the
business of providing wireless communications services and local wireline
communications services to residences and businesses on a nationwide basis under
the "Sprint" brand. The TCI Group owns a 30% interest in the Telephony Joint
Venture.
With respect to wireless communications, the Telephony Joint Venture has
been participating in the auctions being conducted by the Federal Communications
Commission ("FCC") of broadband personal communications services ("PCS")
licenses and was the winning bidder in 29 of 51 markets in the first round
auction which was concluded during the first quarter of 1995. The Telephony
Joint Venture also has a 49% limited partnership interest in a company that
holds a PCS license for the Washington, D.C.-Baltimore market and is negotiating
definitive agreements for a 40% interest in a partnership that will hold a PCS
license
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for the Los Angeles - San Diego market. The TCI Group also owns a 35.3% interest
in a partnership with subsidiaries of Sprint and Cox which was the winning
bidder for a PCS license in the Philadelphia market.
With respect to wireline communications, the Telephony Joint Venture will
serve its customers primarily through the cable television facilities of cable
television operators that affiliate with the Telephony Joint Venture in exchange
for agreed upon compensation. The modification of existing regulations and laws
governing the local telephone market will be necessary in order for the
Telephony Joint Venture to provide its proposed wireline communications services
on a competitive basis in most states. Subject to agreement upon a business
plan, a schedule for the upgrading of its cable television facilities in
selected markets and certain other matters, the Company has agreed to affiliate
certain of its cable systems with the Telephony Joint Venture. Subsidiaries of
TCIC, Comcast, Cox and another cable television operator own Teleport
Communications Group, Inc. ("TCG"). TCG has informed the Company that it
believes that, based on the number of route miles served by TCG, its
subsidiaries and affiliates, it is the nation's largest competitive access
provider. The TCI Group, Comcast and Cox have agreed, subject to certain
conditions, to contribute their respective interests in TCG and its affiliates
to the Telephony Joint Venture.
International Cable and Programming. The TCI Group holds its interests, and
conducts its operations, in cable television and telephone networks and in
certain programming companies outside of the United States through
International. The activities of International are currently concentrated in
Europe, Latin America and Asia, with particular focus on the United Kingdom,
Argentina and Asia. International has ownership interests in companies operating
broadband networks that, at December 31, 1994, provided cable television service
to an aggregate of approximately 1.4 million basic subscribers and, in the
United Kingdom, provided telephone service over approximately 236,000
residential and 35,000 business telephone lines. International also has
ownership interests in or manages, through its subsidiaries and affiliates, 26
cable and satellite programming services which, at December 31, 1994, were
received by subscribers in at least 21 countries. International is currently
proposing to offer and sell, in an initial public offering, shares of its common
equity which will represent between 15 and 20 percent of its outstanding common
equity immediately after the closing of the offering, and has filed a
registration statement with the Commission in respect of such offering (the
prospectus included in such registration statement is referred to herein as the
"International Prospectus"). The net proceeds of the offering would be used to
repay certain indebtedness to the Company, to fund a portion of International's
commitments to contribute capital and make loans to its subsidiaries and
affiliates and for other general corporate purposes. No assurance can be given
as to when, or whether, the offering will close. Consummation of the
International public offering will result in International becoming a public
company with minority stockholders to which the board of directors of
International will owe fiduciary duties.
Technology/Venture Capital. The TCI Group's technology/venture capital
business is conducted through TCI Technology and through TCI Technology's
subsidiaries and affiliates. TCI Technology is an investor in companies and
joint ventures involved in developing and providing services for new television
and telecommunications technologies. Current investments and technologies under
development include interactive and set-top box technology, entertainment
software, and other services for wireline and wireless switched broadband
interactive networks. TCI Technology has formed a joint venture with Sega of
America and
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Time Warner Entertainment Company, L.P. to develop and market the first video
game channel, called "The Sega Channel." In addition, TCI Technology also has
investments in TSX Corporation, a producer of communications equipment, Acclaim
Entertainment, Inc. ("Acclaim"), the Microsoft Network, a partnership controlled
by Microsoft Corporation ("Microsoft") which will operate Microsoft's proposed
on-line service, and Netscape Communications Corporation, which develops and
markets software used to access the Internet. TCI Technology and Acclaim have
also formed a joint venture to develop, acquire and distribute games and other
interactive entertainment software over various telecommunications networks. TCI
Technology also owns the National Digital Television Center, an entity formed by
the Company to provide digital compression and authorization services to
programming suppliers and to cable television systems and other video
distribution outlets. In addition to its technology investments, TCI Technology
operates Western Tele-Communications, Inc., a wholesale provider of long
distance video, voice, data and other telecommunications services.
The Annual Meeting
The Annual Meeting will be held at [place], on July 27, 1995 starting at
[time], local time. Holders of record of shares of Class A Common Stock, Class B
Common Stock, Class B Preferred Stock and the Company's Convertible Preferred
Stock, Series C, par value $.01 per share (the "Series C Preferred Stock"), at
the close of business on June 9, 1995 (the "Record Date") are entitled to notice
of the Annual Meeting. Holders of record of the Class A Common Stock, the Class
B Common Stock, the Class B Preferred Stock and the Series C Preferred Stock at
the close of business on the Record Date are entitled to vote in the election of
directors. Holders of record of the Class A Common Stock, the Class B Common
Stock and the Series C Preferred Stock at the close of business on the Record
Date are also entitled to vote upon the Liberty Media Group Stock Proposal, the
Increased Authorization Proposal and the Director Stock Option Plan Proposal.
Each share of Class A Common Stock is entitled to one vote, each share of Class
B Common Stock is entitled to ten votes, each share of Class B Preferred Stock
is entitled to one vote and each share of Series C Preferred Stock is entitled
to 100 votes, on each matter on which holders of shares of such class or series
are entitled to vote at the Annual Meeting.
The following table summarizes the classes entitled to vote and the vote
required for approval of each matter to be voted upon at the Annual Meeting.
Record Holders
Entitled to Vote Vote Required
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Election of Directors: Class A Common Stock Plurality of the votes
Class B Common Stock of the shares of Class A
Class B Preferred Stock Common Stock, Class B
Series C Preferred Stock Common Stock, Class B
Preferred Stock and
Series C Preferred Stock
represented and entitled
to vote at the Annual
Meeting, voting as a
single class.
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Record Holders
Entitled to Vote Vote Required
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Liberty Media Group Stock
Proposal: Class A Common Stock 66 2/3% of the combined
Class B Common Stock voting power of the
Series C Preferred Stock shares of Class A Common
Stock, Class B Common
Stock and Series C
Preferred Stock
outstanding on the
Record Date, voting as a
single class;
Majority of the number
of the shares of Class A
Common Stock outstanding
on the Record Date,
voting as a separate
class; and
Majority of the number
of the shares of Class B
Common Stock
outstanding on the
Record Date, voting as a
separate class.
Increased Authorization
Proposal: Class A Common Stock 66 2/3% of the combined
Class B Common Stock voting power of the
Series C Preferred Stock shares of Class A Common
Stock, Class B Common
Stock and Series C
Preferred Stock
outstanding on the
Record Date, voting as a
single class.
Director Stock Option Plan
Proposal: Class A Common Stock Majority of the combined
Class B Common Stock voting power of the
Series C Preferred Stock shares of Class A Common
Stock, Class B Common
Stock and Series C
Preferred Stock
represented and entitled
to vote at the Annual
Meeting, voting as a
single class; and
Majority of the combined
number of the shares of
Class A Common Stock,
Class B Common Stock and
Series C Preferred Stock
represented and entitled
to vote at the Annual
Meeting, voting as a
single class.
The directors and officers of the Company as of the Record Date owned
[6,084,075] outstanding shares of the Class A Common Stock, [63,601,807]
outstanding shares of the Class B Common Stock and [438,884] outstanding shares
of the Class B Preferred Stock. Of such shares, John C. Malone, the President
and Chief Executive Officer of the Company, owns [25,447,083] shares of the
Class B Common Stock and [306,000] shares of the Class B Preferred Stock, of
which [3,120,000] shares of Class B Common Stock and [40,000] shares of Class B
Preferred Stock (the "Restricted Voting Shares") are subject to a repurchase
right by the Company and certain voting restrictions and, in accordance
therewith, will be voted at the
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Annual Meeting in the same proportions as votes represented by all other shares
are cast with respect to each proposal to be voted upon at the Annual Meeting.
The directors and officers of the Company have informed the Company that they
intend to vote their shares (exclusive of the Restricted Voting Shares) in favor
of the slate of directors to which this solicitation relates, the Liberty Media
Group Stock Proposal, the Increased Authorization Proposal and the Director
Stock Option Plan Proposal. Such shares represent approximately [42.78]% of the
combined voting power of the Class A Common Stock, Class B Common Stock, Class B
Preferred Stock and Series C Preferred Stock, [42.80]% of the combined voting
power of the Class A Common Stock, Class B Common Stock and Series C Preferred
Stock, [1.07]% of the number of outstanding shares of Class A Common Stock,
[71.27]% of the number of outstanding shares of Class B Common Stock and
[10.14]% of the total number of outstanding shares of Class A Common Stock,
Class B Common Stock and Series C Preferred Stock (exclusive of the Restricted
Voting Shares). See "The Annual Meeting".
Election of Directors
John W. Gallivan, Jerome H. Kern and Bob Magness are the three nominees for
election as directors of the Company, with the term of office of each to
continue until the 1998 Annual Meeting of Stockholders or until their successors
are elected and qualified. Messrs. Gallivan, Kern and Magness are each incumbent
directors. See "Election of Directors".
The Liberty Media Group Stock Proposal
General
The stockholders of the Company are being asked to consider and approve the
Liberty Media Group Stock Proposal, including adoption of the proposed
amendments to the Company's Charter set forth in Appendix III-A hereto. The
amendments would provide for the Company's Common Stock to be divided into four
series and for an increase of 825,000,000 in the number of authorized shares so
that the Common Stock would consist of: (i) 750,000,000 newly authorized shares
designated Series A Liberty Media Group Common Stock, (ii) 75,000,000 newly
authorized shares designated Series B Liberty Media Group Common Stock, (iii)
1,100,000,000 shares designated Series A TCI Group Common Stock and (iv)
150,000,000 shares designated Series B TCI Group Common Stock. The Series A TCI
Group Common Stock and the Series B TCI Group Common Stock would be created by
redesignation of the Company's previously authorized Class A Common Stock and
Class B Common Stock, respectively. If both the Liberty Media Group Stock
Proposal and the Increased Authorization Proposal are approved, the authorized
shares of Series A TCI Group Common Stock would be increased from 1,100,000,000
to 1,750,000,000. See "The Increased Authorization Proposal".
Subject to the approval by the stockholders of the Liberty Media Group
Stock Proposal, the Board of Directors has adopted resolutions declaring the
Distribution. The Series A Liberty Media Group Common Stock and the Series B
Liberty Media Group Common Stock issuable in connection with the Distribution
would be intended initially to reflect 100% of the equity value of the Company
attributable to the Liberty Media Group.
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Fractional shares of Liberty Media Group Common Stock will not be issued in
connection with the Distribution. If the number of shares of Liberty Media Group
Common Stock calculated to be issued to any holder of record of Class A Common
Stock or Class B Common Stock includes a fraction of a whole share, the Company
will pay to such record holder the cash value of such fractional share within 60
trading days of the Distribution, based upon the average of the last reported
sales prices of the Series A Liberty Media Group Common Stock during the first
ten trading days following the Distribution.
Additional authorized shares of Liberty Media Group Common Stock could be
issued from time to time at the discretion of the Board of Directors. See "The
Liberty Media Group Stock Proposal--General".
Risk Factors and Other Special Considerations
See "Risk Factors and Other Special Considerations" for a discussion of
certain factors that should be considered in connection with the Liberty Media
Group Stock Proposal.
Reasons for the Liberty Media Group Stock Proposal
The Liberty Media Group Stock Proposal is intended to provide investors
with securities reflecting the performance of each Group, while at the same time
enabling the Company's businesses to preserve the benefits of being part of a
consolidated enterprise. The Board of Directors believes the Liberty Media Group
Stock Proposal will enhance stockholder value over the long term by permitting
separate market valuations of the TCI Group Common Stock and the Liberty Media
Group Common Stock, which will result in greater market recognition of the value
of each Group. The Liberty Media Group Stock Proposal is also intended to
provide the Company greater flexibility with regard to raising capital and the
choice of stock consideration for acquisitions and investments, including
strategic partnering transactions. Unlike the case with separate publicly held
corporations, however, holders of the TCI Group Common Stock and the Liberty
Media Group Common Stock will continue to be subject to all the risks associated
with an investment in the Company and all of its businesses, assets and
liabilities. See "The Liberty Media Group Stock Proposal--Background and Reasons
for the Liberty Media Group Stock Proposal" and "Risk Factors and Other Special
Considerations".
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE LIBERTY MEDIA GROUP
STOCK PROPOSAL AND BELIEVES THAT ITS ADOPTION IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE LIBERTY MEDIA GROUP STOCK
PROPOSAL.
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Description of TCI Group Common Stock and Liberty Media Group Common Stock
See "Summary Comparison of Terms of Existing Common Stock with TCI Group
Common Stock and Liberty Media Group Common Stock under the Liberty Media Group
Stock Proposal" above for a summary description of the TCI Group Common Stock
and the Liberty Media Group Common Stock. For a more complete description of the
TCI Group Common Stock and the Liberty Media Group Common Stock, see "The
Liberty Media Group Stock Proposal--Description of TCI Group Common Stock and
Liberty Media Group Common Stock".
No Initial Inter-Group Interest
The shares of Liberty Media Group Common Stock issuable in connection with
the Distribution are intended initially to represent 100% of the equity value of
the Company attributable to the Liberty Media Group and, accordingly, the TCI
Group will not have an Inter-Group Interest in the Liberty Media Group. An
Inter-Group Interest would be created only if a subsequent transfer of cash or
other property from the TCI Group to the Liberty Media Group is specifically
designated by the Board of Directors as being made to create an Inter-Group
Interest (in contrast to transfers made for other consideration such as
transfers as loans or in purchase and sale transactions) or if outstanding
shares of Liberty Media Group Common Stock cease to be outstanding following
their purchase with funds attributed to the TCI Group. The terms of the Liberty
Media Group Stock Proposal do not permit the Liberty Media Group to have an
Inter-Group Interest in the TCI Group.
The amount of any Inter-Group Interest would be expressed in terms of the
"Number of Shares Issuable with respect to the Inter-Group Interest", which is
intended to provide a measure of the Inter-Group Interest on a basis comparable
to an investment in shares of Liberty Media Group Common Stock. In general, if
an Inter-Group Interest is created by a transfer of funds or other assets from
the TCI Group to the Liberty Media Group, the Number of Shares Issuable with
Respect to the Inter-Group Interest would be increased by an amount determined
by dividing the amount of funds or value of the assets transferred by the Market
Value of a share of Series A Liberty Media Group Common Stock as of the date of
such transfer. In the event a subsequent transfer of funds or other assets from
the TCI Group to the Liberty Media Group is determined by the Board of Directors
to be made in respect of an increase in the Inter-Group Interest, the Number of
Shares Issuable with Respect to the Inter-Group Interest would be increased by
an amount determined by dividing the amount of the additional funds or value of
the additional assets so transferred by the Market Value of a share of Series A
Liberty Media Group Common Stock as of the date of such transfer. Any decrease
in the Number of Shares Issuable with Respect to the Inter-Group Interest
resulting from a transfer of funds or other assets from the Liberty Media Group
to the TCI Group determined by the Board of Directors to be made in respect of
such a decrease would be similarly calculated. To the extent outstanding shares
of Liberty Media Group Common Stock cease to be outstanding following their
repurchase with funds attributed to the TCI Group, the Number of Shares Issuable
with Respect to the Inter-Group Interest would increase on a share for share
basis. Shares of Liberty Media Group Common Stock purchased with funds
attributed to the TCI Group which remain outstanding (as a result of being held
by a subsidiary included in the TCI Group) would not create an Inter-Group
Interest or increase any then-existing Inter-Group Interest but would constitute
an outstanding interest in
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the equity value of the Company attributable to the Liberty Media Group.
Issuances of shares of Series A Liberty Media Group Common Stock designated by
the Board of Directors as being made in reduction of any Inter-Group Interest
then existing would reduce the Number of Shares Issuable with Respect to the
Inter-Group Interest on a share for share basis. Shares of Series B Liberty
Media Group Common Stock may not be designated as being issued for the account
of the TCI Group in respect of a reduction in any Inter-Group Interest.
The "Outstanding Interest Fraction" means the percentage interest in
the equity value of the Company attributable to the Liberty Media Group that is
represented at any time by the outstanding shares of Liberty Media Group Common
Stock, and the "Inter-Group Interest Fraction" means any remaining percentage
interest in the equity value of the Company attributable to the Liberty Media
Group that is attributed to the TCI Group by virtue of an Inter-Group Interest.
The sum of the Outstanding Interest Fraction and the Inter-Group Interest
Fraction would always equal 100%. See "The Liberty Media Group Stock Proposal--
No Initial Inter-Group Interest". The Adjusted Outstanding Interest Fraction is
a fraction the numerator of which is the number of outstanding shares of Liberty
Media Group Common Stock and the denominator of which is the sum of (a) such
number of outstanding shares, (b) the Number of Shares Issuable with Respect to
the Inter-Group Interest, (c) the number of shares of Liberty Media Group Common
Stock issuable upon conversion, exercise or exchange of Pre-Distribution
Convertible Securities and (d) the number of Committed Acquisition Shares that
remain issuable in certain acquisition transactions not yet consumated.
Dividend Policy
The Company has never paid cash dividends on its Class A Common Stock
or Class B Common Stock. If the Liberty Media Group Stock Proposal is approved,
the Board of Directors does not currently intend to pay cash dividends on the
TCI Group Common Stock or the Liberty Media Group Common Stock. The decision,
if any, to pay dividends in the future will depend on the financial condition,
results of operations and business requirements of the Company as a whole. Any
future dividends on the TCI Group Common Stock and the Liberty Media Group
Common Stock would be paid on such basis as the Board of Directors determines,
subject to the provisions referred to under "The Liberty Media Group Stock
Proposal--Description of TCI Group Common Stock and Liberty Media Group Common
Stock--Dividends". In making any determination to pay dividends, the Board of
Directors expects to follow a policy under which it will consider, among other
factors, the relative financial condition, results of operations and business
requirements of the respective Groups. See "The Liberty Media Group Stock
Proposal--Dividend Policy".
Inclusion in Nasdaq National Market
The Series A Liberty Media Group Common Stock and the Series B Liberty
Media Group Common Stock have been approved for inclusion in the Nasdaq National
Market under the symbols "LBTYA" and "LBTYB", respectively. Shares of Series A
TCI Group Common Stock, Series B TCI Group Common Stock and Class B Preferred
Stock will continue to be included in the Nasdaq National Market under the
symbols "TCOMA", "TCOMB" and "TCOMP", respectively.
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No Dissenters' Rights
Under the DGCL, stockholders of the Company do not have dissenters'
rights in connection with the Liberty Media Group Stock Proposal.
Certain Federal Income Tax Considerations
The Company has been advised by counsel that no gain or loss would be
recognized by the Company on any distribution or the issuance and sale of the
Liberty Media Group Common Stock, and that a distribution of Liberty Media Group
Common Stock to stockholders of the Company on a pro rata basis should
constitute a tax-free stock dividend. However, there are no current court
decisions bearing directly on transactions similar to the Liberty Media Group
Stock Proposal, and the Internal Revenue Service has had under study from time
to time the federal income tax consequences of transactions similar to the
Liberty Media Group Stock Proposal. See "The Liberty Media Group Stock
Proposal--Certain Federal Income Tax Considerations".
The Increased Authorization Proposal
The stockholders of the Company are being asked to consider and approve the
Increased Authorization Proposal, including adoption of the proposed amendments
to the Company's Charter set forth in Appendix III-B hereto. The amendments
would increase the number of authorized shares of Class A Common Stock (which
would be redesignated Series A TCI Group Common Stock under the Liberty Media
Group Stock Proposal) from 1,100,000,000 to 1,750,000,000 and the number of
authorized shares of Series Preferred Stock from 10,000,000 to 50,000,000 and to
clarify that the rights, powers and preferences of any series of the Series
Preferred Stock may differ in any respect from those of any other series thereof
(except as limited by the rights of any outstanding class or series of preferred
stock). If both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the Company's authorized
shares of Common Stock would consist of 1,750,000,000 authorized shares of
Series A TCI Group Common Stock, 150,000,000 authorized shares of Series B TCI
Group Common Stock, 750,000,000 authorized shares of Series A Liberty Media
Group Common Stock and 75,000,000 authorized shares of Series B Liberty Media
Group Common Stock. Approval of the Increased Authorization Proposal will (i)
provide additional shares of capital stock to be available for issuance for
general corporate purposes, including, but not limited to, acquisitions, stock
dividends and splits and financings, (ii) provide a sufficient number of shares
of Class A Common Stock for issuance upon conversion of certain convertible
preferred stock of the Company as described under "The Liberty Media Group Stock
Proposal--Issuance of Series F Preferred Stock" and "Description of Existing
Common Stock and Other Capital Stock--Series E Redeemable Convertible Preferred
Stock" and (iii) if the Liberty Media Group Stock Proposal is approved, provide
for the potential conversion of the Liberty Media Group Common Stock. If the
Liberty Media Group Stock Proposal is approved by stockholders, the Company will
exchange certain securities of the Company held by subsidiaries of the Company
for shares of a new series of preferred stock of the Company, and if the
Increased Authorization Proposal is approved by stockholders, the right of the
holder to convert shares of such series into shares of Series A TCI Group Common
Stock will become effective. See "The Liberty Media Group Stock Proposal -
Issuance of Series F Preferred Stock".
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The Board of Directors would be authorized to reserve and, without further
approval of the stockholders, issue the additional shares of Class A Common
Stock (to be redesignated Series A TCI Group Common Stock under the Liberty
Media Group Stock Proposal) that would be authorized under the Increased
Authorization Proposal or the additional shares of Series Preferred Stock that
would be so authorized at such time or times, to such persons, and for such
consideration as it may determine, except as may otherwise be required by
applicable law, regulation or Nasdaq National Market requirement. The Company's
Charter authorizes the Board of Directors to issue shares of the Series
Preferred Stock in one or more series and to fix and state the designations,
powers, preferences, qualifications, limitations, restrictions and relative
rights of the shares of each such series. The amendments to the Charter that
would be effected by the Increased Authorization Proposal also contain language
that would clarify that the rights, powers and preferences that the Board of
Directors may establish for any series of Series Preferred Stock may differ from
those of any other series thereof (except as limited by the rights of any
outstanding class or series of preferred stock).
Other than as described above, the Company has no present understanding or
agreement with respect to the issuance for any purpose of any of the additional
shares that will be authorized for issuance if the Increased Authorization
Proposal is approved. Although the Board of Directors of the Company has no
present intention of doing so, the additional shares of Class A Common Stock and
Series Preferred Stock that would be authorized for issuance if the Increased
Authorization Proposal is approved could be issued in one or more transactions
(within limitations imposed by applicable law) that would make a takeover of the
Company more difficult and, therefore, less likely, even though such a takeover
might be economically beneficial to the Company and its stockholders. The Board
of Directors and management of the Company have no knowledge of any person or
entity that intends to seek a controlling interest in, or to make a takeover
proposal with respect to, the Company. See "The Increased Authorization
Proposal".
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE INCREASED AUTHORIZATION
PROPOSAL AND BELIEVES THAT ITS ADOPTION IS IN THE BEST INTERESTS OF THE COMPANY
AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE IN FAVOR OF THE INCREASED AUTHORIZATION PROPOSAL.
The Director Stock Option Plan Proposal
The stockholders of the Company are being asked to consider and approve the
Director Stock Option Plan Proposal. The Board of Directors believes that the
Company's ability to attract and retain capable persons as independent directors
will be enhanced if it can provide its nonemployee directors with stock options
and that the Company will benefit from encouraging a sense of proprietorship of
such persons and stimulating the active interest of such persons in the
development and financial success of the Company. See "The Director Stock Option
Plan Proposal".
-29-
<PAGE>
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE DIRECTOR STOCK OPTION
PLAN PROPOSAL AND BELIEVES ITS ADOPTION IS IN THE BEST INTERESTS OF THE
STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE IN FAVOR OF THE DIRECTOR STOCK OPTION PLAN PROPOSAL.
-30-
<PAGE>
Price Range Of Class A Common Stock and Class B Common Stock
The Class A Common Stock and the Class B Common Stock are traded on the
Nasdaq National Market under the symbols "TCOMA" and "TCOMB", respectively. The
following table sets forth the high and low sales prices of the Class A Common
Stock and the Class B Common Stock as reported by the Nasdaq National Market for
the periods indicated. For periods prior to August 5, 1994, the prices shown are
of the Class A and Class B common stock of Old TCI. The prices do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Class A Class B
Common Common
Stock Stock
----- -----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Year ended December 31, 1993
First Quarter................ $25 1/2 $20 3/4 $25 1/2 $21
Second Quarter............... 24 17 1/2 24 18 3/8
Third Quarter................ 26 3/4 21 5/8 27 22
Fourth Quarter............... 33 1/4 24 7/8 40 25 1/2
Year ended December 31, 1994
First Quarter................ 30 1/4 20 3/8 32 3/4 22
Second Quarter............... 23 3/8 18 1/4 24 3/4 21 1/4
Third Quarter*............... 24 1/8 19 3/4 25 3/4 21 1/4
Fourth Quarter............... 25 20 1/4 25 1/2 21 1/2
Year ending December 31, 1995
First Quarter................ 23 3/4 19 7/8 25 20 3/4
Second Quarter (through
June 14, 1995)............. 22 17 1/4 21 3/4 18 1/4
</TABLE>
- --------------------
* The Old TCI/LMC Combination was consummated on August 4, 1994.
On February 8, 1995, the last trading day the Class A Common Stock, Class B
Common Stock and Class B Preferred Stock traded before the public announcement
of the Liberty Media Group Stock Proposal, the last reported sale prices for
shares of Class A Common Stock, Class B Common Stock and Class B Preferred Stock
were $22.00, $21.75 and $63.00, respectively. On ______, the last trading day
before the date of this Proxy Statement/Prospectus, the last reported sale
prices for shares of Class A Common Stock, Class B Common Stock and Class B
Preferred Stock were $_______, $_______ and $_______, respectively.
As of the Record Date, there were approximately [8,558], [662] and [169]
holders of the Class A Common Stock, the Class B Common Stock and the Class B
Preferred Stock, respectively. The number of holders includes record holders and
individual participants in security position listings (so that, for example,
stockholders whose shares are held by brokerage houses are not counted as
holders but each brokerage house typically is counted as a holder).
-31-
<PAGE>
Selected Historical and Pro Forma Financial Data
Tele-Communications, Inc.
The following table sets forth selected historical financial data for the
Company for each of the five fiscal years in the period ended December 31, 1994
and the three-month periods ended March 31, 1995 and 1994. The table also sets
forth selected unaudited pro forma balance sheet data for the Company as of
March 31, 1995, giving pro forma effect to the Company's acquisition of
controlling interests in Cablevision S.A., Televisora Belgrano S.A., Construred
S.A. and Univent's S.A. (collectively, "Cablevision") (the "Cablevision
Acquisition") as if such transaction had occurred as of March 31, 1995, and
selected unaudited pro forma statement of operations data for the Company for
the year ended December 31, 1994, giving pro forma effect to the Old TCI/LMC
Combination, the Cablevision Acquisition and the acquisition of TeleCable
Corporation ("TeleCable") by means of a merger (the "TeleCable Merger") and for
the three months ended March 31, 1995, giving pro forma effect to the TeleCable
Merger and the Cablevision Acquisition as if the same had occurred prior to
January 1, 1994. The pro forma financial data is not necessarily indicative of
the financial position or results of operations that would have been obtained
had the Old TCI/LMC Combination, the TeleCable Merger and the Cablevision
Acquisition been effective at or prior to such assumed dates, or of the future
results of operations of the Company. Additionally, such pro forma statement of
operations data reflects earnings attributable to the TCI Group Common Stock and
the Liberty Media Group Common Stock common shareholders and earnings per share
for the TCI Group Common Stock and the Liberty Media Group Common Stock after
giving effect to the Liberty Media Group Stock Proposal. The following
information is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements and notes thereto of the Company and
the unaudited condensed pro forma financial statements and notes thereto of the
Company included in Appendix IV.
-32-
<PAGE>
<TABLE>
<CAPTION>
Three months
ended March 31, Year Ended December 31,
-------------------------- ----------------------------------------------------------
Pro Pro
Forma Forma
1995 1995 1994 1994 1994 1993 1992 1991 1990
------ ----- ------ -------- -------- -------- -------- -------- --------
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue............................ $ 1,587 $ 1,524 $ 1,060 $ 6,131 $ 4,936 $ 4,153 $ 3,574 $ 3,214 $ 2,940
Operating, selling, general and
administrative expenses.......... (1,097) (1060) (610) (4,081) (3,138) (2,295) (1,937) (1,784) (1,678)
Depreciation and amortization...... (303) (287) (235) (1,173) (1,018) (911) (764) (756) (716)
Operating income................... (187) 180 234 877 788 916 864 674 546
Earnings (loss) from:
Continuing operations............ (51) (45) 32 111 55 (7) 7 (78) (191)
Discontinued operations.......... - - -- -- -- -- (15) (19) (63)
------ ----- ------ ------- ------- ------- ------- ------- -------
(51) (45) 32 111 55 (7) (8) (97) (254)
Dividend requirement on
redeemable preferred stocks...... (9) (8) -- (31) (8) (2) (15) -- --
------ ----- ------ ------- ------- ------- ------- ------- -------
Net earnings (loss) attributable to
common stockholders.............. $ (60) $ (53) $ 32 $ 80 $ 47 $ (9) $ (23) $ (97) $ (254)
====== ====== ====== ======= ======= ======= ======= ======= =======
Net loss attributable to TCI Group
Series A and Series B common
shareholders..................... $ (48) $ (52)
Net earnings (loss) attributable to
Liberty Media Group Series A and
Series B common shareholders..... $ (12) $ 132
Primary earnings (loss) attributable
to common stockholders per
common and common equivalent
share:
Continuing operations.......... $ (.09) $ (.08) $ .07 $ .11 $ .09 $ (.02) $ (.01) $ (.22) $ (.54)
Discontinued operations........ -- -- -- -- -- -- (.04) (.05) (.18)
------ ------ ------ ------- ------- ------- ------- ------- -------
$ (.09) $ (.08) $ .07 $ .11 $ .09 $ (.02) $ (.05) $ (.27) $ (.72)
====== ====== ====== ======= ======= ======= ======= ======= =======
TCI Group Series A and Series B
Common Stock................... $ (.08) $ (.05)
------ =======
Liberty Media Group Series A
and Series B Common
Stock.......................... $ (.08) $ .64
====== =======
Primary weighted average common
shares outstanding...............
TCI Class A and Class B
Common Stock................... 635 492 635 600 541 433 424 360 355
TCI Group Series A and Series B
Common Stock................... 635 600
Liberty Media Group Series A
and Series B Common
Stock.......................... 159 163
Other Data:
Operating income before
depreciation, amortization and
non-cash operating expenses/1/... $ 487 $ 464 $ 450 $ 2,036 $ 1,798 $ 1,858 $ 1,637 $ 1,430 $ 1,262
Consolidated domestic basic cable
and satellite subscribers........ 12.7 12.7 11.3 12.5 11.7 10.7 10.2 8.9 8.5
</TABLE>
- --------------------
/1/ Operating income before depreciation, amortization and non-cash operating
expenses should not be considered as an alternative to net income or to cash
flows provided by operating activities or to any other measure of
performance or liquidity as an indicator of an entity's operating
performance.
-33-
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
---------------- -------------------------------------------
Pro
Forma
1995 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net...................... $ 6,756 $ 6,704 $ 5,876 $ 4,935 $ 4,562 $ 4,081 $ 4,156
Franchise costs, net............................. 13,558 11,371 9,444 9,197 9,300 8,104 7,348
Net assets of discontinued operations............ -- -- -- -- -- 242 54
Total assets..................................... 22,973 22,454 19,528 16,520 16,310 15,166 14,106
Total debt....................................... 11,707 11,371 11,162 9,900 10,285 9,455 8,922
Stockholders' equity............................. 4,663 4,663 2,971 2,112 1,726 1,570 748
Shares outstanding (net of treasury shares):
Class A Common Stock........................... 573 573 491 403 382 370 310
Class B Common Stock........................... 85 85 85 47 48 49 48
</TABLE>
Liberty Media Group
The following table supplementally sets forth selected historical combined
financial data for the Liberty Media Group for each of the three fiscal years in
the period ended December 31, 1994 and for the three-month periods ended
March 31, 1995 and 1994. The table sets forth pro forma statement of operations
data reflecting earnings attributable to the Liberty Media Group Common Stock
common shareholders and earnings per share for the Liberty Media Group Common
Stock after giving effect to the Liberty Media Group Stock Proposal. The
following information is qualified in its entirety by, and should be read in
conjunction with, the combined financial statements and notes thereto of the
Liberty Media Group, and with the consolidated financial statements and notes
thereto of Tele-Communications, Inc. and its affiliate, Liberty Media
Corporation, included in Appendix IV.
-34-
<PAGE>
<TABLE>
<CAPTION>
Three Months
ended March 31, Year Ended December 31,
----------------------- ----------------------------------------
Pro Pro
Forma Forma
1995 1995 1994 1994 1994 1993 1992
------ ------ ------- ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(In millions, except per share amounts)
Summary of Operations Data:
Revenue, including amounts from the
TCI Group......................................... $ 358 $ 358 $ 351 $ 1,483 $ 1,483 $1,207 $ 209
Cost of goods sold, operating, selling,
general and administrative expenses,
including amounts to the TCI Group................ (395) (395) (326) (1,411) (1,411) (1,131) (189)
Depreciation and amortization....................... (16) (16) (10) (49) (49) (40) (14)
Operating earnings (loss)........................... (26) (26) 25 31 31 (4) (11)
Interest expense, including amounts to the
TCI Group......................................... (6) (6) (3) (15) (15) (14) (14)
Dividend and interest income, primarily
from affiliates................................... 2 2 6 20 20 23 12
Share of earnings of affiliates,
net............................................... (2) (2) 7 28 20 24 24
Net earnings (loss)................................. (12) (12) 15 132 127 27 15
==== ===== ====== ======= ======= ====== =====
Earnings (loss) attributable to the Liberty Media
Group Series A and Series B common shareholders... (12) 132
Primary earnings attributable to Liberty Media Group
Series A and Series B Common Stock per
common and common equivalent share................ (.08) .81
Primary weighted average shares of Liberty Media
Group Series A and Series B
Common Stock outstanding.......................... 159 163
Other Data:
Operating income (loss) before
depreciation, amortization and
non-cash operating expenses/2/.................... (6) (6) (27) 86 86 82 8
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
March 31,
1995 1994 1993 1992
------ ------- ------- -------
(In millions)
<S> <C> <C> <C> <C>
Summary Balance Sheet Data:
Investment in affiliates, accounted for under the
equity method....................................... $ 272 $ 196 $ 229 $ 214
Investment in Turner Broadcasting System, Inc......... 694 654 487 487
Other investments, at cost............................ 174 439 235 76
Total assets.......................................... 2,296 2,440 1,730 999
Total debt............................................ 364 330 400 289
Combined equity....................................... 1,291 1,373 890 628
</TABLE>
TCI Group
The following table supplementally sets forth selected historical combined
financial data for the TCI Group for each of the three fiscal years in the
period ended December 31, 1994 and for the three-month periods ended March 31,
1995 and 1994. The table also sets forth selected unaudited pro forma combined
balance sheet data for the TCI Group as of March 31, 1995, giving effect to the
Cablevision Acquisition as if such transaction had occurred as of March 31,
1995, and selected unaudited pro forma combined statement of operations data for
the TCI Group for the year ended December 31, 1994 and
- --------------------
/2/ Operating income before depreciation, amortization and non-cash operating
expenses should not be considered as an alternative to net income or to cash
flows provided by operating activities or to any other measure of
performance or liquidity as an indicator of an entity's operating
performance.
-35-
<PAGE>
the three months ended March 31, 1995, giving pro forma effect to the
Cablevision Acquisition and the TeleCable Merger as if such transactions had
occurred prior to January 1, 1994. The pro forma combined financial data is not
necessarily indicative of the financial position or results of operations that
would have been obtained had the Cablevision Acquisition and the TeleCable
Merger been effective at or prior to such assumed dates or of the future results
of operations of the TCI Group. Additionally, such pro forma statement of
operations data reflects earnings attributable to the TCI Group Common Stock
common shareholders and earnings per share for the TCI Group Common Stock after
giving effect to the Liberty Media Group Stock Proposal. The following
information is qualified in its entirety by, and should be read in conjunction
with, the combined financial statements and notes thereto of the TCI Group, and
with the consolidated financial statements and notes thereto of Tele-
Communications, Inc. and its affiliate, Liberty Media Corporation, included in
Appendix IV.
<TABLE>
<CAPTION>
Three Months
ended March 31, Year Ended December 31,
--------------------------- ------------------------------------
Pro Pro
Forma Forma
1995 1995 1994 1994 1994 1993 1992
------- ------- -------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(In millions, except per share amounts)
Summary of Operations Data:
Revenue..................................... $1,248 $1,185 $ 1,040 $ 4,710 $ 4,269 $ 4,090 $3,519
Operating, selling,
general and administrative expenses....... (736) (697) (574) (2,695) (2,439) (2,179) (1,834)
Depreciation and amortization............... (287) (271) (238) (1,124) (1,001) (920) (766)
Operating earnings (loss)................... 212 205 236 845 788 919 872
Interest expense............................ (248) (235) (178) (834) (784) (733) (710)
Dividend and interest income, primarily
from affiliates........................... 6 6 4 24 23 20 87
Share of losses of affiliates,
net....................................... (27) (27) (7) (117) (117) (66) (111)
Earnings (loss) before earnings
(loss) of Liberty Media Group............. (39) (33) 17 (20) (21) (32) (16)
Earnings (loss) of Liberty Media Group...... (12) (12) 15 127 127 27 14
Net earnings (loss)......................... (51) (45) 32 107 106 (5) (2)
Earnings (loss) attributable to the TCI
Group Series A and Series B common
shareholders.............................. (48) (51)
Loss attributable to TCI Group Series A
and Series B Common Stock per common and
common equivalent share................... (.06) (.06)
Primary weighted average shares of TCI
Group Series A and Series B
Common Stock outstanding.................. 635 600
Other Data:
Operating income (loss) before
depreciation, amortization and
non-cash operating expenses/3/............ 512 1,251 474 2,015 1,789 1,839 1,638
<CAPTION>
March 31, December 31,
---------------------- ------------------------------
Pro
Forma
1995 1995 1994 1993 1992
------ ------- ------- ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net................. $ 6,560 $ 6,508 $ 5,682 $ 5,007 $ 4,578
Franchise costs, net........................ 12,705 11,371 9,444 9,334 9,351
Total assets................................ 20,740 20,221 17,150 15,648 15,612
Total debt.................................. 11,342 11,006 10,831 9,760 10,159
Combined equity............................. 3,372 3,372 1,598 1,400 1,152
</TABLE>
---------------
/3/ Operating income before depreciation, amortization and non-cash operating
expenses should not be considered as an alternative to net income or to cash
flows provided by operating activities or to any other measure of
performance or liquidity as an indicator of an entity's operating
performance.
-36-
<PAGE>
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
Stockholders should carefully consider the following factors, in addition
to the other information contained elsewhere in this Proxy Statement/Prospectus,
the Appendices hereto and the documents incorporated by reference or otherwise
referred to herein, in connection with the Liberty Media Group Stock Proposal.
Stockholders of One Company; Financial Effects on One Business Could Affect
Other Businesses
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense between the Groups for the purpose of preparing the
combined financial statements of the Liberty Media Group and the combined
financial statements of the TCI Group, the change in the capital structure of
the Company contemplated by the Liberty Media Group Stock Proposal will not
affect legal title to such assets or responsibility for such liabilities of the
Company or any of its subsidiaries. Holders of TCI Group Common Stock and of
Liberty Media Group Common Stock will be common stockholders of the Company and
will be subject to risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Financial effects arising from either
Group that affect the Company's consolidated results of operations or financial
condition could affect the combined results of operations or financial condition
of the other Group and the market price of both the TCI Group Common Stock and
the Liberty Media Group Common Stock. In addition, any net losses of either
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock or the Liberty Media Group Common Stock, and dividends on, or certain
repurchases of, preferred stock, will reduce funds of the Company legally
available for the payment of dividends on both the TCI Group Common Stock and
the Liberty Media Group Common Stock. The combined financial statements of the
Liberty Media Group and the combined financial statements of the TCI Group
should be read in conjunction with the consolidated financial statements of the
Company and, for the periods prior to August 4, 1994, the consolidated financial
statements of LMC.
If the Liberty Media Group Stock Proposal is approved, the Company will
provide financial statements, management's discussion and analysis and other
relevant information for the Company, the Liberty Media Group and the TCI Group
to all holders of TCI Group Common Stock and Liberty Media Group Common Stock,
so long as the Liberty Media Group Common Stock is outstanding. The combined
financial statements of each Group will principally reflect the combined
financial position, results of operations and cash flows of the businesses
included therein. However, each Group's financial information could also
include allocated portions of the individual assets and liabilities that are not
separately identified with the operations of a specific Group.
Limited Separate Stockholder Rights; Effects on Voting Power
Under the Liberty Media Group Stock Proposal, holders of TCI Group Common
Stock and Liberty Media Group Common Stock would not be provided any rights
specifically related to their corresponding Groups or have any right to vote on
matters as a separate class, other than
-37-
<PAGE>
(i) as set forth in the provisions relating to dividend and liquidation rights
and requirements for mandatory dividend, redemption or conversion of Liberty
Media Group Common Stock upon the disposition of the Liberty Media Group as
described under "The Liberty Media Group Stock Proposal--Description of TCI
Group Common Stock and Liberty Media Group Common Stock--Conversion and
Redemption" and (ii) separate voting rights in limited circumstances as required
by the DGCL. Separate meetings for the holders of TCI Group Common Stock or
Liberty Media Group Common Stock would not be held.
Under the Liberty Media Group Stock Proposal, holders of TCI Group Common
Stock, Liberty Media Group Common Stock and any preferred stock having general
voting rights would vote as one class on all matters coming before any meeting
of stockholders and would not have any separate class voting rights except in
limited circumstances as required by the DGCL. Under the DGCL, the holders of
the outstanding shares of a class are entitled to vote as a class upon a
proposed amendment to a corporation's certificate of incorporation, whether or
not entitled to vote on such amendment by the certificate of incorporation, if
the amendment would alter or change the powers, preferences or special rights of
such class so as to affect them adversely. For this purpose, if a proposed
amendment would alter or change the powers, preferences or special rights of one
or more series of any class so as to effect them adversely, but would not so
affect the entire class, then only the shares of the series so affected by the
amendment would be entitled to vote as a separate class on the amendment.
Accordingly, following the redesignation, a proposed amendment the adverse
effect of which on the powers, preferences or rights of the Series A TCI Group
Common Stock does not differ from its adverse effect on the powers, preferences
or rights of the Series B TCI Group Common Stock would not entitle either such
series to vote as a class separately from the other series, notwithstanding that
such amendment would have required separate votes of the Class A Common Stock
and the Class B Common Stock if submitted for approval prior to the
redesignation.
Certain matters on which holders of TCI Group Common Stock and of Liberty
Media Group Common Stock would vote together as a single class could involve a
divergence or the appearance of a divergence of interests between the holders of
TCI Group Common Stock and the holders of Liberty Media Group Common Stock. For
example, the Amended Charter does not require that a merger or consolidation of
the Company requiring the approval of the Company's stockholders be approved by
a separate vote of holders of any series of Common Stock, and Delaware law
requires such approval only in certain circumstances. As a result, if holders
of any one or more series of the Company's Common Stock that possess the
requisite voting power vote to approve the merger or consolidation, the merger
or consolidation could be consummated even if the holders of a majority of some
other series of Common Stock vote against the merger or consolidation.
See "--Potential Divergence of Interests--Allocation of Proceeds of Mergers or
Consolidations". Immediately following the Distribution, the combined voting
power of the Series A TCI Group Common Stock and Series B TCI Group Common Stock
would represent a majority of the voting power of all classes and series
entitled to vote in the election of directors.
-38-
<PAGE>
If the Liberty Media Group Stock Proposal is approved by stockholders, the
Series A Liberty Media Group Common Stock will have one vote per share and the
Series B Liberty Media Group Common Stock will have ten votes per share. The
Class A Common Stock and Class B Common Stock (redesignated as Series A TCI
Group Common Stock and Series B TCI Group Common Stock, respectively) will
continue to have one vote per share and ten votes per share, respectively. See
"The Liberty Media Group Stock Proposal--Description of TCI Group Common Stock
and Liberty Media Group Common Stock--Voting Rights".
Potential Divergence of Interests; No Specific Procedures for Resolution
The existence of the TCI Group Common Stock and the Liberty Media Group
Common Stock may give rise to occasions when the interests of the holders of TCI
Group Common Stock and the holders of Liberty Media Group Common Stock may
diverge or appear to diverge. As further discussed below, examples include,
among others, determinations by the Board of Directors to (i) convert each
outstanding share of Liberty Media Group Common Stock into shares of TCI Group
Common Stock, (ii) approve the disposition of all or substantially all of the
assets of the Liberty Media Group, (iii) allocate consideration to be received
by holders of Common Stock in connection with a merger or consolidation
involving the Company among holders of different series of Common Stock,
(iv) allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group instead of the other
Group, (v) if and to the extent there is an Inter-Group Interest, allocate the
proceeds of issuances of Liberty Media Group Common Stock either to the TCI
Group in respect of a reduction in the Inter-Group Interest or to the equity of
the Liberty Media Group, (vi) pay or omit dividends on TCI Group Common Stock or
Liberty Media Group Common Stock or (vii) approve transactions involving the
transfer of funds or assets from one Group to the other or make other
operational or financial decisions with respect to one Group that could be
considered to be detrimental to the other Group. Other than as described under
"The Liberty Media Group Stock Proposal--Management and Allocation Policies", no
specific procedures have been adopted for consideration of matters involving a
divergence of interests between the holders of TCI Group Common Stock and
Liberty Media Group Common Stock. Rather than develop additional specific
procedures in advance, the Board of Directors intends to exercise its judgment
from time to time, depending on the circumstances, as to how best to obtain
information regarding the divergence (or potential divergence) of interests,
under what circumstances to seek the assistance of outside advisers, whether a
committee of the Board of Directors should be appointed to address the matter,
and how to assess which available alternative is in the best interests of the
Company and all of its stockholders. The Board of Directors believes the
advantages of retaining flexibility in determining how best to fulfill its
responsibilities in such circumstances as they may arise outweigh any perceived
advantages from adopting additional specific procedures in advance.
-39-
<PAGE>
Optional Conversion of Liberty Media Group Common Stock into TCI Group Common
Stock
The Board of Directors may determine to convert each outstanding share of
Series A Liberty Media Group Common Stock into shares of Series A TCI Group
Common Stock and each outstanding share of Series B Liberty Media Group Common
Stock into shares of Series B TCI Group Common Stock, in each case determined
based upon the ratio of the value (as determined on the basis of appraisals
performed by investment banking firms) of one share of Liberty Media Group
Common Stock to the average Market Value over the 20-trading day period prior to
the date such appraisal process is initiated of one share of Series A TCI Group
Common Stock. Such a conversion could be effected at any time, including at a
time when the value of one share of Liberty Media Group Common Stock determined
by appraisal differs significantly from the market value of the Liberty Media
Group Common Stock reflected in the trading markets, or at a time when the
Market Value of the TCI Group Common Stock used in the determination of the
conversion ratio reflects what might be considered an overvaluation or
undervaluation. Basing the conversion ratio on an appraised value determination
for the Liberty Media Group Common Stock and a trading market valuation for the
TCI Group Common Stock could result in the conversion ratio being significantly
different from that which would have resulted if the same measure were used for
the valuation of both the TCI Group Common Stock and the Liberty Media Group
Common Stock. For example, a conversion could be considered dilutive of the
interests of the holders of the TCI Group Common Stock if the Market Value of
the TCI Group Common Stock is less than the valuation of the TCI Group Common
Stock that would have resulted if a similar appraisal procedure to that used in
the determination of the value of the Liberty Media Group Common Stock were
used. Such a conversion would also have the effect of precluding holders of
Liberty Media Group Common Stock from retaining their investment in a security
intended to reflect separately the business of the Liberty Media Group.
Disposition of Group Assets
As long as the assets of a Group continue to represent less than
substantially all of the properties and assets of the Company, the Board of
Directors may approve sales and other dispositions of any amount of the
properties and assets of such Group without stockholder approval, because under
the DGCL and the Amended Charter stockholder approval is required only for a
sale or other disposition of all or substantially all of the properties and
assets of the entire Company. The Amended Charter, however, contains provisions
which, in the event of a Disposition of all or substantially all of the
properties and assets of the Liberty Media Group in one transaction or a series
of related transactions, other than in a transaction in which the Company
receives primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business, and other than in connection
with the disposition of all or substantially all of the assets of the entire
Company, require the Company, at its option, either to (i) distribute by
dividend or redemption to the holders of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock an amount in cash and/or
securities or other property equal to their proportionate interest in the Net
Proceeds of such Disposition or (ii) convert outstanding shares of Series A
Liberty Media Group Common Stock into shares of Series A TCI Group Common Stock
and outstanding shares of Series B
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Liberty Media Group Common Stock into shares of Series B TCI Group Common Stock,
such conversion in each case to be at a 10% premium. The provisions of the
Amended Charter do not require the Board of Directors to select the option which
would result in the distribution with the highest value to the holders of the
Liberty Media Group Common Stock or with the smallest effect on the TCI Group
Common Stock. The Amended Charter does not require the Company to take such
actions upon sales or other dispositions of less than substantially all of the
properties and assets of the Liberty Media Group or upon two or more unrelated
sales or other dispositions which together constitute the sale of substantially
all of the assets of the Liberty Media Group. See "The Liberty Media Group Stock
Proposal--Description of TCI Group Common Stock and Liberty Media Group Common
Stock--Conversion and Redemption". The appropriate disposition of proceeds in
the latter case would be subject to determination by the Board of Directors in
accordance with the Amended Charter, approved allocation policies and in the
exercise of its fiduciary duties. See "--Fiduciary Duties of the Board of
Directors are to All Stockholders Regardless of Class or Series".
Allocation of Proceeds of Mergers or Consolidations
The Amended Charter does not contain any provisions governing how
consideration to be received by the Company's stockholders in connection with a
merger or consolidation involving the Company (in which the Common Stock is to
be converted into other securities, cash or other property) is to be allocated
among holders of the TCI Group Common Stock and the Liberty Media Group Common
Stock. In any such merger or consolidation, the allocation of consideration
would be determined by the Board of Directors. See "--Limited Separate
Stockholder Rights; Effects on Voting Power".
Allocation of Resources and Financial Support; Pursuit of Business
Opportunities or Operational Strategies
The Board of Directors could from time to time allocate resources and
financial support to or pursue business opportunities or operational strategies
through one Group instead of the other Group. The decision to allocate
resources and financial support to one Group may adversely affect the ability of
the other Group to obtain funds sufficient to implement its business strategies.
Because both the Liberty Media Group and the TCI Group (through International)
have significant interests in entities which provide programming services to
markets outside the United States, and also have business strategies which
anticipate expansion into international markets, it is likely that the Board of
Directors of the Company will be presented with opportunities which could be
pursued through either the TCI Group (through International) or the Liberty
Media Group, or jointly through both Groups. See "The Liberty Media Group Stock
Proposal--Management and Allocation Policies".
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Allocation of Proceeds Upon Issuance of Liberty Media Group Common Stock
If and to the extent there is an Inter-Group Interest at the time of any
sale of shares of Liberty Media Group Common Stock, the Board of Directors would
determine the allocation of the proceeds of such sale between the TCI Group and
the Liberty Media Group. In such case, the Board of Directors could allocate
100% of the net proceeds of the sale of Liberty Media Group Common Stock to the
TCI Group or to the Liberty Media Group, and such net proceeds would be
reflected entirely on the combined financial statements of the Group to which
such proceeds were allocated. Any such allocation of net proceeds to the TCI
Group would reduce the Inter-Group Interest.
No Assurance of Payment of Dividends
The Company has never paid cash dividends on its Class A Common Stock or
Class B Common Stock. If the Liberty Media Group Stock Proposal is approved, the
Board of Directors does not currently intend to pay cash dividends on the TCI
Group Common Stock or the Liberty Media Group Common Stock. Any dividends on the
TCI Group Common Stock and the Liberty Media Group Common Stock which may be
declared by the Board of Directors will be payable out of the lesser of (i) the
funds of the Company legally available for such purpose, which are determined on
the basis of the entire Company, and (ii) the TCI Group Available Dividend
Amount and the Liberty Media Group Available Dividend Amount, respectively. Such
dividends are further subject to the prior payment of dividends on outstanding
shares of any class or series of capital stock of the Company with preferential
dividend provisions. Any net losses of the Company (without regard to whether
such losses arose from any specific Group), and any dividends or distributions
on, or repurchases of, the TCI Group Common Stock or the Liberty Media Group
Common Stock, and dividends on, and certain repurchases of, preferred stock,
will reduce the funds of the Company legally available for payment of dividends
on both the TCI Group Common Stock and the Liberty Media Group Common Stock.
Subject to limitations of the DGCL and the Amended Charter, the Board of
Directors may declare and pay dividends on TCI Group Common Stock and Liberty
Media Group Common Stock in equal or unequal amounts, or may decide not to
declare and pay such dividends, notwithstanding the relationship between the TCI
Group Available Dividend Amount and the Liberty Media Group Available Dividend
Amount, the respective amounts of prior dividends paid on, or liquidation rights
of, the TCI Group Common Stock or the Liberty Media Group Common Stock or any
other factor. See "The Liberty Media Group Stock Proposal--Description of TCI
Group Common Stock and Liberty Media Group Common Stock--Dividends" and
"--Dividend Policy".
Operational and Financial Decisions
The Board of Directors could from time to time make operational and
financial decisions that affect the Groups disproportionately, such as transfers
of funds or assets between Groups, the allocation of funds for capital
expenditures, the determination to expand into new areas and the allocation of
resources and personnel that may be suitable for more than one Group. The
decision to provide funds to one Group may adversely affect the ability of the
other Group to obtain funds sufficient to implement its business strategies. For
further discussion of potential
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divergence of interests arising from financial decisions, see "--Transfer of
Funds between Groups; Equity Contributions from the TCI Group."
Fiduciary Duties of the Board of Directors are to All Stockholders Regardless of
Class or Series
Under Delaware law, the Board of Directors has a duty to act with due care
and in the best interests of all the Company's stockholders, including the
holders of TCI Group Common Stock and Liberty Media Group Common Stock. The
existence of the TCI Group Common Stock and the Liberty Media Group Common Stock
may give rise to occasions when the interests of the holders of TCI Group Common
Stock and Liberty Media Group Common Stock may diverge or appear to diverge. See
"--Potential Divergence of Interests; No Specific Procedures for Resolution".
The Board of Directors will address and resolve any issues involving material
divergence of interests between the holders of TCI Group Common Stock and
Liberty Media Group Common Stock.
Although the Company is not aware of any precedent concerning the manner in
which principles of Delaware law would be applied in the context of a capital
structure involving multiple classes or series of capital stock the rights of
which include terms designed to reflect the separate performance of specified
businesses, principles of Delaware law provide that a board of directors must
act in accordance with its good faith business judgment of the corporation's
best interests, taking into consideration the interests of all stockholders
regardless of class or series. Under these principles of Delaware law and the
"business judgment rule", a good faith determination made by a disinterested and
adequately informed Board of Directors with respect to any matter having a
disparate impact upon the holders of TCI Group Common Stock and the holders of
Liberty Media Group Common Stock would be a defense to any challenge to such
determination made by or on behalf of any of such groups of holders.
Nevertheless, a Delaware court hearing a case involving such a challenge may
decide to apply principles of Delaware law other than those discussed above, or
may fashion new principles of Delaware law, in order to decide such a case,
which would be a case of first impression. There may arise circumstances
involving a divergence of interests in which the Board of Directors is held to
have properly discharged its responsibilities to act with due care and in the
best interests of the Company and all of its stockholders, but in which holders
of either the TCI Group Common Stock or the Liberty Media Group Common Stock
consider themselves to be disadvantaged relative to the other series. In such a
case, such holders would not have any other remedy under Delaware law with
respect to the circumstances giving rise to the divergence of interests.
Disproportionate ownership interests of members of the Board of Directors
in the TCI Group Common Stock and the Liberty Media Group Common Stock or
disparate values of the TCI Group Common Stock and the Liberty Media Group
Common Stock could create or appear to create potential conflicts of interest
when directors are faced with decisions that could have different implications
for different series. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution". Nevertheless, the Company believes that a director
would be able to discharge his or her fiduciary responsibilities even if his or
her interests in shares of TCI
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Group Common Stock and Liberty Media Group Common Stock were disproportionate or
had disparate values.
Transfer of Funds Between Groups; Equity Contributions from the TCI Group
If the Liberty Media Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the Distribution would be specifically attributed to and reflected on
the combined financial statements of the TCI Group, except debt incurred by
entities included in the Liberty Media Group and to the extent otherwise
determined by the Board of Directors. The Board of Directors could determine
from time to time that debt of the Company not incurred by entities included in
the Liberty Media Group or preferred stock and the proceeds thereof should be
specifically attributed to and reflected on the combined financial statements of
the Liberty Media Group to the extent that the debt is incurred or the preferred
stock is issued for the benefit of the Liberty Media Group.
To the extent cash needs of the Liberty Media Group exceed cash provided by
the Liberty Media Group, the TCI Group may transfer funds to the Liberty Media
Group. Conversely, to the extent cash provided by the Liberty Media Group
exceeds cash needs of the Liberty Media Group, the Liberty Media Group may
transfer funds to the TCI Group. The TCI Group will initially provide
centralized cash management functions under which cash receipts of certain
entities included in the Liberty Media Group are remitted to the TCI Group and
certain cash disbursements of the Liberty Media Group will be funded by the TCI
Group on a daily basis. Such transfers of funds between the TCI Group and the
Liberty Media Group will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to the Liberty
Media Group, reflected as the creation of, or an increase in any then existing,
Inter-Group Interest or, in the case of a transfer from the Liberty Media Group
to the TCI Group, reflected as a reduction in any Inter-Group Interest. There
are no specific criteria for determining when a transfer will be reflected as a
borrowing or as an increase or reduction in any Inter-Group Interest. The Board
of Directors expects to make such determinations, either in specific instances
or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. Generally, it is expected that entities included
in the Liberty Media Group will seek their own long-term debt financing.
Loans from one Group to the other Group would bear interest at such rates
and have such repayment schedules and other terms as are established from time
to time by, or pursuant to procedures established by, the Board of Directors.
The Board of Directors expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
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Although the creation of or any increase in an Inter-Group Interest
resulting from an equity contribution by the TCI Group to the Liberty Media
Group or any decrease in the Inter-Group Interest resulting from a transfer of
funds from the Liberty Media Group to the TCI Group would be determined by
reference to the Market Value of the Series A Liberty Media Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at a
time when such shares could be considered overvalued.
Management and Allocation Policies Subject to Change
The Board of Directors has adopted certain management and allocation
policies described herein with respect to cash management, corporate expenses,
allocation of assets and liabilities and inter-Group transactions, any and all
of which could be modified or rescinded by the Board of Directors, in its sole
discretion, without the approval of stockholders, although there is no present
intention to do so. The Board of Directors could also adopt additional policies
depending upon the circumstances. Any determination to modify or rescind such
policies, or to adopt additional policies, including any such decision that
could have disparate effects upon holders of TCI Group Common Stock or Liberty
Media Group Common Stock, would be made by the Board of Directors as set forth
under "--Fiduciary Duties of the Board of Directors are to All Stockholders
Regardless of Class or Series". See "The Liberty Media Group Stock Proposal--
Management and Allocation Policies".
No Assurance as to Market Price
Because there has been no prior market for the Liberty Media Group Common
Stock, there can be no assurance as to the market price of the Liberty Media
Group Common Stock following the Distribution. Moreover, it is not possible to
predict the impact of the issuance of the Liberty Media Group Common Stock
pursuant to the Distribution on the market price of the Company's existing Class
A Common Stock and Class B Common Stock (to be redesignated Series A TCI Group
Common Stock and Series B TCI Group Common Stock) and, accordingly, there can be
no assurance that the combined market values of the TCI Group Common Stock and
the Liberty Media Group Common Stock held by a stockholder after the
Distribution will equal or exceed the market value of the Company's existing
Class A Common Stock and Class B Common Stock held by such stockholder prior to
the Distribution. See "Proxy Statement/Prospectus Summary--Price Range of Class
A Common Stock and Class B Common Stock".
The market prices of the TCI Group Common Stock and the Liberty Media Group
Common Stock after the Distribution would be determined in the trading markets
and could be influenced by many factors, including the consolidated results of
the Company, as well as the respective performances of the Groups, investors'
expectations for the Groups, trading volumes, regulatory environment and general
economic and market conditions. There can be no assurance as to the extent to
which investors would assign values to the TCI Group Common Stock and the
Liberty Media Group Common Stock based on the reported financial results or
other measures of performance or prospects of the relevant businesses.
Financial effects of the Groups that affect the Company's consolidated results
of operations or financial condition could affect
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the market prices of the TCI Group Common Stock and the Liberty Media Group
Common Stock. In addition, the Company cannot predict the impact on the market
price of the TCI Group Common Stock or the Liberty Media Group Common Stock of
certain terms of such securities, such as basing the consideration to be paid if
all or substantially all of the assets of the Liberty Media Group are sold in a
Disposition on the Net Proceeds of such Disposition, the ability of the Company
to convert shares of Liberty Media Group Common Stock into TCI Group Common
Stock at a conversion ratio based on an appraised fair value determination for
the Liberty Media Group Common Stock and a trading market valuation for the TCI
Group Common Stock or the discretion of the Board of Directors to make various
other determinations with respect to the Groups and the TCI Group Common Stock
and Liberty Media Group Common Stock. There is no assurance that the Series A
Liberty Media Group Common Stock will be included in any stock market index in
which the Company's existing Class A Common Stock is now included, or that the
redesignated Series A TCI Group Common Stock will continue to be included in
such index. Not being included in an index could adversely affect demand for the
Liberty Media Group Common Stock or the TCI Group Common Stock and,
consequently, the market price thereof.
Potential Conversion of Liberty Media Group Common Stock
The Liberty Media Group Stock Proposal will permit the conversion, solely
at the Company's option, of all of the outstanding shares of Liberty Media Group
Common Stock into TCI Group Common Stock upon the terms described under "The
Liberty Media Group Stock Proposal--Description of TCI Group Common Stock and
Liberty Media Group Common Stock--Conversion and Redemption". The Company cannot
predict the impact on the market prices of the TCI Group Common Stock or the
Liberty Media Group Common Stock of its ability to effect any such conversion or
the effect, if any, that the exercise by the Company of this conversion right
would have on the market price of the TCI Group Common Stock or the Liberty
Media Group Common Stock prevailing at such time. See "--Potential Divergence of
Interests; No Specific Procedures for Resolution--Optional Conversion of Liberty
Media Group Common Stock into TCI Group Common Stock".
Potential Effects of Possible Disposition of Assets of the Liberty Media Group
The terms of the Liberty Media Group Common Stock provide that if the
Company were to dispose of all or substantially all of the properties and assets
of the Liberty Media Group, other than in a transaction in which the Company
receives primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business and other than in connection
with the disposition of all or substantially all of the assets of the Company,
the Company would be required, at its option, either to (i) distribute to
holders of Liberty Media Group Common Stock an amount equal to their
proportionate interest in the Net Proceeds of such Disposition, either by
special dividend or by redemption of all or part of the outstanding shares of
Liberty Media Group Common Stock or (ii) convert outstanding shares of Liberty
Media Group Common Stock into shares of the corresponding series of TCI Group
Common Stock at a conversion ratio based on 110% of the average daily ratio of
the Market Value of a share of Series A Liberty Media Group Common Stock to the
Market Value of a share of
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Series A TCI Group Common Stock over a specified period following such
Disposition. "Net Proceeds" means the proceeds of such Disposition after payment
of or provision for certain specified costs, including taxes to be paid by the
Company in respect of the Disposition or such dividend or redemption,
transaction costs and liabilities attributed to the Liberty Media Group. If the
Liberty Media Group were a separate independent company and its shares were
acquired by another person, certain of those costs, including corporate level
taxes, might not be payable in connection with such an acquisition. As a result,
the consideration that would be received by stockholders of such a separate
independent company in connection with such a stock acquisition might be greater
than the Net Proceeds that would be received by holders of Liberty Media Group
Common Stock if the assets of the Liberty Media Group were sold. In addition, no
assurance can be given that the Net Proceeds per share of Liberty Media Group
Common Stock to be received in connection with a Disposition of all of the
assets of the Liberty Media Group will be equal to or more than the market value
per share of Liberty Media Group Common Stock prior to or after announcement of
such Disposition. See "--Potential Conversion of Liberty Media Group Common
Stock" and "--No Assurance as to Market Price" above and "The Liberty Media
Group Stock Proposal--Description of TCI Group Common Stock and Liberty Media
Group Common Stock--Conversion and Redemption".
Potential Dilution from Issuances of Liberty Media Group Common Stock upon
Conversion of Securities Outstanding at Time of Distribution
After the Distribution, existing preferred stock and debt securities of the
Company that are convertible into or exchangeable for shares of Class A Common
Stock will, as a result of the operation of antidilution provisions, be adjusted
so that there will be delivered upon their conversion or exchange (in addition
to the same number of shares of redesignated Series A TCI Group Common Stock as
were theretofore issuable thereunder) the number of shares of Series A Liberty
Media Group Common Stock that would have been issuable in the Distribution with
respect to the Class A Common Stock issuable upon conversion or exchange had
such conversion or exchange occurred prior to the record date for the
Distribution. Options to purchase Class A Common Stock outstanding at the time
of the Distribution will be adjusted by issuing to the holders of such options
separate options to purchase that number of shares of Series A Liberty Media
Group Common Stock which the holder would have been entitled to receive had the
holder exercised such option to purchase Class A Common Stock prior to the
record date for the Distribution and reallocating a portion of the aggregate
exercise price of the previously outstanding options to the newly issued options
to purchase Series A Liberty Media Group Common Stock. Such convertible or
exchangeable preferred stock and debt securities and options outstanding on the
record date for the Distribution are referred to as "Pre-Distribution
Convertible Securities." The issuance of shares of Series A Liberty Media Group
Common Stock upon such conversion, exercise or exchange of Pre-Distribution
Convertible Securities will not result in any transfer of funds or other assets
from the TCI Group to the Liberty Media Group or a reduction in any Inter-Group
Interest that then may exist, in consideration of such issuance. In the case of
the exercise of Pre-Distribution Convertible Securities consisting of options to
purchase Series A Liberty Media Group Common Stock, the proceeds received upon
the exercise of such options will be attributed to the Liberty Media Group.
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If Pre-Distribution Convertible Securities remain outstanding at the time
of any redemption of all outstanding shares of Liberty Media Group Common Stock
following the disposition of all of the properties and assets of the Liberty
Media Group (see "The Liberty Media Group Stock Proposal -- Description of TCI
Group Common Stock and Liberty Media Group Common Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock"), the proportionate interest in the Net Proceeds of the
Disposition to be distributed to the holders of Liberty Media Group Common Stock
will be determined on the basis of the Adjusted Outstanding Interest Fraction,
which will result in the allocation to the TCI Group of a portion of such Net
Proceeds, in addition to the portion attributable to any Inter-Group Interest,
sufficient to provide for the delivery of the portion of the consideration (if
any) deliverable by the Company on any post-redemption conversion, exercise or
exchange of Pre-Distribution Convertible Securities that is in substitution for
shares of Liberty Media Group Common Stock that would have been issuable upon
such conversion, exercise or exchange if it had occurred prior to the
redemption. Likewise, if Pre-Distribution Convertible Securities remain
outstanding at the time of any redemption of all the outstanding shares of
Liberty Media Group Common Stock in exchange for stock of any one or more
wholly-owned subsidiaries of the Company which hold all of the assets and
liabilities of the Liberty Media Group (see "The Liberty Media Group Stock
Proposal--Description of TCI Group Common Stock and Liberty Media Group Common
Stock--Conversion and Redemption--Redemption in Exchange for Stock of
Subsidiary"), the number of shares of such subsidiaries deliverable in
redemption of the outstanding shares of Liberty Media Group Common Stock will be
determined on the basis of the Adjusted Outstanding Interest Fraction, resulting
in the allocation to the TCI Group of a portion of the shares of such
subsidiaries, in addition to the number of shares so allocated in respect of any
Inter-Group Interest, sufficient to provide for the delivery of the portion of
the consideration (if any) deliverable by the Company upon any post-redemption
conversion, exercise or exchange of Pre-Distribution Convertible Securities that
is in substitution for shares of Liberty Media Group Common Stock that would
have been issuable upon such conversion, exercise or exchange if it had occurred
prior to such redemption. If Pre-Distribution Convertible Securities remain
outstanding at the time of any conversion at the option of the Company of all
outstanding shares of Liberty Media Group Common Stock into TCI Group Common
Stock (see "The Liberty Media Group Stock Proposal -- Description of TCI Group
Common Stock and Liberty Media Group Common Stock -- Conversion and Redemption--
Conversion at the Option of the Company"), the determination of the value (as
determined on the basis of appraisals performed by investment banking firms) of
one share of Liberty Media Group Common Stock used in calculating the conversion
ratio will be made on a basis that assumes conversion, exercise or exchange of
all Pre-Distribution Convertible Securities.
As of the date of this Proxy Statement/Prospectus, the Company has
outstanding preferred stock and debt securities convertible into or exchangeable
for [55,763,474] shares of Class A Common Stock and options to purchase
[12,757,328] shares of Class A Common Stock (excluding shares issuable upon
conversion of convertible securities of the Company held by subsidiaries of the
Company). Such preferred stock and debt securities will, as a result of the
adjustments made to give effect to the Distribution, be convertible into or
exchangeable for [13,940,868] shares of Series A Liberty Media Group Common
Stock (in addition to a number
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of shares of redesignated Series A TCI Group Common Stock equal to the number of
shares of Class A Common Stock into or for which they were previously
convertible or exchangeable) and the adjustments made with respect to such
outstanding options will result in the issuance of separate options to acquire
[3,189,332] shares of Series A Liberty Media Group Common Stock. In addition,
options to purchase 300,000 shares of Class A Common Stock have been granted
under the Director Stock Option Plan, subject to stockholder approval of such
plan at the Annual Meeting. The Distribution would result in the issuance of
options under the Director Stock Option Plan covering 75,000 shares of Series A
Liberty Media Group Common Stock.
Potential Dilution from Issuances of Liberty Media Group Common Stock Pursuant
to Existing Acquisition Agreements
Prior to the date of this Proxy Statement/Prospectus, the Company has
entered into agreements with respect to several acquisitions in which all or
part of the consideration payable was to consist of Class A Common Stock or
other securities which are convertible into or exchangeable for Class A Common
Stock. In connection with the negotiation of certain of these acquisitions, the
Company agreed that it would issue both TCI Group Common Stock and Liberty Media
Group Common Stock (or other securities convertible into or exchangeable for TCI
Group Common Stock and Liberty Media Group Common Stock) to the selling parties
upon consummation of such transactions if such transactions are consummated
subsequent to the record date for the Distribution, notwithstanding that the
acquisition relates to assets or properties which may not be attributable to the
Liberty Media Group. In all such cases, the Company intends to treat its
obligation to so issue shares of Liberty Media Group Common Stock (the
"Committed Acquisition Shares") to the selling parties in a manner similar to
its obligation to deliver Liberty Media Group Common Stock upon the conversion,
exercise or exchange of Pre-Distribution Convertible Securities.
As a result, the issuance of Committed Acquisition Shares upon the
consummation of these transactions will not result in any transfer of funds or
other assets from the TCI Group to the Liberty Media Group or a reduction in any
Inter-Group Interest that may then exist in consideration of such issuance, and
would be dilutive to the interests of the holders of Liberty Media Group Common
Stock.
The number of Committed Acquisition Shares issuable in these transactions
cannot be determined, in part because the number of shares issuable may be
dependent upon the relative market prices of the TCI Group Common Stock and the
Liberty Media Group Common Stock at or about the time of the consummation of
such transaction. Based, however, on the current trading market values of the
Class A Common Stock, the Company anticipates that the aggregate number of
Committed Acquisition Shares issuable in such transactions would not exceed
___________.
If (a) a redemption of all outstanding shares of Liberty Media Group Common
Stock in connection with a disposition of all of the properties and assets of
the Liberty media Group or in exchange for stock of one or more subsidiaries
holding all the assets and liabilities of the Liberty Media Group or (b) a
conversion at the option of the Company of all outstanding shares of Liberty
Media Group Common Stock into TCI Group Common Stock occurs while there remain
unconsummated one or more transactions in which Committed Acquisition Shares may
be issuable, the Committed Acquisition Shares which remain so issuable will be
taken into
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account in a manner similar to Pre-Disposition Convertible Securities
as described in the second paragraph under the caption "-- Potential Dilution
from Liberty Media Group Common Stock upon Conversion of Securities Outstanding
at Time of Distribution". See "The Liberty Media Group Stock Proposal --
Description of TCI Group Common Stock and Liberty Media Group Common Stock --
Conversion and Redemption -- Mandatory Dividend, Redemption or Conversion of
Liberty Media Group Common Stock", "-- Redemption in Exchange for Stock of
Subsidiary" and "-- Conversion at the Option of the Company".
Limitations on Potential Acquisition of a Group
If each Group were a separate publicly held corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding stock of such corporation by means of a
tender offer or proxy contest. Although adoption of the Liberty Media Group
Stock Proposal would authorize issuance of the Liberty Media Group Common Stock
with economic terms designed to reflect the separate performance of the Liberty
Media Group, a person interested in acquiring only one Group without negotiation
with the Company's management would still be required to seek control of the
voting power represented by all of the outstanding capital stock of the Company,
including the TCI Group Common Stock and the Liberty Media Group Common Stock.
See "The Liberty Media Group Stock Proposal--Description of TCI Group Common
Stock and Liberty Media Group Common Stock--Voting Rights".
Absence of Approval Rights with Respect to Future Issuances of Authorized Shares
The authorized but unissued shares of capital stock would be available for
issuance from time to time by the Company at the sole discretion of the Board of
Directors for any proper corporate purpose. Such issuances could include shares
of TCI Group Common Stock or Liberty Media Group Common Stock, as well as the
issuance of such shares upon the conversion or exercise of securities of the
Company that are convertible into or exercisable for such shares. The approval
of the stockholders of the Company will not be sought by the Company for the
issuance of authorized but unissued shares of TCI Group Common Stock or Liberty
Media Group Common Stock (or the reissuance of previously issued shares that
have been reacquired by the Company) or securities of the Company that are
convertible into or exercisable for such shares, unless deemed advisable by the
Board of Directors or required by applicable law, regulation or Nasdaq National
Market requirements.
Anti-Takeover Considerations
The DGCL, the Charter and the Company's Bylaws contain provisions which may
serve to discourage or make more difficult a change in control of the Company
without the support of the Board of Directors or without meeting various other
conditions. The Company is subject to Section 203 of the DGCL, which, in
general, prohibits a "business combination" between a corporation and an
"interested stockholder" unless certain conditions are met. Charter and Bylaw
provisions which may discourage or make more difficult a change in control of
the Company include the requirement of a supermajority vote to approve specified
actions, the
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authorization of the Company's Board of Directors to issue additional shares of
Series Preferred Stock in one or more series and to fix and state the
designations, powers, preferences, qualifications, limitations, restrictions and
relative rights of the shares of each such series without further action by the
Company's stockholders, certain procedures required in connection with the
nomination of directors of the Company and the other provisions described under
"Anti-Takeover Considerations". In addition, the existence of the Liberty Media
Group Common Stock would present complexities and could in certain circumstances
pose obstacles, financial and otherwise, to an acquiring person. For example, a
potential acquiror would have to take into consideration that holders of
different series of Common Stock might be more or less receptive to the
acquiror's proposal, that a tender offer would have to be structured so as to
take into account different prices at which shares of the different series might
be acquired, that a merger would require allocation of consideration among the
different series of Common Stock and the effects of actions the Company might
take such as causing a conversion of the Liberty Media Group Common Stock. The
provisions of the DGCL, the Amended Charter and the Company's Bylaws and the
existence of the Liberty Media Group Common Stock could, under certain
circumstances, prevent stockholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control. See "Anti-Takeover
Considerations".
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THE ANNUAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of Class A Common Stock, Class B Common
Stock, Class B Preferred Stock and Series C Preferred Stock by the Board of
Directors for use at the Annual Meeting.
Time and Place; Purposes
The Annual Meeting will be held at [place], on July 27, 1995 starting at
[time], local time. At the Annual Meeting, the stockholders of the Company will
be asked to consider and vote upon the election of three directors of the
Company to hold office until their successors are elected and qualified, the
Liberty Media Group Stock Proposal, the Increased Authorization Proposal, the
Director Stock Option Plan Proposal and such other matters as may properly come
before the Annual Meeting.
Voting Rights; Votes Required for Approval
The Board of Directors has fixed the close of business on June 9, 1995, as
the date for the determination of holders of Class A Common Stock, Class B
Common Stock, Class B Preferred Stock and Series C Preferred Stock entitled to
notice of and to vote at the Annual Meeting. Only holders of record of shares of
Class A Common Stock, Class B Common Stock, Class B Preferred Stock and Series C
Preferred Stock at the close of business on the Record Date are entitled to
notice of and to vote at the Annual Meeting. Holders of record of the Class A
Common Stock, the Class B Common Stock, the Class B Preferred Stock and the
Series C Preferred Stock at the close of business on the Record Date are
entitled to vote in the election of directors. Holders of record of the Class A
Common Stock, the Class B Common Stock and the Series C Preferred Stock at the
close of business on the Record Date are also entitled to vote upon the Liberty
Media Group Stock Proposal, the Increased Authorization Proposal and the
Director Stock Option Plan Proposal. At the close of business on the Record
Date, there were [571,499,424] shares of Class A Common Stock outstanding and
entitled to vote at the Annual Meeting held by [8,558] stockholders of record,
[84,864,800] shares of Class B Common Stock outstanding and entitled to vote
held by [662] stockholders of record, [1,620,026] shares of Class B Preferred
Stock outstanding and entitled to vote held by [169] stockholders of record and
[70,559] shares of Series C Preferred Stock outstanding and entitled to vote
held by [one] stockholder of record. The number of holders includes record
holders and individual participants in security position listings.
The presence, in person or by proxy, of the holders of a majority of the
combined voting power of the outstanding shares of Class A Common Stock, Class B
Common Stock, Class B Preferred Stock and Series C Preferred Stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. Directors will
be elected by a plurality of the votes of the shares of Class A Common Stock,
Class B Common Stock, Class B Preferred Stock and Series C Preferred Stock,
represented in person or by proxy and entitled to vote at the Annual Meeting,
voting as a single class. The affirmative vote, in person or by proxy, of (i)
the holders of
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record of at least 66 2/3% of the combined voting power of the shares of Class A
Common Stock, Class B Common Stock and Series C Preferred Stock, voting together
as a single class, (ii) the holders of record of a majority of the total number
of shares of Class A Common Stock, voting as a separate class, and (iii) the
holders of record of a majority of the total number of shares of Class B Common
Stock, voting as a separate class, in each case issued and outstanding on the
Record Date, is required to approve the Liberty Media Group Stock Proposal. The
affirmative vote, in person or by proxy, of the holders of record of at least
66 2/3% of the combined voting power of the shares of Class A Common Stock,
Class B Common Stock and Series C Preferred Stock issued and outstanding on the
Record Date, voting together as a single class, is required to approve the
Increased Authorization Proposal. The affirmative vote of a majority of the
combined voting power and a majority of the combined number of the shares of the
Class A Common Stock, Class B Common Stock and Series C Preferred Stock
represented in person or by proxy and entitled to vote at the Annual Meeting,
voting as a single class, is required to approve the Director Stock Option Plan
Proposal. Each holder of record as of the Record Date of (i) Class A Common
Stock is entitled to cast one vote per share, (ii) Class B Common Stock is
entitled to cast ten votes per share, (iii) Class B Preferred Stock is entitled
to cast one vote per share and (iv) Series C Preferred Stock is entitled to cast
100 votes per share, on each matter on which holders of shares of such class or
series are entitled to vote at the Annual Meeting.
The directors and officers of the Company as of the Record Date owned
[6,084,075] outstanding shares of the Class A Common Stock, [63,601,807]
outstanding shares of the Class B Common Stock, [438,884] outstanding shares of
Class B Preferred Stock and no shares of Series C Preferred Stock. Of such
shares, John C. Malone, the President and Chief Executive Officer of the
Company, owns [25,447,083] shares of the Class B Common Stock and [306,000]
shares of the Class B Preferred Stock, of which [3,120,000] shares of Class B
Common Stock and [40,000] shares of Class B Preferred Stock are subject to a
repurchase right by the Company and certain voting restrictions and, in
accordance therewith, will be voted at the Annual Meeting in the same
proportions as votes represented by all other shares are cast with respect to
each proposal to be voted upon at the Annual Meeting. The directors and
officers of the Company have informed the Company that they intend to vote their
shares (exclusive of the Restricted Voting Shares) in favor of the slate of
directors to which this solicitation relates, the Liberty Media Group Stock
Proposal, the Increased Authorization Proposal and the Director Stock Option
Plan Proposal. Such shares represent approximately [42.78]% of the total voting
power of the Class A Common Stock, Class B Common Stock, Class B Preferred Stock
and Series C Preferred Stock, [42.80]% of the total voting power of the Class A
Common Stock, Class B Common Stock and Series C Preferred Stock, [1.07]% of the
total number of the outstanding shares of Class A Common Stock, [71.27]% of the
total number of the outstanding shares of Class B Common Stock and [10.14]% of
the total number of the outstanding shares of Class A Common Stock, Class B
Common Stock and Series C Preferred Stock (exclusive of the Restricted Voting
Shares).
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Proxies
All shares of Class A Common Stock, Class B Common Stock, Class B Preferred
Stock and Series C Preferred Stock represented by properly executed proxies
received prior to or at the Annual Meeting, and not revoked, will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such proxies will be voted FOR the election of the three nominees
listed under "Election of Directors" below, FOR the Liberty Media Group Stock
Proposal, FOR the Increased Authorization Proposal and FOR the Director Stock
Option Plan Proposal. So far as the Company's Board of Directors is aware, the
election of the three nominees as directors, the Liberty Media Group Stock
Proposal, the Increased Authorization Proposal and the Director Stock Option
Plan Proposal are the only matters to be acted upon at the Annual Meeting. As to
any other matter which may properly come before the Annual Meeting, the persons
named in the accompanying proxy card will vote thereon in accordance with their
best judgment. A properly executed proxy marked "ABSTAIN", although counted for
purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power represented and entitled to vote at the
Annual Meeting, will not be voted and, therefore, except in the case of the
election of directors, will have the same effect as a vote cast against the
matter to which such instruction is indicated. Shares represented by "broker
non-votes" (i.e., shares held by brokers or nominees which are represented at a
meeting but with respect to which the broker or nominee is not empowered to vote
on a particular proposal) will also be counted for purposes of determining
whether there is a quorum at the Annual Meeting, and, with respect to the
Liberty Media Group Stock Proposal and the Increased Authorization Proposal,
will have the same effect as a vote cast against such proposals and, with
respect to the other matters, will be deemed shares not entitled to vote and
will not be included for purposes of determining the aggregate voting power and
number of shares represented and entitled to vote on such matter.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated signed proxy or by attending the Annual Meeting and voting in
person. Attendance at the Annual Meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, officers and regular employees of the Company
may solicit proxies by telephone, telegram, in person or by other means. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares held of record by them
and will be reimbursed for their reasonable out-of-pocket expenses in connection
therewith. The Company has retained Georgeson & Company Inc. to perform various
proxy advisory, distribution and solicitation services. The fee of Georgeson &
Company Inc. is currently estimated to be approximately $__________ plus
reimbursement of out-of-pocket expenses.
ELECTION OF DIRECTORS
The persons named in the accompanying proxy will vote for the election of
three directors, with the term of office of each to continue until the 1998
Annual Meeting of Stockholders or until his successor shall have been duly
elected and qualified, unless authority to vote is withheld. John W. Gallivan,
Jerome H. Kern and Bob Magness are the three
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nominees for election as directors of the Company, and the Company is informed
that these nominees are willing to serve as directors. However, if any such
nominee should decline or shall become unable to serve as a director for any
reason, votes will be cast for a substitute nominee, if any, designated by the
Board of Directors, or, if none is so designated prior to the election, votes
will be cast according to the judgment in such matters of the person or persons
voting the proxy. Messrs. Gallivan, Kern and Magness are each incumbent
directors.
The following lists the three nominees for election as directors of the
Company and the six directors of the Company whose term of office will continue
after the Annual Meeting, including the birth date of each person, the positions
with the Company or principal occupations of each person, certain other
directorships held and the year each person became a director of the Company.
The numbers of shares of Class A Common Stock, Class B Common Stock and Class B
Preferred Stock owned beneficially by each such person as of May 1, 1995, are
set forth in "Voting Securities and Principal Holders Thereof".
Directors will be elected by a plurality of the votes of the shares of
Class A Common Stock, Class B Common Stock, Class B Preferred Stock and Series C
Preferred Stock, represented in person or by proxy and entitled to vote at the
Annual Meeting, voting as a single class.
Nominees for Election as Directors
Bob Magness: Born June 3, 1924;
Chairman of the Board of the Company since June of 1994
and of TCIC since 1973; TCIC director since 1968.
John W. Gallivan: Born June 28, 1915;
director of the Company since June of 1994;
Chairman of the Board of Kearns-Tribune Corporation, a newspaper publishing
concern;
also a director of Silver King Mining Company;
TCIC director from 1980 to August of 1994.
Jerome H. Kern: Born June 1, 1937;
director of the Company since June of 1994;
TCIC director from December of 1993 to August of 1994;
also is a senior partner with the law firm of Baker & Botts, L.L.P.,
since September of 1992.
Prior to joining Baker & Botts, L.L.P., was senior partner
with the Law Offices of Jerome H. Kern from January 1, 1992 to September 1, 1992
and, prior to that, was a senior partner
with the law firm of Shea & Gould from 1986 through December 31, 1991.
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Directors Whose Term Expires in 1996
John C. Malone: Born March 7, 1941;
director of the Company since June of 1994;
Chief Executive Officer and President of TCI since January of 1994;
Chief Executive Officer of TCIC from March of 1992 to October of 1994
and President of TCIC from 1973 to October of 1994;
is President and a director of many of the Company's subsidiaries;
also a director of Turner Broadcasting System, Inc., BET Holdings, Inc.,
and The Bank of New York; TCIC director since 1973.
Tony Coelho: Born June 14, 1942;
director of the Company since June of 1994;
TCIC director from March of 1994 to August of 1994;
also President and Chief Executive Officer of Wertheim Schroder Investment
Services;
Managing Director of Wertheim Schroder & Co., Incorporated;
was formerly U.S. Representative from California from January 1979 through
June 1989
and the Majority Whip of the U.S. House of Representatives
from December 1986 through June 1989;
also a director of Circus Circus Enterprises, Inc., ICF Kaiser International,
Inc.,
Service Corporation International, Specialty Retail Group, Inc.,
Tanknology Environmental, Inc. and Crop Growers Corporation
Robert A. Naify: Born February 17, 1922;
director of the Company since June of 1994;
TCIC director from 1987 to August of 1994;
also Co-Chairman, Co-Chief Executive Officer and a director of
The Todd-AO Corporation.
Directors Whose Term Expires in 1997
Donne F. Fisher: Born May 24, 1938;
director of the Company since June of 1994;
Executive Vice President and Treasurer of the Company since January of 1994;
Executive Vice President of TCIC from December of 1991 to October of 1994;
was previously Senior Vice President of TCIC since 1982 and Treasurer since
1970;
also a director of General Communication, Inc.; TCIC director since 1980.
Kim Magness: Born May 17, 1952;
director of the Company since June of 1994; TCIC director from 1985 to August of
1994;
manages numerous personal and business investments, and
is Chairman and President of a company developing liners for irrigation canals.
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R.E. Turner: Born November 19, 1938;
director of the Company since June of 1994;
TCIC director from June of 1994 to August of 1994;
also Chairman of the Board and President of
Turner Broadcasting System, Inc. since 1970.
THE LIBERTY MEDIA GROUP STOCK PROPOSAL
General
The stockholders of the Company are being asked to consider and approve the
Liberty Media Group Stock Proposal, including adoption of the proposed
amendments to the Company's Charter set forth in Appendix III-A hereto. The
amendments would (a) provide for the Company's Common Stock to be divided into
four series and for an increase of 825,000,000 in the number of authorized
shares so that the Common Stock would consist of: (i) 750,000,000 newly
authorized shares designated Series A Liberty Media Group Common Stock, (ii)
75,000,000 newly authorized shares designated Series B Liberty Media Group
Common Stock, (iii) 1,100,000,000 shares designated Series A TCI Group Common
Stock and (iv) 150,000,000 shares designated Series B TCI Group Common Stock and
(b) establish the voting powers and relative, participating, optional and other
special rights and qualifications, limitations and restrictions of the new
series. The Series A TCI Group Common Stock and the Series B TCI Group Common
Stock would be created by redesignation of the Company's previously authorized
Class A Common Stock and Class B Common Stock, respectively. If both the
Liberty Media Group Stock Proposal and the Increased Authorization Proposal are
approved, the authorized shares of Series A TCI Group Common Stock would be
increased from 1,100,000,000 to 1,750,000,000. See "The Increased Authorization
Proposal".
If the Liberty Media Group Stock Proposal is approved by stockholders, the
Company anticipates filing with the Secretary of State of the State of Delaware
a Certificate of Amendment to the Charter including the amendments substantially
in the form set forth in Appendix III-A hereto (the "Certificate of Amendment").
It is currently anticipated that such filing will be made as promptly as
practicable after the Annual Meeting.
Subject to stockholder approval of the Liberty Media Group Stock Proposal,
the Board of Directors has adopted resolutions declaring a distribution to
holders of record of outstanding Class A Common Stock and Class B Common Stock
at the close of business on the day following the date upon which the
Certificate of Amendment has been filed with the Secretary of State of the
State of Delaware and becomes effective, of one-fourth of one share of Series A
Liberty Media Group Common Stock on each outstanding share of Class A Common
Stock and one-fourth of one share of Series B Liberty Media Group Common Stock
on each outstanding share of Class B Common Stock. The Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock issuable in
connection with the Distribution would be intended initially to reflect 100% of
the equity value of the Company attributable to the
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Liberty Media Group. The distribution ratio described in this paragraph was
determined by the Board of Directors in consultation with Lehman Brothers Inc.
and The First Boston Corporation, the Company's financial advisors in
connection with the Liberty Media Group Stock Proposal, and is based upon the
desired initial trading range of the Liberty Media Group Common Stock and the
equity value of the Company attributable to the Liberty Media Group. This
equity value was established by taking into account the assets and liabilities
to be assigned to the Liberty Media Group, the Liberty Media Group's recent
historical financial performance relative to its competitors that are publicly
traded and the current state of the markets for public offerings and other
stock transactions.
If the Liberty Media Group Stock Proposal is approved by the stockholders
at the Annual Meeting, the Company anticipates that certificates representing
Liberty Media Group Common Stock will be mailed promptly after the record date
for the Distribution. At the time the Certificate of Amendment becomes
effective, certificates formerly representing shares of Class A Common Stock and
Class B Common Stock will be deemed to represent an equal number of shares of
Series A TCI Group Common Stock and Series B TCI Group Common Stock,
respectively. New certificates representing shares of Series A TCI Group Common
Stock and Series B TCI Group Common Stock will be issued in replacement of
certificates formerly representing shares of Class A Common Stock and Class B
Common Stock as such certificates are received and canceled by the transfer
agent as a result of trading activities or upon the request of the holders of
such shares.
Fractional shares of Liberty Media Group Common Stock will not be issued in
connection with the Distribution. In connection with the determination of the
number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock issuable to any holder of record pursuant to
the Distribution (including any fractions of shares), the Company may aggregate
the number of shares of Class A Common Stock and Class B Common Stock,
respectively, held by such holder of record. If the number of shares of Liberty
Media Group Common Stock to be issued to any holder of record of Class A Common
Stock or Class B Common Stock includes a fraction of a whole share, the Company
will pay to such holder of record the cash value of such fractional share within
60 trading days of the Distribution, based upon the average of the last reported
sales prices of the Series A Liberty Media Group Common Stock on the Nasdaq
National Market during the first ten trading days following the Distribution.
Stockholders who own their stock beneficially through brokers or other nominees
listed as holders of record will have their fractional shares handled according
to the practices of such broker or nominee, which may result in such
stockholders receiving a price that is higher or lower than the price paid by
the Company to holders of record. If the necessary trading of Liberty Media
Group Common Stock does not occur within 20 trading days after the Distribution,
the Board of Directors will determine the fair value of a share of Liberty Media
Group Common Stock and the amount to be paid in lieu of fractional shares.
Following the Distribution, the Company may from time to time, by action of
its Board of Directors, (i) offer shares of TCI Group Common Stock and Liberty
Media Group Common Stock for cash in one or more public offerings, (ii) issue
shares of TCI Group Common Stock and Liberty Media Group Common Stock as
consideration for acquisitions or investments,
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(iii) issue shares of TCI Group Common Stock and Liberty Media Group Common
Stock to employees of the Company pursuant to employee benefit plans or (iv)
issue shares of TCI Group Common Stock and Liberty Media Group Common Stock for
any other proper corporate purpose. So long as sufficient authorized shares are
available, the timing, sequence, size and terms of such transactions would be
determined by the Board of Directors, without further approval of the
stockholders, unless deemed advisable by the Board of Directors or required by
applicable law, regulation or Nasdaq National Market requirements.
The affirmative vote of 66 2/3% of the combined voting power of shares of
the Class A Common Stock, Class B Common Stock and Series C Preferred Stock,
voting together as a single class, a majority of the total number of shares of
Class A Common Stock, voting as a separate class, and a majority of the total
number of shares of Class B Common Stock, voting as a separate class, in each
case issued and outstanding on the Record Date, is required for approval of the
Liberty Media Group Stock Proposal.
Background and Reasons for the Liberty Media Group Stock Proposal
Liberty Media Corporation
LMC was formed in connection with an exchange offer made to stockholders of
Old TCI in 1991. At that time, numerous proposals were pending before Congress
and the FCC relating to increased regulation of the cable television industry.
Certain of these proposals contemplated imposing horizontal limits on the number
of subscribers that could be served by cable systems in which a particular
entity had an attributable ownership interest. Other proposals contemplated
placing vertical limits on the ownership by cable system operators of interests
in entities producing cable television programming, or imposing limitations on
the programming decisions that cable operators, who also owned interests in
cable programming entities, could make. Because Old TCI at that time had
substantial interests in both cable television systems and cable programming
producers, management of Old TCI believed that enactment or adoption of certain
of such proposals, or variants thereof, could require divestiture by Old TCI of
a significant portion of such interests, as well as materially limit Old TCI's
opportunities for growth in cable-related areas in the future.
Faced with these legislative and regulatory uncertainties, Old TCI's board
of directors adopted a restructuring plan, through which Old TCI hoped to avoid
or reduce the likelihood of forced divestitures of assets at some unknown time
in the future by contributing selected assets to a new public company, LMC, in
which Old TCI's stockholders would have the opportunity to participate. Because
of its smaller size and the composition of its assets, the Board determined that
LMC might have greater freedom than would be available to Old TCI under future
legislation or regulations to pursue growth opportunities in the areas of
producing cable television programming and providing cable television services.
In order to implement this restructuring plan, in early 1991 Old TCI
contributed to LMC (i) substantially all of Old TCI's interests in entities that
produced programming for distribution on cable television (other than TBS and
Discovery) and (ii) Old TCI's interests (consisting
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primarily of minority interests) in certain cable television operating
companies. In exchange for the assets contributed by it, Old TCI received shares
of several different classes and series of LMC's preferred stock. Thereafter,
LMC effected exchange offers with the holders of each class of Old TCI's common
stock and holders of certain options and convertible debt securities that were
exercisable for or convertible into common stock by issuing to such holders
rights to acquire shares of LMC common stock in exchange for shares of Old TCI's
common stock. Upon consummation of these exchange offers, LMC commenced its
separate existence as a public company.
In selecting the assets to be contributed to LMC, management of Old TCI was
mindful of the then-proposed legislation and regulations that would limit the
ownership by cable system operators of interests in entities that produce cable
television programming. Old TCI's decision to retain its interests in TBS and
Discovery was based, among other things, on the large amount invested in such
entities and the limited liquidity of such investments in light of provisions of
stockholder and other agreements. In addition, because the services produced by
TBS and Discovery were well established and widely distributed, and thus less
susceptible to the practices with which the proposed cross-ownership rules were
concerned, management of Old TCI considered it unlikely that Old TCI's continued
ownership of such interests would be the subject of concern by legislators.
In October 1992 the Cable Television Consumer Protection Act of 1992 (the
"1992 Cable Act") was enacted. The 1992 Cable Act directed the FCC to issue
regulations establishing horizontal limitations upon the number of subscribers
which may be reached by a multiple system cable operator and vertical
limitations upon the number of channels on a cable system which can be occupied
by programmers in which the cable system operator has an attributable ownership
interest. The FCC issued these regulations in September 1993. The effect of
these regulations on Old TCI and LMC was twofold: First, because of the cross-
ownership of securities between Old TCI and LMC and because certain directors
of Old TCI were also directors of LMC, the regulations would require that Old
TCI and LMC be considered together for purposes of determining compliance with
the vertical and horizontal restrictions contained in the regulations. Second,
despite the business of LMC being attributed to Old TCI, the combined Old
TCI/LMC entity would fit within the limitations created by the regulations.
Thus, the concerns which had caused Old TCI to implement the restructuring plan
in 1991 had essentially been eliminated. The programming interests contributed
to LMC had originally been acquired by Old TCI in order to promote business
efficiencies and operational synergies; however, the separation from Old TCI of
these programming interests as a result of the restructuring had, in
management's view, created costs that could be avoided if the two companies
were recombined and would also eliminate certain potential conflicts of
interest and operational restraints that could result from the continued
separation of Old TCI and LMC. As a result, management of Old TCI began to
consider the possibility of re-combining the two companies. Formal negotiations
were undertaken in October 1993 regarding such a combination. These
negotiations ultimately led to the execution of a merger agreement between Old
TCI and LMC, which culminated in the Old TCI/LMC Combination in August 1994.
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The Business Line Restructuring
Following the Old TCI/LMC Combination, the Board of Directors of the
Company determined to undertake the Business Line Restructuring and to
restructure the Company's businesses into four separate business lines: Domestic
Cable and Communications; Programming; International Cable and Programming; and
Technology/Venture Capital. The Business Line Restructuring, which was
accomplished by the transfer of certain assets among the subsidiaries of the
Company, was intended to create a structure that would help the Company realize
the management and organizational benefits anticipated in connection with the
Old TCI/LMC Combination. In addition, the Board determined that restructuring
the Company into four distinct business lines would facilitate increased
investor understanding of the different lines of business and enhance
opportunities to finance the operations of each division separately, where
appropriate, through financing tailored specifically to the capital needs of the
division in question. In addition, the Board determined that the separation into
divisions could encourage strategic partnering with other companies in that line
of business.
In the Business Line Restructuring, stock of certain indirect subsidiaries
was acquired by the Company from certain other subsidiaries and then transferred
by the Company to existing or newly created subsidiaries as capital
contributions. The consideration used in such transactions was shares of Class A
Common Stock and/or the Company's Redeemable Convertible Preferred Stock, Series
E (the "Series E Preferred Stock"). See "--Issuance of Series F Preferred
Stock". In the Business Line Restructuring, TCIC transferred stock of its
subsidiaries that owned its international-related assets and technology/venture
capital-related assets to International and TCI Technology, respectively.
Because of transfer restrictions related to the cable television system-related
assets held by LMC, these assets were retained by LMC while stock of LMC's
subsidiaries that owned cable television programming-related assets was
transferred to a new subsidiary of the Company, together with stock of TCIC's
subsidiaries that owned programming-related assets (which consisted primarily of
substantially all of the Company's interests in TBS and Discovery and the
Company's interest in the partnership that distributes the STARZ! premium movie
service). See "Description of Business of Liberty Media Group - Certain
Relationships and Related Transactions". After these transfers, the assets held
in LMC consisted primarily of cable television system assets. LMC was then re-
named "TCI Cable Investments, Inc." The entity formed to hold the Company's
programming assets was named "Liberty Media Corporation" in order to take
advantage of the brand-name recognition established by LMC prior to the Old
TCI/LMC Combination. As a result of the Business Line Restructuring, Liberty,
through its subsidiaries and affiliates, now holds all of the cable television
programming assets held by LMC prior to the Old TCI/LMC Combination as well as
certain programming assets previously held by TCIC.
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Consideration of Alternatives
Following the Old TCI/LMC Combination in August 1994, the Board of
Directors of the Company directed management to study various methods of
enhancing stockholder value. This direction resulted from the Board's belief
that the Company was undervalued by the capital markets, in part because the
market focused primarily upon the Company's dominant cable television system
business and did not give full value to the other diverse assets held by the
Company, such as its programming, international and technology businesses. In
arriving at its belief that the Company was so undervalued, the Board
considered, among other things, information analyzing the relationship of the
aggregate equity market value of the Company to the sum of the values of the
Company's business segments as estimated in various published research reports
which contained comparative estimates for other companies. In addition, the
Board reviewed a summary of trading and valuation data for a group of companies
operating in several lines of business, and noted that the data for such
companies tended to correlate with the data for comparable companies sharing the
same dominant line of business (i.e., that line of business having the greatest
financial contribution or with which the market is most familiar). The Board
believed that overall stockholder value would be enhanced if there was increased
recognition in the investment community of the Company's individual lines of
business and the value of the assets used in such businesses.
Management proceeded to review with its financial advisors potential
actions which the Company could undertake in order to increase market
recognition of the value of the Company's assets used in each of its lines of
business. Among the actions considered by management were a spin-off to the
Company's stockholders of all or part of one or more of its divisions, public
offerings of minority interests in one or more of the divisions, and the
issuance of separate securities of the Company the economic attributes of which
would be defined by reference to the performance of one or more of its divisions
(commonly known as "tracking stock" or "targeted stock").
After considering the various alternatives, the Board determined that the
issuance of tracking stock came closest to meeting the Board's objectives. In
arriving at its determination, the Board noted, among other things, the
experience of other companies that have issued tracking stock with respect to
(i) publication of separate research reports by investment analysts with
relevant industry expertise and (ii) holdings of the separate equity securities
by different groups of shareholders that also hold securities of comparable
companies operating in the same line of business. The Board believed that
tracking stock would enable investors to gain a better understanding of each
line of business, and the separate reporting of their results would create a
framework for increased and more focused equity research coverage by the
investment community. Because each tracking stock would be a security of the
Company, the Company would be able to maintain the benefits of being a
consolidated enterprise, while at the same time enabling investors to invest in
a security that would track the performance of a single line of business. The
Board also believed that tracking stock would provide the Company with
flexibility in future financings by allowing the Company to select which
security to offer in a particular transaction, and to access capital from
sources which might be unable or unwilling to invest in the Company's existing
common stock representing all lines of the Company's
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business. In addition, issuance of tracking stock would enable the Company to
engage in strategic partnering with companies in particular lines of business
and could also be used as currency for investments and acquisitions in
particular lines of business. The Board also took into account, however, that in
a tracking stock structure, unlike the case with separate publicly held
corporations, holders of each series of common stock would continue to be
subject to the risks associated with an investment in the Company and all of its
businesses, assets and liabilities, and that there would be no assurance as to
the degree to which the market value of a tracking stock would reflect the
separate performance of the business group to which it relates.
The Board then considered with its financial advisors which divisions of
the Company would be appropriate for the issuance of tracking stock. In November
1994, the Board approved and the Company announced a proposal in which the
Company would seek authorization for tracking stocks related to each of its four
divisions, with the timing and manner of issuance of any particular tracking
stock to be left for subsequent determination by the Board. After considering
further the capital needs of each division, the ability to raise capital through
other means, and the anticipated uses for the tracking stock, such as
acquisitions and strategic partnering, the Board determined that the Company's
programming business was the best candidate for the creation of a tracking stock
and determined to seek authorization only for tracking stock related to that
business. In making this determination, the material matters considered by the
Board were: the relative size of the programming business, the public perception
of programming company stocks, the capital requirements of the programming
business, which have few revenue generating assets which would enable it to
service indebtedness effectively, and the Company's prior experience with
respect to LMC's growth since it became a public company in 1991. The Board also
determined that the financing needs of the remaining divisions could be
satisfied through other methods, such as the anticipated sale of a minority
interest in International.
The Liberty Media Group Stock Proposal
On February 8, 1995, the Board of Directors determined that the Liberty
Media Group Stock Proposal was in the best interests of the Company and its
stockholders and unanimously declared it advisable and recommended that the
Company's stockholders vote in favor of the Liberty Media Group Stock Proposal.
The Liberty Media Group Stock Proposal is intended to provide investors
with securities reflecting the separate performance of each Group, while at the
same time enabling the Company's businesses to preserve and retain the benefits
of being part of a consolidated enterprise, including the absence of certain
costs associated with operation of separate, publicly held corporations. The
Board of Directors believes the Liberty Media Group Stock Proposal will enhance
stockholder value over the long term by permitting separate market valuations of
the TCI Group Common Stock and the Liberty Media Group Common Stock, which will
result in greater market recognition of the value of each Group. The Liberty
Media Group Stock Proposal is also intended to provide the Company greater
flexibility with regard to raising capital and the choice of stock consideration
for acquisitions and investments, including strategic partnering transactions.
Unlike the case with separate publicly held corporations, however,
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holders of TCI Group Common Stock and Liberty Media Group Common Stock will
continue to be subject to all the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. See "Risk Factors and
Other Special Considerations--Stockholders of One Company; Financial Effects on
One Business Could Affect Other Businesses".
In connection with its approval of the Liberty Media Group Stock Proposal,
the Board of Directors also evaluated the potentially adverse aspects of the
proposal, including the lack of assurance as to the degree to which the market
price of the Liberty Media Group Common Stock will reflect the separate
performance of the Liberty Media Group and the uncertainty as to the impact of
the proposal on the market price of the TCI Group Common Stock, as well as the
fact that implementation of the Liberty Media Group Stock Proposal will, to an
extent, make the capital structure of the Company more complex and may give rise
to occasions when the interests of the holders of TCI Group Common Stock and the
holders of Liberty Media Group Common Stock may diverge or appear to diverge.
See "Risk Factors and Other Special Considerations--No Assurance as to Market
Price" and "--Potential Divergence of Interests; No Specific Procedures for
Resolution". The Board determined, however, that the positive aspects of the
Liberty Media Group Stock Proposal outweighed any potentially adverse aspect.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE LIBERTY MEDIA GROUP
STOCK PROPOSAL AND BELIEVES THAT ITS ADOPTION IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE LIBERTY MEDIA GROUP STOCK
PROPOSAL.
Management and Allocation Policies
If the Liberty Media Group Stock Proposal is approved by stockholders, the
Company will prepare consolidated financial statements of the Company, combined
financial statements of the Liberty Media Group and combined financial
statements of the TCI Group. The combined financial statements of the Liberty
Media Group and the combined financial statements of the TCI Group, taken
together, would effectively comprise all the accounts reflected as consolidated
financial statements of the Company. The combined financial statements of the
Liberty Media Group and the combined financial statements of the TCI Group will
principally reflect the combined financial position, results of operations and
cash flows of the businesses included therein. Consistent with the Amended
Charter and applicable policies, the Group financial information could also
include allocated portions of individual assets and liabilities that are not
separately identified with the operations of a specific Group. Notwithstanding
allocations of assets and liabilities for the purpose of preparing Group
combined financial statements, holders of both TCI Group Common Stock and
Liberty Media Group Common Stock would continue to be subject to risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. See "Risk Factors and Other Special
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Considerations--Stockholders of One Company; Financial Effects on One Business
Could Affect Other Businesses" above.
If the Liberty Media Group Stock Proposal is approved by stockholders, upon
initial issuance of Liberty Media Group Common Stock, cash management, taxes and
allocation of principal corporate activities between the TCI Group and the
Liberty Media Group would be based upon methods that management of the Company
believes to be reasonable and would be reflected in the respective Group
financial information as follows:
(i) All debt incurred or preferred stock issued by the Company and its
subsidiaries would be specifically attributed to and reflected on the
combined financial statements of the TCI Group, except (a) debt incurred by
entities included in the Liberty Media Group and (b) to the extent
otherwise determined by the Board. The Board of Directors could determine
from time to time that debt of the Company not incurred by entities
included in the Liberty Media Group or preferred stock and the proceeds
thereof should be specifically attributed to and reflected on the combined
financial statements of the Liberty Media Group to the extent that the debt
is incurred or the preferred stock is issued for the benefit of the Liberty
Media Group.
(ii) For all periods prior to the Distribution, all financial impacts
of equity offerings are attributed entirely to the TCI Group. After the
Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock will be attributed entirely to the TCI Group, all
financial impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the Liberty Media
Group will to such extent be reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of which
are attributed to the TCI Group in respect of a reduction in any Inter-
Group Interest will to such extent be reflected in the combined financial
statements of the TCI Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Common Stock will be
attributed entirely to the TCI Group, and financial impacts of dividends or
other distributions on Liberty Media Group Common Stock will be attributed
entirely to the Liberty Media Group, except that dividends or other
distributions on the Liberty Media Group Common Stock will (if at the time
there is an Inter-Group Interest) result in the TCI Group being credited,
and the Liberty Media Group being charged (in addition to the charge for
the dividend or other distribution paid), with an amount equal to the
product of the aggregate amount of such dividend or other distribution paid
or distributed in respect of outstanding shares of Liberty Media Group
Common Stock and a fraction the numerator of which is the Inter-Group
Interest Fraction and the denominator of which is the Outstanding Interest
Fraction. Financial impacts of repurchases of Liberty Media Group Common
Stock the consideration for which is charged to the Liberty Media Group
will to such extent be reflected in the combined financial statements
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of the Liberty Media Group, and financial impacts of repurchases of Liberty
Media Group Common Stock the consideration for which is charged to the TCI
Group will to such extent be reflected in the combined financial statements
of the TCI Group and will result in the creation of, or an increase in any
then-existing, Inter-Group Interest.
(iii) To the extent cash needs of the Liberty Media Group exceed cash
provided by the Liberty Media Group, the TCI Group may transfer funds to
the Liberty Media Group. Conversely, to the extent cash provided by the
Liberty Media Group exceeds cash needs of the Liberty Media Group, the
Liberty Media Group may transfer funds to the TCI Group. The TCI Group will
initially provide centralized cash management functions under which cash
receipts of certain entities attributed to the Liberty Media Group are
remitted to the TCI Group and certain cash disbursements of the Liberty
Media Group will be funded by the TCI Group on a daily basis. Such
transfers of funds between the TCI Group and the Liberty Media Group will
be reflected as borrowings or, if determined by the Board of Directors, in
the case of a transfer from the TCI Group to the Liberty Media Group,
reflected as the creation of, or an increase in any then-existing, Inter-
Group Interest or, in the case of a transfer from the Liberty Media Group
to the TCI Group, reflected as a reduction in any Inter-Group Interest.
There are no specific criteria for determining when a transfer will be
reflected as borrowings or as an increase or reduction in any Inter-Group
Interest. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment objectives of
the Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the Liberty
Media Group will seek their own long-term debt financing.
(iv) Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the Board
of Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the use
of proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans of and the investment opportunities available to each
Group and the availability, cost and time associated with alternative
financing sources.
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(v) In the event of a transfer of funds or other assets from the TCI
Group to the Liberty Media Group that the Board of Directors has determined
to reflect as creating or increasing an Inter-Group Interest, the Number of
Shares Issuable with Respect to the Inter-Group Interest would be increased
by an amount determined by dividing the amount of funds or the value of the
assets transferred by the Market Value of a share of Series A Liberty Media
Group Common Stock as of the date of such transfer, and the Inter-Group
Interest Fraction would be increased and the Outstanding Interest Fraction
would be decreased accordingly. In the event of a transfer of funds or
other assets from the Liberty Media Group to the TCI Group that the Board
of Directors has determined to reflect as a decrease in any Inter-Group
Interest, the Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased by an amount determined by dividing the amount
of funds or the value of the assets transferred by the Market Value of a
share of Series A Liberty Media Group Common Stock as of the date of such
transfer, and the Inter-Group Interest Fraction would be decreased and the
Outstanding Interest Fraction would be increased accordingly.
(vi) The combined balance sheets of the TCI Group would reflect its
net loans to or borrowings from the Liberty Media Group, and the combined
balance sheets of the Liberty Media Group would reflect its net loans to or
borrowings from the TCI Group. Similarly, the respective combined
statements of operations of the TCI Group and the Liberty Media Group would
reflect interest income or expense, as the case may be, associated with
such loans or borrowings and the respective combined statements of cash
flows of the TCI Group and the Liberty Media Group would reflect changes in
the amounts of loans or borrowings deemed outstanding. In the historical
financial information included in this Proxy Statement/Prospectus and the
Appendices hereto, net borrowings have been included as a component of the
recipient Group's combined equity. Until the Distribution, the net
borrowings will continue to be characterized as a component of the
recipient Group's combined equity.
(vii) Certain corporate general and administrative costs (including,
but not limited to, certain corporate, legal, finance, accounting, tax,
data processing, employee benefit and insurance costs) would be charged to
the Liberty Media Group at rates set at the beginning of each year based on
projected utilization for that year. The balance of such costs would be
reflected on the combined financial statements of the TCI Group. The
utilization based charges will be set at levels that management believes to
be reasonable and that would approximate the costs that the Liberty Media
Group would incur for comparable services on a stand-alone basis. Assuming
the Distribution had occurred on January 1, 1995, the Company estimates
that such costs would have aggregated approximately $3,100,000 for the year
ended December 31, 1995. Certain other corporate general and administrative
costs related specifically to management of the Liberty Media Group would
be allocated entirely to the Liberty Media Group.
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The scope of the services charged to the Liberty Media Group on an
allocated basis could be adjusted from time to time depending on the extent
to which it is determined that services should instead be performed
directly by employees of entities included in the Liberty Media Group. The
historical combined statements of operations for the Liberty Media Group
included in this Proxy Statement/Prospectus do not reflect the allocation
of corporate general and administrative costs in the aforementioned manner
because the majority of the entities attributable to the Liberty Media
Group were owned, directly or indirectly, for the majority of the periods
reflected in the statements of operations included in this Proxy
Statement/Prospectus, by LMC before LMC became a subsidiary of the Company.
(viii) In addition to those described above, the TCI Group will
provide certain other services to the Liberty Media Group, and the Liberty
Media Group will provide certain other services to the TCI Group. In
pricing the services rendered by one Group to the other, the Board of
Directors intends to establish a pricing structure which would approximate
the cost at which such services could be obtained from an unaffiliated
third party. The services which the TCI Group will provide to the Liberty
Media Group include encryption, compression and up-linking of Liberty Media
Group programming services and inclusion of Liberty Media Group programming
services in the TCI Group's various means of domestic and international
distribution, both in packaging of services and a la carte, including in
the Headend In The Sky program. The services which the Liberty Media Group
will provide to the TCI Group include video production services, affiliate
sales and marketing for foreign programming services owned by the TCI Group
if and to the extent such services are offered in the United States, sales
of national advertising where buyers may want to purchase advertising time
on programming services and local cable systems. The Liberty Media Group
may also provide distribution and marketing of home video and CD-ROM
products by the TCI Group and direct marketing services, offering products
and services to targeted groups of customers served by the TCI Group.
(ix) Federal income taxes and certain state and local taxes would be
paid on a consolidated basis. However, pursuant to a tax sharing agreement,
federal income taxes are calculated, with certain adjustments, on a
separate return basis for each corporation in each Group (applying
provisions of the Internal Revenue Code of 1986, as amended, and related
regulations as if such corporation filed a separate return for federal
income tax purposes). Based upon these separate calculations, an allocation
of
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tax liabilities is made such that each separate corporation within the
Liberty Media Group is responsible to the Company for its gross share of
the Company's consolidated federal income tax liabilities, such gross share
being determined without regard to (a) tax benefits that are attributable
to the Company or its other consolidated corporations or (b) certain tax
benefits that are attributable to the corporations within the Liberty Media
Group but that are taken into account in determining the Company's
consolidated federal income tax benefit carryovers. Similarly, the Company
is responsible to each corporation within the Liberty Media Group for tax
benefits attributable to such corporations and actually used by the Company
in determining its consolidated federal income tax liability. Tax
attributes, including but not limited to net operating losses, investment
tax credits, alternative minimum tax net operating losses, alternative
minimum tax credits, deferred intercompany gains and tax basis in assets
would be inventoried and tracked for the entities comprising each Group. In
addition, pursuant to such tax sharing agreement, state and local income
taxes are calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the
Group were a separate unitary or combined group for tax purposes and the
Company's combined or unitary tax liability is allocated between the
Groups based upon such separate calculation). The Company has retained the
right to file all returns, make all elections and control all audits and
contests.
(x) The Board of Directors expects to determine, either in specific
instances or by setting generally applicable policies from time to time,
whether to allocate resources and financial support to or pursue business
opportunities or operational strategies through the TCI Group or the
Liberty Media Group, after consideration of such factors as it deems
relevant. The Company has advised International that the Company intends
(a) to make available to International any opportunity to acquire, develop,
own and/or manage cable and/or telephony operations outside the United
States that is presented to the Company or any of its controlled affiliates
and (b) except as provided below, to make available to International any
opportunity to acquire, develop, manage and/or operate programming services
originated outside of the United States (an "International Programming
Opportunity") that is presented to the Company or any of its controlled
affiliates, including those that are a part of the Liberty Media Group. The
foregoing does not apply to (1) international programming services owned or
managed, directly or indirectly (in whole or in part), by the Company or
any of its controlled affiliates other than International as of the date of
the International Prospectus, (2) International Programming Opportunities
under development by the Company or any of its controlled affiliates other
than International that are the subject of a signed letter of intent or
other agreement in principle as of the date of the International
Prospectus, (3) an International Programming Opportunity in respect of
foreign sports programming, which may be pursued either through the Company
or Liberty, (4) an International Programming Opportunity presented to a
public company that is a controlled affiliate of either the Company or any
of the Company's controlled affiliates (other than International), (5) an
International Programming Opportunity presented to, or cable television or
cable telephony services provided by, any company or other entity in which
the Company or any of its controlled affiliates has an interest but which
is not itself a controlled affiliate of either the Company
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or any of the Company's controlled affiliates (included in this category
would be, among others, Discovery, IFE, TBS and QVC) and (6) the
distribution outside the United States of a programming service initially
distributed within the United States and owned and/or managed by the
Company or any of its controlled affiliates (other than International). If
International determines not to pursue an International Programming
Opportunity, the Company (through the Liberty Media Group or through
subsidiaries or controlled affiliates of the Company other than
International) may pursue such International Programming Opportunity or
International and the Liberty Media Group or a subsidiary of the Company
(or any of its controlled affiliates) other than International may pursue
such opportunity jointly. To the extent that the Company or any of its
controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, the Company or such affiliates may also
utilize those rights worldwide, including to provide "backdrop" services.
Neither the Company nor any of its controlled affiliates will be obligated
to make available to International any International Programming
Opportunity to the extent the Company or such controlled affiliate is
legally (for example, by a fiduciary duty owed to others) or contractually
prohibited from doing so. The foregoing arrangement concerning
International Programming Opportunities will, in any event, be terminable
at such time as the Company ceases to beneficially own at least a majority
in voting power of the outstanding shares of common stock of International.
Notwithstanding the policies described above, determinations with respect
to the transfer of funds from one Group to the other would be made at the
discretion of the Board of Directors. Nothing in the foregoing policies
obligates the Board of Directors to cause either Group to provide funds to the
other if the Board of Directors determines it is in the best interests of the
Company not to do so.
The above management and allocation policies could be modified or rescinded
by the Board of Directors, in its sole discretion, without approval of
stockholders, although there is no present intention to do so. The Board of
Directors could also adopt additional policies depending upon the circumstances.
The Board of Directors intends that any determination it might make to modify or
rescind such policies, or to adopt additional policies, including any such
decision that could have disparate effects upon holders of different series of
Common Stock, would be made by the Board of Directors as set forth under "Risk
Factors and Other Special Considerations--Fiduciary Duties of the Board of
Directors are to All Stockholders Regardless of Class or Series".
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Description of TCI Group Common Stock and Liberty Media Group Common Stock
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE GLOSSARY OF
CERTAIN DEFINED TERMS CONTAINED IN APPENDIX I TO THIS PROXY STATEMENT/PROSPECTUS
AND TO APPENDIX III-A TO THIS PROXY STATEMENT/PROSPECTUS, WHICH CONTAINS THE
FULL TEXT OF THE PROPOSED AMENDMENTS TO THE CHARTER.
General
The Charter currently provides that the Company is authorized to issue
1,262,375,096 shares of capital stock, including (i) 1,250,000,000 shares of
common stock, of which 1,100,000,000 shares are designated as Class A Common
Stock and 150,000,000 shares are designated as Class B Common Stock, and (ii)
12,375,096 shares of preferred stock, of which 700,000 shares are designated as
Class A Preferred Stock, par value $0.01 per share (the "Class A Preferred
Stock"), 1,675,096 shares are designated as Class B Preferred Stock and
10,000,000 shares are designated as Series Preferred Stock, issuable in series.
Of the Series Preferred Stock, 80,000 shares are designated as Series C
Preferred Stock, 1,000,000 shares are designated as Convertible Preferred Stock,
Series D (the "Series D Preferred Stock"), and 400,000 shares are designated as
Redeemable Convertible Preferred Stock, Series E (the "Series E Preferred
Stock"). If the Liberty Media Group Stock Proposal is approved, the Charter will
be amended to provide for the Company's Common Stock to be divided into four
series and for an increase of 825,000,000 in the number of authorized shares so
that the Common Stock would consist of: (i) 750,000,000 newly authorized shares
designated Series A Liberty Media Group Common Stock, (ii) 75,000,000 newly
authorized shares designated Series B Liberty Media Group Common Stock, (iii)
1,100,000,000 shares designated Series A TCI Group Common Stock and (iv)
150,000,000 shares designated Series B TCI Group Common Stock. The Series A TCI
Group Common Stock and the Series B TCI Group Common Stock would be created by
redesignation of the Company's previously authorized Class A Common Stock and
Class B Common Stock, respectively. If both the Liberty Media Group Stock
Proposal and the Increased Authorization Proposal are approved, the authorized
shares of Series A TCI Group Common Stock would be increased from 1,100,000,000
to 1,750,000,000. See "The Increased Authorization Proposal".
The authorized but unissued shares of TCI Group Common Stock and Liberty
Media Group Common Stock will be available for issuance by the Company from time
to time, as determined by the Board of Directors, for any proper corporate
purpose, which could include raising capital, acquiring other companies or
making investments or providing compensation or benefits to employees. The
issuance of such shares would not be subject to approval by the stockholders of
the Company, unless deemed advisable by the Board of Directors or required by
applicable law, regulation or Nasdaq National Market requirements.
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Voting Rights
Under the Liberty Media Group Stock Proposal, holders of Series A TCI Group
Common Stock will continue to be entitled to one vote for each share of such
stock held, and holders of Series B TCI Group Common Stock will continue to be
entitled to ten votes for each share of such stock held, on all matters
presented to such stockholders. Holders of Series A Liberty Media Group Common
Stock will be entitled to one vote for each share of such stock held, and
holders of Series B Liberty Media Group Common Stock will be entitled to ten
votes for each share of such stock held, on all matters presented to such
stockholders. Except as may otherwise be required by the DGCL or in the
instrument creating or evidencing any class or series of preferred stock, the
holders of TCI Group Common Stock, the holders of Liberty Media Group Common
Stock and the holders of voting preferred stock, if any, will vote as one class
for all purposes.
Under the Liberty Media Group Stock Proposal, the term "Voting Securities",
as defined in the Amended Charter, will include the Series A TCI Group Common
Stock, the Series B TCI Group Common Stock, the Series A Liberty Media Group
Common Stock, the Series B Liberty Media Group Common Stock and any class or
series of preferred stock entitled to vote with the holders of Common Stock
generally upon all matters which may be submitted to a vote of stockholders at
any annual meeting or special meeting thereof. The Amended Charter provides that
the affirmative vote of holders of at least 66 2/3% of the total voting power of
the then outstanding Voting Securities, voting together as a single class, is
required for (i) the amendment, alteration or repeal of any provision of the
Amended Charter or the addition or insertion of other provisions therein, (ii)
the adoption, amendment or repeal of any provision of the Company's Bylaws,
unless approved by at least 75% of the members of the Board of Directors then in
office, in which case no vote of stockholders will be required, (iii) the merger
or consolidation of the Company with or into any other corporation other than a
merger or consolidation which does not require the consent of stockholders under
the DGCL or which at least 75% of the members of the Board of Directors then in
office have approved, (iv) the sale, lease or exchange of all or substantially
all of the property and assets of the Company or (v) the dissolution of the
Company. Any action to remove directors would be required to be for "cause" (as
defined in the Amended Charter) and be approved by the holders of 66 2/3% of the
total voting power of the then outstanding shares entitled to vote in the
election of directors (which would include the Class B Preferred Stock).
Neither the holders of Series A TCI Group Common Stock or Series B TCI
Group Common Stock, nor the holders of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock, will have any rights to vote as a
separate class or series on any matter coming before the stockholders of the
Company, except with respect to certain limited class and series voting rights
provided under the DGCL. Under the DGCL, the approval of the holders of a
majority of the outstanding shares of any class of capital stock of a
corporation, voting separately as a class, is required to approve any amendment
to the charter that would alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely, provided
that, if any amendment would alter or change the powers, preferences or special
rights of one or more series of the class so as to affect them
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adversely, but would not so affect the entire class, then only the shares
of the series so affected by the amendment would be entitled to vote thereon
separately as a class. Because the Series A TCI Group Common Stock, the Series B
TCI Group Common Stock, the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock will each be separate series of a
single class of stock under the Liberty Media Group Stock Proposal, each series
would be entitled to vote separately as a class upon an amendment to the Amended
Charter that would alter or change the powers, preferences or special rights of
such series so as to affect them adversely only if the other series were not so
affected. The DGCL does not provide for any other separate voting rights of a
class or series of capital stock (other than with respect to a change in par
value or, in certain circumstances not applicable in the case of the Company's
outstanding stock, an increase or decrease in the authorized shares of such
class or series). Consequently, because most matters brought to a stockholder
vote will require the approval of only a specified percentage of all of the
Company's outstanding capital stock entitled to vote on such matters (including
the TCI Group Common Stock and Liberty Media Group Common Stock) voting together
as a single class, if the holders of one or more series of Common Stock have
more than the number of votes required to approve any such matter, such holders
would be in a position to control the outcome of the vote on such matter.
Dividends
Dividends on TCI Group Common Stock and Liberty Media Group Common Stock
will be subject to the same limitations as dividends on the existing Class A
Common Stock and Class B Common Stock, which are limited to legally available
funds of the Company under the DGCL and subject to the prior payment of
dividends on outstanding shares of preferred stock. The DGCL limits the amount
of distributions on common stock to the funds of the Company legally available
for that purpose, which are determined on the basis of the entire Company and
not just the Groups. Consequently, the amount of legally available funds will be
reduced by the amount of any net losses of the Groups and any dividends or
distributions on, or repurchases of, the TCI Group Common Stock or the Liberty
Media Group Common Stock and dividends on, or certain repurchases of, preferred
stock. Certain loan agreements to which certain subsidiaries of the Company are
parties or are subject contain restricted payment provisions that limit the
amount of dividends, other than stock dividends, that those companies may pay.
Future loan agreements may also contain similar restrictions and limits.
Dividends on the TCI Group Common Stock, in addition to the limitations set
forth above, will be further limited to an amount not in excess of the TCI Group
Available Dividend Amount, which is intended to be similar to the amount that
would be legally available for the payment of dividends on the TCI Group Common
Stock under the DGCL if the TCI Group were a separate Delaware corporation.
There can be no assurance that there will be a TCI Group Available Dividend
Amount.
The TCI Group Available Dividend Amount, as of any date, means either (a)
the excess of (i) an amount equal to the total assets of the TCI Group less the
total liabilities (not including preferred stock) of the TCI Group as of such
date over (ii) the aggregate par value of, or any greater amount determined to
be capital in respect of, all outstanding shares of Series A TCI
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Group Common Stock, Series B TCI Group Common Stock and each class or series of
preferred stock attributed to the TCI Group or (b) in case there is no such
excess, an amount equal to the Company Earnings (Loss) Attributable to the TCI
Group (if positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year. "Company Earnings (Loss) Attributable to the TCI Group",
for any fiscal year, means the net earnings or loss of the TCI Group for such
fiscal year (or for the fiscal year of the Company commencing prior to the date
of the first issuance of shares of Liberty Media Group Common Stock, the pro
forma net earnings or loss of the TCI Group for such fiscal year as if such
issuance had occurred on the first day of such fiscal year) determined on a
basis consistent with the determination of the net earnings or loss of the TCI
Group for such fiscal year, as presented in the combined financial statements of
the TCI Group for such fiscal year, including income and expenses of the Company
attributed to the operations of the TCI Group on a substantially consistent
basis, including without limitation, corporate administrative costs, net
interest and income taxes.
Dividends on the Liberty Media Group Common Stock, in addition to the
limitations set forth in the first paragraph under this caption, will be further
limited to an amount not in excess of the Liberty Media Group Available Dividend
Amount, which is intended to be similar to the amount that would be legally
available for the payment of dividends on the Liberty Media Group Common Stock
under the DGCL if the Liberty Media Group were a separate Delaware corporation.
There can be no assurance that there will be a Liberty Media Group Available
Dividend Amount.
The Liberty Media Group Available Dividend Amount, as of any date, means
the product of the Outstanding Interest Fraction and either (a) the excess of
(i) an amount equal to the total assets of the Liberty Media Group less the
total liabilities (not including preferred stock) of the Liberty Media Group as
of such date over (ii) the aggregate par value of, or any greater amount
determined to be capital in respect of, all outstanding shares of Series A
Liberty Media Group Common Stock, Series B Liberty Media Group Common Stock and
each class or series of preferred stock attributed to the Liberty Media Group or
(b) in case there is no such excess, an amount equal to the Company Earnings
(Loss) Attributable to the Liberty Media Group (if positive) for the fiscal year
in which such date occurs and/or the preceding fiscal year. The "Company
Earnings (Loss) Attributable to the Liberty Media Group", for any fiscal year,
means the net earnings or loss of the Liberty Media Group for such fiscal year
(or for the fiscal year of the Company commencing prior to the date of the first
issuance of shares of Liberty Media Group Common Stock, the pro forma net
earnings or loss of the Liberty Media Group for such fiscal year as if such
issuance had occurred on the first day of such fiscal year) determined in
accordance with generally accepted accounting principles in effect at such time,
including income and expenses of the Company attributed to the operations of the
Liberty Media Group on a substantially consistent basis, including without
limitation, corporate administrative costs, net interest and income taxes.
Except for dividends declared or paid as described below under "--Share
Distributions", any dividends paid on the Series A TCI Group Common Stock or the
Series B TCI Group Common Stock will be paid only on both series, in equal
amounts per share, and any dividends paid on the Series A Liberty Media Group
Common Stock or the Series B Liberty Media Group Common Stock will be paid only
on both series, in equal amounts per share.
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The Board of Directors, subject to the provisions described herein under
"--Dividends" and below under "--Share Distributions", will have the authority
and discretion to declare and pay dividends on the TCI Group Common Stock or the
Liberty Media Group Common Stock in equal or unequal amounts, notwithstanding
the relationship between the TCI Group Available Dividend Amount and the Liberty
Media Group Available Dividend Amount, the respective amounts of prior dividends
declared on, or liquidation rights of, the TCI Group Common Stock or the Liberty
Media Group Common Stock or any other factor. See "--Dividend Policy".
At the time of any dividend or other distribution on the outstanding shares
of Liberty Media Group Common Stock (including any dividend of Net Proceeds from
the Disposition of all or substantially all of the properties and assets of the
Liberty Media Group), the TCI Group will (if at such time there is an Inter-
Group Interest) be credited, and the Liberty Media Group will be charged (in
addition to the charge for the dividend or other distribution paid or
distributed in respect of outstanding shares of Liberty Media Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or distribution paid or distributed in respect of outstanding shares of
Liberty Media Group Common Stock times (ii) a fraction the numerator of which is
the Inter-Group Interest Fraction and the denominator of which is the
Outstanding Interest Fraction.
See Appendix II for illustrations of the calculation of the Inter-Group
Interest Fraction and the effects of dividends on shares of Liberty Media Group
Common Stock.
Share Distributions
Distributions on TCI Group Common Stock. The Distribution will be made on
the basis of one share of Series A Liberty Media Group Common Stock for each
four shares of Class A Common Stock (redesignated Series A TCI Group Common
Stock) and one share of Series B Liberty Media Group Common Stock for each four
shares of Class B Common Stock (redesignated Series B TCI Group Common Stock).
If at any time after the Distribution a distribution paid in TCI Group Common
Stock, Liberty Media Group Common Stock or any other securities of the Company
or a subsidiary of the Company (a "share distribution") is to be made with
respect to the TCI Group Common Stock, such share distribution will be declared
and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI
Group Common Stock, on an equal per share basis; or consisting of
shares of Series B TCI Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series
B TCI Group Common Stock) to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock, on an equal per share
basis; or consisting of shares of Series A TCI Group Common Stock (or
Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to
holders of Series A TCI Group
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Common Stock and, on an equal per share basis, shares of Series B TCI
Group Common Stock (or like Convertible Securities convertible into
or exercisable or exchangeable for shares of Series B TCI Group
Common Stock) to holders of Series B TCI Group Common Stock;
(ii) a share distribution consisting of shares of Series A Liberty Media
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media
Group Common Stock) to holders of Series A TCI Group Common Stock and
Series B TCI Group Common Stock, on an equal per share basis;
provided that the sum of (1) the aggregate number of shares of Series
A Liberty Media Group Common Stock to be so issued (or the number of
such shares which would be issuable upon conversion, exercise or
exchange of any Convertible Securities to be so issued) and (2) the
number of shares of such series that are subject to issuance upon
conversion, exercise or exchange of any Convertible Securities then
outstanding that are attributed to the TCI Group other than Pre-
Distribution Convertible Securities is less than or equal to the
Number of Shares Issuable with Respect to the Inter-Group Interest;
and
(iii) a share distribution consisting of any class or series of securities
other than TCI Group Common Stock or Liberty Media Group Common Stock
(or Convertible Securities convertible into or exercisable or
exchangeable for shares of TCI Group Common Stock or Liberty Media
Group Common Stock), either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock
or on the basis of a distribution of one class or series of
securities to holders of Series A TCI Group Common Stock and another
class or series of securities to holders of Series B TCI Group Common
Stock, provided that the securities so distributed (and, if the
distribution consists of Convertible Securities, the securities into
which such Convertible Securities are convertible or for which they
are exercisable or exchangeable) do not differ in any respect other
than relative voting rights and related differences in designation,
conversion, redemption and share distribution provisions not greater
than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the
Series A TCI Group Common Stock and the Series B TCI Group Common
Stock and provided that such distribution is otherwise made on an
equal per share basis.
The Company will not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
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Distributions on Liberty Media Group Common Stock. If at any time a share
distribution is to be made with respect to the Liberty Media Group Common Stock,
such share distribution will be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A Liberty Media
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media
Group Common Stock) to holders of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, on an equal per
share basis; or consisting of shares of Series B Liberty Media Group
Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series B Liberty Media
Group Common Stock) to holders of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, on an equal per
share basis; or consisting of shares of Series A Liberty Media Group
Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media
Group Common Stock) to holders of Series A Liberty Media Group Common
Stock and, on an equal per share basis, shares of Series B Liberty
Media Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B Liberty
Media Group Common Stock) to holders of Series B Liberty Media Group
Common Stock; and
(ii) a share distribution consisting of any class or series of securities
other than as described in the foregoing clause (i) and other than
TCI Group Common Stock, either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of
Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock or on the basis of a distribution of one class or
series of securities to holders of Series A Liberty Media Group
Common Stock and another class or series of securities to holders of
Series B Liberty Media Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of
Convertible Securities, the securities into which such Convertible
Securities are convertible or for which they are exercisable or
exchangeable) do not differ in any respect other than relative voting
rights and related differences in designation, conversion, redemption
and share distribution provisions not greater than the corresponding
differences in voting rights, designation, conversion, redemption and
share distribution provisions between the Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common Stock.
The Company will not reclassify, subdivide or combine the Series A Liberty
Media Group Common Stock without reclassifying, subdividing or combining the
Series B Liberty Media Group Common Stock, on an equal per share basis, and the
Company will not reclassify, subdivide or combine the Series B Liberty Media
Group Common Stock without reclassifying, subdividing or combining the Series A
Liberty Media Group Common Stock, on an equal per share basis.
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Conversion and Redemption
Conversion at the Option of the Holder. Each share of Series B TCI Group
Common Stock will be convertible, at the option of the holder thereof, into one
share of Series A TCI Group Common Stock. Each share of Series B Liberty Media
Group Common Stock will be convertible, at the option of the holder thereof,
into one share of Series A Liberty Media Group Common Stock. Any such conversion
may be effected by surrendering the certificate or certificates representing the
Series B TCI Group Common Stock or Series B Liberty Media Group Common Stock to
be converted, duly endorsed, at the office of the Company or its transfer agent,
together with a written notice that such holder elects to convert all or a
specified number of the shares represented by such certificate or certificates
and stating the name or names in which such holder desires the certificate or
certificates deliverable upon conversion to be issued. If so required by the
Company, any certificate for shares surrendered for conversion will be
accompanied by instruments of transfer, in form satisfactory to the Company,
duly executed by the holder of such shares or the duly authorized representative
of such holder. Such conversion will be deemed to have been made at the close of
business on the date of receipt by the Company or any such transfer agent of the
certificate or certificates, notice and, if required, instruments of transfer
referred to above, and the person or persons entitled to receive the Series A
TCI Group Common Stock or Series A Liberty Media Group Common Stock issuable on
such conversion will be treated for all purposes as the record holder or holders
of such Series A TCI Group Common Stock or Series A Liberty Media Group Common
Stock on that date. Shares of Series A TCI Group Common Stock will not be
convertible into shares of Series B TCI Group Common Stock, and shares of Series
A Liberty Media Group Common Stock will not be convertible into shares of Series
B Liberty Media Group Common Stock.
Conversion at the Option of the Company. The Board of Directors may at any
time declare that (i) each of the outstanding shares of Series A Liberty Media
Group Common Stock will be converted into a number (or fraction) of fully paid
and nonassessable shares of Series A TCI Group Common Stock equal to the
Optional Conversion Ratio, and (ii) each of the outstanding shares of Series B
Liberty Media Group Common Stock will be converted into a number (or fraction)
of fully paid and nonassessable shares of Series B TCI Group Common Stock equal
to the Optional Conversion Ratio.
For these purposes, the "Optional Conversion Ratio" means the quotient
(calculated to the nearest five decimal places) obtained by dividing (x) the
Liberty Media Group Common Stock Per Share Value by (y) the average Market Value
of one share of Series A TCI Group Common Stock for the 20-Trading Day period
ending on the Trading Day preceding the Appraisal Date. The "Liberty Media Group
Common Stock Per Share Value" means the quotient obtained by dividing the
Liberty Media Group Private Market Value by the Adjusted Outstanding Shares of
Liberty Media Group Common Stock.
The "Liberty Media Group Private Market Value" means an amount equal to the
private market value of the Liberty Media Group, as determined by appraisal in
accordance with the procedures described herein. In the event that the Company
determines to establish the Liberty Media Group Private Market Value, on the
date as of which the Liberty Media Group
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Private Market Value is to be determined (the "Appraisal Date"), two investment
banking firms of recognized national standing will be designated to determine
the private market value of the Liberty Media Group, one designated by the
Company (the "First Appraiser") and one designated by a committee of the Board
of Directors all of whose members are independent directors as determined under
Nasdaq National Market rules (the "Second Appraiser"). Within 20 days after the
Appraisal Date, the First Appraiser and the Second Appraiser will each determine
its initial view as to the private market value of the Liberty Media Group as of
the Appraisal Date and will consult with one another with respect thereto. By
the 30th day after the Appraisal Date, the First Appraiser and the Second
Appraiser will each have determined its final view as to such private market
value. At that point, if the higher of the respective final views of the First
Appraiser and the Second Appraiser as to such private market value (the "Higher
Appraised Amount") is not more than 120% of the lower of such respective final
views (the "Lower Appraised Amount"), the Liberty Media Group Private Market
Value will be the average of those two amounts. If the Higher Appraised Amount
is more than 120% of the Lower Appraised Amount, the First Appraiser and the
Second Appraiser will agree upon and jointly designate a third investment
banking firm of recognized national standing (the "Mutually Designated
Appraiser") to determine such private market value. The Company will not
disclose the final view of the First Appraiser and Second Appraiser to the
Mutually Designated Appraiser, nor will the Mutually Designated Appraiser have
the benefit of any of the work of the First Appraiser and Second Appraiser. The
Mutually Designated Appraiser will, no later than the 20th day after the date
the Mutually Designated Appraiser is designated, determine such private market
value (the "Mutually Appraised Amount"), and the Liberty Media Group Private
Market Value will be (i) if the Mutually Appraised Amount is between the Lower
Appraised Amount and the Higher Appraised Amount, (a) the average of (1) the
Mutually Appraised Amount and (2) the Lower Appraised Amount or the Higher
Appraised Amount, whichever is closer to the Mutually Appraised Amount, or (b)
the Mutually Appraised Amount, if neither the Lower Appraised Amount nor the
Higher Appraised Amount is closer to the Mutually Appraised Amount, or (ii) if
the Mutually Appraised Amount is greater than the Higher Appraised Amount or
less than the Lower Appraised Amount, the average of the Higher Appraised Amount
and the Lower Appraised Amount. For these purposes, if any such investment
banking firm expresses its final view of the private market value of the Liberty
Media Group as a range of values, such investment banking firm's final view of
such private market value will be deemed to be the midpoint of such range of
values.
Each of the investment banking firms referred to in the preceding paragraph
will be instructed to determine the private market value of the Liberty Media
Group as of the Appraisal Date based upon the amount a willing purchaser would
pay to a willing seller, in an arm's length transaction, if it were acquiring
the Liberty Media Group, as if the Liberty Media Group were a publicly traded
non-controlled corporation and without consideration of any potential regulatory
constraints limiting the potential purchasers of the Liberty Media Group other
than that which would have existed if the Liberty Media Group were a publicly
traded non-controlled entity.
Following the determination of the Liberty Media Group Private Market
Value, the investment banking firms whose final views of the private market
value of the Liberty Media Group were used in the calculation of the Liberty
Media Group Private Market Value will
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determine the Adjusted Outstanding Shares of Liberty Media Group Common Stock
together with any further adjustments to the Liberty Media Group Private Market
Value resulting from such determination. The "Adjusted Outstanding Shares of
Liberty Media Group Common Stock" means a number, as determined by such
investment banking firms as of the Appraisal Date, equal to the sum of the
number of shares of Liberty Media Group Common Stock outstanding, the Number of
Shares Issuable with Respect to the Inter-Group Interest, the number of
Committed Acquisition Shares issuable and the number of shares of Liberty Media
Group Common Stock issuable upon the conversion, exercise or exchange of all
Pre-Distribution Convertible Securities and those Convertible Securities (other
than Pre-Distribution Convertible Securities) the holders of which would derive
an economic benefit upon conversion, exercise or exchange of such Convertible
Securities which exceeds the economic benefit of not converting, exercising or
exchanging such Convertible Securities.
If the Company determines to convert shares of Series A Liberty Media Group
Common Stock into Series A TCI Group Common Stock and shares of Series B Liberty
Media Group Common Stock into Series B TCI Group Common Stock at the Optional
Conversion Ratio, such conversion will occur on a conversion date on or prior to
the 120th day following the Appraisal Date. If the Company determines not to
undertake such conversion, the Company may at any time thereafter undertake to
reestablish the Liberty Media Group Common Stock Per Share Value as of a
subsequent date.
Any such conversion would dilute the interests of holders of TCI Group
Common Stock and would preclude holders of Liberty Media Group Common Stock from
retaining their interest in a security reflecting separately the business of the
Liberty Media Group. In addition, the adjustments in respect of Pre-Distribution
Convertible Securities and Committed Acquisition Shares would dilute the
interests of holders of Liberty Media Group Common Stock upon any conversion of
shares of Liberty Media Group Common Stock into TCI Group Common Stock at the
Optional Conversion Ratio. See "Risk Factors and Other Special Considerations--
Potential Conversion of Liberty Media Group Common Stock" and "Potential
Dilution from Issuances of Liberty Media Group Common Stock upon Conversion of
Securities Outstanding at Time of Distribution" and "--Potential Dilution from
Issuances of Liberty Media Group Common Stock Pursuant to Existing Acquisition
Agreements".
Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common
Stock. Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise), in
one transaction or a series of related transactions by the Company and its
subsidiaries to any one or more persons, entities or groups (a "Disposition") of
all or substantially all of the properties and assets of the Liberty Media Group
(other than (a) in connection with the Disposition by the Company of all of the
Company's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Company, (b) on a pro rata basis to (1) the holders of all outstanding
shares of Liberty Media Group Common Stock and (2) the Company for the benefit
of the TCI Group with respect to the Number of Shares Issuable with Respect to
the Inter-Group Interest, (c) to any person, entity or group which the Company,
directly or indirectly, after giving effect to the Disposition, controls or (d)
in connection with
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a Related Business Transaction), the Company is required, on or prior to the
85th Trading Day following the consummation of such Disposition, to either:
(i) subject to the limitations described above under "--Dividends",
declare and pay a dividend in cash and/or securities or other
property (other than a dividend or distribution of Common Stock) to
the holders of the outstanding shares of Liberty Media Group Common
Stock equally on a share for share basis, in an aggregate amount
equal to the product of the Outstanding Interest Fraction as of the
record date for determining the holders entitled to receive such
dividend and the Net Proceeds of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the Liberty Media Group Available Dividend Amount would
have been sufficient to pay a dividend in lieu thereof as described
in clause (i) of this paragraph, then:
(A) if such Disposition involves all (not merely substantially
all) of the properties and assets of the Liberty Media Group, redeem
all outstanding shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock in consideration for
cash and/or securities or other property (other than Common Stock) in
an aggregate amount equal to the product of the Adjusted Outstanding
Interest Fraction as of the date of such redemption and the Net
Proceeds of such Disposition, such aggregate amount to be allocated
to shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock in the ratio of the number of shares
of each such series outstanding (so that the amount of consideration
paid for the redemption of each share of Series A Liberty Media Group
Common Stock and each share of Series B Liberty Media Group Common
Stock is the same); or
(B) if such Disposition involves substantially all (but not
all) of the properties and assets of the Liberty Media Group, apply
an aggregate amount of cash and/or securities or other property
(other than Common Stock) equal to the product of the Outstanding
Interest Fraction as of the date shares are selected for redemption
and the Net Proceeds of such Disposition to the redemption of
outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, such aggregate amount to
be allocated to shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock in the ratio of the
number of shares of each such series outstanding, and the number of
shares of each such series to be redeemed to equal the lesser of (x)
the whole number nearest the number determined by dividing the
aggregate amount so allocated to the redemption of such series by the
average Market Value of one share of Series A Liberty Media Group
Common Stock during the ten-Trading Day period beginning on the 16th
Trading Day following the consummation of such Disposition and (y)
the number of shares of such series outstanding (so that the amount
of consideration paid for the redemption of each
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share of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock is the same); or
(iii) convert (A) each outstanding share of Series A Liberty Media Group
Common Stock into a number of fully paid and nonassessable shares of
Series A TCI Group Common Stock and (B) each outstanding share of
Series B Liberty Media Group Common Stock into a number of fully paid
and nonassessable shares of Series B TCI Group Common Stock, in each
case equal to 110% of the average daily ratio (calculated to the
nearest five decimal places) of the Market Value of one share of
Series A Liberty Media Group Common Stock to the Market Value of one
share of Series A TCI Group Common Stock during the ten-Trading Day
period referred to in clause (ii)(B) of this paragraph.
For these purposes, "substantially all of the properties and assets of the
Liberty Media Group" means a portion of such properties and assets that
represents at least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets of the Liberty Media Group as
of such date.
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets of the Liberty Media Group in
which the Company receives as proceeds of such Disposition primarily equity
securities (including, without limitation, capital stock, convertible
securities, partnership or limited partnership interests and other types of
equity securities, without regard to the voting power or contractual or other
management or governance rights related to such equity securities) of the
purchaser or acquiror of such assets and properties of the Liberty Media Group,
any entity which succeeds (by merger, formation of a joint venture enterprise or
otherwise) to such assets and properties of the Liberty Media Group or a third
party issuer, which purchaser, acquiror or other issuer is engaged or proposes
to engage primarily in one or more businesses similar or complementary to the
businesses conducted by the Liberty Media Group prior to such Disposition, as
determined in good faith by the Board of Directors. The Related Business
Transaction exception would enable the Company to enter into transactions in
which the properties or assets of the Liberty Media Group may be considered to
be "disposed of" in exchange for equity securities of an entity engaged or
proposing to engage in similar or complementary business areas to those of the
Liberty Media Group while maintaining the capital structure and delineation of
business groups contemplated by the Liberty Media Group Stock Proposal.
The "Adjusted Outstanding Interest Fraction" means a fraction the numerator
of which is the number of outstanding shares of Liberty Media Group Common Stock
and the denominator of which is the sum of (a) such number of outstanding
shares, (b) the Number of Shares Issuable with Respect to the Inter-Group
Interest, (c) the number of shares of Liberty Media Group Common Stock issuable
upon conversion, exercise or exchange of Pre-Distribution Convertible Securities
and (d) the number of Committed Acquisition Shares issuable. The effect of using
the Adjusted Outstanding Interest Fraction, instead of the Outstanding Interest
Fraction, in the determination of amounts to be paid in redemption of shares of
Liberty Media Group Common Stock following a Disposition of all of the
properties and assets of the Liberty Media Group is
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to allocate to the TCI Group a portion of the Net Proceeds of the Disposition,
in addition to the amount so allocated in respect of any Inter-Group Interest,
sufficient to provide for the delivery of the portion of the consideration
deliverable by the Company upon any post-Disposition conversion, exercise or
exchange of Pre-Distribution Convertible Securities that is in substitution for
shares of Liberty Media Group Common Stock that would have been issuable upon
such conversion, exercise or exchange if it had occurred prior to such
Distribution and to make similar provision for the Company's obligation in
respect of any Committed Acquisition Shares that remain issuable. See "-Effects
on Convertible Securities" and "Risk Factors and Other Special Considerations --
Potential Dilution from Issuances of Liberty Media Group Common Stock upon
Conversion of Securities Outstanding at Time of Distribution" and "-- Potential
Dilution from Issuances of Liberty Media Group Common Stock Pursuant to Existing
Acquisition Agreements". In the event any redemption of the Liberty Media Group
Common Stock or conversion of the Liberty Media Group Common Stock into TCI
Group Common Stock is made in circumstances in which securities or property are
allocated to the TCI Group in respect of Pre-Distribution Convertible
Securities, Committed Acquisition Shares or other Convertible Securities
entitled to receive such securities or property upon conversion, exercise or
exchange (such securities or other property, the "Reserved Property"), the TCI
Group will segregate and hold such property separate (in the case of any
Reserved Property other than TCI Group Common Stock), or duly reserve shares of
TCI Group Common Stock issuable upon such conversion, exercise or exchange, for
the benefit of the holders of Pre-Distribution Convertible Securities, Committed
Acquisition Shares or other Convertible Securities. In the event the holders of
any such Pre-Distribution Convertible Securities or other Convertible Securities
do not convert, exercise or exchange such securities prior to the expiration of
any conversion or exercise right or the retirement of such security, or the
acquisition relating to such Committed Acquisition Shares is not consummated,
then the Reserved Property shall revert to the TCI Group and the former holders
of Liberty Media Group Common Stock shall have no interest in such Reserved
Property.
The "Net Proceeds" from any Disposition of any of the properties and assets
of the Liberty Media Group means an amount, if any, equal to the gross proceeds
of such Disposition after any payment of, or reasonable provision for, (a) any
taxes payable by the Company in respect of such Disposition or in respect of any
resulting dividend or redemption (or which would have been payable but for the
utilization of tax benefits attributable to the TCI Group), (b) any transaction
costs, including, without limitation, any legal, investment banking and
accounting fees and expenses and (c) any liabilities (contingent or otherwise)
of, or attributed to, the Liberty Media Group, including, without limitation,
any indemnity or guarantee obligations incurred in connection with the
Disposition or any liabilities for future purchase price adjustments and any
preferential amounts plus any accumulated and unpaid dividends in respect of
preferred stock attributed to the Liberty Media Group. The Company may elect to
pay the dividend or redemption price referred to in clause (i) or (ii) above
either in the same form as the proceeds of the Disposition were received or in
any other combination of cash or securities or other property (other than Common
Stock) that the Board of Directors determines will have an aggregate market
value on a fully distributed basis, of not less than the amount of the Net
Proceeds. If the dividend or redemption price is paid in the form of capital
stock of an issuer other than the Company the Board of Directors may determine
either to (i) pay the dividend or redemption price in the form of separate
classes or series of common stock with relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions not greater than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions between
the Series A Liberty Media Group Common Stock and the Series B Liberty Media
Group Common Stock, with holders of shares of Series B Liberty Media Group
Common Stock receiving the class or series having the higher relative voting
rights, or (ii) pay the dividend or redemption price in the form of a single
class of capital stock without distinction between the shares received by the
holders of the two series of Liberty Media Group Common Stock.
The option to convert the Liberty Media Group Common Stock into TCI
Group Common Stock in the event of a Disposition provides the Company with
additional flexibility by allowing the Company to deliver consideration in the
form of shares of TCI Group Common Stock rather than cash or securities or other
properties. This alternative could be used, for example, in circumstances when
the Company did not have sufficient legally available assets under the
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DGCL to pay the full amount of an otherwise required dividend or redemption or
when the Company desired to retain such proceeds.
If less than substantially all of the properties and assets of the Liberty
Media Group were disposed of by the Company in one transaction (even if an
additional transaction were consummated at a later time in which additional
properties and assets of the Liberty Media Group were disposed of by the
Company, which, together with the properties and assets disposed of in the first
transaction, would have constituted substantially all of the properties and
assets of the Liberty Media Group at the time of the first transaction), the
Company would not be required to pay a dividend on, redeem or convert the
outstanding shares of Liberty Media Group Common Stock, unless such transactions
constituted a series of related transactions. The second transaction, however,
could trigger such a requirement if, at the time of the second transaction, the
properties and assets disposed of in such transaction constituted at least
substantially all of the properties and assets of the Liberty Media Group at
such time. If less than substantially all of the properties and assets of the
Liberty Media Group were disposed of by the Company, the holders of the Liberty
Media Group Common Stock would not be entitled to receive any dividend or have
their shares redeemed or converted for TCI Group Common Stock, although the
Board of Directors could determine, in its sole discretion, to pay a dividend on
the Liberty Media Group Common Stock in an amount related to the proceeds of
such Disposition.
At the time of any dividend made as a result of a Disposition referred to
above, the TCI Group will be credited, and the Liberty Media Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of Liberty Media Group Common Stock), with an amount equal to
the product of (i) the aggregate amount paid in respect of such dividend times
(ii) a fraction the numerator of which is the Inter-Group Interest Fraction and
the denominator of which is the Outstanding Interest Fraction.
After any conversion date on which all outstanding shares of Liberty Media
Group Common Stock were converted, any share of Liberty Media Group Common Stock
that is issued on conversion, exercise or exchange of any Convertible Securities
will, immediately upon issuance pursuant to such conversion, exercise or
exchange and without any notice or any other action on the part of the Company
or its Board of Directors or the holder of such share of Liberty Media Group
Common Stock, be converted into the kind and amount of shares of capital stock,
cash and/or other securities or property that a holder of such Convertible
Security would have been entitled to receive pursuant to the terms of such
Convertible Security had such terms provided that the conversion, exercise or
exchange privilege in effect immediately prior to any conversion by the Company
of any of its capital stock into shares of any other capital stock of the
Company would be adjusted so that the holder of any such Convertible Security
thereafter surrendered for conversion, exercise or exchange would be entitled to
receive the kind and amount of shares of capital stock, cash and/or other
securities or property such holder would have received immediately following
such action had such Convertible Security been converted, exercised or exchanged
immediately prior thereto. The provisions described in this paragraph will not
apply to the extent that adjustments in respect of such conversion or redemption
are otherwise made pursuant to the provisions of such Convertible Securities.
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Redemption in Exchange for Stock of Subsidiary. Any time at which all of
the assets and liabilities attributed to the Liberty Media Group are held
directly or indirectly by any one or more wholly-owned subsidiaries of the
Company (the "Liberty Media Group Subsidiaries"), the Board of Directors may,
subject to the availability of assets legally available for the purpose, redeem
all of the outstanding shares of Liberty Media Group Common Stock in exchange
for an aggregate number of outstanding shares of common stock of each Liberty
Media Group Subsidiary equal to the product of the Adjusted Outstanding Interest
Fraction and the number of all of the outstanding shares of common stock of such
Liberty Media Group Subsidiary, on a pro rata basis. The effect of using the
Adjusted Outstanding Interest Fraction, instead of the Outstanding Interest
Fraction, in the determination of the shares of the Liberty Media Group
Subsidiaries deliverable in such a redemption is to allocate to the TCI Group a
portion of the shares of the Liberty Media Group Subsidiaries, in addition to
the number of such shares so allocated in respect of any Inter-Group Interest,
sufficient to provide for the delivery of the portion of the consideration
deliverable by the Company upon any post-redemption conversion, exercise or
exchange of Pre-Distribution Convertible Securities that become so payable in
substitution for shares of Liberty Media Group Common Stock that would have been
issuable upon such conversion, exercise or exchange if it had occurred prior to
such redemption and to make similar provision for the Company's obligations in
respect of any Committed Acquisition Shares that remain issuable. See "Effects
on Convertible Securities" and "Risk Factors and Other Special Considerations --
Potential Dilution from Issuances of Liberty Media Group Common Stock upon
Conversion of Securities Outstanding at Time of Distribution" and "-- Potential
Dilution from Issuances of Liberty Media Group Common Stock Pursuant to Existing
Acquisition Agreements".
In effecting such a redemption, the Board of Directors may determine either
to (i) redeem shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock in exchange for shares of separate classes or
series of common stock of each Liberty Media Group Subsidiary with relative
voting rights and related differences in designation, conversion, redemption and
share distribution provisions not greater than the corresponding difference in
voting rights, designation, conversion, redemption and share distribution
provisions between the Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, with holders of shares of Series B Liberty
Media Group Common Stock receiving the class or series having the higher
relative voting rights, or (ii) redeem shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock in exchange for
shares of a single class of common stock of each Liberty Media Group Subsidiary
without distinction between the shares distributed to the holders of the two
series of Liberty Media Group Common Stock. If the Company determines to
undertake a redemption as described in clause (i) of the preceding sentence, the
outstanding shares of common stock of each Liberty Media Group Subsidiary not
distributed to holders of Liberty Media Group Common Stock would consist solely
of the class or series having the lower relative voting rights.
General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above under
"--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common
Stock", the Company will announce publicly by press release (i) the Net Proceeds
of such Disposition, (ii) the number of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media
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Group Common Stock, (iii) the number of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock into or for which
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (iv) the Outstanding
Interest Fraction on the date of such notice. Not earlier than the 26th Trading
Day and not later than the 30th Trading Day following the consummation of such
Disposition, the Company will announce publicly by press release which of the
actions described in clauses (i), (ii) or (iii) of the first paragraph under
"--Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common
Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend described in clause (i) of the
first paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty
Media Group Common Stock", the Company will, not later than the 30th Trading Day
following the consummation of such Disposition, cause to be given to each holder
of outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such series
(unless provision for notice is otherwise made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) the record date for
determining holders entitled to receive such dividend, which will be not earlier
than the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition, (ii) the anticipated payment date of such
dividend (which will not be more than 85 Trading Days following the consummation
of such Disposition), (iii) the kind of shares of capital stock, cash and/or
other securities or property to be distributed in respect of shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
(iv) the Net Proceeds of such Disposition, (v) the Outstanding Interest Fraction
on the date of such notice, (vi) the number of outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and the number of shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof and (vii) in the case of a notice to holders
of Convertible Securities, a statement to the effect that holders of such
Convertible Securities will be entitled to receive such dividend only if they
appropriately convert, exercise or exchange them prior to the record date
referred to in clause (i) of this sentence.
If the Company determines to undertake a redemption of shares of Liberty
Media Group Common Stock following a Disposition of all of the properties and
assets of the Liberty Media Group as described in clause (ii)(A) of the first
paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock", the Company will cause to be given to each holder of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and to each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for such notice
is otherwise made pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a statement that all shares of Liberty Media Group
Common Stock outstanding on the redemption date will be redeemed, (ii) the
redemption date (which will not be more than 85 Trading Days following the
consummation of such Disposition), (iii) the kind of shares of capital
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stock, cash and/or other securities or property to be paid as a redemption price
in respect of shares of Liberty Media Group Common Stock outstanding on the
redemption date, (iv) the Net Proceeds of such Disposition, (v) the Adjusted
Outstanding Interest Fraction on the date of such notice, (vi) the place or
places where certificates for shares of Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Company waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property, (vii) the number
of outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which such Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof and (viii)
in the case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities will be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the redemption
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holders will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, the provision described in the last
paragraph under "--Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock" if such holders convert, exercise or exchange such
Convertible Securities following such redemption date. Such notice will be sent
by first-class mail, postage prepaid, not less than 35 Trading Days nor more
than 45 Trading Days prior to the redemption date, at such holder's address as
the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption of shares of Liberty
Media Group Common Stock following a Disposition of substantially all of the
properties and assets of the Liberty Media Group as described in clause (ii)(B)
of the first paragraph under "--Mandatory Dividend, Redemption or Conversion of
Liberty Media Group Common Stock", the Company will, not later than the 30th
Trading Day following the consummation of such Disposition, cause to be given to
each holder of record of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock, and to each holder
of Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(i) a date not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition which will be the
date on which shares of the Liberty Media Group Common Stock then outstanding
will be selected for redemption, (ii) the anticipated redemption date (which
will not be more than 85 Trading Days following the consummation of such
Disposition), (iii) the kind of shares of capital stock, cash and/or other
securities or property to be paid as a redemption price in respect of shares of
Liberty Media Group Common Stock outstanding on the redemption date, (iv) the
Net Proceeds of such Disposition, (v) the Outstanding Interest Fraction on the
date of such notice, (vi) the number of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock and the
number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the conversion
or exercise prices thereof and (vii) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible
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Securities will be entitled to participate in such redemption only if such
holders appropriately convert, exercise or exchange such Convertible Securities
on or prior to the date referred to in clause (i) of this sentence and a
statement as to what, if anything, such holders will be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable, the
provision described in the last paragraph under "--Mandatory Dividend,
Redemption or Conversion of Liberty Media Group Common Stock" if such holders
convert, exercise or exchange such Convertible Securities following such date.
Promptly following the date referred to in clause (i) of the preceding sentence,
but not earlier than the 40th Trading Day and not later than the 50th Trading
Day following the consummation of such Disposition, the Company will cause to be
given to each holder of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock to be redeemed, a notice setting forth
(i) the number of shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock held by such holder to be redeemed, (ii) a
statement that such shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock will be redeemed, (iii) the redemption
date (which will not be more than 85 Trading Days following the consummation of
such Disposition), (iv) the kind and per share amount of shares of capital
stock, cash and/or other securities or property to be received by such holder
with respect to each share of such Liberty Media Group Common Stock to be
redeemed, including details as to the calculation thereof, and (v) the place or
places where certificates for shares of such Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Company waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property. Such notices will
be sent by first-class mail, postage prepaid, at such holder's address as the
same appears on the transfer books of the Company. If less than all of the
outstanding shares of Liberty Media Group Common Stock are to be redeemed as
described above under "--Mandatory Dividend, Redemption or Conversion of Liberty
Media Group Common Stock", such shares will be redeemed by the Company pro rata
among the holders of Liberty Media Group Common Stock or by such other method as
may be determined by the Board of Directors to be equitable.
In the event of any conversion as described above under "--Conversion at
the Option of the Company" or "--Mandatory Dividend, Redemption or Conversion of
Liberty Media Group Common Stock", the Company will cause to be given to each
holder of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock and to each holder of Convertible Securities convertible into
or exercisable or exchangeable for shares of either such series (unless
provision for such notice is otherwise made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) a statement that all
outstanding shares of Liberty Media Group Common Stock will be converted, (ii)
the conversion date (which will not be more than 85 Trading Days following the
consummation of such Disposition), (iii) the per share number of shares of
Series A TCI Group Common Stock or Series B TCI Group Common Stock, as
applicable, to be received with respect to each share of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock, including
details as to the calculation thereof, (iv) the place or places where
certificates for shares of Liberty Media Group Common Stock, properly endorsed
or assigned for transfer (unless the Company waives such requirement), are to be
surrendered, (v) the number of outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock and the number
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of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock into or for which outstanding Convertible Securities
are then convertible, exercisable or exchangeable and the conversion, exercise
or exchange prices thereof and (vi) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible Securities will be entitled to receive shares of Series A TCI Group
Common Stock or Series B TCI Group Common Stock, as applicable, only if such
holders appropriately convert, exercise or exchange such Convertible Securities
on or prior to the conversion date referred to in clause (ii) of this sentence
and a statement as to what, if anything, such holders will be entitled to
receive pursuant to the terms of such Convertible Securities or, if applicable,
the provision described in the last paragraph under "--Mandatory Dividend,
Redemption or Conversion of Liberty Media Group Common Stock" if such holders
convert, exercise or exchange such Convertible Securities following such
conversion date. Such notice will be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
conversion date, at such holder's address as the same appears on the transfer
books of the Company.
If the Company determines to redeem shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock as described above
under "--Redemption in Exchange for Stock of Subsidiary", the Company will
promptly cause to be given to each holder of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock and to each holder of
Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for such notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(i) a statement that all outstanding shares of Liberty Media Group Common Stock
will be redeemed in exchange for shares of common stock of the Liberty Media
Group Subsidiaries, (ii) the redemption date, (iii) Adjusted Outstanding
Interest Fraction on the date of such notice, (iv) the place or places where
certificates for shares of Liberty Media Group Common Stock, properly endorsed
or assigned for transfer (unless the Company waives such requirement), are to be
surrendered for delivery of certificates for shares of common stock of the
Liberty Media Group Subsidiaries, (v) the number of outstanding shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and the number of shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof and (vi) in the case of a notice to holders
of Convertible Securities, a statement to the effect that holders of such
Convertible Securities will be entitled to receive shares of common stock of the
Liberty Media Group Subsidiaries upon redemption only if such holders
appropriately convert, exercise or exchange such Convertible Securities on or
prior to the redemption date referred to in clause (ii) of this sentence and a
statement as to what, if anything, such holders will be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable, the
provisions described in the last paragraph under "--Mandatory Dividend,
Redemption or Conversion of Liberty Media Group Common Stock" if such holders
convert, exercise or exchange such Convertible Securities following such
redemption date. Such notice will be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
redemption date, at such holder's address as the same appears on the transfer
books of the Company.
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Neither the failure to mail any notice to any particular holder of Liberty
Media Group Common Stock or of Convertible Securities nor any defect therein
will affect the sufficiency thereof with respect to any other holder of
outstanding shares of Liberty Media Group Common Stock or of Convertible
Securities, or the validity of any conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of Liberty
Media Group Common Stock upon any conversion, redemption, dividend or other
distribution described above. In connection with the determination of the number
of shares of any class of capital stock that is issuable or the amount of
securities that is deliverable to any holder of record upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares or
securities), the Company may aggregate the number of shares of Liberty Media
Group Common Stock held at the relevant time by such holder of record. If the
number of shares of any class of capital stock or the amount of securities
remaining to be issued or delivered to any holder of Liberty Media Group Common
Stock is a fraction, the Company will, if such fraction is not issued or
delivered to such holder, pay a cash adjustment in respect of such fraction in
an amount equal to the fair market value of such fraction on the fifth Trading
Day prior to the date such payment is to be made (without interest). For
purposes of the preceding sentence, "fair market value" of any fraction will be
(i) in the case of any fraction of a share of capital stock of the Company, the
product of such fraction and the Market Value of one share of such capital stock
and (ii) in the case of any other fractional security, such value as is
determined by the Board of Directors.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Liberty Media Group Common Stock; provided, however,
that if such shares are converted or redeemed by the Company after the record
date for determining holders of Liberty Media Group Common Stock entitled to any
dividend or distribution thereon, such dividend or distribution will be payable
to the holders of such shares at the close of business on such record date
notwithstanding such conversion or redemption.
Before any holder of shares of Liberty Media Group Common Stock will be
entitled to receive certificates representing shares of any kind of capital
stock or cash and/or securities or other property to be received by such holder
with respect to any conversion or redemption of shares of Liberty Media Group
Common Stock, such holder is required to surrender at such place as the Company
will specify certificates for such shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement). As soon as practicable
after surrender of certificates for shares of Liberty Media Group Common Stock,
the Company will deliver to the person for whose account such shares were so
surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock or cash
and/or securities or other property to which such person is entitled, together
with any payment for fractional securities referred to above. If less than all
of the shares of Liberty Media Group Common Stock represented by any one
certificate are to be redeemed, the Company will issue and deliver a new
certificate for the shares of Liberty Media Group Common Stock not redeemed. The
Company will not be required to register a transfer of (i) any shares of Liberty
Media Group Common Stock for a period of 15 Trading Days next
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preceding any selection of shares of Liberty Media Group Common Stock to be
redeemed or (ii) any shares of Liberty Media Group Common Stock selected or
called for redemption.
From and after any conversion or redemption, all rights of a holder of
shares of Liberty Media Group Common Stock that were converted or redeemed will
cease except for the right, upon surrender of the certificates representing
shares of Liberty Media Group Common Stock, to receive certificates representing
shares of the kind and amount of capital stock or cash and/or securities or
other property for which such shares were converted or redeemed, together with
any payment for fractional securities. No holder of a certificate that,
immediately prior to the conversion or redemption of Liberty Media Group Common
Stock, represented shares of Liberty Media Group Common Stock will be entitled
to receive any dividend or other distribution with respect to shares of any kind
of capital stock into or in exchange for which the Liberty Media Group Common
Stock was converted or redeemed until surrender of such holder's certificate for
a certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there will be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date after the conversion or redemption, but
that were not paid by reason of the foregoing, with respect to the number of
whole shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion or
redemption of Liberty Media Group Common Stock, the Company will, however, be
entitled to treat the certificates for Liberty Media Group Common Stock that
have not yet been surrendered for conversion or redemption as evidencing the
ownership of the number of whole shares of the kind or kinds of capital stock
for which the shares of Liberty Media Group Common Stock represented by such
certificates have been converted or redeemed, notwithstanding the failure to
surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of Liberty Media Group Common Stock. The Company will not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of any shares of capital stock in a name other than
that in which the shares of Liberty Media Group Common Stock so converted or
redeemed were registered and no such issue or delivery will be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid.
Liquidation Rights
The Liberty Media Group Stock Proposal provides that, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any preferred stock is entitled, (i) the holders
of the outstanding shares of TCI Group Common Stock will share equally, on a
share for share basis, in a percentage of the funds of the Company remaining for
distribution to its common stockholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of X/Z for the 20-Trading Day period ending
on the Trading Day prior to the date of
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the public announcement of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, and (ii) the holders of the
outstanding shares of Liberty Media Group Common Stock will share equally, on a
share for share basis, in a percentage of the funds of the Company remaining for
distribution to its common stockholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of Y/Z for the 20-Trading Day period ending
on the Trading Day prior to the date of the public announcement of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, where X is the aggregate Market Capitalization of the Series A TCI
Group Common Stock and the Series B TCI Group Common Stock, Y is the aggregate
Market Capitalization of the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock, and Z is the aggregate Market
Capitalization of the Series A TCI Group Common Stock, the Series B TCI Group
Common Stock, the Series A Liberty Media Group Common Stock and the Series B
Liberty Media Group Common Stock. Neither a consolidation, merger nor sale of
assets will be construed to be a "liquidation", "dissolution" or "winding up".
No holder of Liberty Media Group Common Stock shall have any special right
to receive specific assets of the Liberty Media Group in the case of any
dissolution, liquidation or winding up of the Company.
Determinations by the Board of Directors
The Amended Charter will provide that any determinations made by the Board
of Directors under any provision described under "--Description of TCI Group
Common Stock and Liberty Media Group Common Stock" will be final and binding on
all stockholders of the Company, except as may otherwise be required by law.
Such a determination would not be binding if it were established that the
determination was made in breach of a fiduciary duty of the Board of Directors.
See "Risk Factors and Other Special Considerations - Fiduciary Duties of the
Board of Directors are to All Stockholders Regardless of Class or Series". The
Company will prepare a statement of any such determination by the Board of
Directors respecting the fair market value of any properties, assets or
securities and will file such statement with the Secretary of the Company.
Preemptive Rights
Under the Liberty Media Group Stock Proposal, the holders of the TCI Group
Common Stock and Liberty Media Group Common Stock will not have any preemptive
rights to subscribe for any additional shares of capital stock or other
obligations convertible into or exercisable for shares of capital stock that may
hereafter be issued by the Company.
No Initial Inter-Group Interest
The Liberty Media Group Common Stock issuable pursuant to the Distribution
will represent 100% of the equity value of the Company attributable to the
Liberty Media Group and, accordingly, the TCI Group will not have an Inter-Group
Interest in the Liberty Media Group. However, if at any time shares of Liberty
Media Group Common Stock representing less than 100% of the equity value of the
Company attributable to the Liberty Media Group are outstanding, the remaining
equity value will be attributed to the TCI Group as an Inter-Group Interest in
the Liberty Media Group. An Inter-Group Interest would be created only if a
subsequent transfer of cash or other property from the TCI Group to the Liberty
Media Group
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is specifically designated by the Board of Directors as being made to create an
Inter-Group Interest (in contrast to transfers made for other consideration such
as transfers as loans or in purchase and sale transactions) or if outstanding
shares of Liberty Media Group Common Stock cease to be outstanding following
their purchase with funds attributed to the TCI Group. The terms of the Liberty
Media Group Stock Proposal do not permit the Liberty Media Group to have an
Inter-Group Interest in the TCI Group.
The "Number of Shares Issuable with Respect to the Inter-Group Interest"
means the number of shares of Series A Liberty Media Group Common Stock that
could be issued by the Company for the account of the TCI Group in respect of
any Inter-Group Interest. Shares of Series B Liberty Media Group Common Stock
may not be issued by the Company for the account of the TCI Group in respect of
any Inter-Group Interest. The "Outstanding Interest Fraction" means the
percentage interest in the equity value of the Company attributable to the
Liberty Media Group that is represented at any time by the outstanding shares of
Liberty Media Group Common Stock, and the "Inter-Group Interest Fraction" means
any remaining percentage interest in the equity value of the Company
attributable to the Liberty Media Group that is attributed to the TCI Group. The
sum of the Outstanding Interest Fraction and the Inter-Group Interest Fraction
would always equal 100%. The Adjusted Outstanding Interest Fraction is a
fraction the numerator of which is the number of outstanding shares of Liberty
Media Group Common Stock and the denominator of which is the sum of (a) such
number of outstanding shares, (b) the Number of Shares Issuable with Respect to
the Inter-Group Interest, (c) the number of shares of Liberty Media Group Common
Stock issuable upon conversion, exercise or exchange of Pre-Distribution
Convertible Securities and (d) the number of Committed Acquisition Shares that
remain issuable. The Adjusted Outstanding Interest Fraction is used instead of
the Outstanding Interest Fraction in certain provisions described under "--
Description of TCI Group Common Stock and Liberty Media Group Common Stock --
Conversion and Redemption". The full definitions of "Number of Shares Issuable
with Respect to the Inter-Group Interest", "Outstanding Interest Fraction",
"Inter-Group Interest Fraction" and "Adjusted Outstanding Interest Section" are
set forth in Appendix III-A .
Any Number of Shares Issuable with Respect to the Inter-Group Interest
would not be represented by outstanding shares of Liberty Media Group Common
Stock and, therefore, would not be entitled to any voting rights. In addition,
outstanding shares of Liberty Media Group Common Stock that are held by
majority-owned subsidiaries of the Company (as to which the Company owns a
majority of the shares entitled to vote in the election of directors) would not,
in accordance with the DGCL, be entitled to vote on matters presented to
stockholders or be counted for quorum purposes. Accordingly, the Company will
not have any voting rights with respect to any Inter-Group Interest, and the
outcome of any vote of the Liberty Media Group Common Stock would be determined
by the holders of the outstanding shares of Liberty Media Group Common Stock
(excluding any shares held by such majority-owned subsidiaries of the Company).
For financial reporting purposes, shares of Liberty Media Group Common
Stock acquired by consolidated subsidiaries of the Company which are part of the
TCI Group which remain outstanding following such acquisition would be combined
with the Number of Shares Issuable with Respect to the Inter-Group Interest and
reported as the TCI Group's investment in the Liberty Media Group. Any
differences between such reported investment and any then existing Inter-Group
Interest would be reconcilable by adding to any then existing Inter-Group
Interest the number of outstanding shares of Liberty Media Group Common Stock
held by consolidated subsidiaries of the Company. Because these shares would
still be outstanding for purposes of the receipt of dividends and payment of
redemption or liquidation amounts, the TCI Group would obtain substantially the
same economic benefits from such outstanding shares as it would have received
had such shares ceased to be outstanding following their purchase and added to
the Number of Shares Issuable with Respect to the Inter-Group Interest.
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The authorized shares of Liberty Media Group Common Stock in excess of the
total number of shares outstanding will be available for issuance without
further approval by the stockholders of the Company and may be issued at any
time at prices that could dilute the value of the outstanding shares of Liberty
Media Group Common Stock. If there is an Inter-Group Interest, whenever shares
of Liberty Media Group Common Stock are subsequently issued by the Company, it
will identify (i) the number of shares of Liberty Media Group Common Stock
issued for the account of the TCI Group in respect of a reduction in any then
existing Inter-Group Interest, the net proceeds from the sale of which will be
reflected in the combined financial statements of the TCI Group, and (ii) the
number of such shares issued for the account of the Liberty Media Group as an
additional equity interest in the Liberty Media Group, the net proceeds of which
will be reflected in the combined financial statements of the Liberty Media
Group. Shares of Series B Liberty Media Group Common Stock may not be issued by
the Company for the account of the TCI Group in respect of a reduction in any
Inter-Group Interest. The Board of Directors expects to make such determination,
in its sole discretion, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the relative
levels of internally generated cash flow of the Groups, the capital expenditure
plans of and investment opportunities available to the Groups, the long-term
business prospects for the Groups and the availability, cost and time associated
with alternative financing sources. See "Special Considerations--Fiduciary
Duties of the Board of Directors". If there is an Inter-Group Interest, whenever
additional shares of Liberty Media Group Common Stock are issued by the Company
for the account of the TCI Group in respect of a reduction in the Inter-Group
Interest, the Number of Shares Issuable with Respect to the Inter-Group Interest
would decrease on a share-for-share basis and the Inter-Group Interest Fraction
would decrease and the Outstanding Interest Fraction would increase accordingly.
If the Number of Shares Issuable with Respect to the Inter-Group Interest is
reduced to zero as a result of such issuances, shares of Liberty Media Group
Common Stock could no longer be issued by the Company for the account of the TCI
Group unless an Inter-Group Interest is again subsequently created. If the net
proceeds of any issuance by the Company of Liberty Media Group Common Stock are
allocated to the Liberty Media Group, the Number of Shares Issuable with Respect
to the Inter-Group Interest would not be reduced, but the Inter-Group Interest
Fraction would decrease and the Outstanding Interest Fraction would increase
accordingly.
If there is an Inter-Group Interest and the Board of Directors determines
to issue shares of Liberty Media Group Common Stock as a distribution on the TCI
Group Common Stock, such distribution would be treated as a distribution of
shares issuable with respect to the Inter-Group Interest, and as a result, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease by the number of shares distributed to the holders of TCI Group Common
Stock, resulting in a proportionate decrease in the Inter-Group Interest
Fraction and increase in the Outstanding Interest Fraction. Following the
Distribution, shares of Series B Liberty Media Group Common Stock may not be
issued by the Company as a distribution on the TCI Group Common Stock.
If shares of Liberty Media Group Common Stock cease to be outstanding
following their purchase with funds attributed to the TCI Group, the Number of
Shares Issuable with Respect to the Inter-Group Interest would increase on a
share-for-share basis and the Inter-Group Interest
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Fraction would increase and the Outstanding Interest Fraction would decrease
accordingly. If the purchase of shares of Liberty Media Group Common Stock were
attributed to the Liberty Media Group, the Number of Shares Issuable with
Respect to the Inter-Group Interest in the Liberty Media Group would not be
increased, but the Inter-Group Interest Fraction would increase and the
Outstanding Interest Fraction would decrease accordingly. The Board of Directors
would, in its sole discretion, determine whether purchases of Liberty Media
Group Common Stock should be made with consideration attributed to the TCI Group
or the Liberty Media Group, by considering such factors as it deems relevant,
including, without limitation, the needs of the Company, the relative levels of
internally generated cash flow of the Groups, the capital expenditure plans of
the Groups, the investment opportunities available to the Groups, the long-term
business prospects for the Groups and the availability, cost and time associated
with alternative financing sources.
The Board of Directors could, in its sole discretion, determine from time
to time to contribute cash or other property of the TCI Group as additional
equity to the Liberty Media Group, which would increase the Number of Shares
Issuable with Respect to the Inter-Group Interest by the number determined by
dividing the amount of such cash or the fair value (as determined by the Board
of Directors) of such property by the Market Value of one share of Series A
Liberty Media Group Common Stock as of the date of such contribution. In such
event, the Inter-Group Interest Fraction will increase and the Outstanding
Interest Fraction will decrease accordingly. The Board of Directors could, in
its sole discretion, also determine from time to time to transfer cash or other
property of the Liberty Media Group from the Liberty Media Group to the TCI
Group in respect of a reduction in any then-existing Inter-Group Interest, in
which case the Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased by the number determined by dividing the amount of
such cash or the fair value (as determined by the Board of Directors) of such
property by the Market Value of one share of Series A Liberty Media Group Common
Stock as of the date of such contribution. In such event, the Inter-Group
Interest Fraction would decrease and the Outstanding Interest Fraction would
increase accordingly. The Board of Directors could, in its sole discretion,
determine to make contributions or other transfers referred to in this paragraph
after consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
The TCI Group will be credited, and the Liberty Media Group will be charged
(in addition to the charge for the dividend or other distribution paid or
distributed in respect of outstanding shares of Liberty Media Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of any
dividend or other distribution paid or distributed in respect of outstanding
shares of Liberty Media Group Common Stock (including any dividend of Net
Proceeds from the Disposition of all or substantially all of the assets and
properties of the Liberty Media Group), times (ii) a fraction the numerator of
which is the Inter-Group Interest Fraction and the denominator of which is the
Outstanding Interest Fraction.
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See Appendix II for illustrations of the calculation of the Inter-Group
Interest in the Liberty Media Group and the effects thereon of dividends on, and
the issuance or repurchase of, shares of Liberty Media Group Common Stock and
contributions of cash or other property of the TCI Group to the Liberty Media
Group.
Dividend Policy
The Company has never paid dividends on its Class A Common Stock or Class B
Common Stock. If the Liberty Media Group Stock Proposal is approved, the Board
of Directors does not currently intend to pay dividends on the TCI Group Common
Stock or the Liberty Media Group Common Stock. However, the Board of Directors
reserves the right to pay such dividends at any time and from time to time out
of funds legally available therefor.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. Any future dividends on the TCI Group Common Stock and the Liberty Media
Group Common Stock would be paid on such basis as the Board of Directors
determines, subject to the provisions described under "--Description of TCI
Group Common Stock and Liberty Media Group Common Stock--Dividends". In making
its determination, the Board of Directors expects to follow a policy under which
it will consider, among other factors, the relative financial condition, results
of operations and business requirements of the respective Groups. See Appendix
IV for the Consolidated Financial Information of the Company, the Combined
Financial Information of the Liberty Media Group and the Combined Financial
Information of the TCI Group.
For information concerning dividends on the TCI Group Common Stock and the
Liberty Media Group Common Stock, see "--Description of TCI Group Common Stock
and Liberty Media Group Common Stock--Dividends".
Stock Transfer Agent and Registrar
The Bank of New York will act as transfer agent and registrar for the
Liberty Media Group Common Stock upon issuance thereof and will continue to act
as transfer agent and registrar for the TCI Group Common Stock.
Inclusion in Nasdaq National Market
The Series A Liberty Media Group Common Stock and the Series B Liberty
Media Group Common Stock have been approved for inclusion in the Nasdaq National
Market under the symbols "LBTYA" and "LBTYB", respectively. Shares of Series A
TCI Group Common Stock, Series B TCI Group Common Stock and Class B Preferred
Stock will continue to be included in the Nasdaq National Market under the
symbols "TCOMA", "TCOMB" and "TCOMP", respectively.
Financial Advisors
Lehman Brothers Inc. and CS First Boston Corporation (collectively, the
"Financial Advisors") are acting as the Company's exclusive financial advisors
in connection with the Liberty Media Stock Group Proposal. The Financial
Advisors are also assisting the Company in the solicitation of proxies for the
Annual Meeting. The Company has paid to each of the Financial Advisors a fee of
$_________ for their services and will pay to each of the Financial Advisors an
additional fee of $_________ if the Liberty Media Group Stock Proposal is
approved by the Company's stockholders. In addition, the Company has agreed to
pay to each of the Financial Advisors a fee of $_________ upon the distribution
of the Liberty Media Group Common Stock, a portion of which fee will be subject
to a credit against future financial services which may be rendered by such
Financial Advisor or certain underwriting fees payable to such Financial Advisor
in respect of future debt or equity financings by the Company. The Company has
also agreed to reimburse the Financial Advisors for certain of their reasonable
out-of-pocket expenses and has agreed to indemnify each of the Financial
Advisors against certain liabilities, including liabilities under the Securities
Act.
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No Dissenters' Rights
Under the DGCL, stockholders of the Company do not have dissenters' rights
in connection with the Liberty Media Group Stock Proposal.
Certain Federal Income Tax Considerations
The following summary of the material Federal income tax consequences of
the Liberty Media Group Stock Proposal is based on the opinion of Baker & Botts,
L.L.P., counsel to the Company and Baker & Botts, L.L.P. is of the opinion that
this summary accurately describes such material consequences. The discussion is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), Treasury Department regulations, published positions of the Internal
Revenue Service (the "Service") and court decisions now in effect, all of which
are subject to change. In particular, Congress could enact legislation affecting
the treatment of stock with characteristics similar to the Liberty Media Group
Common Stock or the Treasury Department could change the current law in future
regulations, including regulations issued pursuant to its authority under
Section 337(d) of the Code. Any further legislation or regulations could be
enacted or promulgated so as to apply retroactively to the Liberty Media Group
Stock Proposal. However, upon advice of counsel, the Company believes that, as a
practical matter, it is unlikely that such legislation or regulations would
apply retroactively to the Liberty Media Group Common Stock. In addition, the
discussion and counsel's opinion are based on the assumption that the Liberty
Media Group Stock Proposal will be implemented as described herein, and on
certain assumptions as to the manner in which any offering or distribution of
Liberty Media Group Common Stock would be accomplished.
The Company has not applied for an advance tax ruling from the Service
because the Service has announced that it will not issue advance rulings on the
classification of stock with characteristics similar to the Liberty Media Group
Common Stock.
It is important to note that the opinion of counsel contained herein is
based upon the law in effect as of the date hereof. The Liberty Media Group
Stock Proposal contemplates the possibility of the passage of time between the
date hereof and the Distribution and any subsequent offering or other
distribution of Liberty Media Group Common Stock. Therefore, the Company will
seek appropriate advice from its counsel to update this opinion prior to the
Distribution and any such offering or distribution.
Tax Implications to Stockholders. This discussion addresses only those
stockholders who hold the Class A Common Stock or Class B Common Stock and would
hold Liberty Media Group Common Stock as a capital asset within the meaning of
Section 1221 of the Code and is included for general information only. It does
not discuss all aspects of Federal income taxation that could be relevant to a
stockholder in light of such stockholder's particular tax circumstances and does
not apply to certain types of stockholders who could be subject to special
treatment under the Federal income tax laws. Stockholders should consult their
own tax advisors with regard to the application of the Federal income tax laws
to their particular situation, as well
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as to the applicability and effect of any state, local, or foreign tax laws to
which they could be subject.
Distribution and Receipt of Liberty Media Group Common Stock. Under the
Liberty Media Group Stock Proposal, shares of Liberty Media Group Common Stock
will be issued as a distribution on the Class A Common Stock and Class B Common
Stock on a pro rata basis. In the opinion of counsel, the Liberty Media Group
Common Stock would be common stock of the Company for Federal income tax
purposes, and counsel is of the view that such distribution should constitute a
tax-free stock dividend. In such case, the basis of the Class A Common Stock and
Class B Common Stock held by a stockholder immediately before the distribution
would be allocated between the Liberty Media Group Common Stock received and
such Class A Common Stock and Class B Common Stock in proportion to the fair
market value of the Liberty Media Group Common Stock received and such Class A
Common Stock and Class B Common Stock, and the holding period of the Liberty
Media Group Common Stock and the Class A Common Stock and Class B Common Stock
would include the holding period of the Class A Common Stock and Class B Common
Stock, assuming that the Class A Common Stock and Class B Common Stock were a
capital asset in the hands of the stockholder on the date of distribution. If
such distribution did not constitute a tax-free stock dividend (but assuming the
Liberty Media Group Common Stock were common stock of the Company for Federal
income tax purposes), then stockholders of Class A Common Stock and Class B
Common Stock would be in receipt of a taxable distribution in an amount equal to
the value of the shares of Liberty Media Group Common Stock distributed as of
the time of the distribution.
Although it is counsel's opinion that a distribution of Liberty Media Group
Common Stock would not result in the recognition of any income, gain or loss or
the receipt of a taxable dividend by stockholders, there are no Federal income
tax regulations, court decisions or published Service rulings bearing directly
on the effect of the dividend and liquidation features of the Liberty Media
Group Common Stock. In addition, the Service announced during 1987 that it was
studying the Federal income tax consequences of stock which has certain voting
and liquidation rights in an issuing corporation, but whose dividend rights are
determined by reference to the earnings and profits of a segregated portion of
the issuing corporation's assets, and that it would not issue any advance
rulings regarding such stock. Earlier this year, the Service withdrew such stock
from its list of matters under consideration and reiterated that it would not
issue advance rulings regarding such stock. In the absence of such a ruling,
there is a risk that the Service could claim that the Liberty Media Group Common
Stock represents property other than stock of the Company.
If the Liberty Media Group Common Stock were treated as property other than
stock of the Company, the distribution of the Liberty Media Group Common Stock
could be taxed as a dividend to stockholders in an amount equal to the fair
market value of the Liberty Media Group Common Stock. In addition, if the
Liberty Media Group Common Stock were treated as property other than stock of
the Company, the Company could recognize gain on the distribution of Liberty
Media Group Common Stock, in an amount equal to the difference between the fair
market value of the Liberty Media Group Common Stock and the Company's tax basis
in such property. However, as indicated above, counsel is of the opinion that
the Liberty Media Group
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Common Stock would be treated as stock of the Company. The Company will seek
appropriate advice from its counsel prior to any distribution of Liberty Media
Group Common Stock.
Sale or Exchange of Common Stock. Upon the taxable sale or exchange of the
Liberty Media Group Common Stock, a stockholder would recognize gain or loss
equal to the difference between (i) any cash received plus the fair market value
of any other consideration received, and (ii) the tax basis of the stock sold or
exchanged. Such tax basis could be determined as described under "--Distribution
and Receipt of Liberty Media Group Common Stock" above.
If the Company redeems the Liberty Media Group Common Stock for shares of
the Liberty Media Group Subsidiaries, it intends to do so in a manner that will
be tax free under Section 355 of the Code. If the redemption does not qualify
under Section 355 of the Code, then (i) the Company could recognize gain on the
distribution of stock of the Liberty Media Group Subsidiaries in an amount equal
to the difference between the fair market value of such stock distributed and
the Company's tax basis in such stock, and (ii) the holders of the Liberty Media
Group Common Stock could, depending on their individual circumstances, either
(a) recognize gain on the redemption in an amount equal to the difference
between the fair market value of the Liberty Media Group Subsidiaries stock
received and the stockholders' tax basis in their shares being redeemed or (b)
be treated as having received a taxable dividend in an amount equal to the fair
market value of the stock.
A conversion of Liberty Media Group Common Stock into TCI Group Common
Stock should constitute a tax free exchange. However, it is not entirely clear
that an exchange between holders of shares of Liberty Media Group Common Stock
for shares of TCI Group Common Stock, or shares of TCI Group Common Stock for
shares of Liberty Media Group Common Stock, will constitute a tax free exchange
under Section 1036 of the Code (or any other provision).
The excess of net long-term capital gains over net short-term capital loss
could be taxed at a lower rate than ordinary income for certain noncorporate
taxpayers. A capital gain is long-term if the asset is held for more than one
year and is short-term if held for one year or less. The distinction between
capital gain or loss and ordinary income is also relevant for purposes of, among
other things, the limitation on the deductibility of capital losses.
Adjustments to Convertible Securities. If the Liberty Media Group Stock
Proposal is approved by stockholders, any outstanding Convertible Securities
convertible into or exercisable for Class A Common Stock and Class B Common
Stock will become convertible into a combination of TCI Group Common Stock and
Liberty Media Group Common Stock, or (in the case of the Series F Preferred
Stock) into an increased amount of TCI Group Common Stock, at the time of such
transaction. To the extent that, in connection with such transaction, the right
to convert such convertible securities is adjusted only as necessary to prevent
dilution, such adjustment should not be deemed a taxable stock distribution to
the holders of Convertible Securities.
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United States Alien Holders. Dividend payments received by a United States
Alien (as defined below) holder of Liberty Media Group Common Stock would be
subject to United States Federal withholding tax in the same manner as such
holder is subject to Federal withholding tax on Common Stock. A United States
Alien holder would not be subject to United States Federal income or withholding
tax on any gain realized on the taxable sale or exchange of any such stock,
unless (A) such gain was effectively connected with a United States trade or
business of the United States Alien, (B) the United States Alien was an
individual who had been present in the United States for a period or periods of
183 days or more during the taxable year and certain other conditions were met
or (C) the stock sold or exchanged was a "United States Real Property Interest"
as defined in section 897(c)(1) of the Code at any time during the five years
prior to the sale or exchange of the stock or at any time during the time that
the United States Alien held such stock, whichever time was shorter. The Liberty
Media Group Common Stock sold or exchanged would be a United States Real
Property Interest only if, at any time during the five years prior to the sale
or exchange of such stock or at any time during the period that the United
States Alien held such stock, whichever time was shorter, the Company had been a
"United States real property holding corporation" as defined in section
897(c)(2) of the Code and the United States Alien directly or constructively had
owned more than 5% of such series of Liberty Media Group Common Stock. The
Company believes that it is not, has not been and will not become a "United
States real property holding corporation" for Federal income tax purposes.
A "United States Alien" is any person who, for United States Federal income
tax purposes, is a foreign corporation, a nonresident alien individual, a
nonresident alien fiduciary or a foreign estate or trust, or a foreign
partnership that includes as a member any of the foregoing persons.
Backup Withholding. Certain noncorporate holders of Liberty Media Group
Common Stock could be subject to backup withholding at a rate of 31% on the
payment of dividends on such stock. Backup withholding would apply only if the
holder (i) failed to furnish its Taxpayer Identification Number ("TIN"), which,
for an individual, would be his or her Social Security number, (ii) furnished an
incorrect TIN, (iii) was notified by the Service that it had failed to properly
report payments of interest or dividends, or (iv) under certain circumstances,
failed to certify under penalties of perjury that it had furnished a correct TIN
and had been notified by the Service that it had failed to properly report
payments of interest or dividends. Stockholders should consult their tax
advisors regarding their qualification for exemption from backup withholding and
the procedures for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a holder of Liberty
Media Group Common Stock would be allowed as a credit against such stockholder's
Federal income tax liability and could entitle such stockholder to a refund,
provided that the required information was furnished to the Service.
Tax Implications to the Company. In the opinion of counsel, the Liberty
Media Group Common Stock would be common stock of the Company and no gain or
loss would be recognized by the Company on any distribution of Liberty Media
Group Common Stock. If, however, the Liberty Media Group Common Stock were
treated as property other than stock
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of the Company, the Company could recognize gain on the distribution of such
stock in an amount equal to the difference between the fair market value of such
stock and its tax basis in the hands of the Company. If the Liberty Media Group
Common Stock were issued and treated as stock of a subsidiary of the Company,
and not as Common Stock of the Company, depending upon the amount of stock
issued, the Liberty Media Group would not be includable in the Company's
consolidated Federal income tax return, and any dividends paid or deemed to be
paid to the Company by the Liberty Media Group would be taxed to the Company.
Although it is possible that the Service could claim that the Liberty Media
Group Common Stock is not stock of the Company, it is the opinion of Baker &
Botts, L.L.P., that such a position, if asserted, would not prevail.
Effects on Convertible Securities
After the Distribution and the redesignation of the Class A Common Stock
and Class B Common Stock, existing securities of the Company that are
convertible into or exchangeable for shares of Class A Common Stock will, as a
result of the operation of antidilution provisions, be adjusted so that a number
of shares of Series A TCI Group Common Stock equal to the number of shares of
Class A Common Stock theretofore issuable upon such conversion or exchange would
be issued upon such conversion or exchange and there will also be delivered upon
their conversion or exchange the number of shares of Series A Liberty Media
Group Common Stock that would have been issuable in the Distribution with
respect to the Class A Common Stock that would have been issuable upon their
conversion or exchange prior to the Distribution. The issuance of shares of
Series A Liberty Media Group Common Stock upon such conversion or exchange will
not result in any transfer of funds or other assets from the TCI Group to the
Liberty Media Group or a reduction in any Inter-Group Interest that then may
exist, in consideration of such issuance.
Adjustments Under Stock Incentive Plan and Director Stock Option Plan
If the Liberty Media Group Stock Proposal is approved, pursuant to
applicable provisions of the Company's 1994 Stock Incentive Plan, the
Compensation Committee of the Board of Directors (the "Compensation Committee")
will determine appropriate adjustments to outstanding options and stock
appreciation rights to take account of the Distribution. Under these
adjustments, each holder of an outstanding option or stock appreciation right
will receive an additional option or stock appreciation right, as applicable,
covering a number of shares of Series A Liberty Media Group Common Stock equal
to one-fourth of the number of shares of Class A Common Stock theretofore
subject to the outstanding option or stock appreciation right, and the
outstanding option or stock appreciation right would continue in effect as an
option or stock appreciation right covering the same number of shares of Series
A TCI Group Common Stock (as redesignated) that were theretofore subject to the
option or stock appreciation right. The aggregate pre-adjustment strike price of
the outstanding options or stock appreciation rights will be allocated between
the outstanding options or stock appreciation rights and the newly issued
options or stock appreciation rights in a ratio to be determined by the
Compensation Committee.
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If the Director Stock Option Plan is approved at the Annual Meeting,
outstanding options granted under that plan in November 1994, subject to
approval at the Annual Meeting, will be adjusted so that each holder of an
outstanding option will receive an additional option covering a number of shares
of Series A Liberty Media Group Common Stock equal to one-fourth of the number
of shares of Class A Common Stock theretofore subject to the outstanding option,
and the outstanding option will continue in effect as an option covering the
same number of shares of Series A TCI Group Common Stock (as redesignated) that
were theretofore subject to the option. The aggregate pre-adjustment strike
price of such outstanding options will be allocated so that the aggregate strike
price of the additional options covering Series A Liberty Media Group Common
Stock will be 25% of the pre-adjustment strike price and the aggregate strike
price of the options covering Series A TCI Group Common Stock will be 75% of the
pre-adjustment strike price.
Future Issuances Pursuant to Stock Incentive Plan and Director Stock Option Plan
In the event the Liberty Media Group Stock Proposal is approved by
stockholders, the 1994 Stock Incentive Plan and, if the Director Stock Option
Plan Proposal is approved, the Director Stock Option Plan will be adjusted in
connection with the Distribution to provide for future grants in respect of
shares of Series A TCI Group Common Stock and Series A Liberty Media Group
Common Stock.
The 1994 Stock Incentive Plan will be adjusted to provide that the number
and type of shares subject to future awards would consist of a number of shares
of Series A TCI Group Common Stock equal to the number of shares of Class A
Common Stock subject to future awards immediately prior to the Distribution and
a number of shares of Series A Liberty Media Group Common Stock equal to one-
fourth of the number of shares of Class A Common Stock subject to future awards
immediately prior to Distribution. Following the Distribution, the Compensation
Committee may in its discretion grant awards, including awards of options on, or
stock appreciation rights respecting, shares of Series A TCI Group Common Stock,
Series A Liberty Media Group Common Stock, or combinations thereof, in such
amounts and types as it determines in accordance with the terms of the 1994
Stock Incentive Plan, as adjusted.
The adjustments to the Director Stock Option Plan would result in the
number of shares reserved for issuance under such Plan being changed from
1,000,000 shares of Class A Common Stock to 1,000,000 shares of Series A TCI
Group Common Stock and 250,000 shares of Series A Liberty Media Group Common
Stock. In addition, the automatic grant of options to purchase 50,000 shares of
Class A Common Stock that the Director Option Plan provides will be made to each
person becoming a nonemployee director subsequent to its approval at the Annual
Meeting will be changed to an automatic grant of options to purchase 50,000
shares of Series A TCI Group Common Stock and 12,500 shares of Series A Liberty
Media Group Common Stock.
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In determining whether awards under the 1994 Stock Incentive Plan in
respect of Series A TCI Group Common Stock, Series A Liberty Media Group Common
Stock, or a combination thereof, are to be made to specific employees, it is
anticipated that the Compensation Committee will consider, among other things,
the identity of the Group to which the employee in question provides services.
It is also anticipated, however, that the Compensation Committee will consider
that employees should be rewarded based on the success of the Company as a whole
and that a policy of granting awards solely in respect of the Common Stock
relating to the Group for which the employee provides services may be
counterproductive to the overall success of the Company. In addition, because of
the complementary nature of the businesses of the TCI Group and the Liberty
Media Group, it is anticipated that services performed in respect of one Group
would have at least an indirect effect upon the business of the other Group.
Therefore, it is anticipated that the Compensation Committee could decide that
in order to provide the maximum incentive to employees regarding the overall
success of the Company, it may be appropriate to grant awards consisting of
securities in respect of both Groups to employees performing services for one
Group. If the Compensation Committee elects to grant awards to individual
employees consisting of stock options on, or stock appreciation rights
respecting, both Series A TCI Group Common Stock and Series A Liberty Media
Group Common Stock, the allocation between the two will be at the Compensation
Committee's discretion. To the extent that options or stock appreciation rights
on Liberty Media Group Common Stock are granted to employees of the Company, the
issuance of shares of Liberty Media Group Common Stock upon exercise will not be
made out of any then-existing Inter-Group Interest and will therefore dilute the
holders of Liberty Media Group Common Stock.
In connection with the allocation of expenses related to and proceeds
received upon the exercise of options awarded under the Director Stock Option
Plan, such expenses and proceeds will be attributed to the TCI Group in the case
of options to purchase TCI Group Common Stock and to the Liberty Media Group in
the case of options to purchase Liberty Media Group Common Stock. With respect
to the allocation of compensation expenses relating to awards under the 1994
Stock Incentive Plan, such compensation expenses will generally be attributed to
the Group to which the employee provides services. The proceeds received upon
any exercise of options to acquire TCI Group Common Stock or Liberty Media Group
Common Stock will be attributed to the corresponding Group.
Issuance of Series F Preferred Stock
A number of wholly owned subsidiaries of the Company which are part of the
TCI Group own shares of Class A Common Stock and preferred stock of the Company
which have been classified for accounting purposes as treasury shares (the "TCI
Treasury Shares"). The TCI Treasury Shares were acquired primarily through the
Company's acquisition of entities which held shares of common stock of the
Company and as a result of the Old TCI/LMC Combination and the Business Line
Restructuring. Because the Distribution of the Liberty Media Group Common Stock
will be made as a dividend to all holders of the Company's Class A Common Stock
and Class B Common Stock and, pursuant to the anti-dilution provisions set forth
therein, to the holders of securities convertible into Class A Common Stock and
Class B Common Stock
-103-
<PAGE>
upon the conversion thereof, shares of Liberty Media Group Common Stock would
otherwise be issued and become issuable in respect of the TCI Treasury Shares
held by these subsidiaries and would be attributed to the TCI Group. The Liberty
Media Group Stock Proposal provides that the Liberty Media Group Common Stock
issuable in connection with the Distribution is intended to constitute 100% of
the equity value thereof to the holders of the Class A Common Stock and Class B
Common Stock and that the TCI Group will initially not have any Inter-Group
Interest in the Liberty Media Group. Therefore, the Company has determined to
exchange all of the outstanding TCI Treasury Shares for shares of a new series
of Series Preferred Stock designated Convertible Redeemable Participating
Preferred Stock, Series F (the "Series F Preferred Stock"). The rights,
privileges and preferences of Series F Preferred Stock do not entitle its
holders to receive Liberty Media Group Common Stock in the Distribution or upon
conversion of the Series F Preferred Stock.
Immediately prior to the record date for the Distribution, the Company will
cause each of its subsidiaries holding TCI Treasury Shares to exchange such
shares for shares of Series F Preferred Stock having an aggregate value of not
less than that of the TCI Treasury Shares so exchanged. Each share of Series F
Preferred Stock will be convertible into 1,000 shares of Class A Common Stock,
subject to anti-dilution adjustments, at the option of the holder at any time
after the Company amends its Charter to increase the number of authorized shares
of Class A Common Stock to a number that would permit the conversion of all
securities of the Company that are convertible into or exercisable or
exchangeable for shares of Class A Common Stock, including all of the shares of
Series F Preferred Stock then outstanding. Such condition to the optional
conversion of such shares would be satisfied upon stockholder approval of the
Increased Authorization Proposal and the filing of the Amended Charter. The
anti-dilution provisions of the Series F Preferred Stock will provide that the
conversion rate of the Series F Preferred Stock will be adjusted by increasing
the number of shares of Class A Common Stock issuable upon conversion in the
event of any non-cash dividend or distribution on the Class A Common Stock to
give effect to the value of the securities, assets or other property so
distributed; however no such adjustment shall entitle the holder to receive the
actual security, asset or other property so distributed upon the conversion of
shares of Series F Preferred Stock. Therefore, the Distribution will result in
an adjustment to the conversion rate of the Series F Preferred Stock giving such
holder the right to receive upon conversion additional shares of Class A Common
Stock having a fair value (as determined by the Board of Directors) equal to the
number of shares of Series A Liberty Media Group Common Stock which it would
have received had such shares of Series F Preferred Stock been converted
immediately prior to the record date for the Distribution rather than such
number of shares of Liberty Media Group Common Stock.
The holders of the Series F Preferred Stock are entitled to participate, on
an as-converted basis, with the holders of the Series A TCI Group Common Stock,
with respect to any cash dividends or distributions declared and paid on the
Series A TCI Group Common Stock. Dividends or distributions on the Series A TCI
Group Common Stock which are not paid in cash would result in the adjustment of
the applicable conversion rate as described above.
-104-
<PAGE>
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series F Preferred Stock will be entitled to receive from the assets of the
Company available for distribution to stockholders an amount, in cash or
property or a combination thereof, per share of Series F Preferred Stock, equal
to the sum of (x) $.01 and (y) the amount to be distributed per share of Class A
Common Stock in such liquidation, dissolution or winding up multiplied by the
applicable conversion rate of a share of Series F Preferred Stock.
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in part, at a redemption
price, per share, equal to the issue price of a share of Series F Preferred
Stock (as adjusted in respect of stock splits, reverse splits and other events
affecting the shares of Series F Preferred Stock), plus any dividends which have
been declared but are unpaid as of the date fixed for such redemption. The
Company may elect to pay the redemption price (or designated portion thereof) of
the shares of Series F Preferred Stock called for redemption by issuing to the
holder thereof, in respect of its shares to be redeemed, a number of shares of
Series A TCI Group Common Stock equal to the aggregate redemption price (or
designated portion thereof) of such shares divided by the average of the last
sales prices of the Class A Common Stock for a period specified, and subject to
the adjustments described, in the certificate of designations establishing the
Series F Preferred Stock.
The exchange of the TCI Treasury Shares for shares of Series F Preferred
Stock will be consummated only if the Distribution is made.
-105-
<PAGE>
DESCRIPTION OF BUSINESS OF LIBERTY MEDIA GROUP
Business
The Liberty Media Group, through Liberty and its subsidiaries and
affiliates, is an investor in and manager of entities engaged in the production,
acquisition and distribution through all available formats and media, including
cable television systems, broadcast television stations, radio, C-Band home
satellite dishes ("HSDs"), direct broadcast satellite ("DBS"), on-line and
interactive services, home video and traditional retail outlets, of branded
entertainment, educational and informational programming and software, including
multimedia products, delivered in both analog and digital form. The various
entertainment, education and information programming and programming-related
businesses in which the Liberty Media Group has interests fall into two
categories: sports programming services; and general entertainment and
information services. The Liberty Media Group is also engaged in electronic
retailing, direct marketing, advertising sales relating to programming services,
infomercials and transaction processing.
The following table sets forth the Liberty Media Group's programming
interests which are held directly and indirectly through partnerships, joint
ventures, common stock investments and instruments convertible into common
stock. Ownership percentages in the table are approximate, calculated as of
March 31, 1995 and, where applicable, assume conversion to common stock by all
holders. In some cases, the Liberty Media Group's interest may be subject to
buy/sell procedures, repurchase rights or, under certain circumstances,
dilution. In the case of public companies, the number of shares owned by the
Liberty Media Group in addition to the primary national securities exchange and
trading symbol of those subsidiaries and affiliates which are publicly traded,
are set forth in the table.
<TABLE>
<CAPTION>
SPORTS PROGRAMMING SERVICES
- -----------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NATIONAL SPORTS
NETWORKS
Prime Network 48,424,000 Prime SportsChannel 34%(1)(2)
NewSport 5,141,000 Networks Associates
Prime Sports Radio 21,790,000(3) Liberty Sports, Inc. 100%
Prime Sports Showcase 1,800,000 Liberty Sports, Inc. 100%
Liberty Satellite Sports(4) 1,668,000 Affiliated Regional 68%(2)
Communications, Ltd. ("ARC")
Prime Deportiva 220,000 Liberty Sports, Inc. 100%
- -----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REGIONAL SPORTS
NETWORKS
Home Team Sports 2,919,000 Home Team Sports Limited 20.5%(1)
Partnership
Prime Sports-Intermountain 552,000 Liberty Sports, Inc. 100%
West
Prime Sports-KBL 1,631,000 Liberty Sports, Inc. 100%
Prime Sports-Southwest 4,288,000 ARC 68%
Prime Sports-Midwest 603,000 ARC 68%
Prime Sports-Rocky 1,666,000 Liberty Sports, Inc. 78.5%(1)
Mountain
Prime Sports-Northwest 2,217,000 LMC Northwest Cable Sports, 60%(2)
Inc.
Prime Sports-West 4,236,000 Liberty Sports, Inc. 100%
La Cadena Deportiva 904,000 Liberty Sports Inc. 100%
Prime Sports-Upper 438,000 Upper Midwest Cable Partners 38.6%(1)(2)
Midwest
SportsChannel Chicago 2,370,000 SportsChannel Chicago 50%(2)
Associates
SportsChannel Pacific 3,387,000 SportsChannel Pacific Associates 50%(2)
SportsChannel 2,384,000 SportsChannel Prism Associates 23%(1)(2)
Philadelphia/PRISM
SportSouth Network 4,516,000 SportSouth Network, L.P. 44%(2)
Sunshine Network 3,590,000 Sunshine Network JV 38%(1)(2)
INTERNATIONAL SPORTS
PROGRAMMING
Premier Sports Network 4,380 LMC International, Inc. 50%
Premier All Star Sports 500(5)
Prime Network 138,000 ARC 68%
(International)
Prime Deportiva 65,000 Liberty Sports, Inc. 100%
- -----------------------------------------------------------------------------------------------------
</TABLE>
-107-
<PAGE>
<TABLE>
<CAPTION>
GENERAL ENTERTAINMENT AND INFORMATION SERVICES
- -----------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MOVIE SERVICES
Encore 5,955,000 Encore Media Corporation 90%
Love Stories 312,000
Westerns 472,000
Mystery 472,000
Action 308,000
True Stories and
Drama 303,000
WAM! America's
Youth Network 303,000
STARZ! 1,924,000 QE+Ltd. 47.9%(7)
Request TV 26,211,000(6) Reiss Media Enterprises, 40%(2)
Inc.
Viewer's Choice 29,067,000(6) PPVN Holding Company 10%
EDUCATION/INFORMATION
Court TV 16,935,000 Courtroom Television 33%(2)(9)
Network
The Discovery Channel 63,578,000 Discovery Communications, 49%
The Learning Channel 34,493,000 Inc.
Discovery Asia 690,000
Discovery Europe 10,620,000
TLC Europe (9)
Discovery Latin 3,573,000
America
What on Earth 100,000(6) Ingenius 50%
X*Change 29,500,000(6)
International Channel 6,264,000 Encore ICCP, Inc. 45%(2)
GENERAL ENTERTAINMENT
America One 14,758,000(10) Liberty Sports, Inc. 100%
BET Cable Network 41,344,000 BET Holdings, Inc. 18%
BET Action 6,500,000 (NYSE-BTV) 1,831,600 A Common
Pay-Per-View 1,831,600 B Common
The Box 19,919,000(US) Video Jukebox Network, 5.5%
407,000(UK) Inc. 1,203,464 Common
(NASDAQ-JUKE)
DMX 32,281,000(6) DMX Inc. 8.6%(2)
(NASDAQ-TUNE) 3,409,063 Common
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
E! Entertainment 29,300,000 E! Entertainment Television, 10%(2)
Inc.
The Family Channel 60,085,000 International Family 18.5%
Cable Health Club 4,400,000 Entertainment, Inc. 1,670,986 B Common
The Family Channel 3,243,000 (NYSE-FAM) 220,000 Preferred(12)
UK(11) $23,000,000 Conv. notes(13)
CNN 64,100,000 Turner Broadcasting System, 23%
Cartoon Network 13,400,000 Inc. 225,000 A Common
Headline News 55,600,000 (AMEX - TBS/A; 29,281,771 B Common
TNT 62,000,000 TBS/B) 5,939,551 C Preferred(14)
Turner Classic Movies 4,000,000
TBS SuperStation 63,500,000
CNN International 63,700
TNT Latin America 3,700
Cartoon Network
Latin America 4,200
TNT & Cartoon
Network Europe 25,600
TNT & Cartoon
Network Asia 900
tv! Network 6,773,000 TV Network Corporation 100%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ELECTRONIC RETAILING SERVICES
- --------------------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HSN 63,700,000(15) Home Shopping Network 41.5%(16)
Spree! (NYSE-HSN) 17,566,702 Common
20,000,000 B Common
QVC Network 51,200,000 QVC, Inc. 42.6%(2)
Q2 10,700,000
QVC-The Shopping
Channel (UK) 3,300,000
CVC Telemercado
Alameda (Mexico) 6,600,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OTHER ASSETS
- --------------------------------------------------------------------------------------------------------------
DESCRIPTION SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
AT INTEREST
3/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Television Programming N/A Americana Television 66%(2)
Production Productions LLC
Hardware/software N/A Asian Television and 44%
sales and consulting Communications LLC
Movie production N/A Cutthroat Productions LP 7.5%
News/Documentary N/A MacNeil/Lehrer Productions 66%
Production
Distribution of 410,000 Netlink USA 100%
programming to HSDs 20,000 Netlink International
UHF/LPTV broadcast 28,000,000(17) Silver King 23%(18)
TV stations Communications, Inc. 61,630 Common
(NASDAQ-SKTV)
Distribution of TBS 59,584,000 Southern Satellite Systems, 100%
SuperStation signal (in Inc.
the U.S.)
Distribution of TBS 962,000 Royal Communications, Inc. 100%
SuperStation signal (in
Canada)
Marketing Support N/A Vision Group, Inc. 100%
Services
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes indirect interest attributed through ARC's ownership.
(2) The interests of the Liberty Media Group in these entities are presently or
will become subject to buy-sell procedures under which one owner may
initiate the procedure by giving notice setting forth a value for the
entity and the other owner(s) may then elect either to buy the interest of
the initiating owner or to sell their interests to the initiating owner at
the price specified by the initiating owner.
(3) Population in broadcast areas of affiliates.
(4) Distributor of Sports Programming to HSD and DBS markets.
(5) Commercial establishments, primarily pubs.
(6) Number of subscribers to whom service is available.
(7) Reflects attributed ownership interest effective July 1, 1995. Also
effective July 1, 1995, an entity included in the TCI Group will own a
majority interest in QE+ Ltd.
(8) The Liberty Media Group has held discussions with the other general
partners regarding restructuring the partnership so that the Liberty Media
Group would reduce its interest in Courtroom Television Network in exchange
for a reduction of its obligation to the partnership.
(9) Included with Discovery Europe.
(10) Number of television households in broadcast areas of stations carrying
America One.
(11) Operated by a joint venture in which IFE has a 61% interest and Flextech
plc, in which International has a majority interest, has the remaining 39%
interest.
(12) $22,000,000 face amount, convertible into 3,300,000 shares of Class B
common stock at $6.67 per share.
(13) $23,000,000 face amount, convertible into 2,070,000 shares of Class B
common stock at $11.11 per share.
(14) Convertible into 6 shares of Class B common stock for each share of
preferred.
(15) Includes broadcast households and cable subscribers.
(16) The Liberty Media Group has 80% voting power.
(17) Number of television households in areas of Silver King's broadcast
stations.
(18) Assumes exercise of an option to purchase 2,000,000 shares of Class B
common stock at $1.50 per share. Exercise of such options is subject to
certain regulatory restrictions. As a result of the multiple voting rights
attributable to the Class B Common Stock, the Liberty Media Group would
have 65% voting power upon exercise. See description of Silver King
Communications, Inc. in "--Other Assets" below.
-110-
<PAGE>
Sports Programming Services
National Sports Programming Services
"Prime Network" is a national "backdrop" service consisting of a variety of
professional and collegiate sports events and other sports programming not
subject to territorial restrictions, including college football, baseball and
basketball games, professional tennis, auto racing, soccer, golf, boxing and
skiing. The term "backdrop" service is used to distinguish between original
programming produced by a regional sports network and ancillary programming
purchased by the regional sports network from others, such as Prime Network, to
supplement its programming service. Prime Network is operated by Prime
SportsChannel Networks Associates ("PSC"), a partnership between ARC, NBC/SC
America Holding, Inc. and Rainbow Program Holding, Inc. PSC distributes Prime
Network primarily to regional sports networks. Such regional sports networks
include the backdrop of nationally cleared sports events of Prime Network,
together with the local or regional sports programming produced by or for such
networks and other ancillary programming acquired by them, in the programming
package the regional networks offer to cable operators and other customers.
"NewSport" is a national service also operated by PSC primarily dedicated
to the production and delivery of sports news and related programming. NewSport
is distributed primarily to regional sports networks to be used as either a
backdrop or a stand alone second service. NewSport is distributed directly by
PSC to cable operators and other programming distributors where it is not
carried or distributed by a regional sports network. Both Prime Network and
NewSport are delivered via satellite. PSC typically charges a per-subscriber fee
for the Prime Network or NewSport service. In certain cases fees may be paid or
satisfied in part through barter arrangements that permit PSC to include in the
Prime Network or NewSport service certain of the regional sports networks'
regional programming that is not subject to territorial restrictions and which
might be of interest to a national audience. PSC generally operates through
multi-year affiliation agreements with third-party and related regional
distributors, as well as formal license agreements with rights holders of
certain programming to be distributed via the Prime Network and NewSport
distribution networks.
"Prime Sports Showcase" is produced and distributed by Liberty Sports, Inc.
("Liberty Sports"), a wholly-owned subsidiary of Liberty. This service was
launched on December 31, 1994, is generally offered as an expanded basic service
and is initially intended to showcase programming of "Prime Deportiva" (a
national Spanish language sports service), "Women's Sports Network" (a national
sports service concentrating on women's sports), "Press Box" (sports news
programming) and "Classic Sports Network" (nostalgic sports programs). Prime
Deportiva is separately available on a full-time, 24-hour basis, having been
launched on March 1, 1995. Prime Deportiva is also distributed internationally
in Latin America. Prime Deportiva is generally offered as an expanded basic
service or for distribution on another acceptable tier. Women's Sports Network
is intended for launch later in 1995. Press Box and Women's Sports Network are
both produced by Liberty Sports. Classic Sports Network, in which Liberty Sports
has no ownership interest, is produced independently and was launched as a
separate network in May 1995. Prime Sports Showcase will also feature other
sports
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<PAGE>
programming as part of the service. At launch Prime Sports Showcase was
distributed to 1.8 million subscribers, all of which received the service
pursuant to an affiliation agreement with Satellite Services, Inc. ("SSI"), a
wholly owned subsidiary of TCIC. SSI purchases programming services from
programming suppliers and then makes such services available to TCIC's
subsidiaries and affiliates and to eligible subsidiaries and affiliates of TCI
Cable Investments.
Customers served by cable television systems eligible to purchase
programming services through SSI ("SSI Subscribers") represent approximately 23%
of U.S. households which receive cable or satellite delivered programming.
Percentages of subscribers to the programming services that are SSI Subscribers
are provided below in the description of the service if they significantly
exceed 23%.
Liberty Sports also acts on occasion as a syndicator of sports events
programming to the broadcast television market.
In September 1994, Liberty Sports launched Prime Sports Radio ("PSR"), a
24-hour per day all sports radio programming service. PSR currently has
affiliate distribution in 24 U.S. markets. The largest affiliated markets are
Boston, Houston and Pittsburgh. The programming service is offered to radio
stations on a barter basis and delivered via satellite. There are 11,500 radio
stations in the U.S. and each of the 261 rated markets has several stations
which would meet Liberty Sports' affiliate criteria. The format is designed to
provide the affiliates with sports information at a national level with the
flexibility to customize for local interest. PSR will cross-promote the Liberty
Media Group's regional sports networks with radio in their respective markets.
Regional Sports Programming Services
The Liberty Media Group has varying interests in several regional sports
networks (the "Liberty Sports Networks"), which have been formed for the purpose
of acquiring, developing, producing, syndicating and distributing sports
programming of primarily local and regional interest by satellite to cable
television operators and other multi-channel video programming distributors and
to HSD owners, in specified geographic areas. The following table sets forth for
each of the Liberty Sports Networks the year of launch, state service area, and
significant teams with respect to whose games the network currently has
programming rights:
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<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Sports Network Year Launched Service Area Current Teams
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prime Sports-Southwest 1983 AR, LA, NM, Dallas Mavericks
(formerly Home Sports OK, TX Houston Aeros
Entertainment) Houston Astros
Houston Rockets
Dallas Stars
San Antonio Spurs
Texas Rangers
Metro Conference
Big 8
SW Conference
Home Team Sports 1984 DC, DE, MD, Baltimore Orioles
NC, PA Washington Bullets
VA, WV Washington Capitals
Colonial Conference
Atlantic 10 Conference
Atlantic Coast Conference
Prime Sports-KBL 1985 MD, NY, OH, Pittsburgh Penguins
(formerly KBL Sports PA, WV Pittsburgh Pirates
Network) University of Pittsburgh
Atlantic 10 Conference
Prime Sports-Intermountain 1990 ID, MT, NV, Utah Jazz
West UT, WY
Prime Sports-Midwest 1989 IL, IN, KS, St. Louis Cardinals
KY, MO, St. Louis Blues
OH
Prime Sports-Upper Midwest 1990 IA, MN, ND, Minnesota Timberwolves
SD, WI
Prime Sports-Northwest 1988 AK, ID, MT, Seattle Mariners
OR, WA Big Sky Conference
PAC-10 Conference
Oregon State
University of Oregon
University of Washington
Washington State
Prime Sports-Rocky Mountain 1988 CO, KS, NE, Denver Nuggets
(formerly Rocky Mountain NM, WY Colorado State University
Prime Sports Network) Denver Grizzlies
University of New Mexico
</TABLE>
-113-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Sports Network Year Launched Service Area Current Teams
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prime Sports-West 1985 AZ, CA, HI, NV Los Angeles Lakers
(formerly Prime Ticket Los Angeles Kings
Network) Anaheim Mighty Ducks
California Angels
San Diego Padres
PAC-10 Conference
University of Hawaii
San Diego State University
La Cadena Deportiva 1993 AZ, CA, HI, NV Los Angeles Lakers
Los Angeles Kings
Anaheim Mighty Ducks
California Angels
San Diego Padres
PAC-10 Conference
SportsChannel Chicago 1984 IA, IL, IN, WI Chicago Blackhawks
Chicago Bulls
Chicago White Sox
Notre Dame University
SportsChannel Pacific 1990 CA, NV, HI Golden State Warriors
Oakland A's
San Francisco Giants
San Jose Sharks
PAC-10 Conference
Stanford University
University of Cal-Berkeley
SportsChannel Philadelphia/ 1983 DE, NJ, PA Philadelphia Flyers
PRISM Philadelphia Phillies
Philadelphia 76ers
Atlantic 10
SportSouth Network 1990 AL, GA, MS, Atlanta Braves
NC, SC, Atlanta Hawks
TN Charlotte Hornets
Southeast Conference
Atlantic Coast Conference
Sunshine Network 1988 FL Orlando Magic
Florida State University
University of Miami
Tampa Bay Lightning
Florida Marlins
Florida Panthers
Miami Heat
- ---------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Liberty Sports has also entered into multi-year agreements for rights to
national distribution of certain sports events of the PAC-10 Conference, Big 12
Conference and Conference USA, which will be distributed in part through
regional sports networks and in part through other distribution media.
Effective January 1, 1995, Liberty Sports changed the names of its
majority-owned and operated regional sports networks to "Prime Sports".
Programming will also be restructured to create uniformity throughout the
networks without losing the regional or "home town team" aspect of individual
networks. Liberty Sports believes the name changes, and consistent programming
and on-air look, will improve national recognition of the networks for both
viewers and the advertising community.
The Liberty Sports Networks derive revenue from two principal sources: (1)
fees paid by cable operators pursuant to affiliation agreements entered into
with the regional sports networks and (2) the sale of advertising time to local,
regional and national advertisers. Each cable operator or other distributor is
typically charged a monthly fee per subscriber in its systems receiving the
programming service, which fees vary depending on the level of service at which
the distributor offers the network to its subscribers and the proximity of the
cable system to the venue of the major sporting events distributed by the
network. The affiliation agreements generally provide for limited increases
during their term in the fees charged by the networks.
In addition to owning interests in and operating regional sports networks,
Liberty Sports also provides various services to affiliated and non-affiliated
networks. Liberty Sports, through Liberty Satellite Sports, acts as a marketing
agent to HSD owners and distributors to HSD owners for certain of the regional
sports networks with which it is affiliated. In addition, Liberty Sports
provides support services, such as master control and satellite uplinking
services, and certain program scheduling, post-production and editing services,
to certain of its affiliated networks.
Each of the Liberty Sports Networks sells advertising time to local,
regional and national advertisers. In general, each network's own sales force
markets and sells advertising time to local and regional advertisers, which
currently are the primary sources of advertising revenues for these networks.
Liberty Sports' sales force markets advertising time to national sources and is
sometimes used alone or in combination with the network's staff to sell
advertising time to local or regional sources. The ability to sell advertising
time on a network is principally affected by the size of such network's viewing
audience and is also affected by viewer demographics and market conditions for
local, regional and national advertising. The price at which advertising time
may be sold is also a function of the type and schedule of the program that will
carry the advertisement. Approximately 28% of the consolidated revenue derived
from the Liberty Media Group's sports programming businesses for the quarter
ended March 31, 1995 was derived from advertising sales (including barter
transactions). Advertising revenue as a percentage of each network's total
revenue varies from network to network, with the more established networks
generally deriving a greater percentage of their revenue from advertising sales
than the newer networks with fewer subscribers. To date, the networks have
concentrated their efforts on
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<PAGE>
increasing the numbers of subscribers to which their programming service is made
available and improving the quantity and quality of the programming offered. If
the networks are successful in this regard, the Liberty Media Group believes
that advertising sales could become a more significant source of revenue for its
sports networks in the future.
The cost of acquiring sports programming rights is the principal expense of
the sports networks. The Liberty Sports Networks typically enter into rights
contracts with one or more professional sports teams in their regions and
acquire rights to collegiate sporting events through arrangements with regional
conferences, individual schools and programming syndicators. The duration of the
rights agreements with the professional teams range from one to ten years, with
most of the existing agreements having remaining terms from two to four years.
The rights contracts for collegiate sporting events typically range from two to
three years. Pursuant to the professional sports rights agreements, the networks
usually acquire the exclusive right to distribute via cable and other forms of
pay television, in their respective regions, a specified number of games that
are not subject to national cable or broadcast contracts. In some cases, the
contract requires the network to exhibit a minimum number of games and permits
exhibition of additional games, up to a fixed maximum number. The arrangements
with respect to collegiate sports are more varied, but usually also provide
exclusive regional distribution rights (other than via free over-the-air
broadcast television) as to a specified number of events. The grant of both
professional and collegiate rights under such agreements are generally
subordinate to rights granted under league or conference national broadcast and
national cable contracts. The fee arrangements for the rights granted to the
networks under the professional and collegiate sports agreements also vary from
contract to contract. In most cases, the contract provides for a charge per game
or event, subject to limited increases over the term of the contract, with
either a minimum annual exhibition requirement or a minimum payment requirement
or both. In certain recent cases a regional network has also acquired broadcast
or radio rights to professional team or collegiate events and has sub-licensed
such rights to broadcast or radio distributors. Certain factors such as player
strikes, or bankruptcy of leagues or individual teams may have an adverse effect
on the revenues of the Liberty Sports Networks.
The value of the exhibition rights granted under sports rights contracts,
and in some cases the financial commitments incurred thereunder, are subject to
certain contingencies that are not within the control of the networks, such as
the relocation of a professional team to a different region, changes in the
schools participating in a particular collegiate conference, the terms of
applicable national broadcast or cable contracts, and the rules and regulations
of the applicable professional or collegiate league, conference or association.
International Sports Programming Services
Liberty Sports also sells and delivers certain programming internationally
to satellite and cable programming distributors in Asia, Europe, Latin America
and South America. Such programming consists in part of U.S. domestic sports
programming to which Liberty Sports has acquired international distribution
rights and, in part, of programming acquired outside the U.S.
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In January 1995, Liberty Sports launched "Premier Sports Network" and
"Premier All Star Sports", sports programming services for distribution in
Australia and New Zealand, in partnership with Australia Sports Pty, Ltd.
("Australis"). Liberty Sports produces and manages the services. Premier
Sports Network is currently delivered as part of a multi-channel pay television
package distributed by Australis, and Premier All Star Sports is distributed by
Australis to commercial establishments, primarily pubs.
General Entertainment and Information Services
Movie Services
"Encore", which is produced and distributed by Encore Media Corporation
("EMC"), was launched in mid-1991 and primarily airs movies from the 1960's,
1970's and 1980's. As of March 31, 1995, the service was being offered by cable
operators and other distribution technologies to approximately 20.6 million
households, of which approximately six million subscribed to Encore. The
service is generally offered as a single premium service or in conjunction with
other programming services. In either case, the subscription price paid by the
subscriber for Encore is generally lower than the prices charged for other
premium movie services. During 1994, Encore launched six new thematic multiplex
services. Three of these pay services (Love Stories, Westerns and Mystery)
launched in July 1994 and the remaining three (Action, True Stories and Drama
and WAM!, America's Youth Network) launched in September 1994. Cable operators
pay EMC a per subscriber fee for the services. As of March 31, 1995,
approximately 65% of Encore's total subsidiaries were SSI subsidiaries. EMC
obtains rights to air movies by entering into film licensing agreements with the
holders of distribution rights. EMC has entered into agreements extending
through 2005 with various distributors to exhibit certain films. EMC has
entered into various other agreements where license fees are contingent on
future production, sales and certain other criteria.
STARZ! is a first-run premium movie programming service which is managed by
EMC. As of March 31, 1995, STARZ! was offered by cable operators to
approximately 10.4 million subscribers, of which approximately 1.8 million
elected to receive STARZ!. Approximately 81% of such subscribers were SSI
Subscribers. As of July 1, 1995, the Liberty Media Group's interest in the
partnership operating the STARZ! service was reduced to a 49.9% general and
limited partnership interest. See "-- Certain Relationships and Related
Transactions".
The Liberty Media Group also has interests in Request TV and Viewer's
Choice which provide pay-per-view movies and pay-per-view events to cable
operators. Both Request TV and Viewer's Choice act as intermediaries between
movie studios and event promoters, on the one hand, and cable operators, on the
other hand, providing scheduling for movies to be sold on a pay-per-view basis,
satellite distribution of such movies, marketing and promotion, and, in some
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instances, billing and collection services. For providing these services, they
are paid a negotiated percentage of pay-per view revenue generated by their
respective affiliated cable operators.
Education/Information Services
The principal businesses of Discovery are the advertiser-supported basic
cable networks "The Discovery Channel", and "The Learning Channel". The
Discovery Channel provides nature, science and technology, history, exploration
and adventure programming and is distributed to customers in virtually all U.S.
cable homes. The Learning Channel broadcasts a variety of educational and non-
fiction programming to customers constituting approximately 47% of all cable
television customers in the United States. The Learning Channel has increased
distribution from less than 14 million cable homes prior to its acquisition by
Discovery in 1991 to more than 34.5 million homes as of March 31, 1995. In
addition, through internally generated funding, significant investments are
being made by Discovery in building a documentary programming library.
Discovery is expanding the Discovery brand name by establishing channels based
in Europe, Latin America and Asia, a substantial portion of the programming of
which is drawn from Discovery's own documentary programming library. Discovery
recently announced plans to open more than 300 retail stores to sell CD-ROMs,
videos and other products based on its programming. Discovery launched such
plans with the acquisition of Discovery Store, Inc., a previously unrelated 11-
store retail chain that sells nature and science-themed products.
Ingenius is a general partnership between a subsidiary of Liberty and
Reuters New Media, Inc. Ingenius operates "X*Change", an information service
which is delivered via cable to personal computers. X*Change consists of news,
weather, sports and limited stock quotes, and is offered to subscribers as part
of their cable service.
Ingenius has also developed "What On Earth", a daily multimedia learning
resource delivered via cable to personal computers using X*Change. What on
Earth delivers six news stories each day, including international news articles,
world sports, and significant cultural events and features. The news stories
comprise text, video, audio pronunciation of key words, glossary, activities
associated with each news story and lesson plans for teachers. What on Earth
was launched on February 10, 1995 and is currently available to approximately
20,000 educators who already receive X*Change.
"Court TV" provides live and/or tape delayed coverage and analysis of
selected criminal and civil legal proceedings. The Court TV service, which was
launched in July of 1991, was received by approximately 16.9 million subscribers
at March 31, 1995, approximately 32.5% of which are SSI Subscribers.
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"International Channel" is a basic cable service providing multi-lingual
programming in the U.S. During 1994, International Channel announced that it
will begin development of 12 single language pay services designed primarily to
serve viewers who use English as their second language.
General Entertainment
TBS is a diversified information and entertainment company, which produces,
finances and distributes entertainment and news programming worldwide, with
operations in motion picture, animation and television production, home video,
television syndication, licensing and merchandising, and publishing. Through its
subsidiaries, TBS owns and operates four domestic entertainment networks (TBS
SuperStation, Turner Network Television, the Cartoon Network and Turner Classic
Movies); four international entertainment networks (TNT Latin America, Cartoon
Network Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network
Asia); three news networks (Cable News Network, Headline News and Cable News
Network International); a motion picture and television production company
(Castle Rock Entertainment); an independent producer and distributor of motion
pictures (New Line Cinema Corporation); and HB Holding Co., which owns over
3,000 half-hours of animated programming. TBS also has ownership interests in
two professional sports teams (the Atlanta Braves and the Atlanta Hawks) and a
regional sports network (SportSouth Network, in which the Liberty Media Group
also has an interest).
IFE's principal business is "The Family Channel", an advertiser-supported
basic cable network carried by cable television systems reaching 95% of all
cable television households in the U.S. Its programming consists of a variety
of comedies, adventures, children's shows, westerns and inspirational and other
programs. These programs include original prime-time series, specials and
movies produced for The Family Channel, as well as syndicated programs
originally broadcast on network television. In addition, IFE owns MTM
Entertainment, Inc. ("MTM"), a producer and worldwide distributor of television
series and made-for-television movies and the owner of a significant library of
television programming. IFE also operates The Family Channel (UK), an
advertiser-supported network in the United Kingdom; Cable Health Club, an
advertiser-supported health and fitness cable network which operates principally
in the United States with some limited distribution in Venezuela; Great American
Entertainment Company, a producer of live musical variety shows; and the Ice
Capades, a touring ice show. IFE recently announced that on July 1, 1995, it
will launch The Family Channel and Cable Health Club in Mexico under the name
"The Family Channel de Las Americas."
"BET Cable Network" is a cable television network whose programming targets
interests and concerns of black Americans. The network's productions, most of
which are live, include hosted music video programs and variety shows. Acquired
programs include situation comedies, soap operas, movies, gospel music programs
and sports and entertainment specials. "BET Action Pay-Per-View" is a pay-per-
view service which distributes films produced by BET Holdings, Inc., and black-
oriented feature films produced by major studios.
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"E! Entertainment Television" ("E!") is a 24-hour network devoted to the
world of celebrities and entertainment. The network's programming mix includes
entertainment news reports, original programs and exclusive live coverage of
major awards shows and celebrity events. E! was distributed to more than 29
million subscribers as of the end of March 31, 1995.
DMX Inc. (formerly known as International Cablecasting Technologies, Inc.)
is primarily engaged in programming, distributing and marketing a premium
digital music service, DMX, which provides 24-hour per day, commercial-free, CD
quality music programming. DMX is delivered, for a monthly per subscriber
license fee, direct to cable operators by C-Band satellite for distribution to
residential and commercial cable subscribers. Since June 1994, DMX Inc. also
has delivered DMX by DBS to commercial subscribers. Both cable and DBS
subscribers receive DMX through a specially designed tuner to their stereo
systems. DMX is available in 30 different music formats for cable distribution
and in 69 different music formats for DBS distribution. DMX also has services
in Canada, Europe, Israel and Central and South America.
"tv! Network", a new 24-hour basic cable service, features programming from
new and existing cable networks which are not widely distributed. tv! Network
also previews premium and pay-per-view services and showcases the latest
developments in programming, new technology and emerging interactive services.
tv! Network is operated as a promotional channel for use by TCIC's cable
television systems and all of tv! Network's subscribers are SSI Subscribers.
"The Box" is a viewer interactive music video service produced by Video
Jukebox Network, Inc. ("VJN") and offered through cable television systems and
low-power television stations. Viewers may select the music videos they desire
to watch by calling a designated 900 or 976 telephone number, in which case they
pay a fee to VJN for their selections, or they may passively view the music
videos selected by others, in which case there is no additional charge for the
service. VJN has entered into revenue sharing arrangements with cable operators
who offer The Box as part of their basic cable service. VJN also has operations
in the United Kingdom.
"America One Television" is a 24-hour general entertainment network
providing programming to the broadcast television market. America One currently
has 68 affiliated broadcast stations. Included in the America One lineup are
sports news and fitness shows provided by Liberty Sports. America One
programming also features a 1,100-title library of nostalgic Hollywood movies,
classic television series and Westerns. Originally operated as Main Street
Television Network ("MSTV"), the assets of MSTV were purchased out of bankruptcy
in late November 1994. Subsequently, the programming and operations were
upgraded and the name changed to America One Television effective February 1,
1995.
Competition - Programming Companies
The business of distributing programming for cable television is highly
competitive. The number of channels available to the average subscriber of a
domestic cable television system is 60 or less. The various sports,
entertainment and information programming companies
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described above in which the Liberty Media Group has interests (the "Programming
Companies") directly compete with other programming services for distribution on
a limited number of cable television channels and, when distribution is
obtained, the programming offered by the Programming Companies competes, in
varying degrees, for viewers and advertisers with other cable programming
services and off-air broadcast television, radio, print media, motion picture
theaters, video cassettes and other sources of information and entertainment.
Important competitive factors are the prices charged for programming, the
quantity, quality and variety of the programming offered and effectiveness of
marketing efforts. With the advent of new compression technologies, which are
intended to increase channel capacity, competition for channel capacity may
substantially decrease, although additional competitors may have the opportunity
to enter the marketplace. No predictions can be made with respect to the
viability of these technologies or the extent to which they will ultimately
impact the availability of channel capacity.
In addition to competition for cable distributors, viewers and advertisers,
the Programming Companies also compete, to varying degrees, for programming.
With respect to the acquisition of sports programming rights, the Programming
Companies compete for national rights principally with the national broadcast
television networks, a number of national cable services that specialize in or
carry sports programming, and television "superstations", which distribute
sports and other programming to cable television systems by satellite, and with
independent syndicators that acquire and resell such rights nationally,
regionally and locally. They also compete for local and regional rights with
those competitors, with local broadcast television stations and with other local
and regional sports networks. The owners of distribution outlets such as cable
television systems may also contract directly with the sports teams in their
service areas for the right to distribute a number of such teams' games on their
systems. Recently, at least one sports league has entered into an agreement with
a national DBS distribution outlet for the distribution of selected league
games. With respect to the acquisition of non-sports programming (such as
syndicated programs and movies) which is not produced by or specifically for the
Programming Companies, competitors include the national broadcast television
networks, local broadcast television stations, suppliers of pay-per-view
programs and other cable program suppliers.
As set forth in the discussion of "--Federal Regulation - Programming
Companies" below, the FCC's "financial interest and syndication" rules limit the
ability of the three major broadcast networks to distribute network programs
through syndication to broadcast stations and to acquire certain financial
interests or domestic syndication rights in first-run non-network programs.
However, these rules are scheduled to expire in November 1995, and the FCC has
initiated a proceeding to consider accelerating their expiration. Elimination
of these restrictions could permit a myriad of broadcast station/network
production/exhibition arrangements, further increasing competition to the
Programming Companies in the acquisition and sale of programming.
In a series of decisions, federal courts have invalidated the statute
prohibiting telephone companies from providing video programming and other
information directly to subscribers in their telephone service areas. Although
these decisions remain subject to review, telephone
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companies have begun to invest in and/or form entities for the production and/or
acquisition of programming. Such entities will provide further competition to
the Programming Companies in the creation, acquisition and/or sale of
programming. Certain proposals also are pending before the FCC and Congress
which would eliminate or relax the statutory restrictions on the provision of
video programming by telephone companies.
Satellite Transponder Agreements. The Liberty Media Group's sports,
entertainment and information programming services subsidiaries and 50% owned
affiliates described above lease satellite transponders as follows: 6 full time
leases and one shared lease on a "protected" or "transponder protected" basis,
and 15 full time "unprotected" leases for an aggregate of 21 transponders on 10
domestic and 2 international communications satellites. Domestic communications
satellite transponders may be leased full or part time on a "protected",
"transponder protected" or "unprotected" basis. When the carrier provides
services to a customer on a "protected" basis, replacement transponders are
reserved on board the satellite for use in the event the "protected" transponder
fails. Should there be no reserve transponders available, the "protected"
customer will displace an "unprotected" transponder customer on the same
satellite. In certain cases, the carrier also maintains a protection satellite
and should a satellite fail completely, all of the lessees' "protected" services
would be moved to the protection satellite. The customer who leases an
"unprotected" transponder has no reserve transponders available, and may have
its service interrupted for an indefinite period when its transponder is
required to restore a "protected" service.
Although the Liberty Media Group believes it has taken reasonable steps to
ensure its continued satellite transmission capability, there can be no
assurance that termination or interruption of satellite transmissions will not
occur. Such a termination or interruption of service by one or more of these
satellites could have a material adverse effect on the operation and financial
condition of the Liberty Media Group.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which the Liberty Media
Group has no control, including competition among prospective users for
available transponders and the availability of satellite launching facilities
for replacement satellites. Many of the commercial satellites now in orbit will
have to be replaced in the next few years. The federal government has placed
restrictions on the launching of commercial satellites by means of the space
shuttle, causing manufacturers of commercial satellites to rely on alternative
delivery systems to place these satellites in orbit. Additional commercial
launching facilities are being developed currently, but there can be no
assurance that the launch systems currently in place, or to be developed, will
be able to replace the domestic communications satellites as their useful lives
end.
The Liberty Media Group anticipates that compressed digital video
transmission will be deployed commercially within the next several years. This
technology converts as many as ten analog signals (now used to transmit video
and voice) into a digital format and compresses such signals (which is
accomplished primarily by eliminating the redundancies in television imagery)
into the space normally occupied by one analog signal. The industry is
currently developing standards for sending and receiving compressed signals.
Several of the Liberty Media Group's
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transponder leases provide the right to use the transponders to provide
compressed services. Use of compressed service may result in greater transponder
capacity.
Regulation - Programming Companies
The FCC regulates the providers of satellite communications services and
facilities for the transmission of programming services, the cable television
systems that carry such services and to some extent the programming services
themselves. The Cable Communications Policy Act of 1984 ("1984 Cable Act") and
the 1992 Cable Act extensively regulate the cable television industry. Cable
television systems are also regulated by municipalities or other state and local
government authorities. Municipalities generally have the jurisdiction to grant
and to review the transfer of franchises, to review rates charged to
subscribers, and to require public, educational, governmental or leased-access
channels, except to the extent that such jurisdiction is preempted by federal
law. Any such rate regulation or other franchise conditions could place
downward pressure on subscriber fees earned by the Liberty Media Group, and such
regulatory carriage requirements could adversely affect the number of channels
available to carry the Liberty Media Group's networks.
The 1992 Cable Act has expanded greatly the scope of federal and local
regulation. Because a number of the regulations adopted by the FCC to implement
the 1992 Cable Act remain subject to reconsideration and because many of the
1992 Cable Act provisions are currently subject to litigation, it is difficult
to predict the impact of this legislation upon the Liberty Media Group.
However, the Liberty Media Group believes that the legislation taken as a whole
and as presently implemented is having a material adverse impact upon the cable
industry in general and upon the Liberty Media Group's programming operations
specifically. Certain of the more significant areas of regulation imposed by the
1992 Cable Act that relate to or may affect programming operations are discussed
below.
Regulation of Program Licensing. The 1992 Cable Act directed the FCC to
promulgate regulations regarding the sale and acquisition of cable programming
between multichannel video program distributors (including cable operators) and
programming services in which a cable operator has an attributable interest. The
legislation and the implementing regulations adopted by the FCC preclude
virtually all exclusive programming contracts between cable operators and
programmers affiliated with any cable operator (unless the FCC first determines
the contract serves the public interest) and generally prohibit a cable operator
which has an attributable interest in a programmer from improperly influencing
the terms and conditions of sale to unaffiliated multichannel video
distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as multi-channel multi-point distribution
systems ("MMDS") and DBS services on terms and conditions that do not unfairly
discriminate among such technologies.
Regulation of Carriage of Programming. Under the 1992 Cable Act, the FCC
has adopted regulations prohibiting cable operators from requiring a financial
interest in a program service as a condition to carriage of such service,
coercing exclusive rights in a programming
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service or favoring affiliated programmers so as to restrain unreasonably the
ability of unaffiliated programmers to compete.
Regulation of Cable Service Rates. Under the 1992 Cable Act, cable systems
are subject to extensive rate regulation. The FCC has established standards and
procedures governing regulation of rates for basic cable service and equipment
to be implemented by state and local cable franchising authorities and for the
FCC's review of the "reasonableness" of rates for additional tiers of cable
service upon complaint from a franchising authority or a cable subscriber.
On April 1, 1993, the FCC adopted rate regulations, which became effective
on September 1, 1993, governing virtually all cable systems. Separately offered
services, such as pay television and pay-per-view services, are not subject to
rate regulation although packages or collective offerings of such services may
be subject to rate regulation. Under such regulations, existing basic and tier
service rates are evaluated initially against "benchmark" rates established by
the FCC. Equipment and installation charges are regulated based on actual
costs. Pursuant to the FCC's initial benchmark rate regulations, if rates for
regulated services exceeded the benchmark, operators electing not to make a cost
of service showing were required to reverse any price increases taken since
September 30, 1992, and to make further reductions of up to 10% of such reduced
rates. Local franchising authorities and the FCC also have the authority to
require rate refunds in certain instances. The FCC had ordered a moratorium on
increases in regulated cable service rates from April 5, 1993 until May 15,
1994.
On February 22, 1994, the FCC announced that it had adopted revised
benchmark regulations pursuant to which those cable systems electing not to make
a cost-of-service showing would be required to set their rates for regulated
services at a level equal to their September 30, 1992 rates minus 17%. Thus,
the revised benchmarks can result in additional rate reductions of up to 7%
beyond the maximum reductions established under the FCC's initial benchmark
regulations. Certain systems which meet the revised, lower benchmark rates have
not been required to reduce their regulated rates by the full 17%, pending
completion of additional cost studies by the FCC, and rate regulations have been
relaxed for systems owned by small operators.
On February 22, 1994, the FCC also adopted interim "cost-of-service" rules
governing attempts by cable operators to justify higher than benchmark rates
based on unusually high costs. The FCC stated that under its interim cost-of-
service rules, a cable operator may recover through rates for regulated cable
services its normal operating expenses plus an interim rate of return equal to
11.25%, which rate may be subject to change in the future. However, the FCC has
presumptively excluded from the rate base acquisition costs above the book value
of tangible assets and of allowable intangible assets at the time of
acquisition, has declined to prescribe depreciation rates and has suggested that
the rules will have limited application. The FCC also adopted rules governing
transactions between cost-of-service regulated cable operators and their
affiliates.
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The FCC's rate regulations permit cable operators to adjust rates to
account for inflation and increases in certain external costs, including
increases in programming costs to the extent such increases exceed the rate of
inflation. However, a cable operator may pass through increases in the cost of
programming services affiliated with such cable operator to the extent such
costs exceed the rate of inflation only if the price charged by the programmer
to the affiliated cable operator reflects prevailing prices offered in the
marketplace by the programmer to unaffiliated third parties or the fair market
value of the programming.
The FCC's rate regulations also provide a mechanism for adjusting rates
when regulated tiers are affected by channel additions or deletions. Cable
operators adding or deleting channels on a regulated tier will adjust the rate
for that tier based on the number of channels offered after the addition or
deletion. Additional programming costs resulting from channel additions on basic
service will be accorded the same external treatment as other program cost
increases, and cable operators presently are permitted to recover a mark-up on
such programming cost increases. In November 1994, the FCC adopted "going
forward" rules which provide an alternative methodology for adding programming
services to cable programming service tiers which includes a flat fee increase
per added channel, with an aggregate cap on such increases plus a license fee
reserve on price increases through 1996. Increases in the license fees for newly
added services are included within such cap. In 1997, an additional flat fee
increase will be available and the license fees for additional channels and for
increases in existing channels will not be subject to the aggregate cap. These
regulations for adding services are scheduled to expire on December 31, 1997.
The aggregate cap and flat fee mark-up elements of these regulations may
adversely affect higher-cost programming services, including the regional sports
networks in which the Liberty Media Group has an ownership interest, while
expanding the carriage of programming services with lower license fees,
including programming services in which the Liberty Media Group has an ownership
interest.
The FCC recently adopted rules that permit channels of new programming
services to be added to cable systems in a separate new product tier which the
FCC has determined will not be rate regulated at this time.
In response to numerous petitions for review of the FCC's rate regulations,
the United States Court of Appeals for the District of Columbia Circuit upheld
the material provisions of those regulations in Time Warner Entertainment Co.,
------------------------------
L.P. v. FCC on June 6, 1995. The Court upheld the constitutionality of the
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FCC's regulations and generally ruled that they were authorized by the 1992
Cable Act.
The complexity of and numerous revisions to the FCC's rate regulations have
impaired the willingness and ability of cable operators to add programming
services and to invest in additional cable plant to expand channel capacity.
Consequently, the cumulative impact of the FCC's rate regulation is likely to
continue to have an adverse impact on the Liberty Media Group's programming
interests.
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Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted
broadcasters a choice of "must carry" rights or "retransmission consent" rights.
The 1992 Cable Act imposes obligations to carry "local" broadcast stations
should such stations choose a "must carry" right as distinguished from the
"retransmission consent" right. The rules adopted by the FCC provide for
mandatory carriage by cable systems after September 1, 1993, of all local full-
power commercial television broadcast signals (up to one-third of all channels),
and, depending on a cable system's channel capacity, at least one non-commercial
television broadcast signal. In July 1993, the FCC ruled that stations
predominantly used for the transmission of sales presentations or program-length
commercials operate in the public interest and are entitled to choose "must
carry" status. A petition for reconsideration of the FCC's ruling currently is
pending before the FCC, which petition has been opposed by HSN. Alternatively,
after October 6, 1993, commercial broadcasters have the right to deny such
carriage unless they grant retransmission consent. HSN's full-time broadcast
affiliates have all requested "must carry" status in lieu of a retransmission
fee.
Although other "must carry" regulations previously adopted by the FCC had
been held unconstitutional by federal appellate courts on two prior occasions
and the Supreme Court declined review, the "must carry" provisions of the 1992
Cable Act were upheld by a three-judge panel of the United States District Court
for the District of Columbia in Turner Broadcasting System, Inc. v. FCC on April
---------------------------------------
8, 1993. However, on June 27, 1994, the Supreme Court vacated the District
Court's decision upholding the law as constitutional because genuine issues of
material fact remain unresolved. The "must-carry" and "retransmission consent"
statutory provisions and regulations remain in effect pending the outcome of the
ongoing proceedings before the District Court. Such statutorily mandated
expansion of carriage of broadcast stations coupled with the provisions of the
1984 Cable Act, which require cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and governmental access, could adversely affect some or
substantially all of the programming services in which the Liberty Media Group
holds an interest by decreasing the carriage of such services in cable systems
with limited channel capacity. However, as a result of "must carry", HSN has
experienced increased cable distribution of its programming due to an increase
in the number of cable systems that carry HSN programming.
Ownership Regulations. The 1992 Cable Act required the FCC to, among other
things, (1) prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (2) consider the necessity and appropriateness of imposing limitations on
the degree to which multichannel video programming distributors (including cable
operators) may engage in the creation or production of video programming.
The FCC adopted regulations in 1993 limiting carriage by a cable operator
of national programming services in which the operator holds an attributable
interest (generally attributable for these purposes if its voting ownership
interest therein is 5% or greater or if there are any common officers or
directors) to 40% of the first 75 activated channels on each of the operator's
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systems. The rules provide for the use of two additional channels or a 45%
limit, whichever is greater, provided that the additional channels carry
minority-controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services. These rules may limit carriage
of the Liberty Media Group's programming services on certain systems of cable
operators affiliated with the Liberty Media Group. In the same rulemaking, the
FCC concluded that additional restrictions on the ability of multichannel
distributors to engage in the creation or production of video programming
presently are unwarranted.
Numerous petitions have been filed with the FCC seeking reconsideration of
various aspects of the regulations implementing the 1992 Cable Act. Petitions
for judicial review of regulations adopted by the FCC, as well as other court
challenges to the 1992 Cable Act and the FCC's regulations, also remain pending.
The Liberty Media Group is uncertain how the courts and/or FCC ultimately will
rule or whether such rulings will materially change any existing rules or
statutory requirements. Further, virtually all are subject to revision at the
discretion of the appropriate governmental authority.
Proposed Changes in Regulation. The regulation of cable television systems
at the federal, state and local levels is subject to the political process and
has been in constant flux over the past decade. This process continues in the
context of legislative proposals for new laws and the adoption or deletion of
administrative regulations and policies. For example, Congress presently is
considering telecommunications legislation which, if enacted into law, would
substantially change existing law, including among other things, the rate
regulation of cable television systems and the restrictions on telephone
companies in the provision of cable television service. The Senate approved the
Telecommunications Competition and Deregulation Act of 1995 on June 15, 1995.
The House Commerce Committee approved the Communications Act of 1995 on May 25,
1995, and the full House is expected to vote on that bill within the next few
months. Further material changes in the law and regulatory requirements must be
anticipated and there can be no assurance that the Liberty Media Group's
business will not be affected adversely by future legislation, new regulation or
deregulation.
Satellites and Uplink. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. Certain satellites are more valuable than others to cable
television programmers based on whether a particular satellite is used by other
programmers of popular cable services. Factors that may affect the Programming
Companies' ability to meet their transponder needs in the future include
increases in the number of prospective users of available transponder space, the
uncertain status
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of future satellite launches by the United States space shuttle program, by
private entities in the United States and by private and governmental entities
in other countries. Under current policy, the Galaxy V, Spacenet 2, SatCom C-1
and SatCom C-3 service providers are not subject to the market exit provisions
of Section 214 of the Communications Act of 1934, as amended (the
"Communications Act"), and may therefore cease providing communications services
to customers on short notice, provided that such action is just, reasonable and
non-discriminatory, and subject to any additional rights or remedies to which
the customer and the carrier may have agreed. The Liberty Media Group has no
reason to believe that such service providers have any intention to cease
providing transmission services via their respective satellite systems.
The FCC also grants licenses to construct and operate satellite uplink
facilities which transmit signals to satellites. These licenses are generally
issued without a hearing if suitable frequencies are available. A number of the
Programming Companies, as well as HSN and Southern Satellite Systems, Inc., have
been granted licenses for construction and operation of C-Band and/or Ku-Band
satellite uplink facilities.
Financial Interest and Syndication. The FCC's "financial interest and
syndication" rules limit the ability of the three major broadcast networks to
distribute network programs through syndication to broadcast stations. The
major broadcast networks have not been restricted from distributing network
programs to cable or satellite programmers, such as the Programming Companies.
However, under the original rules, network programming has been available to
non-network broadcast television stations only through syndicators in which the
three major networks have no financial interest. At the same time, networks
have been prohibited from purchasing syndication rights or obtaining financial
interests in programs obtained from outside (non-network) producers. In
response to the decision of the United States Court of Appeals for the Seventh
Circuit in Schurz Communications, Inc. v. FCC, the FCC released modified
----------------------------------
financial interest and syndication rules in 1993. Although the FCC relaxed the
financial interest and syndication rules in many respects, under the modified
rules the three major networks are prohibited from: (a) actively syndicating any
prime-time entertainment or first-run non-network programming to television
stations in the United States; (b) acquiring financial interests or domestic
syndication rights in any first-run non-network program or series distributed in
the United States unless that program or series was produced solely "in-house"
by the network; and (c) warehousing programming by withholding it from the
syndication market beyond certain defined periods. However, these rules are
scheduled to expire in November 1995, and the FCC has initiated a proceeding to
consider accelerating their expiration.
Elimination or further modification of these restrictions could permit a
myriad of broadcast station/network production/exhibition arrangements that now
only cable operators and the major broadcast networks (to the extent of
distributing to cable and satellite programmers) are permitted to undertake,
further increasing competition to the Programming Companies in the acquisition
and sale of programming. The grant of expanded syndication powers to the three
major networks could lessen the attractiveness and/or availability of the major
networks' programming to cable system operators and programmers because they
would have to compete directly for such programming with broadcast stations and
could be less likely to secure cable/broadcast network exclusive distribution
and other arrangements.
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Electronic Retailing Services
The Liberty Media Group currently provides electronic retailing services
through a subsidiary, HSN, and through an equity affiliate, QVC.
HSN
As of March 31, 1995, the Liberty Media Group owned 41.5% of the common
equity of HSN, which represents approximately 80% voting control (as a result of
multiple voting rights associated with the HSN Class B Common Stock held by the
Liberty Media Group). The primary business and principal source of revenue of
HSN is electronic retail sales of merchandise by Home Shopping Club, Inc.
("HSC"), a wholly owned subsidiary of HSN. HSC sells a variety of consumer
goods and services by means of HSC's live, customer-interactive retail sales
programs which are transmitted twenty-four hours a day, seven days a week, via
satellite to cable television systems, affiliated broadcast television stations
and HSD's. Prior to June 5, 1995, HSC produced three separate retail sales
programming networks, HSN 1, HSN 2 and HSN Spree. HSN 1 was carried by cable
television systems; HSN 2 was carried by broadcast television systems and by
cable television systems retransmitting the signals of one of the independent
broadcast stations carrying HSN 2. HSN Spree was available in one-hour
segments, 24 hours per day, which allowed cable and broadcast affiliates to
distribute HSN Spree in available time slots which otherwise may not have
produced revenue. As of June 5, 1995, HSN converted to two programming networks
which have been renamed HSN and Spree!. HSN is the primary service and is
carried by both cable and broadcast television systems which previously carried
either HSN 1 or HSN 2. Systems with which HSN had contracted for carriage of
both HSN 1 and HSN 2 now carry HSN and Spree!. Both HSN and Spree! are also
available on a part-time basis. As of March 31, 1995, HSC programming was
available to approximately 67.4 million homes, including broadcast television
households, cable television subscribers and HSD households.
HSC's product offerings include: jewelry; hardgoods (such as consumer
electronics, housewares and toys); softgoods (primarily clothing); cosmetics;
and other product categories which include collectibles and consumables. For
the year ended December 31, 1994, jewelry, hardgoods, softgoods, cosmetics and
other categories accounted for approximately 41%, 34%, 14%, 10% and 1%,
respectively, of HSC's net sales. HSC principally purchases merchandise made to
its specifications and also purchases inventories from retailers. The mix of
products and source of such merchandise depends upon a variety of factors
including price and availability. HSC has no long-term commitments with any of
its vendors, and, historically, there have been various sources of supply
available for each category of merchandise sold by HSC.
As part of HSC's customer service policy, HSC maintains a return policy
under which a customer may, generally within 30 days, return for any reason any
item purchased from HSC, except certain special sales items, for a full refund
of the purchase price, including the original shipping and handling charges.
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Transmission and Programming. HSC produces retail sales programs in its
studios located in St. Petersburg, Florida. These programs are distributed to
cable television systems, broadcast television stations and HSD's by means of
HSN's satellite uplink facilities to satellite transponders leased by HSN which
retransmit the signals received from HSN. Any cable television system,
broadcast television station or HSD owner in the United States and the Caribbean
Islands equipped with standard satellite receiving facilities is capable of
receiving HSC programming.
HSN has lease agreements securing full time use of two transponders on two
domestic communications satellites, Satcom C-3 and Satcom C-4, which are located
on two domestic communications satellites owned by GE American Communications,
Inc. ("GE"). The lease agreements grant HSN "protected" rights and are for the
lives of the satellites, which are projected by GE to be through 2004. HSN also
leases a transponder on Galaxy VII located on a domestic communications
satellite. HSN has agreed to sublease the Galaxy VII transponder to a
subsidiary of TCI Technology. Although HSN believes it is taking every
reasonable measure to ensure its continued satellite transmission capability,
there can be no assurance that termination or interruption of satellite
transmission will not occur. Such a termination or interruption of service by
one or more of these satellites could have a material adverse effect on the
operation and financial condition of HSN. The availability of replacement
satellites and transponder time beyond current leases is dependent on a number
of factors over which HSN has no control, including competition among
prospective users of available transponders and the availability of satellite
launching facilities for replacement satellites.
Affiliation with Cable Systems. HSC enters into affiliation agreements
with cable system operators to carry HSC's programming services. HSC's standard
affiliaton agreement provides that the cable operator generally will receive a
commission of 5% of the net sales of merchandise sold to customers located
within the cable operator's franchise areas (from both cable and non-cable
households). In addition, HSC also purchases advertising time from affiliated
operators and in certain markets pays additional commissions for sales above a
specified minimum amount. Although there is some variation among affiliation
agreements with cable operators, the current standard affiliation agreement
provides for an initial term of five years which is automatically renewable for
subsequent one year terms. During the past year, due to the possibility of
"must carry" regulations being found unconstitutional, HSN embarked on an
aggressive campaign to bring the "must carry" households under contract by
volunteering to pay commissions to cable operators required to transmit HSN 2.
See "--Regulation --Programming Companies" above. As an additional contract
incentive, HSN offered to make payments of cable distribution fees, primarily
consisting of up-front payments, based on the number of subscribers committed to
the contract by the cable operator. In exchange for these payments. HSN required
significant long term commitments of up to fifteen years, with an average term
of ten years, for the current programming carriage and additional carriage of
HSC's HSN 1 programming. Due to HSN's success in obtaining long term carriage
commitments, in the event "must carry" is ruled unconstitutional, HSN does not
believe the ruling will have a material adverse effect on HSN or result in a
significant loss in carriage.
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Affiliation Agreements with Broadcast Television Stations. In July 1986,
HSN initiated a program to broaden the viewership of HSC's programming services
by acquiring broadcast television stations in principal television markets
through Silver King Communications, Inc. ("SKC"), which was then a wholly owned
subsidiary of HSN. On December 28, 1992, HSN distributed all of the capital
stock of SKC to HSN shareholders, in the form of a pro rata stock dividend. Each
SKC station has an affiliation agreement with HSC to carry HSC's programming
through December 28, 1997 that is automatically renewable at SKC's option for a
five-year term, unless written notice is given at least 18 months prior to the
expiration date. HSC pays an affiliation fee to SKC based on hourly rates and,
upon reaching certain sales levels, commissions on net sales. Certain of the SKC
stations realized additional commissions during 1994 as a result of "must carry"
regulations, and those stations, and possibly others, may receive additional
commissions during subsequent years of their affiliation agreements if "must
carry" survives legal challenge. See "--Effect on HSN of the 1992 Cable Act"
below. SKC owns 12 full power UHF television stations which serve 8 of the 12
largest metropolitan television markets in the U.S. SKC also owns 27 low power
television ("LPTV") stations that broadcast HSC's programming services. LPTV
stations have lower power transmitters than conventional television stations,
and therefore, the broadcast signal of an LPTV station does not cover as broad a
geographical area as conventional broadcast stations.
In addition to affiliation agreements with the SKC broadcast television and
LPTV stations, HSC has entered into affiliation agreements with other broadcast
television stations and LPTV stations to carry either HSN or Spree! for a
predetermined number of hours per day. The broadcast station affiliation
agreements may generally be terminated upon proper notice and specify the
payment of fixed fees for the carriage of HSC programming.
As of March 31, 1995, HSC had entered into either full- or part-time
affiliation agreements with 32 broadcast television stations to carry HSN
(including broadcast television stations owned by SKC), 61 television stations
to carry Spree! and 52 LPTV stations to carry HSN or Spree!.
The Liberty Media Group holds an option to acquire 2,000,000 shares of the
Class B Common Stock of SKC. If exercised, the ownership of these shares of
Class B Common Stock would give the Liberty Media Group effective voting control
over SKC. Exercise of this option is subject to certain regulatory constraints.
See description of SKC in "--Other Assets" below.
Distribution, Data Processing and Telecommunications. HSN's fulfillment
subsidiaries ship merchandise purchased by customers from warehouses located in
St. Petersburg, Florida; Salem, Virginia; and Waterloo, Iowa. Substantially all
inventory resides at HSN's three fulfillment centers prior to being offered for
sale. Merchandise typically is delivered to customers within 7 to 10 days of
placing an order with HSC. HSN currently operates several Unisys main frame
computers and has extensive proprietary data processing and order processing
systems which facilitate the timely delivery of merchandise to customers. HSN's
computerized systems track purchase orders, inventory, customer orders, shipping
records and customer payments.
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To facilitate merchandise orders by its customers, HSC installed a
state-of-the-art fiber optic telephone system and switching complex which was
developed for HSN. HSC also utilizes a computerized voice response phone
answering system (the "VRU System") capable of handling incoming sales calls.
The VRU System provides callers with the option to place their order by means of
touch tone input or to be transferred, in the case of new members or if the
customer requires personal service, to an operator.
Effect on HSN of the 1992 Cable Act. The "must carry" provisions of the
1992 Cable Act, discussed in "--Regulations--Programming Companies" above,
mandate that cable systems carry the signals of local commercial television
stations or, at the station's option, that cable systems and television stations
negotiate a fee to be paid by cable systems for the retransmission by such cable
systems of the local television station's broadcast signal. HSC's full-time
broadcast affiliates have all requested "must carry" status in lieu of a
retransmission fee.
In November 1994 the FCC issued, pursuant to the 1992 Cable Act, "going
forward" rules regarding the fees cable operators can impose upon subscribers
for new programming, discussed in "--Regulations--Programming Companies" above.
The going forward rules provide that cable operators may increase the charges to
subscribers due to increases in external programming costs. The cable operator
must offset these increases by revenues it receives from all sources other than
advertising. Because HSN provides revenue to the cable operator through
commissions on merchandise sales, this ruling may have an adverse effect on
HSN's ability to seek and maintain new cable carriage. HSN has filed a Petition
for Reconsideration asking that such commission revenues be excluded from the
cable operator's external cost adjustment.
In September 1993, the FCC adopted a Notice of Inquiry initiating a
proceeding to evaluate the commercial programming practices of broadcast
television stations (including stations with shop at home formats) and seeking
comment on whether the public interest would be served by establishing limits on
the amount of commercial matter broadcast by television stations. The FCC has
received comments and reply comments. Although the FCC is only seeking comments
at this time and has not made any proposals to limit the amount of
commercialization on television stations, there can be no assurance whether or
when such proposals will be forthcoming, what the nature of such proposals might
be, whether they will be implemented, and thus what impact, if implemented, they
would have on HSN.
Competition-HSN. HSN operates in a highly competitive environment. It is
in direct competition with businesses which are engaged in retail merchandising,
including traditional retail outlets, such department and specialty stores,
other electronic retailers, direct marketing retailers such as mail order
companies, companies that sell from catalogs, and other discount volume retail
outlets and companies that market through computer technology. HSN also
competes for access to its customers with broadcasters and alternative forms of
entertainment and information, such as programming for network and independent
broadcast television stations, basic and pay cable television services,
satellite master antenna systems, HSD's and home entertainment centers. In
particular, the price and availability of programming for cable television
systems affects the availability of these channels for HSN's programs and the
compensation which must be paid to the cable operators for carriage of HSC
programming.
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In addition, HSN believes that competition for channel capacity has
substantially increased. With the advent of new compression technologies on the
horizon, this competition for channel capacity may substantially decrease,
although additional competitors may have the opportunity to enter the
marketplace. No predictions can be made with respect to the viability of these
technologies or the extent to which they will ultimately affect the availability
of channel capacity.
HSN was the first specialty retailer to market merchandise by means of
live, nationally televised sales programs. There are other companies, some
having an affiliation or common ownership with cable operators, that now market
merchandise by means of live television. A number of other entities are engaged
in direct retail sales businesses which utilize television in some form and
which target the same markets in which HSN operates. HSN cannot predict the
degree of success with which it will meet competition in the future.
In addition to the above factors, HSN's affiliation with broadcast
television stations creates another set of competitive conditions. These
stations compete for television viewers primarily within the local markets.
HSN's affiliated broadcast television stations are located in highly competitive
markets and compete against both VHF and UHF stations. Due to technical
factors, a UHF television generally requires greater power and a higher antenna
to secure substantially the same geographical coverage as a VHF television
station. Under present FCC regulations, additional UHF commercial television
broadcasting stations may be licensed except in thirty designated markets,
including most of the largest cities, under an FCC decision precluding
additional applications. HSN cannot quantify the competitive effect of the
foregoing or any other sources of video programming on any of HSN's affiliated
television stations, nor can it predict whether such competition will have a
material adverse effect on its operations.
In summary, HSN operates in a highly competitive environment in which,
among other things, technological change, changes in distribution patterns,
media innovations, data processing improvements and new entrants make the
competitive position of both HSN and its competitors extremely difficult to
predict.
QVC
In February 1995, QVC Programming Holdings, Inc. ("Holdings"), a
corporation jointly owned by subsidiaries of Comcast and Liberty, completed its
acquisition of QVC. In connection with this acquisition, the Company contributed
substantially all of the shares of QVC owned by it (which constituted
approximately 18.8% of the shares of QVC on a fully diluted basis prior to such
acquisition) together with cash to acquire an approximate 42.6% equity interest
in Holdings. Upon the merger of Holdings into QVC, this interest became an
approximate 42.6% interest in QVC, as the surviving corporation in such merger.
The remaining 57.4% of QVC was acquired by Comcast, which manages the day-to-day
operations of QVC. Subsidiaries of Liberty and Comcast have pledged all of their
shares of QVC as security for certain borrowings under a credit facility
incurred by QVC in connection with its acquisition by Liberty and Comcast.
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QVC markets and sells a wide variety of consumer products and services
primarily by means of its televised shopping programs, known as "QVC" and "Q2".
QVC commenced business in 1986. Cable television system operators that have
entered into affiliation agreements with QVC carry its programming as part of
their basic service and pursuant to such agreements receive from QVC commissions
equal to 5% of the net sales of merchandise sold to customers located in the
cable operator's service area. QVC is also a joint venturer in the operation of
Mexican and British televised shopping programs. QVC faces most of the same
competitive factors that HSN does, described above under "--Competition-HSN".
Unlike HSN, QVC does not have affiliation agreements with over-the-air broadcast
television stations and therefore is not able to obtain the benefits of the
"must carry" regulation.
Other Assets
Transmission of TBS SuperStation ("WTBS")
Southern Satellite Systems, Inc. ("Southern") and Southern's wholly owned
subsidiary, Royal Communications, Inc. ("Royal"), transmit the signal of WTBS, a
24-hour independent UHF television station originated by TBS, from the uplinking
facilities of LMC SatCom, Inc. ("LMC SatCom"), a wholly owned subsidiary of
Southern, in and near Atlanta, Georgia, to a protected transponder on the Galaxy
V Satellite. Southern leases such transponder from TBS pursuant to a sublease
that expires in the year 2000. Southern makes the WTBS signal available to cable
television system operators and operators of other non-broadcast distribution
media who receive the signal on their earth stations and offer the service to
their subscribers. Southern also makes the WTBS signal available to HSD owners
through program packagers. A substantial portion of Southern's consolidated
revenue for calendar year 1994 was derived from the HSD market. No payment to
TBS is required for the transmission by Southern of the WTBS signal. See
"--Regulation--Southern" below. At March 31, 1995, Southern (and Royal)
transmitted WTBS for reception by an estimated 60.5 million homes throughout the
United States, Puerto Rico, the U.S. Virgin Islands and Canada. Cable and other
operators pay Southern a per-subscriber fee for this service, generally pursuant
to written affiliation agreements, the expiration dates of which range from 1995
to 2004. Cable television system operators serving approximately 41% of the U.S.
cable subscribers to whom the WTBS service from Southern was made available at
March 31, 1995, are served either on a non-contract basis or pursuant to
affiliation agreements which expire in the next five years. Approximately 23% of
the U.S. cable subscribers to whom WTBS was made available March 31, 1995
received the service pursuant to an affiliation agreement between Southern and
SSI which expires in 2001. Royal began distribution in Canada of the WTBS signal
in 1991. Canadian agreements expire between 1995 and 1997. Southern provides the
WTBS signal to the U.S. and Canadian HSD markets for a per-subscriber fee
pursuant to program packager agreements, most of which terminate between 1995
and 1998. Southern also has an agreement with Primestar Partners, in which TCIC
has an interest, and with DirecTV, Inc. Both DBS agreements have three year
terms and expire in 1997. Primestar and DirecTV are medium-power and high power,
respectively, DBS distributors.
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Competition-Southern. Although Southern is currently the sole satellite
carrier of WTBS, other independent television stations are transmitted by other
carriers. Southern does not have an agreement with TBS with respect to the
retransmission of the WTBS signal and there are no specific statutory or
regulatory restrictions that would prevent any satellite carrier from
transmitting the WTBS signal so long as the carrier meets the passive carrier
requirements of the Copyright Revision Act of 1976, as amended (the "Copyright
Act"), and any applicable requirements of the Communications Act or, if the
carrier serves HSD owners, so long as the carrier meets the requirements of the
Satellite Home Viewer Act of 1988 (the "SHV Act"). Further, Southern has no
control over the programming on such stations. TBS produces and distributes
other cable programming services, including "TNT", a basic cable entertainment
service, and TBS has and may be expected to continue to give priority to the
programming needs of such services in allocating programming owned by it or to
which it has national distribution rights. Southern's business could be
adversely affected by any change in the type, mix or quality of the programming
on WTBS that results in the service being less desirable to cable operators and
their subscribers. TBS derives significant revenues from the sale of
advertising time on WTBS, however, and the Liberty Media Group therefore
believes that TBS has an economic incentive to maintain the audience appeal of
WTBS's programming.
Regulation-Southern. Southern is subject to a number of FCC and Copyright
Act regulations. In addition to the copyright and licensing requirements
summarized below, Southern is subject to the Regulation of Program Licensing
adopted by the FCC under the 1992 Cable Act as summarized above in the
discussion under "-- Regulation--Programming Companies".
Copyright Regulations. The Copyright Act provides cable television
---------------------
operators with a compulsory copyright license for retransmission of broadcast
television programming without having to negotiate program rights with the
stations or individual copyright owners. However, see "--Regulation of Carriage
of Broadcast Stations" above regarding the imposition of retransmission consent
for broadcast stations. Therefore, cable systems that carry distant broadcast
signals, such as WTBS, must pay royalty fees to the Register of Copyrights, the
amount of which is based upon a formula utilizing the amount of the system's
semi-annual gross receipts and the number and type of distant signals carried by
the system. Any increases in the required fees could adversely affect the
competitive position of WTBS and therefore, Southern. The Copyright Act empowers
the Copyright Office to review periodically and adjust copyright royalty rates
based on inflation and/or petitions for adjustments due to modifications of FCC
rules. Further, the FCC has recommended to Congress the abolition of the
compulsory license for cable television carriage of broadcast signals, a
proposal that has received substantial support from members of Congress. If the
compulsory license is abolished, a cable operator would not be permitted to
retransmit WTBS unless such cable operator reached a licensing agreement with
the copyright owners or licensees of the programming contained on the WTBS
signal being retransmitted.
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Southern is not permitted to provide the WTBS signal to HSD owners under
the separate compulsory license extended to cable systems. Under regulations
adopted by the Copyright Office, satellite carriers such as Southern are not
"cable systems" within the meaning of the Copyright Act. In 1994 the United
States Court of Appeals for the Eleventh Circuit upheld such regulations in an
action challenging their validity brought by Southern and other satellite
carriers, and the Supreme Court declined to review that decision. Instead,
Southern markets the WTBS signal through program packagers to HSD owners.
Pursuant to the SHV Act, Congress granted a compulsory copyright license to
satellite carriers retransmitting the broadcast signals of "superstations", such
as WTBS, and network stations to the public for private home viewing. In 1994,
Congress extended this license until December 31, 1999. Pursuant to the
provisions of the SHV Act, on May 1, 1992 the Copyright Royalty Tribunal ("CRT")
adopted an increase in the compulsory license fees for the HSD market effective
January 1, 1993, which Congress has extended through July 1, 1997, thus
increasing Southern's copyright payment by 17%. New fees after July 1, 1997,
will be determined either through negotiations with the copyright owners of the
signals being carried or, if no agreement can be reached, by an arbitration
panel conducted under the auspices of the Copyright Office. If the license
granted under the SHV Act is not further extended, satellite carriers will be
required to negotiate private licenses for the retransmission of copyrighted
material to HSD owners after 1999.
Syndicated Exclusivity. The FCC's syndicated exclusivity rules, which
----------------------
became effective January 1, 1990, require cable systems with more than 1,000
subscribers to delete programming from distant broadcast signals if exclusive
local broadcast rights to such programming have been purchased by a television
station which broadcasts in the locale of the cable system and such station
requests the cable system to "black out" such programming. These rules could
lead to cable operators dropping distant broadcast signals from their systems
because of the administrative difficulty of providing for the blackout and
because the service may be less attractive to subscribers if a material portion
of its programming were blacked out. Although such rules could therefore result
in additional channels becoming available for certain of the Programming
Companies' services, they could have an adverse effect on Southern's business if
WTBS were to carry a material amount of programming subject to deletion. TBS has
stated that it is programming WTBS to avoid blackouts and that, because it has a
reasonable basis for believing that deletions of its programming will not be
required, it is offering, as permitted by the FCC, to indemnify cable operators
that carry WTBS in order to ensure that its programming is not blacked out.
However, Southern cannot control TBS's programming decisions with respect to
WTBS.
FCC Licensing. Satellite carriers, including carriers like Southern that
-------------
lease transponders from others rather than owning a satellite, may provide their
services as a private carrier and/or as a common carrier. Common carriers are
required, pursuant to the Communications Act, to provide services on terms and
conditions that are just, reasonable and non-discriminatory. The FCC does not
set the rates charged by non-dominant common carriers. However, the United
States Court of Appeals for the District of Columbia Circuit has invalidated the
FCC's permissive de-tariffing rules for non-dominant common carriers in AT&T Co.
--------
v. FCC and its streamlined range rate tariff filing rules for such carriers in
- ------
Southwestern Bell Corp. v. FCC.
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Consequently, even non-dominant carriers are required to file tariffs pursuant
to the FCC's rules. Private carriers are subject to a lesser degree of
regulation by the FCC. The Copyright Act exempts any carrier from liability for
copyright infringement in delivering television broadcast signals to cable
television systems if it meets the passive carrier requirements of the Copyright
Act.
Netlink USA
Netlink markets and distributes programming to the U.S. HSD subscriber
market. As of March 31, 1995, approximately 410,000 HSD owners subscribed to
programming through Netlink. Netlink acquires rights from programmers to market
various satellite-transmitted programming, including services such as ESPN, CNN,
HBO, WTBS (which it purchases from Southern) and the Discovery Channel, to HSD
owners. Netlink offers HSD owners various packages of programming for monthly,
quarterly or annual subscription periods. Once a subscriber has ordered service
by telephone or through an HSD retailer, Netlink transmits an authorization code
to the customer's descrambler, allowing customers to receive the programming.
Since 1993, Netlink has also offered pay-per-view services, with over one
million sales to date.
In addition, Netlink uplinks and sells the signals of nine broadcast
television stations to other HSD packagers and marketers in the U.S. and,
through Netlink International, in Canada. As of March 31, 1995, approximately
500,000 HSD households subscribed to one or more of such stations through HSD
packages offered by Netlink and other HSD packaging and marketing companies.
The other HSD packaging and marketing companies pay Netlink a fee for the right
to sell these services to their customers.
Netlink markets its HSD services primarily through satellite equipment
dealers and distributors. During 1994, approximately 50% of Netlink's new
subscribers were generated through satellite equipment dealers. During 1994,
Netlink paid commissions to more than 2,000 dealers. New subscribers are also
generated as a result of advertising in publications targeted at HSD owners,
telemarketing and direct mail. Approximately 96% of Netlink's HSD customers
with subscription packages which expired in 1994 renewed their subscriptions
with Netlink.
Competition-Netlink. Netlink competes with several large HSD program
packagers, some of which are affiliated with well-known, large programmers and
cable television system operators. Because a significant portion of Netlink's
sales are generated through HSD dealers, Netlink also competes for dealer
relationships on the basis of commission rates and quality of service offered to
the dealer and its customers. In addition, the HSD market faces competition
from cable television as well as emerging technologies such as DBS services,
which were launched in 1994. DBS uses higher power Ku-Band frequencies that can
be received by significantly smaller, and possibly less expensive, hardware than
HSDs that receive C-Band frequencies. Because of the smaller dish size, DBS may
be more widely accepted than HSD systems in urban markets.
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Although the Liberty Media Group is unable to predict the effects of DBS
competition, the Liberty Media Group believes that for the foreseeable future
more programming will be available for the HSD market than DBS because
programming for cable television systems is transmitted on C-Band frequencies.
While HSD C-Band dishes can be equipped to receive Ku-Band frequencies, small
DBS dishes cannot reliably receive C-Band frequencies. Given the initial
investment costs of an HSD system, the Liberty Media Group believes that a
significant portion of current HSD owners will continue to use HSD services
rather than invest in a DBS system.
Netlink leases nine satellite transponders on an "unprotected" or
"transponder unprotected" basis on two separate communications satellites.
Netlink has "seniority status" on such satellite transponders which results in
Netlink having favorable ranking should transponders be required to restore a
"protected" service.
In uplinking and selling the signals of broadcast television stations in
the United States, Netlink is subject to the FCC regulations and Copyright Act
provisions described above under "--Regulation-Southern". Pursuant to such
regulations, Netlink may only distribute the signals of network broadcast
stations to "unserved households" which are outside the Grade B contours of a
primary station affiliated with such network.
Silver King Communications, Inc.
SKC owns and operates 12 independent full power UHF television stations,
including one television satellite station (the "Stations") which affiliate with
and primarily broadcast HSC. See "--Electronic Retailing Services" above. The
Stations serve eight of the 12 largest metropolitan television markets in the
U.S. As of March 31, 1995, the Stations reached approximately 28 million
households, which is one of the largest audience reaches of any owned and
operated independent television broadcast group in the U.S. In addition to the
HSC programming, the Stations broadcast advertising inserts, issue-responsive
programming, children's programming, ethnic, information and/or religious
programming and public service announcements. As of March 31, 1995, SKC also
owned 27 LPTV stations that broadcast HSC retail sales programming and held
options to purchase 2 additional LPTV stations.
On February 11, 1993, Liberty entered into an Option Agreement with RMS
Limited Partnership ("RMS") pursuant to which Liberty had the right to purchase
from RMS at $1.00 per share 2,000,000 shares of SKC's Class B Common Stock at
the price of $1.00 per share (the "Option"). On September 23, 1994, Liberty and
RMS entered into an Amendment to the Option Agreement which, among other things,
extended the exercise period of the Option to February 11, 1999, and provided
for increases in the exercise price of the Option at a rate of $0.25 per year,
resulting in the exercise price of the Option during the final year of
exercisability (February 12, 1998 to February 11, 1999) being $2.25 per share.
The current Option exercise price is $1.50. Upon exercise of the Option,
Liberty would obtain effective voting control of SKC as a result of the voting
power associated with the SKC Class B Common Stock (each share of which is
generally entitled to certain votes per share while each share of SKC Common
Stock is entitled to cast one vote per share).
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It is a condition to the exercise of the Option that the Liberty Media
Group or its assignee receive all necessary FCC and other approvals prior to the
exercise. As of the date hereof, the Liberty Media Group has not filed any
application for the consent of the FCC to any such exercise. Under present FCC
rules it is unlikely that Liberty will be able to obtain the consent of the FCC
with respect to the exercise of the Option because of the Company's ownership of
certain cable television system assets. However, FCC rules and regulations do
permit certain types of noncontrolling direct and indirect interests in SKC to
be held by Liberty. If Liberty is unable to obtain consent to exercise the
Option, Liberty may assign the Option to a third party.
MacNeil/Lehrer Productions
In January 1995, the Liberty Media Group acquired a 66 2/3% general
partnership interest in MacNeil/Lehrer Productions ("MLP"). MLP is the primary
producer of the "MacNeil/Lehrer News Hour" on PBS and a producer of other high-
quality documentary and public affairs programming. Liberty is attempting to
increase the level of production at MLP by finding new markets for MLP
documentary and public affairs programming. These markets may include cable, as
well as broadcast networks, on line services and CD-ROM applications.
Americana Television Productions
Americana Television Productions ("ATP") is a new production company formed
in February 1995 to produce and distribute television shows for the cable,
satellite and broadcast markets. ATP also produces home video and audio
products. ATP's video library was originally developed for the Americana
Television Network, which ceased operations in December 1994. Such library
includes nearly 600 hours of original programming highlighting traditional
music, people and crafts which are uniquely American.
Environmental Matters
Compliance with Federal, state and local provisions which have been enacted
or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Liberty Media Group.
Employees
At March 31, 1995, consolidated entities included in the Liberty Media
Group had approximately 6,100 employees. Of these employees, 14 were located in
its corporate headquarters, 4,841 were employed by HSN, and the balance were
located at the Liberty Media Group's various other facilities in the communities
in which the Liberty Media Group owns and/or operates programming interests.
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Properties
The Liberty Media Group's sports, entertainment, information and home
shopping programming businesses are primarily conducted through its Liberty
Sports, EMC, Southern and HSN subsidiaries. Liberty Sports owns office,
production and satellite receiving and transmitting facilities in Texas, and
leases office, production and transmitting facilities in certain other states in
which its subsidiaries do business. EMC leases its corporate offices in Colorado
and regional offices in California, Illinois, Georgia, New Jersey and Texas.
Southern owns the land, buildings and equipment at its uplink and downlink
facility in Georgia. HSN owns the premises which house its corporate
headquarters, studios, administrative offices, training facilities and a
shopping center facility in Florida. HSN owns warehouse and distribution
facilities in Iowa and Florida and leases its warehouse and distribution
facilities in Virginia. HSN also leases retail, office and/or warehouse space in
California, Colorado and Florida for its subsidiary businesses. The facilities
of consolidated entities attributed to the Liberty Media Group are, in the
opinion of management, suitable and adequate by industry standards.
Certain Relationships and Related Transactions
The Liberty Media Group receives revenues from the TCI Group for sports and
other programming services which are produced and/or distributed by entities
included in the Liberty Media Group and which are purchased by SSI. The charges
for such services are generally based upon customary rates charged to others.
Such programming services are purchased by SSI pursuant to affiliation
agreements between SSI and the programming services. The terms of such
affiliation agreements are generally the same as the terms which would be
offered to other customers of the programming services.
tv! Network, a programming service included in the Liberty Media Group, is
operated pursuant to a Management Services Agreement with TCIC. Under the
terms of such agreement the Liberty Media Group operates tv! Network as a
promotional network for use by TCIC's cable television systems. TCIC determines
the content of the network in accordance with its marketing goals. TCIC pays a
fee to tv! Network equal to the actual cost of operating the network. The
Liberty Media Group has agreed to provide market tv! Network, in its present
format, exclusively to TCIC.
Encore QE Programming Corp. ("QEPC"), a wholly owned subsidiary of EMC
(which is a 90% owned subsidiary of Liberty), and TCI Starz, Inc. ("TCIS"), an
indirect wholly owned subsidiary of TCIC, formed QE+Ltd Limited Partnership
("QE+"), for the purpose of developing, operating and distributing STARZ!, a
first-run movie premium programming service launched in 1994. Initially, QEPC
was the general partner and TCIS was the limited partner, with losses allocated
1% to QEPC and 99% to TCIS until certain defined criteria were met, at which
point profits would be allocated 20% to QEPC and 80% to TCIS. TCIS also had 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 general partnership interest simultaneously converting to a
20% limited partnership interest. In connection with the formation of QE+, EMC
agreed to provide to QE+ certain programming under a programming agreement
requiring QE+ to pay its pro rata share of the total costs incurred by EMC for
--- ----
such programming. EMC was also to be paid a fee for managing the STARZ! service
equal to 20% of the "managed costs" (as defined) of the service.
In connection with the Business Line Restructuring, TCIC transferred its
interest in TCIS to Liberty. On [July 1], 1995, TCIS exercised its option and
converted its limited partnership interest to an 80% general partnership
interest and QEPC's general partnership interest was converted to a 20% limited
partnership interest. Thereafter, TCIS transferred to Liberty Starz Inc., a
wholly owned subsidiary of Liberty ("Liberty Starz"), a 29.9% general
partnership interest in QE+. Immediately after such transfer, Liberty
transferred all of its interest in TCIS to a wholly owned subsidiary of the
Company that is a member of the TCI Group. Liberty Starz also has the right to
acquire from TCIS a 10.1% partnership interest in QE+ based on a formula
designed to approximate the fair value of the interest. Such right will be
exercisable for a period of ten years beginning January 1, 1999 at any time
after QE+ has had positive cash flow for two consecutive calendar quarters. This
right will be exercisable only after all TCIS Contributions have been repaid,
including any preferred return/interest thereon.
In connection with the start-up of the Starz! service, TCIC and a
subsidiary of TCIC (the "TCIC Obligors") became direct obligors or guarantors of
payment of certain amounts that may be due pursuant to certain film output,
distribution and license agreements (the "Film Agreements") under which QE+
acquires rights to display certain theatrically released movies, and QE+ agreed
to indemnify the TCIC Obligors for any amounts they may be required to pay in
respect of the STARZ! service pursuant to the Film Agreements. As of March 31,
1995, the maximum aggregate amount which the TCIC Obligors may be required to
pay in respect of the Film Agreements aggregated approximately $151 million. The
maximum potential payment obligation of the TCIC Obligors under the Film
Agreements is currently not determinable because such amount will be 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.
The QE+ limited partnership agreement provides that TCIS will be required
at any time prior to July 1, 2005 to make special capital contributions to the
partnership, up to a maximum aggregate capital contribution of $350 million (the
"TCIS Contribution"). To the extent QE+ has incremental cash requirements, TCIS
and Liberty Starz will have the option to fund 50.1% and 49.9%, respectively, of
any such additional capital requirements. QE+ will pay to TCIS a preferred
return of 10% per annum upon any contribution which is part of the first $200
million of the TCIS Contribution which is not repaid within five years of the
date of the contribution or January 1, 1996, whichever is later. Any amount of
the TCIS Contribution in excess of $200 million will be entitled to a preferred
return of 10% per annum from the date of the contribution. QE+ will be required
to devote 75% of its available cash flow (as defined), to repay the TCIS
Contribution and any preferred return payable thereon. EMC will continue to be
entitled to its management fee.
In addition, effective July 1, 1995, Liberty Starz will earn a "Content
Fee" for certain services provided to QE+ equal to 4% of the gross revenue of
QE+, estimated to be approximately $1.2 million for the six months ended
December 31, 1995. The Content Fee agreement expires on June 30, 2001, subject
to renewal on an annual basis thereafter. Payment of the Content Fee is
subordinated to the repayment of the TCIS Contribution, and the preferred
return and other obligations of QE+ to its partners.
SSI, a wholly owned subsidiary of the Company that is part of the TCI
Group, has entered into a long-term affiliation agreement with QE+ in respect of
the distribution of the STARZ! service. Per subscriber rates in the agreement
are based upon customary rates charged to other cable system operators. The
affiliation agreement also provides that QE+ will not grant materially more
favorable terms and conditions to other cable system operators unless such more
favorable terms and conditions are also made available to the TCI Group, and
requires SSI to make payments to QE+ with respect to a guaranteed minimum number
of subscribers. Based upon such subscriber guarantee, the minimum amounts
payable in respect of these guaranteed subscribers is approximately $339 million
for 1996, 1997, and 1998, in aggregate. Payments to QE+ for 1995 are anticipated
to aggregate approximately $30,000,000 to $40,000,000.
HSN and QVC pay commissions to the TCI Group for merchandise sales to
customers who are subscribers of cable television systems operated by TCIC. Such
commissions are paid at the customary rates paid to others.
Entities included in the Liberty Media Group lease office space, production
and studio facilities and satellite transponder and uplink facilities from
entities included in the TCI Group. HSN subleases a satellite transponder to TCI
Technology. The Company believes that the terms of such arrangements are no less
advantageous than those which would be available in dealings with unaffiliated
third parties.
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Upon implementation of the Liberty Media Group Stock Proposal, certain
corporate, general and administrative costs would be charged to the Liberty
Media Group at rates set at the beginning of each year based on projected
utilization for that year. The utilization-based charges will be set at levels
that management believes to be reasonable and that would approximate the costs
which the Liberty Media Group would incur for comparable services on a stand
alone basis. See "The Liberty Media Group Stock Proposal -- Management and
Allocation Policies".
THE INCREASED AUTHORIZATION PROPOSAL
The stockholders of the Company are being asked to consider and approve the
Increased Authorization Proposal, including adoption of the proposed amendments
to the Company's Charter set forth in Appendix III-B hereto. The amendments
would increase the number of authorized shares of Class A Common Stock (which
would be redesignated Series A TCI Group Common Stock under the Liberty Media
Group Stock Proposal) from 1,100,000,000 to 1,750,000,000 and the number of
authorized shares of Series Preferred Stock from 10,000,000 to 50,000,000 and to
clarify that the rights, powers and preferences of any series of the Series
Preferred Stock may differ in any respect from those of any other series thereof
(except as limited by the rights of any outstanding class or series of preferred
stock). If both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the Company's authorized
shares of Common Stock would consist of 1,750,000,000 authorized shares of
Series A TCI Group Common Stock, 150,000,000 authorized shares of Series B TCI
Group Common Stock, 750,000,000 authorized shares of Series A Liberty Media
Group Common Stock and 75,000,000 authorized shares of Series B Liberty Media
Group Common Stock.
As of the date of this Proxy Statement/Prospectus, there were [571,499,424]
shares of the Company's Class A Common Stock outstanding, and an additional
[68,520,802] shares were reserved for issuance upon the exercise or conversion
of outstanding stock options and convertible securities (excluding securities of
the Company held by subsidiaries of the Company). As of such date, subsidiaries
of the Company held [86,030,994] shares of Class A Common Stock and securities
convertible into [246,402,000] shares of Class A Common Stock. The Company is
also required to reserve shares of the Company's Class A Common Stock for
issuance (on a share-for-share basis) upon conversion of the Company's Class B
Common Stock at the election of the holder. As of the date of this Proxy
Statement/Prospectus, there were [84,864,800] shares of the Company's Class B
Common Stock outstanding (excluding [4,172,629] shares held by subsidiaries of
the Company). Accordingly, as of such date, the number of the Company's
authorized but unissued and unreserved shares of Class A Common Stock was
[38,509,351]. Approval of the Increased Authorization Proposal will (i) provide
additional shares of capital stock to be available for issuance for general
corporate purposes, including, but not limited to, acquisitions, stock dividends
and splits and financings, (ii) provide a sufficient number of shares of Class A
Common Stock for issuance upon conversion of the
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convertible securities held by subsidiaries of the Company referred to above and
as described under "The Liberty Media Group Stock Proposal - Issuance of Series
F Preferred Stock" and "Description or Existing Common Stock and Other Capital
Stock - Series E Redeemable Convertible Preferred Stock" and (iii) if the
Liberty Media Group Stock Proposal is approved, provide for the potential
conversion of the Liberty Media Group Common Stock. If the Liberty Media Group
Stock Proposal is approved by stockholders, the Company will exchange all of the
outstanding TCI Treasury Shares for shares of Series F Preferred Stock and, if
the Increased Authorization Proposal is approved by stockholders, the right of
the holder to convert such shares of Series F Preferred Stock into shares of
Series A TCI Group Common Stock will become effective. See "The Liberty Media
Group Stock Proposal - Issuance of Series F Preferred Stock".
The Board of Directors would be authorized to reserve and, without further
approval of the stockholders, issue the additional shares of Class A Common
Stock that would be authorized under the Increased Authorization Proposal or the
additional shares of Series Preferred Stock that would be so authorized at such
time or times, to such persons, and for such consideration as it may determine,
except as may otherwise be required by applicable law, regulation or Nasdaq
National Market requirement. The Nasdaq National Market, on which the Class A
Common Stock and Class B Common Stock now trades, currently requires stockholder
approval of the issuance of shares in certain instances, including transactions
where the issuance could increase the number of outstanding shares by 20% or
more. The Company's Charter authorizes the Board of Directors to issue shares of
the Series Preferred Stock in one or more series and to fix and state the
designations, powers, preferences, qualifications, limitations, restrictions and
relative rights of the shares of each such series. The amendments to the Charter
that would be effected by the Increased Authorization Proposal also contain
language that would clarify that the rights, powers and preferences that the
Board of Directors may establish for any series of Series Preferred Stock may
differ from those of any other series thereof (except as limited by the rights
of any outstanding class or series of preferred stock). The Board of Directors
may determine, without any vote or action by the holders of either Class A
Common Stock or Class B Common Stock, among other things, the payment dates and
rates of dividends, if any, whether dividends are to be cumulative or
noncumulative, whether the series is subject to redemption and, if so, the
manner of redemption and the redemption price, the preference of any series over
any other series of preferred stock or Class A Common Stock or Class B Common
Stock on liquidation or dissolution of the Company, any sinking fund or other
retirement provisions for the series and any conversion or exchange rights or
other privilege of the holders to acquire shares of any other series of
preferred stock or of Class A Common Stock or Class B Common Stock of the
Company. The Board of Directors may also determine the number of shares in each
series, the stated value for which the series may be issued and the voting
rights of each series. The shares of each series of Series Preferred Stock may
rank prior to the Class A Common Stock and Class B Common Stock of the Company
in respect of dividends and rights in liquidation.
Other than as described herein under "The Increased Authorization Proposal"
or above under "The Liberty Media Group Stock Proposal--Issuance of Series F
Preferred Stock", the Company has no present understanding or agreement with
respect to the issuance for any purpose of any of the additional shares that
will be authorized for issuance if the Increased
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Authorization Proposal is approved. Although the Board of Directors of the
Company has no present intention of doing so, the additional shares of Class A
Common Stock and Series Preferred Stock that will be authorized for issuance if
the Increased Authorization Proposal is approved could be issued in one or more
transactions (within limitations imposed by applicable law) that would make a
takeover of the Company more difficult and, therefore, less likely, even though
such a takeover might be economically beneficial to the Company and its
stockholders. The Board of Directors and management of the Company have no
knowledge of any person or entity that intends to seek a controlling interest
in, or to make a takeover proposal with respect to, the Company.
The affirmative vote of 66 2/3% of the combined voting power of the
outstanding shares of the Class A Common Stock, Class B Common Stock and Series
C Preferred Stock, voting together as a single class, is required for approval
of the Increased Authorization Proposal.
THE DIRECTOR STOCK OPTION PLAN PROPOSAL
The Board of Directors believes that the Company's ability to attract and
retain capable persons as independent directors will be enhanced if it can
provide its nonemployee directors with stock options and that the Company will
benefit from encouraging a sense of proprietorship of such persons and
stimulating the active interest of such persons in the development and financial
success of the Company. Accordingly, on November 16, 1994, the Board of
Directors of the Company adopted the Director Stock Option Plan and directed
that the Director Stock Option Plan Proposal be submitted to a vote of the
stockholders of the Company at the Annual Meeting. The Director Stock Option
Plan and existing automatic grants thereunder are subject to, and will become
effective upon approval of, the Director Stock Option Plan Proposal by the
requisite vote of the stockholders at the Annual Meeting. A copy of the Director
Stock Option Plan, as amended to provide for adjustments that will be made
thereunder if the Liberty Media Group Stock Option Plan is approved, is attached
hereto as Appendix V. The following description of the Director Stock Option
Plan is subject to, and qualified in its entirety by reference to, the Director
Stock Option Plan.
The Director Stock Option Plan provides for grants to be made of options
("Options") to purchase a maximum of one million shares of Class A Common Stock
(which would be redesignated Series A TCI Group Common Stock under the Liberty
Media Group Stock Proposal), subject to certain adjustments described below. If
the Liberty Media Group Stock Proposal is approved, there would be added to the
one million shares of Series A TCI Group Common Stock reserved for issuance
250,000 shares of Series A Liberty Media Group Common Stock. See "The Liberty
Media Group Stock Proposal--Adjustments Under Stock Incentive Plan and Director
Stock Option Plan". Shares that are subject to Options that expire or terminate
for any reason without having been exercised will return to the pool of such
shares underlying Options available for grant under the Director Stock Option
Plan.
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Under the Director Stock Option Plan, each of the six directors of the
Company who were not employees of the Company or any subsidiary of the Company
(any such director, a "Nonemployee Director") as of November 16, 1994 (the
"Effective Date") has been granted, subject to stockholder approval of the
Director Stock Option Plan Proposal, an Option to purchase 50,000 shares of
Class A Common Stock. The Director Stock Option Plan provides that each
individual who becomes a Nonemployee Director after the Effective Date will
automatically be granted an Option to purchase 50,000 shares of Class A Common
Stock (subject to adjustment as described below) on the date such person first
becomes a Nonemployee Director, if the number of shares subject to future grant
under the Director Stock Option Plan is sufficient to make all automatic grants
required to be made pursuant to the Director Stock Option Plan on such date of
grant. If the Liberty Media Group Stock Proposal is approved, future automatic
grants will consist of an Option to purchase 50,000 shares of Series A TCI Group
Common Stock and an Option to purchase 12,500 shares of Series A Liberty Media
Group Common Stock. The term "subsidiary of the Company" means any corporation
of which the Company directly or indirectly owns shares representing more than
50% of the voting power of all classes or series of capital stock of such
corporation which have the right to vote generally on matters submitted to a
vote of the stockholders of such corporation. Options granted pursuant to the
Director Stock Option Plan will be nonqualified stock options which do not
qualify under Section 422 of the Code.
The Director Stock Option Plan provides that the per share exercise price
of each Option will be equal to 95% of the fair market value of the Class A
Common Stock on the date the Option is granted, with the price resulting from
such percentage rounded down to the nearest quarter dollar. In general, fair
market value is determined by reference to the last sale price for shares of the
Class A Common Stock as reported on the Nasdaq Stock Market on the date of the
grant. Such last sale price on the Effective Date was $23.375 per share and the
exercise price of the Options granted on that date, subject to stockholder
approval of the Director Stock Option Plan, is $22.00 per share. If the Liberty
Media Group Stock Proposal is approved, outstanding options that were previously
granted subject to stockholder approval will be adjusted so that each holder of
such an Option will receive an additional Option covering 12,500 shares of
Series A Liberty Media Group Common Stock and the outstanding Option will
continue in effect as an option covering the 50,000 shares of Series A TCI Group
Common Stock (as redesignated). The aggregate pre-adjustment strike price of
such outstanding Options will be allocated so that the aggregate strike price of
the additional Options covering Series A Liberty Media Group Common Stock will
be 25% of the aggregate pre-adjustment strike price and the aggregate strike
price of the Options covering Series A TCI Group Common Stock will be 75% of the
aggregate pre-adjustment strike price (so that on a per share basis the strike
price of each option to purchase Series A TCI Group Common Stock will be $16.50
and the strike price of each option to purchase Series A Liberty Media Group
Common Stock will be $22.00).
Options granted under the Director Stock Option Plan will vest and become
exercisable in equal annual installments over a five-year period commencing on
the first anniversary of the date of the grant. The method of payment of the
exercise price of an Option, and of the amount required to satisfy applicable
Federal, state and local withholding tax requirements as determined by the
Company, may consist of cash, the surrender of shares of the same class or
series for
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which the Option is exercisable that have been held by the optionee for more
than six months or any combination thereof, at the election of the optionee.
Shares so surrendered in payment in whole or in part of the Option exercise
price and applicable withholding taxes will be valued at their fair market value
on the date of exercise.
Each Option granted pursuant to the Director Stock Option Plan will
terminate upon the earliest to occur of the following: (a) the expiration of ten
years following the date upon which the Option is granted; (b) the expiration of
one year following the date upon which the optionee ceases to be a director of
the Company for any reason other than voluntary termination of director status;
or (c) the expiration of three months following the date on which the optionee
voluntarily ceases his status as a director.
In the event that an optionee ceases to serve as a director of the Company
for any reason other than voluntary termination of director status, each
unmatured outstanding Option held by such optionee shall be accelerated. Upon
the occurrence of a Change in Control, all unmatured outstanding Options will be
accelerated effective as of such Change in Control. A "Change of Control" will
be deemed to have occurred if any of the following events shall have occurred:
(a) there shall have occurred an event required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item
on any similar schedule or form) promulgated under the Exchange Act, whether or
not the Company is then subject to such reporting requirement; (b) after the
Effective Date any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a person that was a director of the Company on the
Effective Date or any person controlled by such a director, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding voting securities; (c)
after the Effective Date any person described in the foregoing clause (b)
commences a tender offer subject to Section 14(d) of the Exchange Act for
securities of the Company representing a majority of the combined voting
power of the Company's then outstanding voting securities, provided that to the
extent any nonmatured Options accelerated under this clause (c) are not
exercised prior to the termination of such offer, such acceleration shall be
annulled and such Options shall revert to their original vesting schedule; (d)
the Company is a party to a merger, consolidation, sale of assets or other
reorganization, or a proxy contest, as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter; or (e)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (including for this purpose any
new director whose election or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period) cease for
any reason to constitute at least a majority of the Board of Directors.
In the event of any subdivision or consolidation of outstanding shares of
Class A Common Stock or declaration of a dividend payable in shares of Class A
Common Stock or other stock split, then (i) the number of shares of Class A
Common Stock issuable pursuant to each Option, (ii) the total number of shares
of Class A Common Stock reserved under the Plan
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and (iii) the per share exercise price of the Options shall each be
proportionately adjusted to reflect such transaction. In the event of any other
recapitalization or capital reorganization of the Company, any consolidation or
merger of the Company with another corporation or entity, the adoption by the
Company of a plan of exchange affecting the Class A Common Stock or any
distribution to holders of Class A Common Stock of securities or property (other
than normal cash dividends or dividends payable in Class A Common Stock), the
Board of Directors shall make appropriate adjustments to (1) the number of
shares of Class A Common Stock issuable pursuant to each Option and (2) the per
share exercise price of the Options to give effect to such transaction; provided
that such adjustments shall only be such as are necessary to maintain the
proportionate interest of the optionees and preserve, without exceeding, the
value of the Options. In the event of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation, the
Board of Directors shall be authorized to issue or assume stock options by means
of substitution of new options for previously issued options or an assumption of
previously issued options as a part of such adjustment. If the Liberty Media
Group Stock Proposal is approved, references to Class A Common Stock in this
paragraph shall apply to Series A Liberty Media Group Common Stock, as
appropriate.
The obligations of the Company with respect to Options granted under the
Director Stock Option Plan are subject to all applicable laws.
All grants of Options under the Director Stock Option Plan will be
automatic and will not be subject to the discretion of any person. The Director
Stock Option Plan will be administered by the Company's Board of Directors, who
will receive no additional compensation for such service. Members of the Board
of Directors who are eligible for Options may vote on matters affecting
administration of the Director Stock Option Plan.
The Board of Directors may amend, alter or discontinue the Director Stock
Option Plan, except that (a) no amendment or alteration that would impair the
rights of any optionee under any Option that he has been granted shall be made
without his consent, (b) no amendment or alteration shall be effective prior to
approval by the Company's stockholders to the extent such approval is then
required pursuant to Rule 16b-3 (or any successor provision) under the Exchange
Act in order to preserve the applicability of any exemption provided by such
rule to any Option then outstanding (unless the holder of such Option consents)
or to the extent stockholder approval is otherwise required by applicable legal
requirements, and (c) the Plan shall not be amended more than once every six
months to the extent such limitation is required by Rule 16b-3(c)(2)(ii) (or any
successor provision) under the Exchange Act as then in effect.
Certain Federal Income Tax Consequences. The following summary generally
describes the principal Federal (but not state and local) income tax
consequences of the Director Stock Option Plan. It is general in nature and is
not intended to cover all tax consequences that may apply to a particular
optionee or the Company. The provisions of the Code and the regulations
thereunder relating to these matters are complex and their impact in any one
case may depend upon the particular circumstances.
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In general, the grant of an Option will not result in taxable income to the
optionee or a deduction to the Company for Federal income tax purposes. Upon
exercise of an Option, the Company will be entitled, for Federal income tax
purposes, to a tax deduction and the optionee will recognize ordinary income.
The amount of such deduction and income generally will equal the amount by which
the fair market value of the shares acquired on the date the Option is exercised
exceeds the Option exercise price of the shares if the shares received on
exercise are transferable and not subject to a substantial risk of forfeiture at
such time. In general, the shares received on exercise of an Option will be
transferable and will not be subject to a substantial risk of forfeiture.
However, if the sale of shares acquired upon exercise of an Option would subject
the optionee to liability under Section 16(b) of the Exchange Act, which
requires certain "insiders" to pay to the Company any profits received from
certain purchases and sales of equity securities of the Company, the optionee
will recognize ordinary income (and the Company will be entitled to a
corresponding tax deduction) equal to the amount by which the fair market value
of the shares acquired exceeds the Option exercise price for the shares on the
earlier of (i) the date that the optionee is no longer subject to liability
under Section 16(b) of the Exchange Act or (ii) six months after the date the
Option is exercised. An optionee subject to liability under Section 16(b) of the
Exchange Act may, however, recognize ordinary income (and the Company will be
entitled to a corresponding tax deduction) at the time the Option is exercised
if the optionee makes an election under Section 83(b) of the Code.
If an Option is exercised through the delivery of shares previously owned
by the optionee, such exercise generally will not be considered a taxable
disposition of the previously owned shares and thus no gain or loss will be
recognized with respect to such shares upon such exercise.
Any difference between the basis of the shares acquired through the
exercise of an Option (the Option exercise price plus the ordinary income
recognized) and the amount realized upon a subsequent sale of such shares will
be treated as a short-term or long-term capital gain or loss, depending on the
length of the period such shares are held prior to sale. Currently, long-term
capital gains are taxed to an individual at a maximum rate of 28% as opposed to
a maximum rate of 39.6% for ordinary income.
The affirmative vote of a majority of the combined voting power and a
majority of the combined number of the shares of Class A Common Stock, Class B
Common Stock and Series C Preferred Stock represented in person or by proxy and
entitled to vote at the Annual Meeting, voting as a single class, is required
for approval of the Director Stock Option Plan Proposal.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Beneficial Ownership of More than Five Percent of Voting Securities
The following table sets forth, as of May 31, 1995, information with
respect to the ownership of Class A Common Stock, Class B Common Stock, Class B
Preferred Stock and Series C Preferred Stock by each person known to the Company
to own beneficially more than 5% of any such class outstanding on that date.
Shares issuable upon exercise or conversion of convertible securities are deemed
to be outstanding for the purpose of computing the percentage
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<PAGE>
of ownership and overall voting power of persons beneficially owning such
convertible securities, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership or overall voting power of any
other person. Voting power in the table is computed with respect to a general
election of directors and, therefore, the Class B Preferred Stock is included in
the calculation. The number of shares indicated as owned by Dr. Malone includes
his interests in shares held by the trustee of the Company's Employee Stock
Purchase Plan ("ESPP"). So far as is known to the Company, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as owned by them except as otherwise stated in the notes to the table and except
for the shares held by the trustee of the ESPP for the benefit of Dr. Malone,
which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
Amount and
Title Nature of
of Name and Address Beneficial Percent Voting
Class of Beneficial Owner Ownership of Class(1) Power
----- ------------------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Class A Bob Magness, Chairman of 4,626,938 (2)(3)(4) * 26.30%
Class B the Board and a Director 37,132,076 (2)(4)(7) 43.75%
Class B Pref. 5619 DTC Parkway 125,000 7.72%
Series C Pref. Englewood, Colorado -- --
Class A John C. Malone, President 1,220,673 (5) * 17.90%
Class B and a Director 25,447,083 (6)(7)(8) 29.99%
Class B Pref. 5619 DTC Parkway 306,000 (6)(8) 18.89%
Series C Pref. Englewood, Colorado -- --
Class A Kearns-Tribune Corporation 8,792,514 (4) 1.54% 7.00%
Class B 400 Tribune Building 9,112,500 (4)(7) 10.74%
Class B Pref Salt Lake City, Utah 67,536 4.17%
Series C. Pref -- --
Class A The Associated Group, Inc. 12,479,976 2.18% 5.83%
Class B 200 Gateway Towers 7,071,852 8.33%
Class B Pref. Pittsburgh, Pennsylvania 41,598 2.57%
Series C Pref. -- --
Class A The Equitable Companies 30,733,246 (9) 5.38% 2.15%
Class B Incorporated -- --
Class B Pref 787 Seventh Avenue -- --
Series C Pref. New York, New York; and -- --
The Mutuelles AXA and AXA
101-100 Terrasse Boieldieu
92042 Paris La Defense France
Class A The Capital Group Companies, 42,352,180 (10) 7.41% 2.96%
Class B Inc. -- --
Class B Pref. 333 South Hope Street -- --
Series C Pref. Los Angeles, California -- --
</TABLE>
- ----------------------------
* Less than one percent.
-148-
<PAGE>
(1) Based on 571,499,424 shares of Class A Common Stock, 84,864,800 shares of
Class B Common Stock, 1,620,026 shares of Class B Preferred Stock and
70,559 shares of Series C Preferred Stock outstanding on May 31, 1995
(after elimination of shares of the Company held by subsidiaries of the
Company).
(2) Mr. Magness, as executor of the Estate of Betsy Magness, is the beneficial
owner of all shares of Class A Common Stock and Class B Common Stock held
of record by the Estate of Betsy Magness. The number of shares in the
table includes 2,105,332 shares of Class A Common Stock and 6,346,212
shares of Class B Common Stock of which Mr. Magness is beneficial owner as
executor.
(3) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 1,000,000 shares of
Class A Common Stock. Options to acquire 400,000 shares of Class A Common
Stock are currently exercisable. See note 7 to the table under "Management
of the Company--Executive Compensation--Summary Compensation Table" below
for additional information.
(4) Mr. Magness and Kearns-Tribune Corporation ("Kearns") are parties to a
buy-sell agreement, entered into in October of 1968, as amended, under
which neither party may dispose of their shares without notification of
the proposed sale to the other, who may then buy such shares at the
offered price, sell all of their shares to the other at the offered price
or exchange one of their shares of Class A Common Stock ("Class A shares")
for each share of Class B Common Stock ("Class B shares") held by the
other and purchase any remaining Class B shares at the offered price.
There are certain exceptions, including transfers to specified persons or
entities, certain public sales of Class A shares and exchanges of Class A
shares for Class B shares.
(5) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 1,000,000 shares of
Class A Common Stock. Options to acquire 400,000 shares of Class A Common
Stock are currently exercisable. See note 7 to the table under "Management
of the Company--Executive Compensation--Summary Compensation Table" below
for additional information.
(6) Includes 1,173,000 shares of Class B Common Stock and 6,900 shares of
Class B Preferred Stock held by Dr. Malone's wife, Mrs. Leslie Malone, but
Dr. Malone has disclaimed any beneficial ownership of such shares.
(7) Pursuant to a letter agreement, dated June 17, 1988, Mr. Magness and
Kearns-Tribune each agreed with Dr. Malone that prior to making a
disposition of a significant portion of their respective holdings of Class
B Common Stock, he or it would first offer Dr. Malone the opportunity to
purchase such shares.
(8) The number of shares of Class B Common Stock and Class B Preferred Stock
in the table includes 3,120,000 and 40,000 Restricted Voting Shares,
respectively, that as of the Record Date are subject to repurchase by the
Company under certain circumstances.
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<PAGE>
Until they cease to be subject to the Company's repurchase right, such
shares may not be transferred and, with respect to any matter submitted to
a vote of the stockholders of the Company, the votes represented thereby
will be cast in the same proportion as all other votes are cast with
respect to such matter. The number of shares of Class A Common Stock,
Class B Common Stock and Class B Preferred Stock in the table which are
not subject to such repurchase rights and voting requirements represent
15.73% of the total voting power of the shares of Class A Common Stock,
Class B Common Stock, Class B Preferred Stock and Series C Preferred Stock
outstanding (excluding the 3,120,000 and 40,000 Restricted Voting Shares
from such total voting power).
(9) The number of shares in the table is based upon a Schedule 13G, dated
February 10, 1995, filed by The Equitable Companies Incorporated and The
Mutuelles AXA and AXA. Subsidiaries of The Equitable Companies
Incorporated are listed in the Schedule 13G as having sole voting power
with respect to 21,927,390 shares, sole dispositive power with respect to
30,322,016 shares, shared voting power with respect to 619,318 shares and
shared dispositive power with respect to 411,230 shares. AXA entities are
listed in the Schedule 13G as having sole voting and dispositive power
with respect to 325,000 shares.
(10) The number of shares in the table is based upon a Schedule 13G, dated
February 8, 1995, filed by The Capital Group Companies, Inc. Certain
operating subsidiaries of The Capital Group Companies, Inc. exercised
investment discretion over various institutional accounts which held as of
December 31, 1994, 42,352,180 shares of Class A Common Stock. Capital
Guardian Trust Company, a bank, and one of such operating companies,
exercised investment discretion over 6,471,333 of said shares. Capital
Research and Management Company, registered investment advisor, and
Capital International, Ltd. and Capital International, S.A., other
operating subsidiaries, had investment discretion with respect to
35,655,750, 137,770 and 87,310 shares, respectively, of the above shares.
Beneficial Ownership by Directors and Officers
The following table sets forth, as of May 31, 1995, information with
respect to the ownership of Class A Common Stock, Class B Common Stock and Class
B Preferred Stock by all directors and each of the named executive officers of
the Company, other than those listed in the immediately preceding table, and by
all executive officers and directors of the Company as a group. None of the
directors or executive officers of the Company owns any Series C Preferred
Stock. Shares issuable upon exercise or conversion of convertible securities are
deemed to be outstanding for the purpose of computing the percentage ownership
and overall voting power of persons beneficially owning such convertible
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other person.
Voting power in the table is computed with respect to a general election of
directors and therefore the Class B Preferred Stock is included in the
calculation. The number of Class A and Class B shares in the table include
interests of the named directors or executive officers or of members of the
group of directors and executive officers in shares held by the trustee of the
Company's ESPP and shares held by the trustee of
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<PAGE>
the United Artists Entertainment Company Employee Stock Ownership Plan for their
respective accounts. So far as is known to the Company, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as owned by them except as otherwise stated in the notes to the table and except
for the shares held by the trustee of the Company's ESPP for the benefit of such
persons, which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
Name of Amount and Nature Percent Voting
Title of Class Beneficial Owner of Beneficial Ownership of Class Power
- -------------- ---------------- ------------------------ -------- ------
<S> <C> <C> <C> <C>
Class A Donne F. Fisher 544,947 (2) * *
Class B 249,072 *
Class B Pref. 3,464 *
Class A John W. Gallivan 2,124 (3) * *
Class B -- --
Class B Pref. 14 *
Class A Kim Magness -- -- *
Class B 518,000 *
Class B Pref. -- --
Class A Jerome H. Kern 2,000,000 (4) * *
Class B -- --
Class B Pref. -- --
Class A R.E. Turner 60,000 (5) * *
Class B -- --
Class B Pref. -- --
Class A Tony Coelho 800 * *
Class B -- --
Class B Pref. -- --
Class A Robert A. Naify 23,638,860 (9) 3.98% 1.63%
Class B -- --
Class B Pref. 1,000 *
Class A Fred A. Vierra 763,433 (6) * *
Class B -- --
Class B Pref. 200 *
Class A Brendan R. Clouston 1,210,171 (8) * *
Class B 230 *
Class B Pref. -- --
Class A All directors and 36,772,607 (1)(2)(3)(4) 6.15% 46.14%
executive officers (5)(6)(7)(8)
Class B as a group (9)(10)(11)
Class B Pref. (18 persons) 63,601,807 (1)(11) 74.94%
438,884 27.09%
</TABLE>
- ----------------------------
* Less than one percent.
-151-
<PAGE>
(1) See notes 1 through 8 to the table above under "Security Ownership of More
than Five Percent of Voting Securities".
(2) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 200,000 shares of Class
A Common Stock. None of the options are exercisable until November 17,
1995. See note 1 to the table under "Management of the Company-Executive
Compensation-Option/SAR Grants Table" below for additional information.
(3) Includes 1,524 shares of Class A Common Stock held by Mr. Gallivan's wife.
(4) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights to acquire 2,000,000 shares of Class A Common Stock at
a purchase price of $16.75 per share. Options to acquire 800,000 shares
are currently exercisable and the remainder vest and become exercisable
evenly over three years. The options expire on October 12, 1998.
(5) Includes 50,000 shares of Class A Common Stock held in trust of which Mr.
Turner is the trustee and beneficiary. Includes 10,000 shares of Class A
Common Stock held in trust of which Mr. Turner's wife is trustee.
(6) Assumes the exercise in full of the following: (a) stock options granted
in tandem with stock appreciation rights in November of 1992 to acquire
100,000 shares of Class A Common Stock, of which options to acquire 40,000
shares of Class A Common Stock are currently exercisable (see note 7 to
the table under "Management of the Company-Executive Compensation-Summary
Compensation Table"); (b) stock options granted in tandem with stock
appreciation rights in November of 1993 to acquire 100,000 shares of Class
A Common Stock, of which options to acquire 25,000 shares of Class A
Common Stock are currently exercisable (see note 6 to the table under
"Management of the Company-Executive Compensation-Summary Compensation
Table"); and (c) stock options granted in tandem with stock appreciation
rights in November of 1994 to acquire 200,000 shares of Class A Common
Stock, none of which options are exercisable until November 17, 1995 (see
note 1 to the table under "Management of the Company-Executive
Compensation-Option/SAR Grants Table").
(7) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 100,000 shares of Class
A Common Stock. All such options became fully exercisable upon retirement
by Mr. Sparkman. See note 7 to the table under "Management of the
Company-Executive Compensation-Summary Compensation Table" below for
additional information.
(8) Assumes the exercise in full of the following: (a) stock options granted
in tandem with stock appreciation rights in November of 1992 to acquire
500,000 shares of Class A Common Stock; (b) options to acquire 200,000
shares of Class A Common Stock are currently exercisable (see note 7 to
the table under "Management of the
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<PAGE>
Company-Executive Compensation-Summary Compensation Table"); (c) stock
options granted in tandem with stock appreciation rights in November of
1993 to acquire 500,000 shares of Class A Common Stock; (d) options to
acquire 125,000 shares of Class A Common Stock are currently exercisable
(see note 6 to the table under "Management of the Company-Executive
Compensation-Summary Compensation Table"); and (e) stock options granted
in tandem with stock appreciation rights in November of 1994 to acquire
200,000 shares of Class A Common Stock, none of which options are
exercisable until November 17, 1995 (see note 1 to the table under
"Management of the Company-Executive Compensation-Option/SAR Grants
Table").
(9) Mr. Robert Naify received notes, which are currently convertible into
22,446,926 shares of Class A Common Stock, as partial consideration for
the sale to the Company of the stock owned by him in United Artists
Communications, Inc. ("UACI"). Mr. Naify is also a co-trustee, along with
Mr. Naify's brother, Marshall, and their sister, of a trust for the
benefit of Marshall which holds additional notes convertible into 341,606
shares of Class A Common Stock. The number of shares in the table assumes
the conversion of these notes.
(10) Certain executive officers and directors of the Company (10 persons,
including Messrs. Magness, Malone, Sparkman, Vierra and Clouston) hold
options which were granted in tandem with stock appreciation rights in
November of 1992, to acquire 3,225,000 shares of Class A Common Stock at a
purchase price of $16.75 per share. Options to acquire 1,290,000 of such
shares are currently exercisable. Additionally certain executive officers
(8 persons including Messrs. Vierra and Clouston) hold stock options which
were granted in tandem with stock appreciation rights in October and
November of 1993, to acquire 1,225,000 shares of Class A Common Stock at a
purchase price of $16.75 per share. Options to acquire 306,250 of such
shares are currently exercisable. Additionally, Mr. Kern holds an option
to acquire 2,000,000 shares of Class A Common Stock as described in note 4
above. Also certain executive officers and directors (9 persons including
Messrs. Fisher, Vierra and Clouston) hold stock options which were granted
in tandem with stock appreciation rights in November of 1994, and first
become exercisable (as to 20% of the shares covered thereby) in November
of 1995, to acquire 3,214,000 shares of Class A Common Stock at a purchase
price of $22.00 per share. The number of Class A shares in the table
assumes the exercise of these options.
(11) The number of shares in the table does not include any shares held by
Kearns, of which Mr. Gallivan is an officer.
No equity securities in any subsidiary of the Company, other than
directors' qualifying shares, are owned by any of the Company's executive
officers or directors, except that Mr. Bob Magness, a director and an executive
officer of the Company, owns 944 shares of WestMarc Communications, Inc.
("WestMarc") Series B Cumulative Compounding Redeemable Preferred Stock; Mr. Kim
Magness, a director of the Company, owns 31 shares of WestMarc Series B
Cumulative Compounding Redeemable Preferred Stock; Dr. Malone, a director and an
executive
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<PAGE>
officer of the Company, owns, as trustee for his children, 68 shares of WestMarc
Series B Cumulative Compounding Redeemable Preferred Stock; Mr. Larry Romrell,
an officer of the Company, owns 103 shares of WestMarc Series B Cumulative
Compounding Redeemable Preferred Stock and Mr. Jerome Kern, a director of the
Company, owns 116 shares of WestMarc Series B Cumulative Compounding Redeemable
Preferred Stock, including 58 shares owned by his wife, Diane D. Kern, over
which Mr. Kern is deemed to have beneficial ownership. Mr. Kern has disclaimed
any beneficial ownership of such shares owned by Mrs. Kern. Mr. Donne Fisher, a
director and executive officer of the Company, pursuant to a Restricted Stock
Award Agreement dated December 10, 1992, was transferred the right, title and
interest in and to 124.03 shares of WestMarc Series B Cumulative Compounding
Redeemable Preferred Stock owned by the Company. Such preferred stock held by
Mr. Fisher 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.
The Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
MANAGEMENT OF THE COMPANY
Executive Officers
The following lists the executive officers of the Company, other than
directors listed above, and their respective birth dates, a description of their
business experience and positions held with the Company as of May 31, 1995. All
officers are elected for an indefinite term, serving at the pleasure of the
Board of Directors.
<TABLE>
<CAPTION>
Name Positions
- ------------------------- ---------------------------------------------------
<S> <C>
Stephen M. Brett; Executive Vice President, General Counsel and
Born September 20, 1940 Secretary of the Company since January of 1994.
Senior Vice President and General Counsel of TCIC
since December of 1991. Vice President and
Secretary and a director of most of the Company's
subsidiaries. From August of 1988 through
December of 1991, was Executive Vice
President-Legal and Secretary of United Artists
Entertainment Company ("UAE") and its predecessor,
UACI.
Fred A. Vierra; Executive Vice President of the Company since
Born November 9, 1931 January of 1994. Chairman of the Board and Chief
Executive Officer of International since September
of 1994. Executive Vice President of TCIC from
December of 1991 to October of 1994. Was
President, Chief Operating Officer and a director
of UAE from May of 1989 through December of 1991.
</TABLE>
-154-
<PAGE>
<TABLE>
<CAPTION>
Name Positions
- ------------------------- ---------------------------------------------------
<S> <C>
Peter R. Barton; Executive Vice President of the Company since
Born April 6, 1951 January of 1994; President and Chief Executive
Officer of LMC from June of 1990 until October
1994 and of Liberty subsequent thereto; was Senior
Vice President of TCIC from 1988 to March of 1991.
Brendan R. Clouston; Executive Vice President of the Company since
Born April 28, 1953 January of 1994; President and Chief Executive
Officer of TCIC since October of 1994; Executive
Vice President and Chief Operating Officer of TCIC
from March of 1992 to October of 1994; previously
Senior Vice President of TCIC since December of
1991; from January of 1987 through December of
1991, held various executive positions with UAE
and its predecessor, UACI, most recently Executive
Vice President and Chief Financial Officer.
Larry E. Romrell; Executive Vice President of the Company since
Born December 30, 1939 January of 1994. President of TCI Technology since
September of 1994; Senior Vice President of TCIC
from 1991 to October of 1994; previously held
various executive positions with WestMarc, a
wholly-owned subsidiary of the Company.
Barry P. Marshall; Executive Vice President and Chief Operating
Born March 4, 1946 Officer of TCIC since October of 1994. Executive
Vice President and Chief Operating Officer of TCI
Cable Management Corporation, TCIC's primary
operating subsidiary, from March of 1992 through
January 1, 1994, where he directly oversaw all of
TCIC's regional operating divisions. From 1986 to
March of 1992, was Vice President and Chief
Operating Officer of TCIC's largest regional
operating division.
Gary K. Bracken; Controller of TCIC since 1969. Appointed Senior
Born July 29, 1939 Vice President of TCIC in December of 1991. Was
named Vice President and Principal Accounting
Officer of TCIC in 1982.
Bernard W. Schotters; Appointed Senior Vice President-Finance and
Born November 25, 1944 Treasurer of TCIC in December of 1991. Was
appointed Vice President-Finance of TCIC in 1984.
Vice President and Treasurer of most of the
Company's subsidiaries, other than Liberty.
Robert N. Thomson; Appointed Senior Vice President of TCIC in
Born December 19, 1943 February of 1995. Senior Vice President of
Communications and Policy Planning for TCIC from
1991 to October of 1994. Previously, Vice
President of Government Affairs for TCIC from
January of 1987 to 1991.
J. C. Sparkman; Executive Vice President of the Company from
Born September 12, 1932 January of 1994 through March of 1995. Mr.
Sparkman retired in March of 1995. TCIC Executive
Vice President from 1987 to October of 1994.
</TABLE>
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<PAGE>
There are no family relations, of first cousin or closer, among the
Company's directors or executive officers, by blood, marriage or adoption,
except that Bob Magness and Kim Magness are father and son, respectively.
During the past five years, none of the Company's directors or executive
officers have had any involvement in such legal proceedings as would be material
to an evaluation of his ability or integrity.
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Commission. Officers, directors and greater than 10%
shareholders are required by Commission regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that, during the year ended December 31, 1994, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with, except that one report each, covering the
initial reporting of shareholdings, was filed late by Mr. Romrell and Mr.
Barton.
Executive Compensation
Summary Compensation Table
The following table shows, for the years ended December 31, 1994, 1993 and
1992, all forms of compensation for the Chief Executive Officer and each of the
four most highly compensated executive officers of the Company, whose total
annual salary and bonus exceeded $100,000 for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ------------------------ -------
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All Other
sation Award(s) SARs Payouts Compensation
Position Year Salary ($) Bonus ($) ($)(4) ($) (#) ($) ($)
- ------------------- ---- ---------- --------- ------- ---------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bob Magness 1994 $830,769 --- $ --- --- --- --- $ 2,500(8)
Chairman of the 1993 $800,000 --- $ --- --- --- --- $ 2,500(8)
Board 1992 $488,250 --- $2,355 --- 1,000,000(7) --- $ 2,000(8)
John C. Malone 1994 $821,731(1) --- $2,610 --- --- --- $17,500(8)(9)
President and Chief 1993 $800,000(1) --- $2,726 --- --- --- $17,500(8)(9)
Executive Officer 1992 $490,385(1) --- $2,595 --- 1,000,000(7) --- $17,999(8)(9)
Fred A. Vierra 1994 $669,613(2) --- $1,024 --- 200,000(5) --- $ 15,000(9)
Executive Vice 1993 $623,617(2) --- $ 263 --- 100,000(6) --- $ 15,000(9)
President 1992 $422,300(2) --- --- --- 100,000(7) --- $ 8,728(9)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
----------------------------------- ------------------------ -------
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All Other
tation Award(s) SARs Payouts Compensation
Position Year Salary ($) Bonus ($) ($)(4) ($) (#) ($) ($)
- ------------------- ---- ---------- --------- ------- ---------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bob Magness 1994 $830,769 --- $ --- --- --- --- $2,500(8)
Brendan R. Clouston 1994 $525,000 --- $1,000 --- 200,000(5) --- $15,000(9)
Executive Vice 1993 $519,231 --- $263 --- 500,000(6) --- $15,000(9)
President 1992 $279,476 --- --- --- 500,000(7) --- $8,728(9)
J. C. Sparkman 1994 $756,750(3) --- $2,745 --- --- --- $15,000(9)
Executive Vice 1993 $738,000(3) --- $2,823 --- --- --- $15,000(9)
President 1992 $431,622(3) --- $2,595 --- 100,000(7) --- $15,286(9)
</TABLE>
- ----------------
(1) Includes deferred compensation of $320,000 in 1994 and $150,000 in each of
1993 and 1992.
(2) Includes deferred compensation of $250,000, $250,000 and $41,667 in 1994,
1993 and 1992, respectively.
(3) Includes deferred compensation of $188,000, $188,000 and $31,333 in 1994,
1993 and 1992, respectively.
(4) Consists of amounts reimbursed during the year for the payment of taxes.
(5) For additional information regarding this award, see "--Option/SAR Grants
Table" below.
(6) The Company has a stock incentive plan, the Tele-Communications, Inc. 1994
Stock Incentive Plan (the "Incentive Plan"). Pursuant to the Agreement and
Plan of Merger, dated as of January 26, 1994, as amended, by and among the
Company, LMC, TCIC, TCI Mergerco, Inc. and Liberty Mergerco, Inc. (the
"Merger Agreement") and certain Assumption and Amended and Restated Stock
Option Agreements, holders of stock options and/or stock appreciation
rights granted (or assumed) by TCIC and holders of stock options and/or
stock appreciation rights granted by Liberty (collectively, the "Assumed
Options and SARs") surrendered the Assumed Options and SARs to the Company
following the Old TCI/LMC Combination. The Company assumed the Assumed
Options and SARs and in place thereof substituted new stock options and
stock appreciation rights under the Incentive Plan having substantially
similar terms. On October 12, 1993 certain executive officers and other
key employees of TCIC were granted 1,355,000 options in tandem with stock
appreciation rights to acquire shares of Class A Common Stock 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 an aggregate of 600,000 shares of Class A Common Stock was made
to Messrs. Clouston and Vierra at a purchase price of $16.75 per share.
Such options, which represent a portion of the Assumed
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<PAGE>
Options and SARs, vest evenly over four years, first became exercisable on
October 12, 1994 and expire on October 12, 2003. Notwithstanding the
vesting schedule as set forth in the option agreement, the option shares
shall become available for purchase if grantee's employment with the
Company (a) shall terminate by reason of (i) termination by the Company
without cause (as defined in the Incentive Plan), (ii) termination by the
grantee for good reason (as defined in the agreement) or (iii) disability,
(b) shall terminate pursuant to provisions of a written employment
agreement, if any, between the grantee and the Company which expressly
permits the grantee to terminate such employment upon occurrence of
specified events (other than the giving of notice and passage of time), or
(c) if grantee dies while employed by the Company. Further, the option
shares will become available for purchase in the event of an Approved
Transaction, Board Change, or Control Purchase (each as defined in the
Incentive Plan), unless in the case of an Approved Transaction, the
Compensation Committee under the circumstances specified in the Incentive
Plan determines otherwise.
(7) On November 11, 1992, certain executive officers and other key employees
were granted 4,020,000 options in tandem with stock appreciation rights to
acquire shares of Class A Common Stock at a purchase price of $16.75 per
share. Such options represent a portion of the Assumed Options and SARs
referenced in note 6 above, vest and become exercisable evenly over five
years, first became exercisable beginning on November 11, 1993 and expire
on November 11, 2002. Notwithstanding the vesting schedule as set forth in
the option agreement, the option shares shall become available for
purchase if grantee's employment with the Company (a) shall terminate by
reason of (i) termination by the Company without cause (as defined in the
Incentive Plan), (ii) termination by grantee for good reason (as defined
in the agreement) or (iii) disability, (b) shall terminate pursuant to
provisions of a written employment agreement, if any, between the grantee
and the Company which expressly permits the grantee to terminate such
employment upon occurrence of specified events (other than the giving of
notice and passage of time), or (c) if grantee dies while employed by the
Company. Further, the option shares will become available for purchase in
the event of an Approved Transaction, Board Change or Control Purchase
(each as defined in the Incentive Plan), unless in the case of an Approved
Transaction, the Compensation Committee under the circumstances specified
in the Incentive Plan determines otherwise.
(8) Includes fees paid to directors for attendance at each meeting of the
Board of Directors ($500 per meeting). During 1994, 1993 and 1992, a total
of $2,500, $2,500 and $3,000 of such fees, respectively, were paid to Dr.
Malone.
(9) Includes dollar value of annual Company contributions to the Company's
ESPP in which all named executive officers are fully vested. Directors who
are not employees of the Company are ineligible to participate in the
ESPP. The ESPP, a defined contribution plan, enables participating
employees to acquire a proprietary interest in the Company and benefits
upon retirement. Under the terms of the ESPP, employees are eligible for
participation after one year of service. The ESPP's normal retirement age
is 65 years. Participants may contribute up to 10% of their compensation
and the Company (by annual
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resolution of the Board of Directors) may contribute up to 100% of the
participants' contributions. The ESPP includes a salary deferral feature
in respect of employee contributions. Forfeitures (due to participants'
withdrawal prior to full vesting) are used to reduce the Company's
otherwise determined contributions. Generally, participants acquire a
vested right in the Company contributions as follows:
<TABLE>
<CAPTION>
Years of service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 1 0
1-2 20
2-3 30
3-4 45
4-5 60
5-6 80
6 or more 100
</TABLE>
Participant contributions are fully vested. Although the Company has not
expressed an intent to terminate the ESPP, it may do so at any time. The
ESPP provides for full and immediate vesting of all participants rights
upon termination. During 1994, 1993 and 1992, the Company contributed
$15,000, $15,000 and $14,999, respectively, to the ESPP for Dr. Malone.
Option/SAR Grants Table
The following table shows all individual grants of stock options and stock
appreciation rights ("SARs") granted to each of the named executive officers of
the Company during the year ended December 31, 1994:
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs Market
SARs Granted Exercise or Price on Grant Date
Granted to Employees Base Price Grant Date Expiration Present Value
Name (#)(1) in Fiscal Year(1) ($/Share) ($/Share)(2) Date ($)(3)
- ------------------- ---------- ----------------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bob Magness --- --- --- --- --- ---
John C. Malone --- --- --- --- --- ---
Fred A. Vierra 200,000 6.2% $22.00 $24.125 November 17, 2004 $2,828,000
Brendan R. Clouston 200,000 6.2% $22.00 $24.125 November 17, 2004 $2,828,000
J.C. Sparkman --- --- --- --- --- ---
</TABLE>
- -----------------
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(1) On November 17, 1994, pursuant to the Incentive Plan, certain executive
officers and other key employees were granted 3,214,000 options in tandem
with stock appreciation rights to acquire shares of Class A Common Stock
at a purchase price of $22.00 per share. Such options vest evenly over
five years, become exercisable beginning on November 17, 1995 and expire
on November 17, 2004. Notwithstanding the vesting schedule as set forth in
the option agreement, the option shares shall become available for
purchase if grantee's employment with the Company (a) shall terminate by
reason of (i) termination by the Company without cause, (ii) termination
by the grantee for good reason (as defined in the agreement) or (iii)
disability, (b) shall terminate pursuant to provisions of a written
employment agreement, if any, between the grantee and the Company which
expressly permits the grantee to terminate such employment upon occurrence
of specified events (other than the giving of notice and passage of time),
or (c) if grantee dies while employed by the Company. Further, the option
shares will become available for purchase in the event of an Approved
Transaction, Board Change, or Control Purchase (each as defined in the
Incentive Plan), unless in the case of an Approved Transaction, the
Compensation Committee under the circumstances specified in the Incentive
Plan determines otherwise.
(2) Represents the closing market price per share of Class A Common Stock on
November 17, 1994.
(3) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 7.25% discount rate; (b) a volatility factor based upon the
Company's historical trading pattern; (c) the 10-year option term; and (d)
the closing price of the Company's common stock on March 1, 1995. The
actual value an executive may realize will depend upon the extent to which
the stock price exceeds the exercise price on the date the option is
exercised. Accordingly, the value, if any, realized by an executive will
not necessarily be the value determined by the model.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
The following table shows each exercise of stock options and SARs during
the year ended December 31, 1994 by each of the named executive officers of the
Company and the December 31, 1994 year-end value of unexercised options and SARs
on an aggregated basis:
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<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-the-
Unexercised Money
Options/SARs at Options/SARs at
December 31, 1994 December 31, 1994
(#) ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ------------------- ------------------ -------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Bob Magness
Exercisable --- --- 400,000 $2,000,000
Unexercisable --- --- 600,000 $3,000,000
John C. Malone
Exercisable --- --- 400,000 $2,000,000
Unexercisable --- --- 600,000 $3,000,000
Fred A. Vierra
Exercisable --- --- 9,714 $ 111,225
Exercisable --- --- 65,000 $ 325,000
Unexercisable --- --- 335,000 $ 675,000
Brendan R. Clouston
Exercisable --- --- 325,000 $1,625,000
Unexercisable --- --- 875,000 $3,375,000
J.C. Sparkman
Exercisable --- --- 40,000 $ 200,000
Unexercisable --- --- 60,000 $ 300,000
</TABLE>
Employment Contracts and Termination of Employment and Change of Control
Arrangements
Effective November 1, 1992 the employment agreements between TCIC and Mr.
Magness and Dr. Malone, as amended, were further amended and restated. Pursuant
to an Assignment and Assumption Agreement, dated August 4, 1994, the payment,
performance and other obligations of such employment agreements were assumed by
the Company. The term of each agreement is extended daily so that the remainder
of the employment term shall at all times on and prior to the effective date of
the termination of employment as provided by each agreement be five years. Dr.
Malone's and Mr. Magness' employment agreements provide for annual salaries of
$800,000. Additionally, these employment agreements provide for personal use of
the Company's aircraft and flight crew, limited to an aggregate value of $35,000
per year.
Dr. Malone's employment agreement provides, among other things, for
deferral of a portion (40% in 1993 and not in excess of 40% thereafter) of the
monthly compensation payable to him. Pursuant to a letter agreement entered into
between Dr. Malone and the Company subsequent to the date of his employment
agreement, Dr. Malone deferred $150,000 in 1993 in lieu of 40% of his
compensation for such year. The deferred amounts will be payable in monthly
installments over a 20-year period commencing on the termination of Dr. Malone's
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employment, together with interest thereon at the rate of 8% per annum
compounded annually from the date of deferral to the date of payment. The
amendment also provides for the payment of certain benefits, discussed below.
Mr. Magness' and Dr. Malone's agreements described above also provide that
upon termination of such executive's employment by the Company (other than for
cause, as defined in the agreement), or if Mr. Magness or Dr. Malone elects to
terminate the agreement because of a change in control of the Company, all
remaining compensation due under the agreement for the balance of the employment
term shall be immediately due and payable.
Dr. Malone's and Mr. Magness' agreements provide that during their
employment with the Company and for a period of two years following the
effective date of their termination of employment with the Company, unless
termination results from a change in control of the Company, they will not be
connected with any entity in any manner, as defined in the agreement, which
competes in a material respect with the business of the Company. However, the
agreements provide that both executives may own securities of any corporation
listed on a national securities exchange or quoted in the Nasdaq System to the
extent of an aggregate of 5% of the amount of such securities outstanding.
Dr. Malone's agreement also provides that in the event of termination of
his employment with the Company, he will be entitled to receive 240 consecutive
monthly payments of $15,000 (increased at the rate of 12% per annum compounded
annually from January 1, 1988 to the date payment commences), the first of which
will be payable on the first day of the month succeeding the termination of Dr.
Malone's employment. In the event of Dr. Malone's death, his beneficiaries will
be entitled to receive the foregoing monthly payments. The Company currently
owns a whole-life insurance policy on Dr. Malone, the face value of which is
sufficient to meet its obligation under the salary continuation arrangement. The
premiums payable by the Company on such insurance policy are currently being
funded through earnings on the policy. Dr. Malone has no interest in this
policy.
The Company pays a portion of the annual premiums (equal to the "PS-58"
costs) on three whole-life insurance policies of which Dr. Malone is the insured
and trusts for the benefit of members of his family are the owners. The Company
is the designated beneficiary of the proceeds of such policies less an amount
equal to the greater of the cash surrender value thereof at the time of Dr.
Malone's death and the amount of the premiums paid by the policy owners.
Effective November 1, 1992, TCIC entered into an employment agreement with
Mr. Vierra which will expire on December 31, 1997. Pursuant to an Assignment and
Assumption Agreement, dated August 4, 1994, the payment, performance and other
obligations of such employment agreement were assumed by the Company. Mr.
Vierra's employment agreement provides for a salary of $650,000 per year, of
which approximately 38.46% of each monthly payment shall be deferred so as to
result in the deferral of payment of Mr. Vierra's salary at the rate of $250,000
per annum. The deferred amounts will be paid in monthly installments over a 240-
month period commencing on the later of January 1, 1998 and the termination of
Mr. Vierra's full-time employment with the Company, together with interest
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thereon at the rate of 8% per annum compounded annually from the date of
deferral to the payment date. Additionally, Mr. Vierra's employment agreement
provides for personal use of the Company's aircraft and flight crew, limited to
an aggregate value of $35,000 per year.
Mr. Vierra's employment agreement provides that upon termination by the
Company without cause, all remaining compensation due under such agreement for
the balance of the employment term would become immediately due and payable to
such executive. Upon the death of such executive during the employment term, the
Company will pay to such executive's beneficiaries a lump sum in an amount equal
to the lesser of (i) the compensation due under such executive's employment
agreement for the balance of the employment term or (ii) one year's
compensation. In the event of such executive's disability, the Company will
continue to pay such executive his annual salary as and when it would have
otherwise become due until the first to occur of the end of the employment term
or the date of such executive's death.
Mr. Vierra's agreement provides that during his employment with the Company
and for a period of two years following the effective date of his termination of
employment with the Company, he will not be connected with any entity in any
manner, as defined in the agreement, which competes in a material respect with
the business of the Company. However, the agreement provides that such executive
may own securities of any corporation listed on a national securities exchange
or quoted in the Nasdaq System to the extent of an aggregate of 5% of the amount
of such securities outstanding. If such executive terminates employment with the
Company prior to the expiration of his employment term or if the Company
terminates such executive's employment for cause, as defined in the agreement,
then the noncompetition clause of the agreement shall apply to the longer of the
previously described two year period or the period beginning on the effective
date of termination of employment through December 31, 1997.
Effective November 1, 1992, TCIC entered into an employment agreement with
Mr. Sparkman which would have expired on December 31, 1997. Pursuant to an
Assignment and Assumption Agreement, dated August 4, 1994 the payment,
performance and other obligations of such employment agreement were assumed by
the Company. Mr. Sparkman's employment agreement provided for a salary of
$738,000 per year, of which approximately 25.47% of each monthly payment was
deferred resulting in the deferral of payment of Mr. Sparkman's salary at the
rate of $188,000 per annum. The deferred amounts will be payable in monthly
installments over a 120-month period commencing on January 1, 1998, together
with interest thereon at the rate of 8% per annum compounded annually from the
date of deferral to the payment date. Additionally, Mr. Sparkman's employment
agreement provided for personal use of the Company's aircraft and flight crew,
limited to an aggregate value of $35,000 per year.
The Company will pay Mr. Sparkman 240 consecutive monthly payments of
$6,250 (increased at the rate of 12% per annum compounded annually from January
1, 1988) commencing upon the termination of his employment. In the event Mr.
Sparkman dies prior to the payment of all monthly payments, the remainder of
such payments shall be made to Mr. Sparkman's designated beneficiaries. The
Company owns a whole-life insurance policy on
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Mr. Sparkman, the face value of which is sufficient to meet its obligations
under this salary continuation arrangement. The premiums payable by the Company
on such insurance policy are currently being funded through earnings on the
policies. Mr. Sparkman has no interest in this policy.
Dr. Malone and Mr. Sparkman each deferred a portion of their monthly
compensation under their previous employment agreements. Such deferred
compensation (together with interest thereon at the rate of 13% per annum
compounded annually from the date of deferral to the date of payment) will
continue to be payable under the terms of the previous agreements. The rate at
which interest accrues on such previously deferred compensation was established
in 1983 pursuant to such earlier agreements.
Report of the Compensation Committee on Executive Compensation
Neither the report of the Compensation Committee of the Board of Directors
(the "Committee") nor the stock performance graph that follows such report shall
be deemed incorporated by reference by any general statement incorporating by
reference this proxy statement into any filing under the Securities Act of 1933
or under the Exchange Act, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
The Committee's compensation philosophy is based on the belief that a link
should exist between executive compensation and the return on investment
provided to stockholders as reflected by the appreciation in the price of the
Company's stock. In applying this philosophy, the Committee has developed and
implemented a compensation policy which seeks to attract and retain highly
skilled and effective executives with the business experience and acumen
necessary to achievement of the long-term business objectives of the Company and
to align the financial interests of the Company's senior executives with those
of its stockholders. The Company attempts to realize these goals by providing
competitive compensation and linking a substantial portion of compensation to
the enhancement of stockholder value.
The Company's executive compensation is based principally on two
components--salary and equity-based incentives--each of which is intended to
serve the Company's overall compensation philosophy. Generally, the Company does
not pay cash bonuses to its senior executives.
Base Salary. Base salary for executive officers is generally targeted at
or below the median for executives with comparable qualifications, experience
and responsibilities at other companies in the cable/media industry. In the
aggregate, executive salaries are consistent with this philosophy. Base salary
levels are also based on the employees' relative levels of seniority and
responsibility. During 1992, TCIC undertook a review of the compensation paid to
its key employees and retained independent consultants to advise it in
connection with setting base salaries. The consultants provided the Committee
with a survey of the base salaries, bonuses and long term incentive compensation
packages of the chief executive officers and certain other senior officers at 93
companies in the media industry, including 47 in the cable television
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<PAGE>
industry, and 394 companies in various other industries. The Committee then
established new salary levels for its executive officers below the median of the
annual salaries and bonuses of officers in comparable positions and in media
companies included in the survey. In connection with this review, in late 1992,
TCIC entered into employment agreements with six of its executive officers,
including the Chief Executive Officer and three of the four other named
executive officers. Two of the Company's employment agreements with executives
(not including any of the named executives) require minimum automatic increases
of $25,000 per year in base salary. The four other agreements, including the
Chief Executive Officer's agreement, established a minimum annual salary and
provided that any increases would be in the discretion of the Board of
Directors. Generally, the executive officers have been paid in accordance with
the salary levels set in 1992 or pursuant to their employment agreements, with
modest increases in the cash compensation paid to the Company's executives in
1994. Certain terms of the employment agreements of certain named executive
officers are described under "MANAGEMENT OF THE COMPANY -- Executive
Compensation -- Employment Contracts and Termination of Employment and Change of
Control Arrangements".
Equity-Based Incentives. In order to make the overall compensation
packages of the Company's executives and other key employees competitive with
other companies in the media industry, the Committee has emphasized equity-based
incentives rather than salary and bonuses. The Committee believes that reliance
upon such incentives is advantageous to the Company because they foster a long-
term commitment by the recipient to the Company and motivate the employees to
seek to improve the long-term market performance of the Company's stock. During
1994, the Committee authorized the grant of stock options in tandem with stock
appreciation rights to certain named executive officers, excluding the Chief
Executive Officer, and other key employees. Such options vest in equal amounts
over five years and except in certain circumstances executives must be employed
by the Company at the time of vesting in order to exercise the options. The
aggregate number of shares of the Class A Common Stock covered by the options
granted to the named executives in 1994 represents less than 1% of the total
number of shares of such class outstanding. These grants were made after a
review of the exercise prices, numbers and dates of the awards of those options
and tandem stock appreciation rights already held by the Company's executives
and other key employees. The Committee based its grants for 1994 in part upon
the level of the executive or other key employee's responsibilities, experience
and expertise and the degree to which such person is in a position to contribute
to the achievement or advancement of the Company's financial and strategic
objectives. No restricted stock grants were made to any of the Company's
executive officers in 1994.
Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code and the U.S. Treasury regulations relating thereto restrict
publicly traded companies from claiming or receiving a tax deduction on
compensation paid to an executive officer in excess of $1 million, unless such
compensation is performance based. As such, many companies with executive pay
levels exceeding the $1 million limit are considering revising or amending
current compensation programs to qualify the payments thereunder for
deductibility. The Compensation
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Committee has taken no action with respect to the Company's executive
compensation plans that were in effect at the time of the adoption of Section
162(m) in 1994. The Compensation Committee will consider structuring future
executive compensation and performance plans so that awards thereunder will
qualify as performance-based compensation under the applicable Treasury
regulations.
Stock Performance Graph
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Class A Common Stock during the five years ended
December 31, 1994 with the cumulative total return on the Standard & Poor's 500
Stock Index and with a selected peer group of six companies engaged in the cable
television industry (including the Company): Cablevision Systems, Corp., Jones
Intercable, Inc., TCA Cable TV, Inc., Comcast and Time Warner, Inc. The
comparison assumes $100 was invested on December 31, 1989 in the Class A Common
Stock and, in each of the foregoing indices, assumes the reinvestment of
dividends.
TOTAL RETURN TO SHAREHOLDERS
TELE-COMMUNICATIONS, INC.
12/31/89 - 12/31/94
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tele-Communications - CLA 100 74.13 172.48 215.60 306.91 220.67
S&P 500 Index 100 96.89 126.42 136.05 149.76 151.74
Peer Group 100 72.16 117.19 148.83 228.10 170.71
</TABLE>
Additional Information with respect to Compensation Committee Interlocks and
Insider Participation in Compensation Decisions
The members of the Company's compensation committee are Messrs. Robert A.
Naify and John W. Gallivan, both directors of the Company. Neither Mr. Naify nor
Mr. Gallivan are or were officers of the Company or any of its subsidiaries.
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Mr. R.E. Turner, a director of the Company, is the Chairman of the Board
and President of TBS and the beneficial owner of 65.2% of the total voting power
of all outstanding TBS stock as of December 31, 1994. Mr. Fred A. Vierra, an
Executive Vice President of the Company, serves on the compensation committee of
the Board of Directors of TBS. During the year ended December 31, 1994, the
Company and its affiliates paid approximately $108 million to purchase certain
cable television programming from TBS.
During the year ended December 31, 1994, the Company paid approximately
$1.8 million to TBS relating to the lease of a satellite transponder. The
Company is committed to pay approximately $10.8 million through the year 2000
pursuant to such lease.
During the year ended December 31, 1994, the Company and its affiliates
paid license fees of approximately $8 million to TBS for the rights to exhibit
certain motion pictures.
The TBS SuperStation signal is retransmitted by a common carrier, Southern,
which is controlled by an indirect wholly-owned subsidiary of the Company.
Southern is compensated by the local cable systems receiving the retransmission
of the TBS SuperStation and does not have a contract with, or receive
compensation from, TBS with respect to such retransmission.
TBS and the Company each own a 44% indirect interest in SportSouth Network,
L.P. ("SportSouth"), a limited partnership that operates a regional sports
network serving the Southeast United States. SportSouth's revenue is primarily
derived from the sale of advertising and the subscription sale of its service to
cable television operators.
Compensation of Directors
The standard arrangement by which the Company's directors are compensated
for all services (including any amounts payable for committee participation or
special assignments) as a director is as follows: each director receives a fee
of $500 plus travel expenses for attendance at each meeting of the Board of
Directors and each director who is not a full-time employee of the Company
receives additional compensation of $30,000 per year. In addition, the Company's
Board of Directors has approved, subject to stockholder approval of the Director
Stock Option Plan at the Annual Meeting, the grant effective as of November 16,
1994, to each person that as of such date was a member of the Board of Directors
and was not an employee of the Company or any of its subsidiaries, of options to
acquire 50,000 shares of Class A Common Stock at a purchase price of $22.00 per
share. Such options will vest and become exercisable over a five-year period,
commencing on November 16, 1995, and will expire on November 16, 2004. If the
stockholders approve the Director Stock Option Plan at the Annual Meeting, each
person who thereafter becomes a director of the Company and is not an employee
of the Company or any of its subsidiaries will be automatically granted similar
options upon such person's becoming a director. The exercise price of each such
subsequently granted option will be equal to 95% of the fair market value of the
Class A Common Stock on the date the option is granted, with the price resulting
from such percentage being rounded down to the nearest quarter dollar. In
general, such fair market value will be the last sale price for the shares of
the Class A Common Stock as reported on the Nasdaq Stock Market on the date of
the grant.
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Effective on November 1, 1992, the Company created a deferred compensation
plan for all nonemployee directors. Each director may elect to defer receipt of
all, but not less than all, of the annual cash compensation (excluding meeting
fees and reimbursable expenses) payable to the director for serving on the
Company's Board of Directors for each calendar year for which such deferral is
elected. An election to defer may be made as to the compensation payable for a
single calendar year or period of years. Any compensation deferred shall be
credited to the director's account on the last day of the quarter for which
compensation has accrued. Such deferred compensation will bear interest from
the date credited to the date of payment at a rate of 8% per annum in 1993 and
120% of the applicable federal long-term rate thereafter, compounded annually.
A director may elect payment of deferred compensation to be made at a
specified year in the future or upon termination of the director's service as
director of the Company. Each director may elect payment in a lump sum, three
substantially equal consecutive annual installments or five substantially equal
consecutive annual installments. In the event that a director dies prior to
payment of all the amounts payable pursuant to the plan, any amounts remaining
in the director's deferred compensation account, together with accrued interest
thereon, shall be paid to the director's designated beneficiary.
There are no other arrangements whereby any of the Company's directors
received compensation for services as a director during 1994 in addition to or
in lieu of that specified by the aforedescribed standard arrangement.
Board Meetings
During 1994, there were six meetings of the full Board of Directors of the
Company and its predecessor, TCIC. No director attended fewer than 75% of the
meetings of the Board of Directors or of any committee of which he is a member.
Committees of the Board of Directors
The Company has an Executive Committee, an Audit Committee and a
Compensation Committee. There is no standing nomination committee of the
Company's Board of Directors.
The members of the Executive Committee are Bob Magness, John C. Malone and
John W. Gallivan. The Executive Committee exercises all of the powers and
authority of the Board of Directors between meetings of the entire Board, other
than such powers and authority as the DGCL specifically prohibits an executive
committee from performing.
The members of the Audit Committee are John W. Gallivan, Robert A. Naify
and Donne F. Fisher. The duties of the Audit Committee are to review and monitor
the Company's financial reports and accounting practices to ascertain that they
are within acceptable limits of sound practice, to receive and review audit
reports submitted by the Company's independent auditors and by its internal
auditing staff and make such recommendations to the Board as may seem
appropriate to the Committee to assure that the interests of the Company are
adequately
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protected and to review all related party transactions and potential
conflict-of-interest situations. The Audit Committee of the Company and its
predecessor, TCIC, held one meeting during 1994.
The members of the Compensation Committee are John W. Gallivan and Robert
A. Naify. The functions of the Compensation Committee are to review and make
recommendations to the Board of Directors concerning the compensation of the
executive officers of the Company, to consider and make recommendations to the
Board of Directors concerning existing and proposed employment agreements
between the Company and its executive officers and to administer the Incentive
Plan. The Compensation Committee of the Company and its predecessor, TCIC, held
one meeting during 1994.
Certain Transactions
Mr. Bob Magness and Dr. Malone, each of whom is a director and executive
officer of the Company, are also directors of TCIC. During 1994 and prior to
the Old TCI/LMC Combination, they were also directors of LMC, and Dr. Malone was
an executive officer of LMC since 1990. The Old TCI/LMC Combination was
consummated on August 4, 1994 and was structured as a tax free exchange of Class
A and Class B shares of both companies and preferred stock of LMC for like
shares of the Company. TCIC common shareholders received one share of the
Company for each of their shares. LMC common shareholders received 0.975 of a
share of the Company for each of their shares. Holders of LMC's Class E, 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock ("LMC Class E
Preferred Stock") received shares of Class B Preferred Stock of the Company,
having designations, preferences, rights and qualifications, limitations and
restrictions substantially identical to those of the LMC Class E Preferred
Stock, except that the holders of the LMC Class E Preferred Stock had no voting
rights with respect to the election of directors. The other classes of
preferred stock of LMC held by TCIC were converted into Class A Preferred Stock,
a new series of preferred stock of the Company having a substantially equivalent
fair market value to that which was given up.
During 1992, TCIC and LMC formed Community Cable Television ("CCT"), a
general partnership created for the purpose of acquiring and operating cable
television systems with Tele-Communications of Colorado, Inc., an indirect
wholly-owned subsidiary of TCIC, owning a 49.999% interest and Liberty Cable
Partner, Inc., an indirect wholly-owned subsidiary of LMC, owning a 50.001%
interest. Pursuant to a cable management agreement, a subsidiary of TCIC
provided management services for cable systems owned by CCT. The subsidiary
received a fee equal to 3% of the gross cable television revenue of CCT through
the date of the Old TCI/LMC Combination. From January 1, 1994 through August 4,
1994, CCT paid $2,044,099 under the agreement.
SSI, a wholly-owned subsidiary of TCIC, purchased sports and other
programming from certain subsidiaries and affiliates of LMC through the date of
the Old TCI/LMC Combination. Charges to SSI (which were based upon customary
rates charged to others) for such programming were $27,284,419 from January 1,
1994 through August 4, 1994. Certain subsidiaries and affiliates of LMC that
operated cable systems purchased, at TCIC's cost plus
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in some cases an administrative fee of up to 10% of the rates actually charged,
certain pay television and other programming through SSI through the date of the
Old TCI/LMC Combination. In addition, a consolidated subsidiary of LMC paid a
commission to TCIC for merchandise sales to customers who are subscribers of
TCIC's cable systems. Aggregate commissions and charges for such programming
were $9,798,431 from January 1, 1994 through August 4, 1994.
TCIC and LMC were parties to a services agreement pursuant to which TCIC
agreed to provide certain financial reporting, tax and other administrative
services to LMC. A subsidiary of LMC also leased office space and satellite
transponder facilities from TCIC. Charges by TCIC for such services and leases
amounted to $124,859 for the period from January 1, 1994 through August 4, 1994.
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During 1994, Peachtree Cable TV, Inc. ("Peachtree"), a Nevada corporation
wholly owned by certain employees of TCIC, including Messrs. Thomson, Schotters,
Marshall and Bracken (executive officers of TCIC), paid $76,859 in management
fees to TCIC for the operation and management of Peachtree's cable television
systems.
Mr. Jerome H. Kern, a director of the Company, is a partner with the law
firm of Baker & Botts, L.L.P., the principal outside counsel for the Company.
Fees paid to Baker & Botts, L.L.P. by the Company and TCIC were $10,069,871 for
the last full fiscal year.
On February 3, 1994, Dr. Malone, then an executive officer and director of
TCIC, borrowed $310,000 from TCIC. Such indebtedness bore interest at the Bank
of New York prime rate. Dr. Malone repaid such indebtedness, including accrued
interest amounting to $1,733, on March 10, 1994.
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On October 24, 1991, Dr. Malone exercised certain options granted to him by
LMC through the delivery of $100,000 in cash and a promissory note in the amount
of $25,500,000. The promissory note Dr. Malone delivered to LMC bore interest at
the rate of 7.54% per annum, and was secured by 16,000,000 shares of LMC Class B
Common Stock and 200,000 shares of LMC Class E Preferred Stock. On October 24,
1991, Dr. Malone tendered to LMC in partial payment of such note 800,000 shares
of TCIC's Class B Common Stock, resulting in a net reduction of $12,194,877 in
the amount payable under the note.
On October 24, 1992, Dr. Malone and LMC 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 LMC Class E Preferred Stock from the
collateral securing the promissory note. The letter agreement provided that the
$12,194,877 payment on the promissory note would be applied as follows: (1)
$10,999,436 to the principal balance; (2) $192,195 as a prepayment of interest
on the reduced principal balance accrued during calendar 1991 (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 (the "Discount Rate")); and
(3) $1,003,246 as a prepayment of interest on the reduced principal balance
accrued during calendar 1992 (after giving effect to the Discount Rate). Dr.
Malone also agreed to make a payment in March 1993 in the amount of $983,823
from the proceeds of dividends received on his shares of LMC Class E Preferred
Stock, which amount would be applied to payment of all interest accruing during
calendar 1993 (after giving effect to the Discount Rate) and not to tender
shares of the LMC Class E Preferred Stock to LMC to pay any of his obligations
under the promissory note without LMC's consent.
The Company acquired such note receivable from Dr. Malone in the Old
TCI/LMC Combination. On October 27, 1994, Dr. Malone tendered to the Company
634,917 shares of Class B Common Stock as payment in full of principal amounting
to $14,500,564 and accrued interest amounting to $896,182. The market value of
the tendered shares was based on the last sales price of $24.25 for the shares
of the Company's Class A Common Stock on October 26, 1994.
The Company believes that the business dealings with management during 1994
described above were based upon terms no less advantageous to the Company or
TCIC, as applicable, than those which would be available in dealing with
unaffiliated persons.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Charter and the Company's Bylaws contain provisions which may
serve to discourage or make more difficult a change in control of the Company
without the support of the Board of Directors or without meeting various other
conditions. The principal provisions of the DGCL and the aforementioned
corporate governance documents are outlined below.
DGCL Section 203, in general, prohibits a "business combination" between a
corporation and an "interested stockholder" within three years of the date such
stockholder became an "interested stockholder", unless (i) prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder
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becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
directors who are also officers and by certain employee stock plans, or (iii) on
or after such date, the business combination is approved by the board of
directors and authorized by the affirmative vote at a stockholders' meeting of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. The term "business combination" is defined to include,
among other transactions between the interested stockholder and the corporation
or any direct or indirect majority-owned subsidiary thereof, a merger or
consolidation; a sale, pledge, transfer or other disposition (including as part
of a dissolution) of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation on a
consolidated basis or the aggregate market value of all the outstanding stock of
the corporation; certain transactions that would increase the interested
stockholder's proportionate share ownership of the stock of any class or series
of the corporation or such subsidiary; and any receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or any such
subsidiary. In general, and subject to certain exceptions, an "interested
stockholder" is any person who is the owner of 15% or more of the outstanding
voting stock (or, in the case of a corporation with classes of voting stock with
disparate voting power, 15% or more of the voting power of the outstanding
voting stock) of the corporation, and the affiliates and associates of such
person. The term "owner" is broadly defined to include any person that
individually or with or through his or its affiliates or associates, among other
things, beneficially owns such stock, or has the right to acquire such stock
(whether such right is exercisable immediately or only after the passage of
time) pursuant to any agreement or understanding or upon the exercise of
warrants or options or otherwise or has the right to vote such stock pursuant to
any agreement or understanding, or has an agreement or understanding with the
beneficial owner of such stock for the purpose of acquiring, holding, voting or
disposing of such stock. The restrictions of DGCL Section 203 do not apply to
corporations that have elected, in the manner provided therein, not to be
subject to such section or, with certain exceptions, which do not have a class
of voting stock that is listed on a national securities exchange or authorized
for quotation on an interdealer quotation system of a registered national
securities association or held of record by more than 2,000 stockholders.
The Charter does not contain any provision "opting out" of the application
of DGCL Section 203 and the Company has not taken any of the actions necessary
for it to "opt out" of such provision. As a result, the provisions of Section
203 will remain applicable to transactions between the Company and any of its
"interested stockholders".
The Charter also contains certain provisions which could make a change in
control of the Company more difficult. For example, the Charter requires,
subject to the rights, if any, of any class or series of preferred stock, the
affirmative vote of 66 2/3% of the total voting power of the outstanding shares
of Voting Stock, voting together as a single class, to approve (i) a merger or
consolidation of the Company with, or into, another corporation, other than a
merger or consolidation which does not require the consent of stockholders under
the DGCL or a merger or consolidation which has been approved by 75% of the
members of the Board of Directors
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(in which case, in accordance with the DGCL, the affirmative vote of a majority
of the total voting power of the outstanding Voting Stock would, with certain
exceptions, be required for approval), (ii) the sale, lease or exchange of all
or substantially all of the property and assets of the Company or (iii) the
dissolution of the Company. "Voting Stock" is currently defined as Class A
Common Stock, Class B Common Stock and any class or series of preferred stock
entitled to vote generally with the holders of common stock on matters submitted
to stockholders for a vote, and if the Liberty Media Group Stock Proposal is
approved, would include the TCI Group Common Stock and Liberty Media Group
Common Stock. The Charter also provides for a Board of Directors of not less
than three members, divided into three classes of approximately equal size, with
each class to be elected for a three-year term at each annual meeting of
stockholders. The exact number of directors, currently nine, is fixed by the
Board of Directors. The holders of the Company's Class A Common Stock, Class B
Common Stock, Class B Preferred Stock and Series C Preferred Stock, voting
together as a single class, vote in elections for directors. (The Company's
Class A Preferred Stock and Series E Preferred Stock have voting rights, but
outstanding shares are not entitled to vote because they are held by a
subsidiary of the Company.) Stockholders of the Company do not have cumulative
voting rights.
The Charter authorizes the issuance of 10,000,000 shares of Series
Preferred Stock, of which 8,520,000 remain available for authorization. Under
the Charter, the Board of Directors is authorized, without further action by the
stockholders of the Company, to establish the preferences, limitations and
relative rights of the Series Preferred Stock. In addition, 1,250,000,000 shares
of the Class A Common Stock and Class B Common Stock are currently authorized by
the Charter, of which [503,432,153] remain available for issuance. If the
Liberty Media Group Stock Proposal and the Increased Authorization Proposal are
approved by stockholders, then following the Distribution, there would be
1,900,000,000 shares of TCI Group Common Stock, 825,000,000 shares of Liberty
Media Group Common Stock and 50,000,000 shares of Series Preferred Stock
authorized, of which [1,153,432,153] shares of TCI Group Common Stock,
[660,908,944] shares of Liberty Media Group Common Stock and [48,683,039] shares
of Series Preferred Stock would be available for issuance as of the date of this
Proxy Statement/Prospectus. If the Increased Authorization Proposal, but not the
Liberty Media Group Stock Proposal, is approved by the stockholders, there would
be 1,900,000,000 shares of Class A Common Stock and Class B Common Stock and
50,000,000 shares of Series Preferred Stock authorized, of which [1,153,432,153]
shares of Class A Common Stock and Class B Common Stock and [48,683,039] shares
of Series Preferred Stock would be available for issuance. The issue and sale of
shares of Class A Common Stock and Class B Common Stock and/or Series Preferred
Stock could occur in connection with an attempt to acquire control of the
Company, and the terms of such shares of Series Preferred Stock could be
designed in part to impede the acquisition of such control.
The Charter requires the affirmative vote of 66 2/3% of the total voting
power of the outstanding shares of Voting Stock, voting together as a single
class, to approve any amendment, alteration or repeal of any provision of the
Charter or the addition or insertion of other provisions therein.
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The Charter and the Company's Bylaws provide that a special meeting of
stockholders will be held at any time, subject to the rights of the holders of
any class or series of preferred stock, upon the call of the Secretary of the
Company upon (i) the written request of the holders of not less than 66 2/3% of
the total voting power of the outstanding shares of Voting Stock or (ii) at the
request of not less than 75% of the members of the Board of Directors. Subject
to the rights of any class or series of preferred stock, the Company's Bylaws
require that written notice of the intent to make a nomination at a meeting of
stockholders must be received by the Secretary of the Company, at the Company's
principal executive offices, not later than (a) with respect to an election of
directors to be held at an annual meeting of stockholders, 90 days in advance of
such meeting, and (b) with respect to an election of directors to be held at a
annual meeting of stockholders, the close of business on the seventh day
following the day on which notice of such meeting is first given to
stockholders. The notice must contain: (1) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (2) a representation that the stockholder is a holder of record of
the Company's Voting Stock entitled to vote at the meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (3) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (4) such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement/prospectus filed pursuant to the proxy rules of the Commission
had each proposed nominee been nominated, or intended to be nominated, by the
Board of Directors; and (5) the consent of each nominee to serve as a director
of the Company if so elected. Any actions to remove directors is required to be
for "cause" (as defined in the Charter) and be approved by the holders of
66 2/3% of the total voting power of the outstanding shares of Voting Stock.
The Company believes that the Liberty Media Group Stock Proposal and the
Increased Authorization Proposal, if approved by the stockholders, should not
make a change in control of the Company more difficult. Although the number of
authorized shares of common stock and preferred stock will increase, and the
number of outstanding shares will increase upon the issuance of the Liberty
Media Group Common Stock pursuant to the Distribution, the cost to an acquiring
person of obtaining majority control would depend on the aggregate market value
and the terms of the outstanding shares. The Company cannot predict whether, to
what extent or during what periods of time such cost may increase or decrease.
See "Special Considerations--No Assurance as to Market Price".
Nevertheless, the existence of the Liberty Media Group Common Stock would
present complexities and could in certain circumstances pose obstacles,
financial and otherwise, to an acquiring person. For example, a potential
acquiror would have to take into consideration that holders of different series
of Common Stock might be more or less receptive to the acquiror's proposal, that
a tender offer would have to be structured so as to take into account different
prices at which shares of the different series might be acquired, that a merger
would require allocation of consideration among the different series of Common
Stock and the effects of actions the Company might take such as causing a
conversion of the Liberty Media Group Common Stock.
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DESCRIPTION OF EXISTING COMMON STOCK
AND OTHER CAPITAL STOCK
The following is a description of the Company's currently authorized
capital stock. Pursuant to the Liberty Media Group Stock Proposal and the
Increased Authorization Proposal, the authorized shares of the Company's common
stock and preferred stock would be increased, the Company's common stock would
be redesignated to comprise 1,900,000,000 shares of TCI Group Common Stock and
825,000,000 shares of Liberty Media Group Common Stock. Each class of the
Company's preferred stock described below will remain authorized following the
approval of such proposals.
Common Stock
The Company is currently authorized to issue 1,100,000,000 shares of Class
A Common Stock and 150,000,000 shares of Class B Common Stock. As of the date of
this Proxy Statement/Prospectus, there were approximately [571,499,424] shares
of Class A Common Stock and [84,864,800] shares of Class B Common Stock issued
and outstanding (after elimination of shares of the Company held by subsidiaries
of the Company).
Each share of Class A Common Stock has one vote and each share of Class B
Common Stock has ten votes on each matter presented to the holders of Common
Stock for a vote. Except as may be required by the DGCL, the holders of the
Class A Common Stock, the Class B Common Stock, and any voting preferred stock
of the Company vote as one class for all purposes. The Class A Common Stock and
Class B Common Stock are otherwise identical in all respects, except that each
share of Class B Common Stock is convertible into one share of Class A Common
Stock at the option of the holder. The Class A Common Stock is not convertible
into Class B Common Stock.
The holders of the Class A Common Stock and Class B Common Stock are
entitled to receive dividends when and as declared by the Board of Directors out
of funds legally available for such payment. Holders of Class A Common Stock and
Class B Common Stock have no preemptive rights to purchase additional shares.
The holders of Class A Common Stock and Class B Common Stock are entitled to
share ratably in the assets of the Company available for distribution to
stockholders in the event of the Company's liquidation, dissolution or winding
up.
The Charter provides that there can be no stock dividend on, or stock
split, reverse stock split or reclassification of, either the Class A Common
Stock or the Class B Common Stock without a corresponding stock dividend on, or
stock split, reverse stock split or other reclassification of, the other class
of Common Stock.
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Preferred Stock
The Company is authorized to issue up to 12,375,096 shares of preferred
stock, divided into 700,000 shares of Class A Preferred Stock, 1,675,096 shares
of Class B Preferred Stock and 10,000,000 shares of Series Preferred Stock, of
which 80,000 shares have been designated as Series C Preferred Stock, 1,000,000
shares have been designated as Series D Preferred Stock and 400,000 shares have
been designated as Series E Preferred Stock.
Class A Preferred Stock. As of the date of this Proxy Statement/Prospectus,
592,798 shares of Class A Preferred Stock have been issued and are outstanding,
all of which are held by a wholly-owned subsidiary of the Company. The dividend,
liquidation and redemption features of the Class A Preferred Stock, each of
which is discussed below, are determined by reference to the liquidation value
of the Class A Preferred Stock, which as of any date of determination is equal,
on a per share basis, to the sum of (i) $322.84, plus (ii) all dividends accrued
on such share through the dividend payment date on or immediately preceding such
date of determination to the extent not paid on or before such date, plus (iii)
for purposes of determining liquidation and redemption payments, all unpaid
dividends accrued on the sum of clauses (i) and (ii) above, to such date of
determination.
The holders of Class A Preferred Stock are entitled to receive preferential
cumulative cash dividends when and as declared by the Board of Directors out of
unrestricted funds legally available therefor. Dividends accrue cumulatively at
an annual rate of 9 3/8% of the liquidation value per share, whether or not such
dividends are declared or funds are legally or contractually available for
payment of dividends. Dividends not paid on any dividend payment date are added
to the liquidation value on such date and remain a part thereof until such
dividends and all dividends accrued thereon are paid in full.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Class A Preferred Stock are entitled to receive from the assets of the
Company available for distribution to stockholders an amount in cash or property
or a combination thereof, per share, equal to the then liquidation value.
The Class A Preferred Stock is subject to optional redemption at any time
by the Company, in whole or in part, and to mandatory redemption by the Company
on the twelfth anniversary of the issue date, in each case at a redemption
price, per share, equal to the then liquidation value of the Class A Preferred
Stock.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. As of
the date of this Proxy Statement/Prospectus, 1,675,096 shares of Class B
Preferred Stock have been issued and are outstanding. Of such issued and
outstanding shares, 55,070 shares are held by subsidiaries of the Company. The
holders of Class B Preferred Stock are entitled to receive preferential
cumulative dividends, when and as declared by the Board of Directors out of
unrestricted funds legally
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available therefor. Dividends accrue cumulatively (but without compounding) at
an annual rate of 6% of the stated liquidation value of $100 per share (the
"Stated Liquidation Value"), whether or not such dividends are declared or funds
are legally available for payment of dividends. Accrued dividends are payable
annually and, in the sole discretion of the Board of Directors, may be declared
and paid in cash, in shares of Class A Common Stock or in any combination of the
foregoing. Accrued dividends not paid as provided above on any dividend payment
date accumulate and such accumulated unpaid dividends may be declared and paid
in cash, shares of Class A Common Stock or any combination thereof at any time
without reference to any regular dividend payment date, to holders of record of
Class B Preferred Stock as of a special record date fixed by the Board of
Directors.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class B Preferred Stock are entitled to receive from the assets
of the Company available for distribution to stockholders an amount in cash or
property or a combination thereof, per share, equal to the Stated Liquidation
Value thereof, plus all accumulated and accrued but unpaid dividends thereon to
the date of payment.
The Class B Preferred Stock is redeemable at the option of the Company, in
whole at any time or in part from time to time, for a redemption price per share
payable in cash equal to the Stated Liquidation Value thereof, plus all
accumulated and accrued but unpaid dividends thereon to and including the
redemption date.
The Class B Preferred Stock is exchangeable at the option of the Company in
whole but not in part at any time for junior subordinated debt securities of the
Company ("Junior Exchange Notes"). If the Company exercises its optional
exchange right, each holder of outstanding shares of Class B Preferred Stock
will be entitled to receive in exchange therefor newly issued Junior Exchange
Notes of a series authorized and established for the purpose of such exchange,
the aggregate principal amount of which will be equal to the aggregate Stated
Liquidation Value of the shares of Class B Preferred Stock so exchanged by such
holder, plus all accumulated and accrued but unpaid dividends thereon to and
including the exchange date. The Junior Exchange Notes will mature on the
fifteenth anniversary of the date of issuance and will be subject to earlier
redemption at the option of the Company, in whole or in part, for a redemption
price equal to the principal amount thereof plus accrued but unpaid interest.
Interest will accrue, and be payable annually, on the principal amount of the
Junior Exchange Notes at a rate per annum to be determined prior to issuance by
adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as
defined in the Indenture pursuant to which the Junior Exchange Notes will be
issued). Interest will accrue on overdue principal at the same rate, but will
not accrue on overdue interest.
Series Preferred Stock. The Series Preferred Stock is issuable, from time
to time, in one or more series, with such designations, preferences and relative
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, as is stated and expressed in a resolution or resolutions
providing for the issue of such series adopted by the Board of Directors.
All shares of any one series of the Series Preferred Stock are required to
be alike in every particular and all series are required to rank equally and be
identical in all respects, except insofar as they may vary with respect to
matters which the Board of Directors is expressly
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authorized by the Charter to determine in the resolution or resolutions
providing for the issue of any series of the Series Preferred Stock.
Series C Convertible Preferred Stock. The Company has issued a series of
Series Preferred Stock designated as "Convertible Preferred Stock, Series C". As
of the date of this Proxy Statement/Prospectus, 70,559 shares of Series C
Preferred Stock have been issued and are outstanding.
Each share of Series C Preferred Stock is convertible, at the option of the
holder, into 100 shares of Class A Common Stock, subject to anti-dilution
adjustments. The dividend, liquidation and redemption features of the Series C
Preferred Stock, each of which is discussed in greater detail below, are
determined by reference to the liquidation value of the Series C Preferred
Stock, which as of any date of determination is equal, on a per share basis, to
the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the
dividend payment date on or immediately preceding such date of determination to
the extent not paid on or before such date, plus (iii) for purposes of
determining liquidation and redemption payments, all unpaid dividends accrued on
the sums of clauses (i) and (ii) above, to such date of determination.
The holders of Series C Preferred Stock are entitled to receive
preferential cumulative cash dividends out of funds legally available therefor.
Dividends accrue cumulatively at an annual rate of 5 1/2% of the liquidation
value per share, whether or not such dividends are declared or funds are legally
or contractually available for payment of dividends, except that if the Company
fails to redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, dividends thereafter accrue cumulatively at an annual rate of
15% of the liquidation value per share. Dividends not paid on any dividend
payment date are added to the liquidation value on such date and remain a part
thereof until such dividends and all dividends accrued thereon are paid in full.
Dividends accrue on unpaid dividends at the rate of 5 1/2% per annum, unless
such dividends remain unpaid for two consecutive quarters in which event such
rate increases to 15% per annum.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series C Preferred Stock are entitled to receive from the assets of the
Company available for distribution to stockholders an amount in cash, per share,
equal to the liquidation value.
The Series C Preferred Stock is subject to optional redemption by the
Company at any time after the seventh anniversary of its issuance, in whole or
in part, at a redemption price, per share, equal to the liquidation value of the
Series C Preferred Stock. Subject to the rights of any other class or series of
the Company's preferred stock ranking pari passu with the Series C Preferred
Stock, the Series C Preferred Stock is required to be redeemed by the Company at
any time after such seventh anniversary at the option of the holder, in whole or
in part (provided that the aggregate liquidation value of the shares to be
redeemed is in excess of $1 million), in each case at a redemption price, per
share, equal to the liquidation value.
Series D Convertible Preferred Stock. The Company has issued a series of
Series Preferred Stock designated as "Convertible Preferred Stock, Series D". As
of the date of this
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Proxy Statement/Prospectus, 1,000,000 shares of Series D Preferred Stock have
been issued and are outstanding.
Each share of Series D Preferred Stock is convertible, at the option of the
holder, into 10 shares of Class A Common Stock, subject to anti-dilution
adjustments. If the Company distributes to holders of Class A Common Stock
rights or warrants to subscribe for or purchase capital stock (other than Class
A Common Stock or Class B Common Stock) of the Company or a subsidiary of the
Company which (a) is common stock of its issuer or (b) participates in one or
more business operations of the issuer in a manner similar to the Liberty Media
Group Common Stock ("Special Securities"), each holder of Series D Preferred
Stock has the option, in lieu of the otherwise applicable antidilution
adjustment, to exchange shares of Series D Preferred Stock for shares of a
series of convertible preferred stock of the issuer of the Special Securities
having terms similar to the Series D Preferred Stock but convertible into
Special Securities.
The dividend, liquidation and redemption features of the Series D Preferred
Stock, each of which is discussed below, are determined by reference to the
liquidation value of the Series D Preferred Stock, which as of any date of
determination is equal, on a per share basis, to the sum of (i) $300, plus (ii)
all dividends accrued on such share through the dividend payment date on or
immediately preceding such date of determination to the extent not paid on or
before such date, plus (iii) for purposes of determining liquidation and
redemption payments, an amount equal to all unpaid dividends accrued on the sum
of clauses (i) and (ii) above, to such date of determination.
The holders of Series D Preferred Stock are entitled to receive
preferential cumulative cash dividends out of funds legally available therefor.
Dividends accrue cumulatively at an annual rate of 5 1/2% of the liquidation
value per share, whether or not such dividends are declared or funds are legally
or contractually available for payment of dividends, except that if the Company
fails to redeem shares of Series D Preferred Stock required to be redeemed on a
redemption date, dividends thereafter accrue cumulatively at an annual rate of
10% of the liquidation value per share. To the extent any cash dividends are not
paid on any dividend payment date, the amount of such dividends will be
automatically converted, to the extent permissible under the DGCL, into shares
of Class A Common Stock at a conversion rate equal to 95% of the then current
market price (as defined in the certificate of designations establishing the
Series D Preferred Stock) of Class A Common Stock, and upon issuance of Class A
Common Stock to holders of Series D Preferred Stock in respect of such
conversion such dividend will be deemed paid for all purposes. Dividends not so
paid or deemed paid on any dividend payment date are added to the liquidation
value on such date and remain a part thereof until such dividends and all
dividends accrued thereon are paid in full. Dividends accrue on such unpaid
dividends at the rate of 5 1/2% per annum, unless such dividends remain unpaid
for two consecutive quarters, in which event such rate increases to 10% per
annum.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series D Preferred Stock are entitled to receive from the assets of the
Company available for distribution to stockholders an amount in cash, per share,
equal to the liquidation value.
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<PAGE>
The Series D Preferred Stock is subject to optional redemption by the
Company at any time after the fifth anniversary of its issuance, in whole or
from time to time in part, at a redemption price, per share, equal to the
liquidation value of the Series D Preferred Stock. Shares of Series D Preferred
Stock may also be redeemed at the option of the Company after the third
anniversary of the issue date if the market value per share of Class A Common
Stock shall have exceeded $37.50 for periods specified in the certificate of
designations establishing the Series D Preferred Stock. Subject to the rights of
any other class or series of the Company's preferred stock ranking pari passu
with the Series D Preferred Stock and subject to any prohibition or restriction
contained in any instrument evidencing indebtedness of the Company, any holder
of Series D Preferred Stock, at such holder's option, may require the Company,
at any time after the tenth anniversary of the issuance of such Series D
Preferred Stock, to redeem all or a portion of such holder's shares of Series D
Preferred Stock, provided that the aggregate liquidation value of the shares to
be redeemed is in excess of $50,000 (or, if all of the shares of Series D
Preferred Stock held by such holder have an aggregate liquidation value of less
than $50,000, all but not less than all of such shares of Series D Preferred
Stock), in each case at a redemption price, per share, equal to the liquidation
value. If the Company fails to effect any redemption of Series D Preferred Stock
on the scheduled redemption date, the holders thereof will have the option to
convert their shares of Series D Preferred Stock into Class A Common Stock at a
conversion rate equal to 95% of the current market value of the Class A Common
Stock over a period specified in the certificate of designations establishing
the Series D Preferred Stock, provided that such option may not be exercised
unless the failure to redeem continues for more than a year.
Series E Redeemable Convertible Preferred Stock. The Company has issued a
series of Series Preferred Stock designated as "Redeemable Convertible Preferred
Stock, Series E". As of the date of this Proxy Statement/Prospectus, 246,402
shares of Series E Preferred Stock have been issued and are outstanding, all of
which are held by wholly-owned subsidiaries of the Company. It is anticipated
that all of the issued and outstanding shares of Series E Preferred Stock will
be exchanged for shares of Series F Preferred Stock prior to the record date for
the Distribution.
At any time after the Company amends its Charter to increase the number of
authorized shares of Class A Common Stock to a number that would permit the
conversion of all of the shares of Series E Preferred Stock then outstanding,
the shares of Series E Preferred Stock shall be convertible, at the option of
the holder, into Class A Common Stock at the rate of 1,000 shares of Class A
Common Stock for each share of Series E Preferred Stock, subject to anti-
dilution adjustments. The dividend, liquidation and redemption features of the
Series E Preferred Stock, each of which is discussed below, are determined by
reference to the liquidation preference of the Series E Preferred Stock, which
as of any date of determination is equal, on a per share basis, to the sum of
(i) $22,303, plus (ii) all dividends accrued on such share through the dividend
payment date on or immediately preceding such date of determination to the
extent not paid on or before such date, plus (iii) for purposes of determining
liquidation and redemption payments, all unpaid dividends accrued on such share
during the period from the immediately
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<PAGE>
preceding dividend payment date (or the date of issuance of such share if the
date of determination is on or prior to the first dividend payment date) through
and including the date of determination.
The holders of Series E Preferred Stock are entitled to receive
preferential cumulative cash dividends when and as declared by the Board of
Directors out of unrestricted funds legally available therefor. Dividends accrue
cumulatively at an annual rate of 5% of the stated liquidation value per share
(such stated liquidation value initially being $22,303), whether or not such
dividends are declared or funds are legally available for payment of dividends.
Dividends not paid on any dividend payment date are added to the liquidation
value on such date and remain a part thereof until such dividends are paid.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series E Preferred Stock are entitled to receive from the assets of the
Company available for distribution to stockholders an amount in cash or property
or a combination thereof, per share, equal to the liquidation preference.
The Series E Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in part, at a redemption
price, per share, equal to the then liquidation preference of the Series E
Preferred Stock. The Company may elect to pay the redemption price (or
designated portion thereof) of the shares of Series E Preferred Stock called for
redemption by issuing to the holder thereof, in respect of his shares to be
redeemed, a number of shares of Class A Common Stock equal to the aggregate
redemption price (or designated portion thereof) of such shares divided by the
average of the last daily sales prices of the Class A Common Stock for a period
specified, and subject to the adjustments described, in the certificate of
designations establishing the Series E Preferred Stock.
Ranking; Limitations on Rights of Holders of Common Stock. All classes and
series of preferred stock outstanding on the date of this Proxy
Statement/Prospectus rank senior to the Common Stock, and if the Liberty Media
Group Increased Authorization Proposal is approved, will rank senior to the
Liberty Media Group Common Stock, as to dividend rights, rights to redemption
and rights on liquidation.
For so long as any dividends are in arrears on any outstanding class or
series of preferred stock, and until all dividends accrued up to the immediately
preceding dividend payment date on such preferred stock and on any class or
series of preferred stock ranking on a parity with such preferred stock ("Parity
Stock") shall have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, neither the Company nor any
subsidiary thereof may purchase or otherwise acquire any shares of such
preferred stock, Parity Stock or any class or series of capital stock ranking
junior to such preferred stock ("Junior Stock"), or set aside any money or
assets for any such purpose, unless all of the outstanding shares of such
preferred stock and Parity Stock are redeemed. For so long as any dividends are
in arrears on any outstanding class or series of preferred stock and until all
dividends accrued up to the immediately preceding dividend payment date on such
preferred stock shall have been paid or declared and set apart so as to be
available for payment in full
-182-
<PAGE>
thereof and for no other purpose, the Company may not declare or pay any
dividend on or make any distribution with respect to the Parity Stock or Junior
Stock or set aside any money or assets for any such purpose. If the Company
fails to redeem shares of Class A Preferred Stock, Class B Preferred Stock or
Series E Preferred Stock required to be redeemed on a redemption date, the
Company may not declare or pay any dividend on or make any distribution with
respect to the Parity Stock or Junior Stock or set aside money or assets for any
such purpose, and neither the Company nor any subsidiary thereof may purchase or
otherwise acquire any shares of such preferred stock, Parity Stock or Junior
Stock or set aside any money or assets for any such purpose, until all shares of
such class or series of preferred stock are redeemed in full. If the Company
fails to redeem shares of Series C Preferred Stock or Series D Preferred Stock
required to be redeemed on a redemption date, neither the Company nor any
subsidiary thereof may purchase or otherwise acquire any shares of Parity Stock
or Junior Stock or set aside any money or assets for any such purpose, until all
shares of such series of preferred stock are redeemed in full. Neither the
Company nor any subsidiary thereof may purchase or otherwise acquire any shares
of Parity Stock or Junior Stock, or set aside any money or assets for such
purpose, if after giving effect to such purchase or acquisition the amount that
would be available for distribution to the holders of Class A Preferred Stock,
Class B Preferred Stock and Series E Preferred Stock upon liquidation,
dissolution or winding up of the Company, if such liquidation, dissolution or
winding up were to occur on the date fixed for such purchase or acquisition of
shares of Parity Stock or Junior Stock, would be less than the aggregate
liquidation preference of all then outstanding shares of such classes and series
of preferred stock. The failure of the Company (i) to redeem on any date fixed
for redemption any outstanding shares of Class A Preferred Stock, Class B
Preferred Stock or Series E Preferred Stock or (ii) to pay dividends on any
Parity Stock, shall not prevent the Company from paying any dividends on Parity
Stock solely in shares of Parity Stock or Junior Stock or on Junior Stock solely
in shares of Junior Stock or the purchase or other acquisition of such preferred
stock or Parity Stock solely in exchange for shares of Parity Stock or Junior
Stock or of Junior Stock solely in exchange for shares of Junior Stock.
LEGAL MATTERS
The validity of the redesignation of the Company's Class A Common Stock and
Class B Common Stock as Series A TCI Group Common Stock and Series B TCI Group
Common Stock and the issuance of the Series A Liberty Media Group Common Stock
and the Series B Liberty Media Group Common Stock in connection with the
Distribution will be passed upon by Baker & Botts, L.L.P., 885 Third Avenue, New
York, New York 10022. Mr. Jerome Kern, a partner of Baker & Botts, L.L.P., is a
director of the Company. Mr. Kern holds options to purchase 2,000,000 shares of
Class A Common Stock. In addition, certain partners of Baker & Botts, L.L.P.
serve as Assistant Secretaries of the Company.
-183-
<PAGE>
INDEPENDENT AUDITORS
The firm of KPMG Peat Marwick LLP serves as the Company's independent
certified public accountants. A partner of KPMG Peat Marwick LLP will be present
at the Annual Meeting with the opportunity to make a statement if KPMG Peat
Marwick LLP so desires and will be available to respond to appropriate
questions.
EXPERTS
The consolidated balance sheets of Tele-Communications, Inc. and
subsidiaries as of December 31, 1994 and 1993, 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, 1994, and all related
schedules, have been included and incorporated by reference herein in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere and incorporated by reference herein, and upon
the authority of said firm as experts in accounting and auditing. The reports of
KPMG Peat Marwick LLP covering the December 31, 1994 consolidated financial
statements refer to the adoption of Statement of Financial Accounting Standards
No. 115, "Accounting for Investments in Certain Debt and Equity Securities", in
1994.
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 TCI
Communications, Inc. (formerly Tele-Communications, Inc.)) (Predecessor) for the
period from January 1, 1991 to March 31, 1991 (Predecessor Periods), have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering the December 31, 1993 consolidated financial
statements refers to a change in the method of accounting for income taxes in
1993.
The combined balance sheets of Liberty Media Group (a combination of
certain assets of Tele-Communications, Inc. and its affiliate, Liberty Media
Corporation) as of December 31, 1994 and 1993, and the related combined
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1994 have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering
the December 31, 1994 combined financial statements refers to the adoption of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", in 1994.
-184-
<PAGE>
The combined balance sheets of TCI Group (a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation) as of
December 31, 1994 and 1993, and the related combined statements of operations,
equity, and cash flows for each of the years in the three-year period ended
December 31, 1994 have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1994
combined financial statements refers to the adoption of Statement of Financing
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", in 1994.
The consolidated balance sheet of TeleWest Communications plc and
subsidiaries as of 31 December 1994 and 1993, and the related consolidated
statements of operations and cash flows for each of the years in the three year
period ended 31 December 1994, which appear in the 31 December 1994 Annual
Report on Form 10-K of Tele-Communications, Inc., as amended, have been
incorporated by reference herein in reliance upon the report of KPMG,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined balance sheets of Cablevision (a combination of certain cable
television assets of Cablevision S.A., Televisora Belgrano S.A., Construred S.A.
and Univent's S.A.) as of December 31, 1994 and 1993, and the related combined
statements of operations and deficit and cash flows for each of the years in the
three year period ended December 31, 1994, which appear in the Current Report on
Form 8-K of Tele-Communications, Inc. dated April 20, 1995, as amended, have
been incorporated by reference herein in reliance upon the report of KPMG
Finsterbusch Pickenhayn Sibille, independent certified public accounts,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated balance sheets of QVC, Inc. and subsidiaries as of
January 31, 1994 and 1993, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended January 31, 1994, which appear in the Current Report on
Form 8-K of Tele-Communications, Inc. dated February 3, 1995, as amended, have
been incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the January 31, 1994
consolidated financial statements refers to a change in the method of accounting
for income taxes.
The financial statements of TeleCable Corporation as of December 31, 1993
and 1992 and for each of the two years in the period ended December 31, 1993,
incorporated herein by reference to the Current Report on Form 8-K of the
Company dated August 26, 1994, have been so incorporated by reference in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
-185-
<PAGE>
STOCKHOLDERS' PROPOSALS
Proposals by stockholders for which consideration is desired at the 1996
annual meeting of stockholders must be received by the Company by _____________,
1996 in order to be considered for inclusion in proxy materials for the 1996
annual meeting.
-186-
<PAGE>
APPENDIX I
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
1984 Cable Act..............................................................123
1992 Cable Act...............................................................60
Acclaim......................................................................22
Adjusted Outstanding Interest Fraction.......................................82
Adjusted Outstanding Shares of Liberty Media Group Common Stock..............80
Amended Charter...............................................................2
Annual Meeting................................................................1
Appraisal Date...............................................................79
ARC.........................................................................106
Assumed Options and SARs....................................................157
ATP.........................................................................139
Australis...................................................................117
Business Line Restructuring..................................................19
Cablevision..................................................................32
Cablevision Acquisition......................................................32
CCT.........................................................................169
Certificate of Amendment.....................................................57
Change of Control...........................................................145
Charter.......................................................................2
Class A Common Stock..........................................................1
Class A Preferred Stock......................................................71
Class A shares..............................................................149
Class B Common Stock..........................................................2
Class B Preferred Stock......................................................19
Class B shares..............................................................149
Code.........................................................................97
Comcast......................................................................20
Commission....................................................................8
Committee...................................................................164
Committed Acquisition Shares.................................................49
Communications Act..........................................................128
Common Stock..................................................................1
Company.......................................................................1
Company Earnings (Loss) Attributable to the Liberty Media Group..............74
Company Earnings (Loss) Attributable to the TCI Group........................74
Compensation Committee......................................................101
Convertible Securities......................................Appendix III - A-22
Copyright Act...............................................................135
Cox..........................................................................20
CRT.........................................................................136
DBS.........................................................................106
DGCL..........................................................................4
Director Stock Option Plan....................................................2
Director Stock Option Plan Proposal...........................................2
Discount Rate...............................................................172
Discovery....................................................................20
Disposition..................................................................80
Distribution..................................................................3
DMX.........................................................................108
E!..........................................................................120
Effective Date..............................................................144
EMC.........................................................................117
Encore.......................................................................20
ESPP........................................................................148
Exchange Act..................................................................8
FCC..........................................................................20
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
Film Agreements.............................................................140
First Appraiser..............................................................79
GE..........................................................................130
Group.........................................................................3
Groups........................................................................3
Higher Appraised Amount......................................................79
Holdings....................................................................133
HSC.........................................................................129
HSDs........................................................................106
HSN..........................................................................20
IFE..........................................................................20
Incentive Plan..............................................................157
Increased Authorization Proposal..............................................2
Inter-Group Interest Fraction................................................27
Inter-Group Interest..........................................................3
International................................................................19
International Programming Opportunity........................................69
International Prospectus.....................................................21
Junior Exchange Notes.......................................................178
Junior Stock................................................................182
Kearns......................................................................149
Liberty.......................................................................8
Liberty Media Group...........................................................2
Liberty Media Group Common Stock..............................................1
Liberty Media Group Common Stock Per Share Value.............................78
Liberty Media Group Private Market Value.....................................78
Liberty Media Group Stock Proposal............................................1
Liberty Media Group Subsidiaries.............................................85
Liberty Sports Networks.....................................................112
Liberty Sports..............................................................111
Liberty Starz...............................................................140
LMC...........................................................................2
LMC Class E Preferred Stock.................................................169
LMC SatCom..................................................................134
Lower Appraised Amount.......................................................79
LPTV........................................................................131
Market Capitalization.......................................Appendix III - A-25
Market Value................................................Appendix III - A-24
Merger Agreement............................................................157
Microsoft....................................................................22
MLP.........................................................................139
MMDS........................................................................123
MSTV........................................................................120
MTM.........................................................................119
Mutually Appraised Amount....................................................79
Mutually Designated Appraiser................................................79
Netlink......................................................................20
Net Proceeds.................................................................47
Nonemployee Director........................................................144
Number of Shares Issuable with Respect to the Inter-Group Interest...........26
Old TCI.......................................................................2
Old TCI/LMC Combination.......................................................8
Optional Conversion Ratio....................................................78
Options.....................................................................143
Outstanding Interest Fraction................................................27
Parity Stock................................................................182
PCS..........................................................................20
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
Peachtree...................................................................171
Pre-Distribution Convertible Securities......................................47
Programming Companies.......................................................121
PSC.........................................................................111
PSR.........................................................................112
QE+.........................................................................140
QEPC........................................................................140
QVC..........................................................................20
Record Date..................................................................22
Registration Statement........................................................8
Related Business Transaction.................................................82
Restricted Voting Shares.....................................................23
RMS.........................................................................138
Royal.......................................................................134
SARs........................................................................159
Second Appraiser.............................................................79
Securities Act................................................................8
Series A Liberty Media Group Common Stock.....................................1
Series A TCI Group Common Stock...............................................1
Series B Liberty Media Group Common Stock.....................................1
Series B TCI Group Common Stock...............................................2
Series C Preferred Stock.....................................................22
Series D Preferred Stock.....................................................71
Series E Preferred Stock.....................................................61
Series F Preferred Stock....................................................104
Series Preferred Stock........................................................2
Service......................................................................97
share distribution...........................................................75
SHV Act.....................................................................135
SKC.........................................................................131
Southern....................................................................134
Special Securities..........................................................180
SportSouth..................................................................167
Sprint.......................................................................20
SSI.........................................................................112
SSI Subscribers.............................................................112
Stated Liquidation Value....................................................177
Stations....................................................................138
TBS..........................................................................20
TCG..........................................................................21
TCI Cable Investments.........................................................8
TCI Group.....................................................................3
TCI Group Common Stock........................................................2
TCI Technology...............................................................19
TCI Treasury Shares.........................................................103
TCIC..........................................................................8
TCIC Obligors...............................................................140
TCIS........................................................................140
TCIS Contribution...........................................................140
TeleCable....................................................................32
TeleCable Merger.............................................................32
Telephony Joint Venture......................................................20
TIN.........................................................................100
Trading Day.................................................Appendix III - A-28
UACI........................................................................153
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
UAE.........................................................................154
VJN.........................................................................120
Voting Securities............................................................72
Voting Stock................................................................174
VRU System..................................................................132
WestMarc....................................................................153
WTBS........................................................................134
</TABLE>
I-4
<PAGE>
APPENDIX II
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the calculations of the TCI Group's
Inter-Group Interest in the Liberty Media Group based on the assumptions set
forth herein and using 825 million shares as the number of authorized shares of
Liberty Media Group Common Stock and 160 million shares as the number of
outstanding shares of Liberty Media Group Common Stock and zero as the Number of
Shares Issuable with Respect to the Inter-Group Interest in the Liberty Media
Group immediately following the Distribution. Unless otherwise specified, each
illustration below should be read independently as if none of the other
transactions referred to below had occurred. Actual calculations may be
slightly different due to rounding. The following illustrations are not
intended to be complete and are qualified in their entirety by the more detailed
information contained in the Proxy Statement/Prospectus and the other Appendices
thereto. Capitalized terms used herein have the respective meanings ascribed to
them in the Proxy Statement/Prospectus. See Appendix I - Glossary of Certain
Defined Terms.
At any given time, the Outstanding Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the
Liberty Media Group that is represented by the outstanding shares of Liberty
Media Group Common Stock, would be equal to:
Outstanding Shares of Liberty Media Group Common Stock
- --------------------------------------------------------------------------------
Outstanding Shares of Liberty Media Group Common Stock + Number of Shares
Issuable with Respect to the Inter-Group Interest
The balance of the equity of the Liberty Media Group is represented by the
TCI Group's Inter-Group Interest in the Liberty Media Group and, at any given
time, the Inter-Group Interest Fraction, which represents the percentage
interest in the equity value of the Company attributable to the Liberty Media
Group that is attributed to the TCI Group, would be equal to:
Number of Shares Issuable with Respect to the Inter-Group Interest
- --------------------------------------------------------------------------------
Outstanding Shares of Liberty Media Group Common Stock + Number of Shares
Issuable with Respect to the Inter-Group Interest
The sum of the Outstanding Interest Fraction and the Inter-Group Interest
Fraction will always equal 100%.
II-1
<PAGE>
Distribution
The following illustration assumes the initial issuance by the Company of
160 million shares of Liberty Media Group Common Stock pursuant to the
Distribution.
. The Number of Shares Issuable with Respect to the Inter-Group Interest
will be zero immediately following the Distribution. As a result, the
Outstanding Interest Fraction will be 100%, calculated as follows:
160 million
-------------------
160 million + 0
The Inter-Group Interest Fraction would accordingly represent an
interest of 0% in the Liberty Media Group.
. In this case, the TCI Group would not be credited, and the Liberty
Media Group would not be charged, with any amount with respect to any
dividend or other distribution paid on the outstanding Liberty Media
Group Common Stock.
. Immediately after the Distribution, the Company would have 665 million
authorized and unissued shares of Liberty Media Group Common Stock
remaining (825 million minus 160 million issued and outstanding).
Repurchases of Liberty Media Group Common Stock
The following illustrations reflect the repurchase by the Company of 80
million shares of Liberty Media Group Common Stock.
Repurchase with Liberty Media Group Funds
Assume all such shares are identified as having been repurchased with funds
attributed to the Liberty Media Group, with the Liberty Media Group being
charged with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding......... 160 million
Shares repurchased............................... 80 million
-----------
Total issued and outstanding after repurchase.... 80 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would not be changed by the repurchase of any shares of Liberty Media
Group Common Stock with funds attributed to the Liberty Media Group.
II-2
<PAGE>
. The Outstanding Interest Fraction would be 100%, calculated as
follows:
80 million
--------------------
80 million + 0
The Inter-Group Interest Fraction would accordingly represent an
interest of 0% in the Liberty Media Group.
. In this case, the TCI Group would not be credited, and the Liberty
Media Group would not be charged, with any amount with respect to any
dividend or other distribution paid on the outstanding Liberty Media
Group Common Stock.
. The Company would have 745 million authorized and unissued shares of
Liberty Media Group Common Stock (825 million minus 80 million issued
and outstanding).
Repurchase with TCI Group Funds
Assume all such shares which cease to be outstanding following their
repurchase are identified as having been repurchased with funds attributed to
the TCI Group, with the TCI Group being charged with the consideration paid for
such shares.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding........... 160 million
Shares repurchased................................. 80 million
-----------
Total issued and outstanding after repurchase...... 80 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased by the number of shares of Liberty Media Group
Common Stock which cease to be outstanding following their
repurchase with funds attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to repurchase.......... 0
Shares which cease to be outstanding following
their repurchase with funds attributed to
the TCI Group..................................... 80 million
----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after repurchase............. 80 million
==========
</TABLE>
. The Outstanding Interest Fraction would be 50%, calculated as follows:
80 million
---------------------------
80 million + 80 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 50% in the Liberty Media Group.
II-3
<PAGE>
. In this case, the TCI Group would be credited, and the Liberty Media
Group would be charged, with an amount equal to 100% (representing the
ratio of the Inter-Group Interest Fraction (50%) to the Outstanding
Interest Fraction (50%)) of the aggregate amount of any dividend or
other distribution paid on the outstanding shares of Liberty Media
Group Common Stock (other than a dividend or other distribution
payable in shares of Liberty Media Group Common Stock). If, for
example, a dividend of $1 per share were declared and paid on the 80
million shares of Liberty Media Group Common Stock outstanding (an
aggregate of $80 million), the TCI Group would be credited with $80
million, and the Liberty Media Group would be charged with that amount
in addition to the $80 million dividend on the outstanding shares of
Liberty Media Group Common Stock (a total of $160 million).
. The Company would have 745 million authorized and unissued shares of
Liberty Media Group Common Stock (825 million minus 80 million issued
and outstanding).
Transfers of Assets Between the TCI Group and the Liberty Media Group
Contribution of Assets from the TCI Group to the Liberty Media Group
The following illustration reflects the contribution by the TCI Group to
the Liberty Media Group with respect to the Inter-Group Interest of $1,600
million of assets attributed to the TCI Group on a date on which the Market
Value of the Liberty Media Group Common Stock is $20 per share.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding........... 160 million
Newly issued shares................................ 0
-----------
Total issued and outstanding after contribution.... 160 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased to reflect the contribution to the Liberty Media
Group of assets theretofore attributed to the TCI Group.
<TABLE>
<CAPTION>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to contribution.......... 0
Adjustment to reflect contribution to the Liberty
Media Group of assets attributed to the TCI Group... 80 million
----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after contribution............. 80 million
==========
</TABLE>
II-4
<PAGE>
. The Outstanding Interest Fraction would be 67%, calculated as follows:
160 million
----------------------------
160 million + 80 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 33% in the Liberty Media Group.
. In this case, the TCI Group would be credited, and the Liberty Media
Group would be charged, with an amount equal to 50% (representing the
ratio of the Inter-Group Interest Fraction (33%) to the Outstanding
Interest Fraction (67%)) of the aggregate amount of any dividend or
other distribution paid on the outstanding shares of Liberty Media
Group Common Stock (other than a dividend or other distribution
payable in shares of Liberty Media Group Common Stock).
. The Company would have 665 million authorized and unissued shares of
Liberty Media Group Common Stock (825 million minus 160 million issued
and outstanding).
Transfer of Assets from the Liberty Media Group to the TCI Group
The following illustration reflects the transfer by the Liberty Media Group
to the TCI Group with respect to the Inter-Group Interest of $800 million of
assets attributed to the Liberty Media Group on a date on which the Market Value
of Liberty Media Group Common Stock is $20 per share and the Number of Shares
Issuable with Respect to the Inter-Group Interest is 80 million.
<TABLE>
<S> <C>
Shares previously issued and outstanding............ 160 million
Shares repurchased.................................. 0
-----------
Total issued and outstanding after transfer......... 160 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would be decreased to reflect the contribution to the TCI Group of
assets theretofore attributed to the Liberty Media Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to transfer............. 80 million
Adjustment to reflect transfer to the TCI Group of
assets attributed to the Liberty Media Group....... 40 million
----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after transfer................ 40 million
==========
</TABLE>
The Liberty Media Group will not make transfers of assets to the TCI
Group with respect to the Inter-Group Interest the fair value of which
exceeds the Market Value of the Number of Shares Issuable with Respect
to the Inter-Group Interest.
II-5
<PAGE>
. The Outstanding Interest Fraction would be 80%, calculated as
follows:
160 million
----------------------------
160 million + 40 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 20% in the Liberty Media Group.
. In this case, the TCI Group would be credited, and the Liberty Media
Group would be charged, with an amount equal to 25% (representing the
ratio of the Inter-Group Interest Fraction (20%) to the Outstanding
Interest Fraction (80%)) of the aggregate amount of any dividend or
other distribution paid on the outstanding shares of Liberty Media
Group Common Stock (other than a dividend or other distribution
payable in shares of Liberty Media Group Common Stock).
. The Company would have 665 million authorized and unissued shares of
Liberty Media Group Common Stock (825 million minus 160 million issued
and outstanding).
Future Offerings of Liberty Media Group Common Stock
The following illustrations reflect the sale by the Company of 80 million
shares of Liberty Media Group Common Stock on a date on which the Number of
Shares Issuable with Respect to the Inter-Group Interest is 80 million.
Offering for the Liberty Media Group
Assume all such shares are identified as issued for the account of the
Liberty Media Group, with the net proceeds credited to the Liberty Media Group.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding........... 160 million
Newly issued shares................................ 80 million
-----------
Total issued and outstanding after offering........ 240 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would not be changed by the issuance of any shares of Liberty Media
Group Common Stock for the account of the Liberty Media Group.
. The Outstanding Interest Fraction would be 75%, calculated as follows:
240 million
---------------------------
240 million + 80 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 25% in the Liberty Media Group.
II-6
<PAGE>
. The Company would have 585 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (825 million minus 240
million issued and outstanding).
Offering for the TCI Group
Assume all of such shares are identified as issued for the account of the
TCI Group with respect to the Inter-Group Interest, with the net proceeds
credited to the TCI Group.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding............ 160 million
Newly issued shares................................. 80 million
-----------
Total issued and outstanding after offering......... 240 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would decrease by the number of shares of Liberty Media Group Common
Stock issued for the account of the TCI Group.
<TABLE>
<CAPTION>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to offering.............. 80 million
Shares issued in offering............................ 80 million
----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after offering................. 0
==========
</TABLE>
. The Outstanding Interest Fraction would be 100%, calculated as
follows:
240 million
-------------------
240 million + 0
The Inter-Group Interest Fraction would accordingly represent an
interest of 0% in the Liberty Media Group.
. The Company would have 585 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (825 million minus 240
million issued and outstanding).
Offerings of Convertible Securities
If the Company were to issue any debt or preferred stock convertible into
shares of Liberty Media Group Common Stock, the Inter-Group Interest Fraction
and the Outstanding Interest Fraction would be unchanged at the time of such
issuance. If any shares of Liberty Media Group Common Stock were issued upon
conversion of such Convertible Security, however, then the Inter-Group Interest
Fraction and the Outstanding Interest Fraction would be affected as shown above
under "Offering for the Liberty Media Group", if such Convertible Security were
attributed to the Liberty Media Group, or under "Offering for the TCI Group", if
such Convertible Security were attributed to the TCI Group.
II-7
<PAGE>
Liberty Media Group Common Stock Dividends
The following illustrations reflect dividends of Liberty Media Group Common
Stock on outstanding Liberty Media Group Common Stock and outstanding TCI Group
Common Stock, respectively, on a date on which the Number of Shares Issuable
with Respect to the Inter-Group Interest is 80 million.
Liberty Media Group Common Stock Dividend on Liberty Media Group Common
Stock
Assume the Company declares a dividend of one-half of one share of Liberty
Media Group Common Stock on each outstanding share of Liberty Media Group Common
Stock.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding.......... 160 million
Newly issued shares............................... 80 million
-----------
Total issued and outstanding after dividend....... 240 million
===========
</TABLE>
. The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased proportionately to reflect the stock dividend
payable in shares of Liberty Media Group Common Stock to holders of
Liberty Media Group Common Stock.
<TABLE>
<CAPTION>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to dividend............. 80 million
Adjustment to reflect dividend of shares on
outstanding shares of Liberty Media Group
Common Stock....................................... 40 million
-----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after dividend................ 120 million
===========
</TABLE>
. The Outstanding Interest Fraction would be 67%, calculated as follows:
240 million
-----------------------------
240 million + 120 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 33% in the Liberty Media Group. The Outstanding Interest
Fraction and the Inter-Group Interest Fraction would be unchanged from
the corresponding percentages prior to the dividend.
. The Company would have 585 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (825 million minus 240
million issued and outstanding).
II-8
<PAGE>
Liberty Media Group Common Stock Dividend on TCI Group Common Stock
Assume an aggregate of 600 million shares of TCI Group Common Stock are
outstanding and the Company declares a dividend of one-tenth of one share of
Liberty Media Group Common Stock on each outstanding share of TCI Group Common
Stock.
<TABLE>
<CAPTION>
<S> <C>
Shares previously issued and outstanding............ 160 million
Newly issued shares................................. 60 million
-----------
Total issued and outstanding after dividend......... 220 million
===========
</TABLE>
. Any dividend of shares of Liberty Media Group Common Stock on the
outstanding shares of TCI Group Common Stock will be treated as a
dividend from the Number of Shares Issuable with Respect to the Inter-
Group Interest. As a result, the Number of Shares Issuable with
Respect to the Inter-Group Interest would decrease by the number of
shares of Liberty Media Group Common Stock distributed on the
outstanding shares of TCI Group Common Stock as a dividend.
<TABLE>
<CAPTION>
<S> <C>
Number of Shares Issuable with Respect to the
Inter-Group Interest prior to dividend.............. 80 million
Shares distributed on outstanding shares of
TCI Group Common Stock.............................. 60 million
----------
Number of Shares Issuable with Respect to the
Inter-Group Interest after dividend................. 20 million
==========
</TABLE>
The Company will not distribute to holders of TCI Group Common Stock
as a dividend a number of shares of Liberty Media Group Common Stock
exceeding the Number of Shares Issuable with Respect to the Inter-
Group Interest.
. The Outstanding Interest Fraction would be 92%, calculated as follows:
220 million
----------------------------
220 million + 20 million
The Inter-Group Interest Fraction would accordingly represent an
interest of 8% in the Liberty Media Group.
. The Company would have 605 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (825 million minus 220
million issued and outstanding).
II-9
<PAGE>
APPENDIX III-A
PROPOSED AMENDMENTS
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
(Implementing the Liberty Media Group Stock Proposal)
The first paragraph of Article IV of the Restated Certificate of
Incorporation is proposed to be amended pursuant to the Liberty Media Group
Stock Proposal to read in its entirety as follows:
AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is two billion eighty-seven million three hundred
seventy-five thousand ninety-six (2,087,375,096) shares, of which two billion
seventy-five million (2,075,000,000) shares shall be common stock ("Common
Stock"), and twelve million three hundred seventy-five thousand ninety-six
(12,375,096) shares shall be preferred stock ("Preferred Stock"). Said shares
of Common Stock and Preferred Stock shall be divided into the following classes:
(a) Two billion eighty-seven million (2,075,000,000) shares of Common
Stock shall be of a class designated as Common Stock with a par value of $1.00
per share, such class to be issuable in series as provided in Section E of this
Article IV;
(b) Seven hundred thousand (700,000) shares of Preferred Stock shall
be of a class designated as Class A Preferred Stock with a par value of $.01 per
share;
(c) One million six hundred seventy-five thousand ninety-six
(1,675,096) shares of Preferred Stock shall be of a class designated as Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock with a par value of
$.01 per share; and
(d) Ten million (10,000,000) shares of Preferred Stock shall be of a
class designated as Series Preferred Stock with a par value of $.01 per share,
such class to be issuable in series as provided in Section D of this Article IV.
If both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the first paragraph of
Article IV of the Restated Certificate of Incorporation will instead be amended
to read in its entirety as set forth in Appendix III-B.
III-A-1
<PAGE>
Section E of Article IV of the Restated Certificate of Incorporation is
proposed to be amended pursuant to the Liberty Media Group Stock Proposal to
read in its entirety as follows:
SECTION E
SERIES A TCI GROUP COMMON STOCK, SERIES B TCI GROUP COMMON
STOCK, SERIES A LIBERTY MEDIA GROUP COMMON STOCK
AND SERIES B LIBERTY MEDIA GROUP COMMON STOCK
One billion one hundred million (1,100,000,000) shares of Common Stock
shall be of a series designated as Series A TCI Group Common Stock (the "Series
A TCI Group Common Stock"), one hundred fifty million (150,000,000) shares of
Common Stock shall be of a series designated as Series B TCI Group Common Stock
(the "Series B TCI Group Common Stock"), seven hundred fifty million
(750,000,000) shares of Common Stock shall be of a series designated as Series A
Liberty Media Group Common Stock (the "Series A Liberty Media Group Common
Stock") and seventy-five million (75,000,000) shares of Common Stock shall be of
a series designated as Series B Liberty Media Group Common Stock (the "Series B
Liberty Media Group Common Stock").
[Note: if both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the immediately preceding
paragraph will instead be amended to read in its entirety as set forth in
Appendix III-B.]
Each share of Series A TCI Group Common Stock and each share of Series B
TCI Group Common Stock shall, except as otherwise provided in this Section E, be
identical in all respects and shall have equal rights and privileges.
Each share of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock shall, except as otherwise provided in
this Section E, be identical in all respects and shall have equal rights and
privileges.
1. Voting Rights.
-------------
Holders of Series A TCI Group Common Stock shall be entitled to one
vote for each share of such stock held, and holders of Series B TCI Group Common
Stock shall be entitled to ten votes for each share of such stock held, on all
matters presented to such stockholders. Except as may otherwise be required by
the laws of the State of Delaware or in the instrument creating or evidencing
any class or series of Preferred Stock, the holders of shares of Series A TCI
Group Common Stock and the holders of shares of Series B TCI Group Common Stock
shall vote with the holders of shares of Series A Liberty Media Group Common
Stock, the holders of shares of Series B Liberty Media Group Common Stock and
the holders of shares of any class or series of Preferred Stock entitled to
vote, if any, as one class with respect to the election of directors and with
respect to all other matters to be voted on by
III-A-2
<PAGE>
stockholders of the Corporation (including, without limitation, any proposed
amendment to this Certificate that would increase the number of authorized
shares of Common Stock or any series thereof or of any other class or series of
stock or decrease the number of authorized shares of any class or series of
stock (but not below the number of shares thereof then outstanding)), and no
separate vote or consent of the holders of shares of Series A TCI Group Common
Stock, the holders of shares of Series B TCI Group Common Stock, the holders of
shares of Series A Liberty Media Group Common Stock, the holders of shares of
Series B Liberty Media Group Common Stock or the holders of shares of such
Preferred Stock shall be required for the approval of any such matter.
Holders of Series A Liberty Media Group Common Stock shall be entitled
to one vote for each share of such stock held, and holders of Series B Liberty
Media Group Common Stock shall be entitled to ten votes for each share of such
stock held, on all matters presented to such stockholders. Except as may
otherwise be required by the laws of the State of Delaware or in the instrument
creating or evidencing any class or series of Preferred Stock, the holders of
shares of Series A Liberty Media Group Common Stock and the holders of shares of
Series B Liberty Media Group Common Stock shall vote with the holders of shares
of Series A TCI Group Common Stock, the holders of shares of Series B TCI Group
Common Stock and the holders of shares of any class or series of Preferred Stock
entitled to vote, if any, as one class with respect to the election of directors
and with respect to all other matters to be voted on by stockholders of the
Corporation (including, without limitation, any proposed amendment to this
Certificate that would increase the number of authorized shares of Common Stock
or any series thereof or of any other class or series of stock or decrease the
number of authorized shares of any class or series of stock (but not below the
number of shares thereof outstanding)), and no separate vote or consent of the
holders of shares of Series A Liberty Media Group Common Stock, the holders of
shares of Series B Liberty Media Group Common Stock, the holders of shares of
Series A TCI Group Common Stock, the holders of shares of Series B TCI Group
Common Stock or the holders of shares of such Preferred Stock shall be required
for the approval of any such matter.
2. Conversion Rights.
-----------------
(a) Conversion of Series B TCI Group Common Stock into Series A TCI
Group Common Stock. Each share of Series B TCI Group Common Stock shall be
convertible, at the option of the holder thereof, into one share of Series A TCI
Group Common Stock. Any such conversion may be effected by any holder of Series
B TCI Group Common Stock by surrendering such holder's certificate or
certificates for the Series B TCI Group Common Stock to be converted, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
B TCI Group Common Stock, together with a written notice to the Corporation at
such office that such holder elects to convert all or a specified number of
shares of Series B TCI Group Common Stock represented by such certificate and
stating the name or names in which such holder desires the certificate or
certificates for Series A TCI Group Common Stock to be issued. If so required
by the Corporation, any certificate for shares surrendered for conversion shall
be accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly
III-A-3
<PAGE>
executed by the holder of such shares or the duly authorized representative of
such holder. Promptly thereafter, the Corporation shall issue and deliver to
such holder or such holder's nominee or nominees, a certificate or certificates
for the number of shares of Series A TCI Group Common Stock to which such holder
shall be entitled as herein provided. Such conversion shall be deemed to have
been made at the close of business on the date of receipt by the Corporation or
any such transfer agent of the certificate or certificates, notice and, if
required, instruments of transfer referred to above, and the person or persons
entitled to receive the Series A TCI Group Common Stock issuable on such
conversion shall be treated for all purposes as the record holder or holders of
such Series A TCI Group Common Stock on that date. A number of shares of Series
A TCI Group Common Stock equal to the number of shares of Series B TCI Group
Common Stock outstanding from time to time shall be set aside and reserved for
issuance upon conversion of shares of Series B TCI Group Common Stock. Shares of
Series B TCI Group Common Stock that have been acquired by the Corporation upon
conversion shall remain treasury shares to be disposed of by resolution of the
Board of Directors. Shares of Series A TCI Group Common Stock shall not be
convertible into shares of Series B TCI Group Common Stock.
(b) Conversion of Series B Liberty Media Group Common Stock into
Series A Liberty Media Group Common Stock. Each share of Series B Liberty Media
Group Common Stock shall be convertible, at the option of the holder thereof,
into one share of Series A Liberty Media Group Common Stock. Any such
conversion may be effected by any holder of Series B Liberty Media Group Common
Stock by surrendering such holder's certificate or certificates for the Series B
Liberty Media Group Common Stock to be converted, duly endorsed, at the office
of the Corporation or any transfer agent for the Series B Liberty Media Group
Common Stock, together with a written notice to the Corporation at such office
that such holder elects to convert all or a specified number of shares of Series
B Liberty Media Group Common Stock represented by such certificate and stating
the name or names in which such holder desires the certificate or certificates
for Series A Liberty Media Group Common Stock to be issued. If so required by
the Corporation, any certificate for shares surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder of such shares or the duly authorized representative
of such holder. Promptly thereafter, the Corporation shall issue and deliver to
such holder or such holder's nominee or nominees, a certificate or certificates
for the number of shares of Series A Liberty Media Group Common Stock to which
such holder shall be entitled as herein provided. Such conversion shall be
deemed to have been made at the close of business on the date of receipt by the
Corporation or any such transfer agent of the certificate or certificates,
notice and, if required, instruments of transfer referred to above, and the
person or persons entitled to receive the Series A Liberty Media Group Common
Stock issuable on such conversion shall be treated for all purposes as the
record holder or holders of such Series A Liberty Media Group Common Stock on
that date. A number of shares of Series A Liberty Media Group Common Stock
equal to the number of shares of Series B Liberty Media Group Common Stock
outstanding from time to time shall be set aside and reserved for issuance upon
conversion of shares of Series B Liberty Media Group Common Stock. Shares of
Series B Liberty Media Group Common Stock that have been acquired by the
Corporation upon conversion shall remain treasury shares to be disposed of by
III-A-4
<PAGE>
resolution of the Board of Directors. Shares of Series A Liberty Media Group
Common Stock shall not be convertible into shares of Series B Liberty Media
Group Common Stock.
(c) Conversion of Series A Liberty Media Group Common Stock into
Series A TCI Group Common Stock and Series B Liberty Media Group Common Stock
into Series B TCI Group Common Stock at the Option of the Corporation. (i) At
the option of the Corporation by action of its Board of Directors, (A) each
share of Series A Liberty Media Group Common Stock shall be convertible into a
number (or fraction) of fully paid and nonassessable shares of Series A TCI
Group Common Stock equal to the Optional Conversion Ratio, and (B) each share of
Series B Liberty Media Group Common Stock shall be convertible into a number (or
fraction) of fully paid and nonassessable shares of Series B TCI Group Common
Stock equal to the Optional Conversion Ratio.
(ii) For purposes of this paragraph 2(c), the "Optional Conversion
Ratio" as of any date, means the quotient (calculated to the nearest five
decimal places) obtained by dividing (x) the Liberty Media Group Common Stock
Per Share Value, by (y) the average Market Value of one share of Series A TCI
Group Common Stock for the 20-Trading Day period ending on the Trading Day
preceding the Appraisal Date. The "Liberty Media Group Common Stock Per Share
Value" shall mean the quotient obtained by dividing the Liberty Media Group
Private Market Value by the Adjusted Outstanding Shares of Liberty Media Group
Common Stock.
(iii) The "Liberty Media Group Private Market Value" shall mean an
amount equal to the private market value of the Liberty Media Group, as
determined by appraisal in accordance with the procedures described below. In
the event that the Corporation determines to establish the Liberty Media Group
Private Market Value, on the date as of which the Liberty Media Group Private
Market Value is to be determined (the "Appraisal Date"), two investment banking
firms of recognized national standing shall be designated to determine the
private market value of the Liberty Media Group, one designated by the
Corporation (the "First Appraiser") and one designated by a committee of the
Board of Directors all of whose members are independent directors as determined
under Nasdaq National Market rules (the "Second Appraiser"). Within 20 days
after the Appraisal Date, the First Appraiser and the Second Appraiser shall
each determine its initial view as to the private market value of the Liberty
Media Group as of the Appraisal Date and shall consult with one another with
respect thereto. By the 30th day after the Appraisal Date, the First Appraiser
and the Second Appraiser shall each have determined its final view as to such
private market value. At that point, if the higher
III-A-5
<PAGE>
of the respective final views of the First Appraiser and the Second Appraiser as
to such private market value (the "Higher Appraised Amount") is not more than
120% of the lower of such respective final views (the "Lower Appraised Amount"),
the Liberty Media Group Private Market Value shall be the average of those two
amounts. If the Higher Appraised Amount is more than 120% of the Lower Appraised
Amount, the First Appraiser and the Second Appraiser shall agree upon and
jointly designate a third investment banking firm of recognized national
standing (the "Mutually Designated Appraiser") to determine such private market
value. The Corporation shall not disclose the final view of the First Appraiser
and Second Appraiser to the Mutually Designated Appraiser, nor shall the
Mutually Designated Appraiser have the benefit of any of the work of the First
Appraiser and Second Appraiser. The Mutually Designated Appraiser shall, no
later than the 20th day after the date the Mutually Designated Appraisal is
designated, determine such private market value (the "Mutually Appraised
Amount"), and the Liberty Media Group Private Market Value shall be (A) if the
Mutually Appraised Amount is between the Lower Appraised Amount and the Higher
Appraised Amount, (I) the average of (1) the Mutually Appraised Amount and (2)
the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer
to the Mutually Appraised Amount, or (II) the Mutually Appraised Amount, if
neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to
the Mutually Appraised Amount, or (B) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such investment banking firm expresses its
final view of the private market value of the Liberty media Group as a range of
values, such investment banking firm's final view of such private market value
shall be deemed to be the midpoint of such range of values.
(iv) Each of the investment banking firms referred to in clause (iii)
of this paragraph 2(c) shall be instructed to determine the private market value
of the Liberty Media Group as of the Appraisal Date based upon the amount a
willing purchaser would pay
III-A-6
<PAGE>
to a willing seller, in an arm's length transaction, if it were acquiring the
Liberty Media Group, as if the Liberty Media Group were a publicly traded non-
controlled corporation and without consideration of any potential regulatory
constraints limiting the potential purchasers of the Liberty Media Group other
than that which would have existed if the Liberty Media Group were a publicly
traded non-controlled entity.
Following the determination of the Liberty Media Group Private Market
Value, the investment banking firms whose final views of the private market
value of the Liberty Media Group were used in the calculation of the Liberty
Media Group Private Market Value shall determine the Adjusted Outstanding Shares
of Liberty Media Group Common Stock together with any further adjustments to the
Liberty Media Group Private Market Value resulting from such determination. The
"Adjusted Outstanding Shares of Liberty Media Group Common Stock" shall mean a
number, as determined by such investment banking firms as of the Appraisal Date,
equal to the sum of the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock outstanding, the Number of
Shares Issuable with Respect to the Inter-Group Interest, the number of
Committed Acquisition Shares issuable and the number of shares of Liberty Media
Group Common Stock issuable upon the conversion, exercise or exchange of all
Pre-Distribution Convertible Securities and those Convertible Securities (other
than Pre-Distribution Convertible Securities) the holders of which would derive
an economic benefit upon conversion, exercise or exchange of such Convertible
Securities which exceeds the economic benefit of not converting, exercising or
exchanging such Convertible Securities.
If the Corporation determines to convert shares of Series A Liberty
Media Group Common Stock into Series A TCI Group Common Stock and shares of
Series B Liberty Media Group Common Stock into Series B TCI Group Common Stock
at the Optional Conversion Ratio, such conversion shall occur on a conversion
date on or prior to the 120th day following the Appraisal Date. If the
Corporation determines not to undertake such conversion, the Corporation may at
any time thereafter undertake to reestablish the Liberty Media Group Common
Stock Per Share Value as of a subsequent date.
(v) The Corporation shall not convert shares of Series A Liberty Media
Group Common Stock into shares of Series A TCI Group Common Stock without
converting shares of Series B Liberty Media Group Common Stock into shares of
Series B TCI Group Common Stock, and the Corporation shall not convert shares of
Series B Liberty Media Group Common Stock into shares of Series B TCI Group
Common Stock without converting shares of Series A Liberty Media Group Common
Stock into shares of Series A TCI Group Common Stock. The Series A Liberty
Media Group Common Stock and the Series B Liberty Media Group Common Stock shall
also be convertible at the option of the Corporation in accordance with
paragraph 5(b)(iii) of this Section E.
III-A-7
<PAGE>
3. Dividends.
---------
(a) Dividends on Series A TCI Group Common Stock and Series B TCI
Group Common Stock. Dividends on the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock may be declared and paid only out of the lesser
of (i) assets of the Corporation legally available therefor and (ii) the TCI
Group Available Dividend Amount. Subject to paragraph 4 of this Section E,
whenever a dividend is paid to the holders of Series A TCI Group Common Stock,
the Corporation also shall pay to the holders of Series B TCI Group Common Stock
a dividend per share equal to the dividend per share paid to the holders of
Series A TCI Group Common Stock, and whenever a dividend is paid to the holders
of Series B TCI Group Common Stock, the Corporation shall also pay to the
holders of Series A TCI Group Common Stock a dividend per share equal to the
dividend per share paid to the holders of Series B TCI Group Common Stock.
(b) Dividends on Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock. Dividends on the Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common Stock may be
declared and paid only out of the lesser of (i) assets of the Corporation
legally available therefor and (ii) the Liberty Media Group Available Dividend
Amount. Subject to paragraph 4 of this Section E, whenever a dividend is paid
to the holders of Series A Liberty Media Group Common Stock, the Corporation
also shall pay to the holders of Series B Liberty Media Group Common Stock a
dividend per share equal to the dividend per share paid to the holders of Series
A Liberty Media Group Common Stock, and whenever a dividend is paid to the
holders of Series B Liberty Media Group Common Stock, the Corporation shall also
pay to the holders of Series A Liberty Media Group Common Stock a dividend per
share equal to the dividend per share paid to the holders of Series B Liberty
Media Group Common Stock.
(c) Discrimination Between or Among Series of Common Stock. The Board
of Directors, subject to the provisions of paragraph 3(a) and 3(b) of this
Section E, shall have the authority to declare and pay dividends on the Series A
TCI Group Common Stock and Series B TCI Group Common Stock and the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
in equal or unequal amounts, notwithstanding the relationship between the TCI
Group Available Dividend Amount and the Liberty Media Group Available Dividend
Amount, the respective amounts of prior dividends declared on, or the
liquidation rights of, the Series A TCI Group Common Stock and Series B TCI
Group Common Stock or the Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock or any other factor.
4. Share Distributions.
-------------------
(a) Distributions on Series A TCI Group Common Stock and Series B TCI
Group Common Stock. The Corporation may provide for the initial issuance of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock by declaring and paying a distribution (the "Distribution")
III-A-8
<PAGE>
consisting of shares of Series A Liberty Media Group Common Stock to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B Liberty Media Group Common Stock to holders of Series B TCI Group
Common Stock. If at any time after the Distribution a distribution paid in
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock, Series B Liberty Media Group Common Stock or
any other securities of the Corporation or a subsidiary of the Corporation
(hereinafter sometimes called a "share distribution") is to be made with respect
to the Series A TCI Group Common Stock or Series B TCI Group Common Stock, such
share distribution may be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of Series
A TCI Group Common Stock and Series B TCI Group Common Stock, on an equal per
share basis; or consisting of shares of Series B TCI Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B TCI Group Common Stock) to holders of Series A TCI Group
Common Stock and Series B TCI Group Common Stock, on an equal per share basis;
or consisting of shares of Series A TCI Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of Series
A TCI Group Common Stock) to holders of Series A TCI Group Common Stock and, on
an equal per share basis, shares of Series B TCI Group Common Stock (or like
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B TCI Group Common Stock) to holders of Series B TCI Group
Common Stock;
(ii) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI Group
Common Stock, on an equal per share basis; provided that the sum of (1) the
aggregate number of shares of Series A Liberty Media Group Common Stock to be so
issued (or the number of such shares which would be issuable upon conversion,
exercise or exchange of any Convertible Securities to be so issued) and (2) the
number of shares of such series that are subject to issuance upon conversion,
exercise or exchange of any Convertible Securities then outstanding that are
attributed to the TCI Group other than Pre-Distribution
III-A-9
<PAGE>
Convertible Securities is less than or equal to the Number of Shares Issuable
with Respect to the Inter-Group Interest; and
(iii) a share distribution consisting of any class or series of
securities other than Series A TCI Group Common Stock, Series B TCI Group Common
Stock, Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock, Series B TCI Group
Common Stock, Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock), either on the basis of a distribution of identical
securities, on an equal per share basis, to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock or on the basis of a distribution of
one class or series of securities to holders of Series A TCI Group Common Stock
and another class or series of securities to holders of Series B TCI Group
Common Stock, provided that the securities so distributed (and, if the
distribution consists of Convertible Securities, the securities into which such
Convertible Securities are convertible or for which they are exercisable or
exchangeable) do not differ in any respect other than relative voting rights and
related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A TCI Group Common Stock and the Series B TCI Group Common
Stock and provided that such distribution is otherwise made on an equal per
share basis.
The Corporation shall not reclassify, subdivide or combine the Series
A TCI Group Common Stock without reclassifying, subdividing or combining the
Series B TCI Group Common Stock, on an equal per share basis, and the
Corporation shall not reclassify, subdivide or combine the Series B TCI Group
Common Stock without reclassifying, subdividing or combining the Series A TCI
Group Common Stock, on an equal per share basis.
(b) Distributions on Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock. If at any time a share distribution
is to be made with respect to the Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock, such share distribution may be
declared and paid only as follows:
(i) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group Common
Stock) to holders of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, on an equal per share basis; or consisting of
shares of Series B Liberty Media Group Common Stock (or like Convertible
Securities convertible into or exercisable or exchangeable for shares of Series
B Liberty Media Group Common Stock) to holders of Series A Liberty Media Group
Common Stock and to holders of Series B Liberty Media Group Common Stock, on an
equal per share basis; or consisting of shares of Series A Liberty Media Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A Liberty Media Group Common Stock) to holders
of Series A Liberty Media Group Common Stock and, on an
III-A-10
<PAGE>
equal per share basis, shares of Series B Liberty Media Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B Liberty Media Group Common Stock) to holders of Series B
Liberty Media Group Common Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Corporation other than as described in clause (i) of this
paragraph 4(b) and other than Series A TCI Group Common Stock or Series B TCI
Group Common Stock, either on the basis of a distribution of identical
securities, on an equal per share basis, to holders of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series A
Liberty Media Group Common Stock and another class or series of securities to
holders of Series B Liberty Media Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of Convertible
Securities, the securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable) do not differ in
any respect other than relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions not
greater than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock.
The Corporation shall not reclassify, subdivide or combine the Series A
Liberty Media Group Common Stock without reclassifying, subdividing or combining
the Series B Liberty Media Group Common Stock, on an equal per share basis, and
the Corporation shall not reclassify, subdivide or combine the Series B Liberty
Media Group Common Stock without reclassifying, subdividing or combining the
Series A Liberty Media Group Common Stock, on an equal per share basis.
5. Redemption and Other Provisions Relating to the Series A Liberty Media
----------------------------------------------------------------------
Group Common Stock and Series B Liberty Media Group Common Stock.
----------------------------------------------------------------
(a) Redemption in Exchange for Stock of Subsidiary. At any time at
which all of the assets and liabilities attributed to the Liberty Media Group
have become and continue to be held directly or indirectly by any one or more
wholly owned subsidiaries of the Corporation (the "Liberty Media Group
Subsidiaries"), the Board of Directors may, subject to the availability of
assets of the Corporation legally available therefor, redeem all of the
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock in exchange for an aggregate number of
outstanding shares of common stock of each Liberty Media Group Subsidiary equal
to the product of the Adjusted Outstanding Interest Fraction and the number of
all of the outstanding shares of common stock of such Liberty Media Group
Subsidiary, on a pro rata basis, each of which shall, upon such issuance, be
fully paid and
III-A-11
<PAGE>
nonassessable. Any such redemption shall occur on a Redemption Date set forth in
a notice to holders of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for notice is otherwise made pursuant to the terms of such Convertible
Securities) pursuant to paragraph 5(d)(vi). In effecting such a redemption, the
Board of Directors may determine either to (i) redeem shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock in
exchange for shares of separate classes or series of common stock of each
Liberty Media Group Subsidiary with relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions not greater than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions between
the Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock, with holders of shares of Series B Liberty Media Group Common
Stock receiving the class or series having the higher relative voting rights, or
(ii) redeem shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock in exchange for shares of a single class of
common stock of each Liberty Media Group Subsidiary without distinction between
the shares distributed to the holders of the Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock. If the Corporation
determines to undertake a redemption as described in clause (i) of the preceding
sentence, the outstanding shares of common stock of each Liberty Media Group
Subsidiary not distributed to holders of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock shall consist solely of the
class or series having the lower relative voting rights.
(b) Mandatory Dividend, Redemption or Conversion in Case of
Disposition of Liberty Media Group Assets. In the event of the Disposition, in
one transaction or a series of related transactions, by the Corporation and its
subsidiaries of all or substantially all of the properties and assets of the
Liberty Media Group to one or more persons, entities or groups (other than (w)
in connection with the Disposition by the Corporation of all of the
Corporation's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Corporation within the meaning of paragraph 6 of this Section E, (x) on a
pro rata basis to (1) the holders of all outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock and (2)
the Corporation for the benefit of the TCI Group with respect to the Number of
Shares Issuable with Respect to the Inter-Group Interest, (y) to any person,
entity or group which the Corporation, directly or indirectly, after giving
effect to the Disposition, controls or (z) in connection with a Related Business
Transaction), the Corporation shall, on or prior to the 85th Trading Day
following the consummation of such Disposition, either:
(i) subject to paragraph 3(b) of this Section E, declare and pay a
dividend in cash and/or in securities or other property (other than a dividend
or distribution of Common Stock) to the holders of the outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock equally on a share for share basis, in an
III-A-12
<PAGE>
aggregate amount equal to the product of the Outstanding Interest Fraction as of
the record date for determining the holders entitled to receive such dividend
and the Net Proceeds of such Disposition; or
(ii) provided that there are assets of the Corporation legally
available therefor and the Liberty Media Group Available Dividend Amount would
have been sufficient to pay a dividend in lieu thereof pursuant to clause (i) of
this paragraph 5(b), then:
(A) if such Disposition involved all (not merely substantially
all) of the properties and assets of the Liberty Media Group, redeem all
outstanding shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock in consideration for cash and/or
securities or other property (other than Common Stock) in an aggregate
amount equal to the product of the Adjusted Outstanding Interest Fraction
as of the date shares are selected for such redemption and the Net Proceeds
of such Disposition, such aggregate amount to be allocated to shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock in the ratio of the number of shares of each such series
outstanding (so that the amount of consideration paid for the redemption of
each share of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not all)
of the properties and assets of the Liberty Media Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the Adjusted Outstanding Interest Fraction
as of the date shares are selected for redemption and the Net Proceeds of
such Disposition to the redemption of outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock, such aggregate amount to be allocated to shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock in
the ratio of the number of shares of each such series outstanding, and the
number of each such series to be redeemed to equal the lesser of (x) the
whole number nearest the number determined by dividing the aggregate amount
so allocated to the redemption of such series by the average Market Value
of one share of Series A Liberty Media Group Common Stock during the ten-
Trading Day period beginning on the 16th Trading Day following the
consummation of such Disposition and (y) the number of shares of such
series outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Liberty Media Group Common Stock and
each share of Series B Liberty Media Group Common Stock is the same);
III-A-13
<PAGE>
such redemption to be effected in accordance with the applicable provisions of
paragraph 5(d) of this Section E; or
(iii) convert (A) each outstanding share of Series A Liberty Media
Group Common Stock into a number of fully paid and nonassessable shares of
Series A TCI Group Common Stock and (B) each outstanding share of Series B
Liberty Media Group Common Stock into a number of fully paid and nonassessable
shares of Series B TCI Group Common Stock, in each case equal to 110% of the
average daily ratio (calculated to the nearest five decimal places) of the
Market Value of one share of Series A Liberty Media Group Common Stock to the
Market Value of one share of Series A TCI Group Common Stock during the ten-
Trading Day period referred to in clause (ii) of this paragraph 5(b).
For purposes of this paragraph 5(b):
(x) as of any date, "substantially all of the properties and assets of
the Liberty Media Group" shall mean a portion of such properties and assets that
represents at least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets of the Liberty Media Group as
of such date;
(y) in the case of a Disposition of properties and assets in a series
of related transactions, such Disposition shall not be deemed to have been
consummated until the consummation of the last of such transactions; and
(z) the Corporation may pay the dividend or redemption price referred
to in clause (i) or (ii) of this subparagraph 5(b) either in the same form as
the proceeds of the Disposition were received or in any other combination of
cash or securities or other property (other than Common Stock) that the Board of
Directors determines will have an aggregate market value on a fully distributed
basis, of not less than the amount of the Net Proceeds. If the dividend or
redemption price is paid in the form of capital stock of an issuer other than
the Corporation, the Board of Directors may determine either to (1) pay the
dividend or redemption price in the form of separate classes or series of common
stock with relative voting rights and related differences in designation,
conversion, redemption and share distribution provisions not greater than the
corresponding differences in voting rights, designation, conversion, redemption
and share distribution provisions between the Series A Liberty Media Group
Common Stock and the Series B Liberty Media Group Common Stock, with holders of
shares of Series B Liberty Media Group Common Stock receiving the class or
series having the higher relative voting rights, or (2) pay the dividend or
redemption price in the form of a single class of capital stock without
distinction between the shares received by the holders of the two series of
Liberty Media Group Common Stock.
(c) Other Redemptions. After any Conversion Date on which all
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock were converted, any share of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock that is
issued on
III-A-14
<PAGE>
conversion, exercise or exchange of any Convertible Securities shall,
immediately upon issuance pursuant to such conversion, exercise or exchange and
without any notice or any other action on the part of the Corporation or its
Board of Directors or the holder of such share of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock, be converted into the
kind and amount of shares of capital stock, cash and/or other securities or
property that a holder of such Convertible Security would have been entitled to
receive pursuant to the terms of such Convertible Security had such terms
provided that the conversion, exercise or exchange privilege in effect
immediately prior to any conversion by the Corporation of any of its capital
stock into shares of any other capital stock of the Corporation would be
adjusted so that the holder of any such Convertible Security thereafter
surrendered for conversion, exercise or exchange would be entitled to receive
the kind and amount of shares of capital stock, cash and/or other securities or
property such holder would have received immediately following such action had
such Convertible Security been converted, exercised or exchanged immediately
prior thereto.
The provisions of this paragraph 5(c) shall not apply to the extent
that adjustments in respect of such conversion or redemption are otherwise made
pursuant to the provisions of such Convertible Securities.
(d) General.
(i) Not later than the 10th Trading Day following the consummation of
a Disposition referred to in subparagraph 5(b) of this Section E, the
Corporation shall announce publicly by press release (A) the Net Proceeds of
such Disposition, (B) the number of outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock, (C) the number
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock into or for which Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof and (D) the Outstanding Interest Fraction on the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Corporation
shall announce publicly by press release which of the actions specified in
clauses (i), (ii) or (iii) of subparagraph 5(b) of this Section E it has
irrevocably determined to take.
III-A-15
<PAGE>
(ii) If the Corporation determines to pay a dividend pursuant to
clause (i) of subparagraph 5(b) of this Section E, the Corporation shall, not
later than the 30th Trading Day following the consummation of such Disposition,
cause to be given to each holder of outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock, and to each
holder of Convertible Securities convertible into or exercisable or exchangeable
for shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(A) the record date for determining holders entitled to receive such dividend,
which shall be not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition, (B) the anticipated
payment date of such dividend (which shall not be more than 85 Trading Days
following the consummation of such Disposition), (C) the kind and aggregate
amount of shares of capital stock, cash and/or other securities or property to
be distributed in respect of shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, (D) the Net Proceeds of such
Disposition, (E) the Outstanding Interest Fraction on the date of such notice,
(F) the number of outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock and the number of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof and (G) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible Securities shall be entitled to receive such dividend only if they
appropriately convert, exercise or exchange them prior to the record date
referred to in clause (A) of this sentence.
(iii) If the Corporation determines to undertake a redemption of
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock following a Disposition of all of the properties and assets
of the Liberty Media Group pursuant to clause (ii) (A) of paragraph 5(b) of this
Section E, the Corporation shall cause to be given to each holder of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and to each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) a statement that all shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock outstanding on the
Redemption Date shall be redeemed, (B) the Redemption Date (which shall not be
more than 85 Trading Days following the consummation of such Disposition), (C)
the kind and aggregate amount of shares of capital stock, cash and/or other
securities or property to be paid as a redemption price in respect of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding on the Redemption Date, (D) the Net Proceeds of such
Disposition, (E) the Adjusted Outstanding Interest Fraction on the date
III-A-16
<PAGE>
of such notice, (F) the place or places where certificates for shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock, properly endorsed or assigned for transfer (unless the Corporation waives
such requirement), are to be surrendered for delivery of certificates for shares
of such capital stock, cash and/or other securities or property, (G) the number
of outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which such Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof and (H) in
the case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities shall be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Redemption
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 5(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following such Redemption Date. Such notice shall be sent by first class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Redemption Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(iv) If the Corporation determines to undertake a redemption of shares
of Series A Media Group Common Stock or Series B Liberty Media Group Common
Stock following a Disposition of substantially all of the properties and assets
of the Liberty Media Group pursuant to clause (ii)(B) of subparagraph 5(b) of
this Section E, the Corporation shall, not later than the 30th Trading Day
following the consummation of such Disposition, cause to be given to each holder
of record of outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the terms
of such Convertible Securities), a notice setting forth (A) a date not earlier
than the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition which shall be the date on which shares of the
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock then outstanding shall be selected for redemption, (B) the
anticipated Redemption Date (which shall not be more than 85 Trading Days
following the consummation of such Disposition), (C) the kind and aggregate
amount of shares of capital stock, cash and/or other securities or property to
be paid as a redemption price in respect of shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock outstanding on
the Redemption Date, (D) the Net Proceeds of such Disposition, (E) the
Outstanding Interest Fraction on the date of such notice, (F) the number of
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion or exercise prices thereof and (G) in the
case of a notice to holders of
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<PAGE>
Convertible Securities, a statement to the effect that holders of such
Convertible Securities shall be entitled to participate in such redemption only
if such holders appropriately convert, exercise or exchange such Convertible
Securities on or prior to the date referred to in clause (A) of this sentence
and a statement as to what, if anything, such holders shall be entitled to
receive pursuant to the terms of such Convertible Securities or, if applicable,
paragraph 5(c) of this Section E, if such holders convert, exercise or exchange
such Convertible Securities following such date. Promptly following the date
referred to in clause (A) of the preceding sentence, but not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition, the Corporation shall cause to be given to
each holder of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock to be so redeemed, a notice setting forth (A)
the number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common stock held by such holder to be redeemed, (B) a
statement that such shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock shall be redeemed, (C) the Redemption
Date (which shall not be more than 85 Trading Days following the consummation of
such Disposition), (D) the kind and per share amount of shares of capital stock,
cash and/or other securities or property to be received by such holder with
respect to each share of such Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock to be redeemed, including details as
to the calculation thereof, and (E) the place or places where certificates for
shares of such Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for delivery of
certificates for shares of such capital stock, cash and/or other securities or
property. Such notices shall be sent by first-class mail, postage prepaid, at
such holder's address as the same appears on the transfer books of the
Corporation. If less than all of the outstanding shares of Series A Liberty
Media Group Common Stock are to be redeemed pursuant to clause (i) of paragraph
5(b) of this Section E, such shares shall be redeemed by the Corporation pro
rata among the holders of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock or by such other method as may be determined by
the Board of Directors to be equitable.
(v) In the event of any conversion pursuant to paragraph 2(c) of this
Section E or pursuant to this paragraph 5 (other than pursuant to paragraph
5(c)), the Corporation shall cause to be given to each holder of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and to each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for such
notice is otherwise made pursuant to the terms of such Convertible Securities),
a notice setting forth (A) a statement that all outstanding shares of Series A
Liberty Media Group Common Stock or Series
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<PAGE>
B Liberty Media Group Common Stock shall be converted, (B) the Conversion Date
(which shall not be more than 85 Trading Days following the consummation of such
Disposition), (C) the per share number of shares of Series A TCI Group Common
Stock or Series B TCI Group Common Stock, as applicable, to be received with
respect to each share of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, including details as to the calculation
thereof, (D) the place or places where certificates for shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered, (E) the number of outstanding shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock and the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof and (F) in
the case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities shall be entitled to receive
shares of Series A TCI Group Common Stock or Series B TCI Group Common Stock, as
applicable, only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the Conversion Date referred to in
clause (B) of this sentence and a statement as to what, if anything, such
holders shall be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, paragraph 5(c) of this Section E if such holders
convert, exercise or exchange such Convertible Securities following such
Conversion Date. Such notice shall be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
Conversion Date, at such holder's address as the same appears on the transfer
books of the Corporation.
(vi) If the Corporation determines to redeem shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
pursuant to subparagraph (a) of this paragraph 5, the Corporation shall promptly
cause to be given to each holder of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for such notice is otherwise made pursuant to the
terms of such Convertible Securities), a notice setting forth (A) a statement
that all outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock shall be redeemed in exchange for
shares of common stock of the Liberty Media Group Subsidiaries, (B) the
Redemption Date, (C) Adjusted Outstanding Interest Fraction on the date of such
notice, (D) the place or places where certificates for shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for shares
of common stock of the Liberty Media Group Subsidiaries, (E) the number of
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof and (F)
in the case of a notice to
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<PAGE>
holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities shall be entitled to receive shares of common stock
of the Liberty Media Group Subsidiaries upon redemption only if such holders
appropriately convert, exercise or exchange such Convertible Securities on or
prior to the Redemption Date referred to in clause (B) of this sentence and a
statement as to what, if anything, such holders shall be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable,
paragraph 5(c) this Section E if such holders convert, exercise or exchange such
Convertible Securities following the Redemption Date. Such notice shall be sent
by first-class mail, postage prepaid, not less than 35 Trading Days nor more
than 45 Trading Days prior to the Redemption Date, at such holder's address as
the same appears on the transfer books of the Corporation.
(vii) Neither the failure to mail any notice required by this
paragraph 5(d) to any particular holder of Series A Liberty Media Group Common
Stock, Series B Liberty Media Group Common Stock or of Convertible Securities
nor any defect therein shall affect the sufficiency thereof with respect to any
other holder of outstanding shares of Series A Liberty Media Group Common Stock,
Series B Liberty Media Group Common Stock or of Convertible Securities, or the
validity of any conversion or redemption.
(viii) The Corporation shall not be required to issue or deliver
fractional shares of any class of capital stock or any fractional securities to
any holder of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock upon any conversion, redemption, dividend or other
distribution pursuant to paragraph 2(c) of this Section E or pursuant to this
paragraph 5. In connection with the determination of the number of shares of
any class of capital stock that shall be issuable or the amount of securities
that shall be deliverable to any holder of record upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares or
securities), the Corporation may aggregate the number of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
held at the relevant time by such holder of record. If the number of shares of
any class of capital stock or the amount of securities remaining to be issued or
delivered to any holder of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock is a fraction, the Corporation shall, if
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<PAGE>
such fraction is not issued or delivered to such holder, pay a cash adjustment
in respect of such fraction in an amount equal to the fair market value of such
fraction on the fifth Trading Day prior to the date such payment is to be made
(without interest). For purposes of the preceding sentence, "fair market value"
of any fraction shall be (A) in the case of any fraction of a share of capital
stock of the Corporation, the product of such fraction and the Market Value of
one share of such capital stock and (B) in the case of any other fractional
security, such value as is determined by the Board of Directors.
(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock; provided, however, that if
the Conversion Date or the Redemption Date with respect to the Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock shall be
subsequent to the record date for the payment of a dividend or
other distribution thereon or with respect thereto, the holders of shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock at the close of business on such record date shall be entitled to receive
the dividend or other distribution payable on or with respect to such shares on
the date set for payment of such dividend or other distribution, notwithstanding
the conversion or redemption of such shares or the Corporation's default in
payment of the dividend or distribution due on such date.
(x) Before any holder of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock shall be entitled to receive
certificates representing shares of any kind capital stock or cash and/or
securities or other property to be received by such holder with respect to
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock pursuant to paragraph 2(c) of this Section E or pursuant to
this paragraph 5, such holder shall surrender at such place as the Corporation
shall specify certificates for shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock, properly endorsed or
assigned for transfer (unless the Corporation shall waive such requirement).
The Corporation shall as soon as practicable after such surrender of
certificates representing shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock deliver to the person for whose
account shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock were so surrendered, or to the nominee or nominees of
such person, certificates representing the number of whole shares of the kind of
capital stock or cash and/or securities or other property to which such person
shall be entitled as aforesaid, together with any payment for fractional
securities contemplated by paragraph 5(d)(viii). If less than all of the shares
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock represented by any one certificate are to be redeemed, the
Corporation shall issue and deliver a new certificate for the shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
not redeemed. The Corporation shall not be required to register a transfer of
(1) any shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock for a period of 15 Trading Days next preceding any
selection of shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock to be redeemed or (2) any shares of Series A
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<PAGE>
Liberty Media Group Common Stock or Series B Liberty Media Group Common selected
or called for redemption.
(xi) From and after any applicable Conversion Date or Redemption Date,
all rights of a holder of shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock that were converted or redeemed shall
cease except for the right, upon surrender of the certificates representing
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, to receive certificates representing shares of the kind and
amount of capital stock or cash and/or securities or other property for which
such shares were converted or redeemed, together with any payment for fractional
securities contemplated by paragraph 5(d)(viii) of this Section E. No holder of
a certificate that, immediately prior to the applicable Conversion Date or
Redemption Date for the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, represented shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock shall be
entitled to receive any dividend or other distribution with respect to shares of
any kind of capital stock into or in exchange for which the Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock was
converted or redeemed until surrender of such holder's certificate for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there shall be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date after the Conversion Date or Redemption
Date, as the case may be, but that were not paid by reason of the foregoing,
with respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such surrender. From
and after a Conversion Date or Redemption Date, as the case may be, for any
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, the Corporation shall, however, be entitled to treat the
certificates for shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock that have not yet been surrendered for
conversion or redemption as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock for which the shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
represented by such certificates shall have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
(xii) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of capital stock and/or other securities on conversion or
redemption of shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock pursuant to this Section E. The Corporation
shall not, however, be required to pay any tax that may be payable in respect of
any transfer involved in the issue and delivery of any shares of capital stock
in a name other than that in which the shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock so converted or
redeemed were registered and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount of
any such tax, or has established to the satisfaction of the Corporation that
such tax has been paid.
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<PAGE>
6. Liquidation.
-----------
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) the holders of the Series A TCI Group Common
Stock and the holders of the Series B TCI Group Common Stock shall share
equally, on a share for share basis, in a percentage of the funds of the
Corporation remaining for distribution to its common stockholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of X/Z for the
20-Trading Day period ending on the Trading Day prior to the date of the public
announcement of a liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, and (b) the holders of the Series A Liberty
Media Group Common Stock and the holders of the Series B Liberty Media Group
Common Stock shall share equally, on a share for share basis, in a percentage of
the funds of the Corporation remaining for distribution to its common
stockholders equal to 100% multiplied by the average daily ratio (expressed as a
decimal) of Y/Z for the 20-Trading Day period ending on the Trading Day prior to
the date of the public announcement of a liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, where X is the aggregate
Market Capitalization of such Series A TCI Group Common Stock and Series B TCI
Group Common Stock, Y is the aggregate Market Capitalization of the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
and Z is the aggregate Market Capitalization of the Series A TCI Group Common
Stock, the Series B TCI Group Common Stock, the Series A Liberty Media Group
Common Stock and the Series B Liberty Media Group Common Stock. Neither the
consolidation or merger of the Corporation with or into any other Corporation or
Corporations nor the sale, transfer or lease of all or substantially all of the
assets of the Corporation shall itself be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this
paragraph 6.
7. Determinations by the Board of Directors.
-----------------------------------------
Any determinations made by the Board of Directors under any provision in
this Section E shall be final and binding on all stockholders of the
Corporation, except as may otherwise be required by law. The Corporation shall
prepare a statement of any such determination by the Board of Directors
respecting the fair market value of any properties, assets or securities and
shall file such statement with the Secretary of the Corporation.
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<PAGE>
8. Certain Definitions.
-------------------
Unless the context otherwise requires, the terms defined in this paragraph
8 shall have, for all purposes of this Section E, the meanings herein specified:
"Adjusted Outstanding Interest Fraction" as of any date is a fraction the
numerator of which shall be the aggregate number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock
outstanding on such date and the denominator of which shall be the sum of (a)
such aggregate number of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock outstanding on such date, (b) the
Number of Shares Issuable with Respect to the Inter-Group Interest as of such
date, (c) the aggregate number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock issuable, determined as of
such date, upon conversion, exercise or exchange of Pre-Distribution
Convertible Securities and (d) the number of Committed Acquisition Shares
issuable, determined as of such date.
"Committed Acquisition Shares" shall mean the shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock that the
Corporation has, prior to the record date for the Distribution, agreed to issue
as consideration in connection with transactions by the Corporation in which all
or part of the consideration to be paid by the Corporation would have consisted
of shares of the Class A Common Stock, par value $1.00 per share, of the
Corporation had such transactions been consummated prior to the record date for
the Distribution.
"Conversion Date" shall mean any date fixed for a conversion of shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock, as set forth in a notice to holders of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock pursuant to this
Certificate.
"Convertible Securities" shall mean any securities of the Corporation that
are convertible into, exchangeable for or evidence the right to purchase any
shares of any series of Common Stock, whether upon conversion, exercise,
exchange, pursuant to antidilution provisions of such securities or otherwise.
"Corporation Earnings (Loss) Attributable to the Liberty Media Group", for
any fiscal year, shall mean the net earnings or loss of the Liberty Media Group
for such fiscal year (or for the fiscal year of the Corporation commencing prior
to the date of the first issuance of shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock, the pro forma net
earnings or loss of the Liberty Media Group for such fiscal year as if such
issuance had occurred on the first day of such fiscal year) determined in
accordance with generally accepted accounting principles in effect at such time,
including income and expenses of the Corporation attributed to the operations of
the Liberty Media Group on a
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<PAGE>
substantially consistent basis, including without limitation, corporate
administrative costs, net interest and income taxes.
"Corporation Earnings (Loss) Attributable to the TCI Group", for any fiscal
year, shall mean the net earnings or loss of the TCI Group for such fiscal year
(or for the fiscal year of the Corporation commencing prior to the date of the
first issuance of shares of Series A Liberty Media Group Common Stock or Series
B Liberty Media Group Common Stock, the pro forma net earnings or loss of the
TCI Group for such fiscal year as if such issuance had occurred on the first day
of such fiscal year) determined on a basis consistent with the determination of
the net earnings or loss of the TCI Group for such fiscal year, as presented in
the combined financial statements of the TCI Group for such fiscal year,
including income and expenses of the Corporation attributed to the operations of
the TCI Group on a substantially consistent basis, including without limitation,
corporate administrative costs, net interest and income taxes.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets or
stock or otherwise) of properties or assets.
"Inter-Group Interest Fraction" as of any date is a fraction the numerator
of which shall be the Number of Shares Issuable with Respect to the Inter-Group
Interest on such date and the denominator of which shall be the sum of (a) such
Number of Shares Issuable with Respect to the Inter-Group Interest as of such
date and (b) the aggregate number of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock outstanding on such
date.
"Liberty Media Group" shall mean, as of any date that any shares of Series
A Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
have been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its subsidiaries in
Liberty Media Corporation or any of its subsidiaries (including any successor
thereto by merger, consolidation or sale of all or substantially all of its
assets, whether or not in connection with a Related Business Transaction) and
its properties and assets,
(b) all assets and liabilities of the Corporation to the extent attributed
to any of the properties or assets referred to in clause (a) of this sentence,
whether or not such assets or liabilities are assets and liabilities of Liberty
Media Corporation or any of its subsidiaries (or a successor as described in
clause (a) of this sentence),
(c) all assets and properties contributed or transferred to the Liberty
Media Group from the TCI Group, and
(d) the interest of the Corporation or any of its subsidiaries in the
businesses, assets and liabilities acquired by the Corporation or any of its
subsidiaries for the Liberty Media Group, as determined by the Board of
Directors;
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<PAGE>
provided that (i) from and after any dividend or other distribution with respect
to any shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock (other than a dividend or other distribution payable in
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, with respect to which adjustment shall be made as provided
in clause (a) of the definition of "Number of Shares Issuable with Respect to
the Inter-Group Interest", or in Convertible Securities convertible into or
exercisable for shares of such series, for which provisions shall be made as set
forth in the last sentence of this definition), the Liberty Media Group shall no
longer include an amount of assets or properties equal to the aggregate amount
of such kind of assets or properties so paid in respect of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
multiplied by a fraction the numerator of which is equal to the Inter-Group
Interest Fraction in effect immediately prior to such dividend or other
distribution and the denominator of which is equal to the Outstanding Interest
Fraction in effect immediately prior to such dividend or other distribution and
(ii) from and after any transfer of assets or properties from the Liberty Media
Group to the TCI Group, the Liberty Media Group shall no longer include the
assets or properties so transferred. If the Corporation shall pay a dividend or
make some other distribution with respect to shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock payable in
Convertible Securities attributed to the Liberty Media Group, the TCI Group
shall be deemed to hold an amount of such Convertible Securities equal to the
amount so distributed multiplied by the fraction specified in clause (i) of this
definition (determined as of a time immediately prior to such distribution), and
to the extent interest or dividends are paid on such Convertible Securities so
distributable, the Liberty Media Group shall no longer include a corresponding
ratable amount of the kind of assets paid as such interest or dividends in
respect of the Convertible Securities so deemed to be held by the TCI Group. The
Corporation may also, to the extent such Convertible Securities are at the time
convertible or exercisable, cause such Convertible Securities deemed to be held
by the TCI Group to be deemed to be converted or exercised (and to the extent
the terms of such Convertible Securities require payment of consideration as
consideration for such exercise or conversion, the Liberty Media Group shall
include an amount of the kind of properties or assets required to be paid as
such consideration for the amount of the Convertible Securities deemed converted
or exercised as if such Convertible Securities were outstanding), in which case
such Convertible Securities shall no longer be deemed to be held by the TCI
Group.
"Liberty Media Group Available Dividend Amount", as of any date, shall mean
the product of the Outstanding Interest Fraction and either:
(a) the excess of (i) an amount equal to the total assets of the
Liberty Media Group less the total liabilities (not including Preferred Stock)
of the Liberty Media Group as of such date over (ii) the aggregate par value of,
or any greater amount determined to be capital in respect of, all outstanding
shares of Series A Liberty Media Group Common Stock, Series B Liberty Media
Group Common Stock and each class or
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<PAGE>
series of Preferred Stock attributed to the Liberty Media Group or (b) in case
there is no such excess, an amount equal to the Corporation Earnings (Loss)
Attributable to the Liberty Media Group (if positive) for the fiscal year in
which such date occurs and/or the preceding fiscal year.
"Market Value" of any class or series of capital stock of the Corporation
on any day shall mean the average of the high and low reported sales prices
regular way of a share of such class or series on such day (if such day is a
Trading Day, and if such day is not a Trading Day, on the Trading Day
immediately preceding such day) or in case no such reported sale takes place on
such Trading Day the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case on the National Association of Securities Dealers Automated Quotations
National Market System, or if the shares of such class or series are not quoted
on such National Market System on such Trading Day, the average of the closing
bid and asked prices of a share of such class or series in the over-the-counter
market on such Trading Day as furnished by any New York Stock Exchange member
firm selected from time to time by the Corporation, or if such closing bid and
asked prices are not made available by any such New York Stock Exchange member
firm on such Trading Day, the market value of a share of such class or series as
determined by the Board of Directors; provided that for purposes of determining
the ratios set forth in paragraphs 2(c), 5(b) and 6 of this Section E, (a) the
"Market Value" of any share of any series of Common Stock on any day prior to
the "ex" date or any similar date for any dividend or distribution paid or to be
paid with respect to such series of Common Stock shall be reduced by the fair
market value of the per share amount of such dividend or distribution as
determined by the Board of Directors and (b) the "Market Value" of any share of
any series of Common Stock on any day prior to (i) the effective date of any
subdivision (by stock split or otherwise) or combination (by reverse stock split
or otherwise) of outstanding shares of such series of Common Stock or (ii) the
"ex" date or any similar date for any dividend or distribution with respect to
any such series of Common Stock in shares of such series of Common Stock shall
be appropriately adjusted to reflect such subdivision, combination, dividend or
distribution.
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<PAGE>
"Market Capitalization" of any class or series of capital stock of the
Corporation on any Trading Day shall mean the product of (i) the Market Value of
one share of such class or series on such Trading Day and (ii) the number of
shares of such class or series outstanding on such Trading Day.
"Net Proceeds", as of any date, from any Disposition of any of the
properties and assets of the Liberty Media Group shall mean an amount, if any,
equal to the gross proceeds of such Disposition after any payment of, or
reasonable provision for, (a) any taxes payable by the Corporation in respect of
such Disposition or in respect of any resulting dividend or redemption pursuant
to clause (i) or (ii), respectively, of paragraph 5(b) of this Section E, (or
which would have been payable but for the utilization of tax benefits
attributable to the TCI Group), (b) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses and
(c) any liabilities (contingent or otherwise) of, or attributed to, the Liberty
Media Group, including, without limitation, any indemnity or guarantee
obligations incurred in connection with the Disposition or any liabilities for
future purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of Preferred Stock attributed to the
Liberty Media Group. For purposes of this definition, any properties and assets
of the Liberty Media Group remaining after such Disposition shall constitute
"reasonable provision" for such amount of taxes, costs and liabilities
(contingent or otherwise) as can be supported by such properties and assets. To
the extent the proceeds of any Disposition include any securities or other
property other than cash, the Board of Directors shall determine the value of
such securities or property, including for the purpose of determining the
equivalent value thereof if the Board of Directors determines to pay a dividend
or redemption price in cash or securities or other property as provided in
paragraph 5(b)(z) of this Section E.
"Number of Shares Issuable with Respect to the Inter-Group Interest" after
the Distribution shall be zero and shall from time to time, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the Series
A Liberty Media Group Common Stock and dividends or distributions of shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock to holders of Series A Liberty Media Group Common Stock and other
reclassifications of Series A Liberty Media Group Common Stock,
(b) decreased (but not to less than zero) by (i) the aggregate number
of shares of Series A Liberty Media Group Common Stock issued or sold by the
Corporation pursuant to agreements entered into by the Corporation after the
record date for the Distribution, the proceeds of which are attributed to the
TCI Group, (ii) the aggregate number of shares of Series A Liberty Media Group
Common Stock issued or delivered upon conversion or exercise of Convertible
Securities issued or sold by the Corporation after the record date for the
Distribution, the proceeds of which are attributed to the TCI Group, (iii) the
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<PAGE>
aggregate number of shares of Series A Liberty Media Group Common Stock issued
by the Corporation as a dividend or distribution to holders of Series A TCI
Group Common Stock and Series B TCI Group Common Stock, (iv) the aggregate
number of shares of Series A Liberty Media Group Common Stock issued upon the
conversion or exercise of any Convertible Securities issued by the Corporation
after the record date for the Distribution as a dividend or distribution or by
reclassification or exchange to holders of Series A TCI Group Common Stock and
Series B TCI Group Common Stock and (v) the aggregate number of shares of Series
A Liberty Media Group Common Stock (rounded, if necessary, to the nearest whole
number), equal to the aggregate fair value (as determined by the Board of
Directors) of assets or properties attributed to the Liberty Media Group that
are transferred from the Liberty Media Group to the TCI Group in consideration
of a reduction in the Number of Shares Issuable with Respect to the Inter-Group
Interest, divided by the Market Value of one share of Series A Liberty Media
Group Common Stock as of the date of such transfer, and
(c) increased by (i) the aggregate number of any shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
which cease to be outstanding following their repurchase, the consideration for
which is attributed to the TCI Group, (ii) a number (rounded, if necessary, to
the nearest whole number), equal to the fair value (as determined by the Board
of Directors) of assets or properties, theretofore attributed to the TCI Group
that are contributed to the Liberty Media Group in consideration of an increase
in the Number of Shares Issuable with Respect to the Inter-Group Interest,
divided by the Market Value of one share of Series A Liberty Media Group Common
Stock as of the date of such contribution and (iii) the aggregate number of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock into or for which Convertible Securities are deemed to be
converted or exercised pursuant to the last sentence of the definition of "TCI
Group" in this paragraph 8. The Corporation shall not issue or sell shares of
Series B Liberty Media Group Common Stock in respect of a reduction in the
Number of Shares Issuable with Respect to the Inter-Group Interest.
Whenever a change in the Number of Shares Issuable with Respect to the
Inter-Group Interest occurs, the Corporation shall prepare and file a statement
of such change with the Secretary of the Corporation.
"Outstanding Interest Fraction" as of any date is a fraction the numerator
of which shall be the aggregate number of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock outstanding on such
date and the denominator of which shall be the sum of (a) such aggregate number
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock outstanding on such date and (b) the Number of Shares
Issuable with Respect to the Inter-Group Interest as of such date.
"Pre-Distribution Convertible Securities" shall mean (i) the Preferred
Stock and debt securities that were outstanding on the record date for the
Distribution and have been convertible into or exchangeable for shares of the
Class A Common Stock, par value $1.00 per share,
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<PAGE>
of the Corporation had such Preferred Stock or debt securities been converted or
exchanged prior to the record date for the Distribution and (ii) options granted
by the Corporation to purchase shares of the Class A Common Stock, par value
$1.00 per share, of the Corporation that were outstanding on the record for the
Distribution.
"Redemption Date" shall mean any date fixed for a redemption or purchase of
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, as set forth in a notice to holders of such series pursuant
to this Certificate.
"Related Business Transaction" shall mean any Disposition of all or
substantially all of the properties and assets of the Liberty Media Group in
which the Corporation receives as proceeds of such Disposition primarily equity
securities (including, without limitation, capital stock, convertible
securities, partnership or limited partnership interests and other types of
equity securities, without regard to the voting power or contractual or other
management or governance rights related to such equity securities) of the
purchaser or acquiror of such assets and properties of the Liberty Media Group,
any entity which succeeds (by merger, formation of a joint venture enterprise or
otherwise) to such assets and properties of the Liberty Media Group or a third
party issuer, which purchaser, acquiror or other issuer is engaged or proposes
to engage primarily in one or more businesses similar or complementary to the
business conducted by the Liberty Media Group prior to such Disposition, as
determined in good faith by the Board of Directors.
"TCI Group" shall mean, as of any date:
(a) the interest of the Corporation or any of its subsidiaries in all
of the businesses in which the Corporation or any of its subsidiaries (or any of
their predecessors or successors) is or has been engaged, directly or
indirectly, and the respective assets and liabilities of the Corporation or any
of its subsidiaries, other than any businesses, assets or liabilities of the
Liberty Media Group;
(b) a proportionate interest in the businesses, assets and liabilities
of the Liberty Media Group equal to the Inter-Group Interest Fraction;
(c) from and after any dividend or other distribution with respect to
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock (other than a dividend or other distribution payable in
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, with respect to which adjustment shall be made as provided
in clause (a) of the definition of "Number of Shares Issuable with Respect to
the Inter-Group Interest", or in Convertible Securities attributed to the
Liberty Media Group, for which provision shall be made as set forth in the last
sentence of this definition), an amount of assets or properties of the Liberty
Media Group equal to the aggregate
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<PAGE>
amount of such kind of assets or properties so paid in respect of such dividend
or other distribution with respect to shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock multiplied by a
fraction the numerator of which is equal to the Inter-Group Interest Fraction in
effect immediately prior to such dividend or other distribution and the
denominator of which is equal to the Outstanding Interest Fraction in effect
immediately prior to such dividend or other distribution; and
(d) any assets or properties transferred from the Liberty Media Group
to the TCI Group;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group, the TCI Group shall no
longer include such assets or properties so contributed or transferred (other
than pursuant to its interest in the Liberty Media Group pursuant to clause (b)
above). If the Corporation shall pay a dividend or make some other distribution
with respect to shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock payable in Convertible Securities attributed to
the Liberty Media Group, the TCI Group shall be deemed to hold an amount of such
Convertible Securities equal to the amount so distributed multiplied by the
fraction specified in clause (c) of this definition (determined as of a time
immediately prior to such distribution), and to the extent interest or dividends
are paid on such Convertible Securities so distributable, the TCI Group shall
include a corresponding ratable amount of the kind of assets paid as such
interest or dividends in respect of the Convertible Securities so deemed to be
held by the TCI Group. The Corporation may also, to the extent such Convertible
Securities are at the time convertible, exercisable or exchangeable, cause such
Convertible Securities deemed to be held by the TCI Group to be deemed to be
converted, exercised or exchanged (and to the extent the terms of such
Convertible Securities require payment of consideration as consideration for
such conversion, exercise or exchange, the Liberty Media Group shall no longer
include an amount of the kind of properties or assets required to be paid as
such consideration for the amount of the Convertible Securities deemed
converted, exercised or exchanged as if such Convertible Securities were
outstanding), in which case such Convertible Securities shall no longer be
deemed to be held by the TCI Group.
"TCI Group Available Dividend Amount", as of any date, shall mean either:
(a) the excess of (i) an amount equal to the total assets of the TCI
Group less the total liabilities (not including Preferred Stock) of the TCI
Group as of such date over (ii) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding shares of Series
A TCI Group Common Stock, Series B TCI Group Common Stock and each class or
series of Preferred Stock attributed to the TCI Group.
III-A-31
<PAGE>
or (b) in case there is no such excess, an amount equal to the Corporation
Earnings (Loss) Attributable to the TCI Group (if positive) for the fiscal year
in which such date occurs and/or the preceding fiscal year.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the Corporation is not traded on
the National Association of Securities Dealers Automated Quotations National
Market System or in the over-the-counter market.
III-A-32
<PAGE>
Section C of Article V of the Restated Certificate of Incorporation is
proposed to be amended pursuant to the Liberty Media Group Stock Proposal to
read in its entirety as follows:
SECTION C
REMOVAL OF DIRECTORS
Subject to the rights of the holders of any class or series of Preferred
Stock, directors may be removed from office only for cause (as hereinafter
defined) upon the affirmative vote of the holders of 66 2/3% of the total voting
power of the then outstanding shares of Series A TCI Group Common Stock, Series
B TCI Group Common Stock, Series A Liberty Media Group Common Stock, Series B
Liberty Media Group Common Stock and any class or series of Preferred Stock
entitled to vote at an election of directors, voting together as a single class.
Except as may be provided by law, "cause" for removal, for purposes of this
Section C, shall exist only if: (i) the director whose removal is proposed has
been convicted of a felony, or has been granted immunity to testify in an action
where another has been convicted of a felony, by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal; (ii)
such director has become mentally incompetent, whether or not so adjudicated,
which mental incompetence directly affects his ability as a director of the
Corporation, as determined by at least 66 2/3% of the members of the Board of
Directors then in office (other than such director); or (iii) such director's
actions or failure to act have been determined by at least 66 2/3% of the
members of the Board of Directors then in office (other than such director) to
be in derogation of the director's duties.
III-A-33
<PAGE>
Article VIII of the Restated Certificate of Incorporation is proposed to be
amended pursuant to the Liberty Media Group Stock proposal to read in its
entirety as follows:
ARTICLE VIII
MEETINGS OF STOCKHOLDERS
SECTION A
ANNUAL AND SPECIAL MEETINGS
Subject to the rights of the holders of any class or series of Preferred
Stock, stockholder action may be taken only at an annual or special meeting.
Except as otherwise provided in the terms of any class or series of Preferred
Stock or unless otherwise prescribed by law or by another provision of this
Certificate, special meetings of the stockholders of the Corporation, for any
purpose or purposes, shall be called by the Secretary of the Corporation (i)
upon the written request of the holders of not less than 66 2/3% of the total
voting power of the outstanding Voting Securities (as hereinafter defined) or
(ii) at the request of at least 75% of the members of the Board of Directors
then in office. The term "Voting Securities" shall include the Series A TCI
Group Common Stock, the Series B TCI Group Common Stock, the Series A Liberty
Media Group Common Stock, the Series B Liberty Media Group Common Stock and any
class or series of Preferred Stock entitled to vote with the holders of Common
Stock generally upon all matters which may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
SECTION B
ACTION WITHOUT A MEETING
Except as otherwise provided in the terms of any class or series of
Preferred Stock, no action required to be taken or which may be taken at any
annual meeting or special meeting of stockholders may be taken without a
meeting, and the power of stockholders to consent in writing, without a meeting,
is specifically denied.
III-A-34
<PAGE>
Article X of the Restated Certificate of Incorporation is proposed to be
amended pursuant to the Liberty Media Group Stock Proposal to read in its
entirety as follows:
ARTICLE IX
ACTIONS REQUIRING SUPERMAJORITY STOCKHOLDER VOTE
Subject to the rights of the holders of any class or series of Preferred
Stock, the affirmative vote of the holders of at least 66 2/3% of the total
voting power of the then outstanding Voting Securities (as defined in Section A
of Article VIII of this Certificate), voting together as a single class at a
meeting specifically called for such purpose, shall be required in order for the
Corporation to take any action to authorize:
(i) the amendment, alteration or repeal of any provision of this
Certificate or the addition or insertion of other provisions herein;
(ii) the adoption, amendment or repeal of any provision of the Bylaws
of the Corporation; provided, however, that this clause (b) shall not apply to,
and no vote of the stockholders of the Corporation shall be required to
authorize, the adoption, amendment or repeal of any provision of the Bylaws of
the Corporation by the Board of Directors in accordance with the power conferred
upon it pursuant to Section F of Article V of this Certificate;
(iii) the merger or consolidation of this Corporation with or into
any other corporation; provided, however, that this clause (c) shall not apply
to any merger or consolidation (i) as to which the laws of the State of
Delaware, as then in effect, do not require the consent of this Corporation's
stockholders, or (ii) which at least 75% of the members of the Board of
Directors then in office have approved;
(iv) the sale, lease or exchange of all, or substantially all, of the
property and assets of the Corporation; or
(v) the dissolution of the Corporation.
All rights at any time conferred upon the stockholders of the Corporation
pursuant to this Certificate are granted subject to the provisions of this
Article IX.
III-A-35
<PAGE>
The Certificate of Amendment to the Restated Certificate of
Incorporation, as proposed to be filed with the Secretary of State of the State
of Delaware pursuant to the Liberty Media Group Stock Proposal, is proposed to
include the following:
Upon the effectiveness of this Certificate of Amendment, (a) each
share of the Class A Common Stock, par value $1.00 per share, of the Corporation
that is issued and outstanding (including shares held in the treasury of the
Corporation) shall be redesignated and changed, ipso facto and without any other
action on the part of the stockholders thereof, into one share of Series A TCI
Group Common Stock and (b) each share of Class B Common Stock, par value $1.00
per share, of the Corporation that is issued and outstanding (including shares
held in the treasury of the Corporation) shall be redesignated and changed, ipso
facto and without any other action on the part of the stockholders thereof, into
one share of Series B TCI Group Common Stock.
III-A-36
<PAGE>
APPENDIX III-B
PROPOSED AMENDMENTS
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
(Implementing the Increased Authorization Proposal)
The first paragraph of Article IV of the Restated Certificate of
Incorporation is proposed to be amended pursuant to the Increased Authorization
Proposal to read in its entirety as follows:
AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation
shall have authority to issue is one billion nine hundred fifty-two million
three hundred seventy-five thousand ninety-six (1,952,375,096) shares, of which
one billion nine hundred million (1,900,000,000) shares shall be common stock
("Common Stock") and fifty-two million three hundred seventy-five thousand
ninety-six (52,375,096) shares shall be preferred stock ("Preferred Stock").
Said shares of Common Stock and Preferred Stock shall be divided into the
following classes:
(a) One billion seven hundred fifty million (1,750,000,000) shares of
Common Stock shall be of a class designated as Class A Common Stock with a par
value of $1.00 per share;
(b) One hundred fifty million (150,000,000) shares of Common Stock
shall be of a class designated as Class B Common Stock with a par value of $1.00
per share;
(c) Seven hundred thousand (700,000) shares of Preferred Stock shall
be of a class designated as Class A Preferred Stock with a par value of $.01 per
share;
(d) One million six hundred seventy-five thousand ninety-six
(1,675,096) shares of Preferred Stock shall be of a class designated as Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock with a par value of
$.01 per share; and
(e) Fifty million (50,000,000) shares of Preferred Stock shall be of a
class designated as Series Preferred Stock with a par value of $.01 per share,
such class to be issuable in series as provided in Section D of this Article IV.
III-B-1
<PAGE>
If both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the first paragraph of
Article IV of the Restated Certificate of Incorporation will instead be amended
to read in its entirety as follows:
AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is two billion seven hundred seventy-seven million three
hundred seventy-five thousand ninety-six (2,777,375,096) shares, of which two
billion seven hundred twenty-five million (2,725,000,000) shares shall be common
stock ("Common Stock") and fifty-two million three hundred seventy-five thousand
ninety-six (52,375,096) shares shall be preferred stock ("Preferred Stock").
Said shares of Common Stock and Preferred Stock shall be divided into the
following classes:
(a) Two billion seven hundred twenty-five million (2,725,000,000) shares of
Common Stock shall be a class designated as Common Stock with a par value of
$1.00 per share, such class to be issuable in series as provided in Section E of
this Article IV;
(b) Seven hundred thousand (700,000) shares of Preferred Stock shall be of
a class designated as Class A Preferred Stock with a par value of $.01 per
share;
(c) One million six hundred seventy-five thousand ninety-six (1,675,096)
shares of Preferred Stock shall be of a class designated as Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock with a par value of
$.01 per share; and
(d) Fifty million (50,000,000) shares of Preferred Stock shall be of a
class designated as Series Preferred Stock with a par value of $.01 per share,
such class to be issuable in series as provided in Section D of this Article IV.
III-B-2
<PAGE>
If both the Liberty Media Group Stock Proposal and the Increased
Authorization Proposal are approved by stockholders, the first paragraph of
Section E of Article IV of the Restated Certificate of Incorporation will be
amended to read in its entirety as follows:
One billion seven hundred fifty million (1,750,000,000) shares of Common
Stock shall be of a series designated as Series A TCI Group Common Stock (the
"Series A TCI Group Common Stock"), one hundred fifty million (150,000,000)
shares of Common Stock shall be of a series designated as Series B TCI Group
Common Stock (the "Series B TCI Group Common Stock"), seven hundred fifty
million (750,000,000) shares of Common Stock shall be of a series designated as
Series A Liberty Media Group Common Stock (the "Series A Liberty Media Group
Common Stock") and seventy-five million (75,000,000) shares of Common Stock
shall be of a series designated as Series B Liberty Media Group Common Stock
(the "Series B Liberty Media Group Common Stock").
III-B-3
<PAGE>
Section D of Article IV of the Restated Certificate of Incorporation is
proposed to be amended pursuant to the Increased Authorization Proposal to read
in its entirety as follows:
SECTION D
SERIES PREFERRED STOCK
The Series Preferred Stock may be issued, from time to time, in
one or more series, with such powers, designations, preferences and relative,
participating, optional or other rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in a resolution or
resolutions providing for the issue of each such series adopted by the Board of
Directors. The Board of Directors, in such resolution or resolutions (a copy of
which shall be filed and recorded as required by law), is also expressly
authorized to fix with respect to each series:
(i) the distinctive serial designations and the division of such
shares into series and the number of shares of a particular series,
which may be increased or decreased, but not below the number of
shares thereof then outstanding, by a certificate made, signed, filed
and recorded as required by law;
(ii) the dividend rate or amounts, if any, for the particular
series, the date or dates from which dividends on all shares of such
series shall be cumulative, if dividends on stock of the particular
series shall be cumulative and the relative rights of priority, if
any, or participation, if any, with respect to payment of dividends on
shares of that series;
(iii) the rights of the shares of each series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment
of shares of each series;
(iv) the right, if any, of the holders of a particular series to
convert or exchange such stock into or for other classes of stock or
indebtedness of the Corporation, and the terms and conditions of such
conversion or exchange, including provision for the adjustment of the
conversion or exchange rate in such events as the Board of Directors
shall determine;
(v) the voting rights, if any, of the holders of a particular
series; and
(vi) the terms and conditions, if any, for the Corporation to
purchase or redeem shares of a particular series.
All shares of any one series of the Series Preferred Stock shall
be alike in every particular.
III-B-4
<PAGE>
APPENDIX IV
FINANCIAL INFORMATION
Index to Appendix IV
<TABLE>
<S> <C>
TELE-COMMUNICATIONS, INC.
Condensed Pro Forma Combined Financial Statements
Condensed Pro Forma Combined Financial Statements, March 31, 1995 (unaudited)......
Condensed Pro Forma Combined Balance Sheet, March 31, 1995 (unaudited).............
Condensed Pro Forma Combined Statement of Operations, March 31, 1995 (unaudited)...
Condensed Pro Forma Combined Statement of Operations, Year
ended December 31, 1994 (unaudited)..............................................
Notes to Condensed Pro Forma Combined Financial Statements,
December 31, 1994 (unaudited)....................................................
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Three months ended March 31, 1995 and 1994.............................
Consolidated Financial Statements
Consolidated Balance Sheets, March 31, 1995 and 1994 (unaudited)...................
Consolidated Statements of Operations, Three months ended
March 31, 1995 and 1994 (unaudited)..............................................
Consolidated Statements of Stockholders' Equity, Three months
ended March 31, 1995 (unaudited).................................................
Consolidated Statements of Cash Flows, Three months ended
March 31, 1995 and 1994 (unaudited)..............................................
Notes to Consolidated Financial Statements, March 31, 1995 (unaudited).............
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1994, 1993 and 1992...........................
Consolidated Financial Statements
Independent Auditors' Report.......................................................
Consolidated Balance Sheets, December 31, 1994 and 1993............................
Consolidated Statements of Operations, Years ended December 31,
1994, 1993 and 1992..............................................................
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1994, 1993 and 1992.................................................
Consolidated Statements of Cash Flows, Years ended December 31,
1994, 1993 and 1992..............................................................
Notes to Consolidated Financial Statements, December 31, 1994,
1993 and 1992....................................................................
LIBERTY MEDIA GROUP
Management's Discussion and Analysis of Financial Condition and
Results of Operations,
Three months ended March 31, 1995 and 1994.......................................
Combined Financial Statements
Combined Balance Sheets,
March 31, 1995 and December 31, 1994 (unaudited).................................
Combined Statements of Operations,
Three months ended March 31, 1995 and 1994 (unaudited)...........................
Combined Statement of Equity,
Three months ended March 31, 1995 (unaudited)....................................
Combined Statements of Cash Flows,
Three months ended March 31, 1995 and 1994 (unaudited)...........................
Notes to Combined Financial Statements,
Three months ended March 31, 1995 and 1994 (unaudited)...........................
</TABLE>
IV-1
<PAGE>
<TABLE>
<S> <C>
LIBERTY MEDIA GROUP (continued)
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Years ended December 31, 1994, 1993 and 1992................
Combined Financial Statements
Independent Auditors' Report.......................................................
Combined Balance Sheets, December 31, 1994 and 1993................................
Combined Statements of Operations, Years ended December 31, 1994,
1993 and 1992....................................................................
Combined Statements of Equity, Years ended December 31, 1994,
1993 and 1992....................................................................
Combined Statements of Cash Flows, Years ended December 31, 1994,
1993 and 1992....................................................................
Notes to Combined Financial Statements, December 31, 1994,
1993 and 1992....................................................................
TCI GROUP
Condensed Pro forma Combined Financial Statements
Condensed Pro forma Combined Financial Statement
March 31, 1995 (unaudited).......................................................
Condensed Pro forma Combined Balance Sheet,
March 31, 1995 (unaudited).......................................................
Condensed Pro forma Combined
Statement of Operations, Three Months
ended March 31, 1995 (unaudited).................................................
Condensed Pro forma Combined
Statement of Operations, Year ended
December 31, 1994 (unaudited)....................................................
Notes to Condensed Pro forma Combined
Financial Statements, March 31, 1995
(unaudited)......................................................................
Managements's Discussion and Analysis of Financial Condition and
Results of Operations,
March 31, 1995 and December 31, 1994.............................................
Combined Financial Statements
Combined Balance Sheets,
March 31, 1995 and December 31, 1994 (unaudited).................................
Combined Statements of Operations,
Three months ended March 31, 1995 and 1994 (unaudited)...........................
Combined Statement of Equity,
Three months ended March 31, 1995 (unaudited)....................................
Combined Statements of Cash Flows,
Three months ended March 31, 1995 and 1994 (unaudited)...........................
Notes to Combined Financial Statements,
March 31, 1995 (unaudited).......................................................
Managements's Discussion and Analysis of Financial Condition and
Results of Operations.
Years ended December 31, 1994, 1993 and 1992.....................................
Combined Financial Statements
Independent Auditors' Report.......................................................
Combined Balance Sheets,
December 31, 1994 and 1993.......................................................
Combined Statements of Operations,
Years ended December 31, 1994, 1993 and 1992.....................................
Combined Statements of Equity,
Years ended December 31, 1994, 1993 and 1992.....................................
Combined Statements of Cash Flows,
Years ended December 31, 1994, 1993 and 1992.....................................
Notes to Combined Financial Statements,
December 31, 1994, 1993 and 1992.................................................
LIBERTY MEDIA CORPORATION
Consolidated Financial Statements
Independent Auditors' Report.......................................................
Consolidated Balance Sheets, December 31, 1993 and 1992............................
Consolidated Statements of Operations, Years ended December 31,
1993 and 1992, nine months ended December 31, 1991
and three months ended March 31, 1991............................................
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..........................
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..........................
Notes to Consolidated Financial Statements, December 31, 1993,
1992 and 1991....................................................................
</TABLE>
IV-2
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Statements
March 31, 1995
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
TCI, dated as of March 31, 1995, assumes that the acquisition of controlling
interests in Cablevision S.A., Televisora Belgrano S.A., Construred S.A. and
Univent's S.A. (collectively "Cablevision)(the "Cablevision Acquisition") had
occurred as of such date. See note (3).
The following unaudited condensed pro forma combined statement of
operations of TCI for the three months ended March 31, 1995 assumes that (i) the
Cablevision Acquisition and (ii) the merger with TeleCable Corporation
("TeleCable")(the "TeleCable Merger") had occurred as of January 1, 1994. See
notes (2) and (3).
The following unaudited condensed pro forma combined statement of
operations of TCI for the year ended December 31, 1994 assumes that the
TeleCable Merger, the Cablevision Acquisition and the combination of TCI
Communications, Inc. ("TCIC") and Liberty Media Corporation ("Liberty"), whereby
TCIC and Liberty each became a wholly-owned subsidiary of TCI (the "Old
TCI/Liberty Combination") (see note 1) had occurred as of January 1, 1994.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the TeleCable Merger, the
Cablevision Acquisition and the Old TCI/Liberty Combination had occurred as of
January 1, 1994. These condensed pro forma combined financial statements of TCI
should be read in conjunction with the historical financial statements and the
related notes thereto of TCI.
IV-3
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------------------
Cablevision Pro forma TCI
TCI Historical adjustments Pro
Historical (3) (3) forma
----------- ------------- ------------ --------
Assets amounts in millions
- ------
<S> <C> <C> <C> <C>
Cash, receivables and
other current assets $ 461 13 -- 474
Investment in affiliates
and Turner Broadcasting
System, Inc., and related
receivables 2,185 -- -- 2,185
Property and equipment,
net of accumulated
depreciation 6,704 36 16 (4) 6,756
Franchise costs,
intangibles and other
assets, net of
amortization 13,104 2 302 (4) 13,558
150 (5)
------- --- ------ ------
$22,454 51 468 22,973
======= === ====== ======
Liabilities and
Stockholders' Equity
- ---------------------
Payables and accruals $ 1,164 26 -- 1,190
Debt 11,371 70 87 (6) 11,707
179 (7)
Deferred income taxes 4,397 7 150 (5) 4,554
Other liabilities 183 -- -- 183
------- --- ------ ------
Total liabilities 17,115 103 416 17,634
------- --- ------ ------
Minority interests 373 -- -- 373
Series D Preferred Stock 303 -- -- 303
Stockholders' equity;
Preferred Stock -- -- -- --
Combined deficit -- (52) 52 (8) --
Class A common stock 659 -- -- 659
Class B common stock 89 -- -- 89
Additional paid-in
capital 4,687 -- -- 4,687
Cumulative foreign
currency translation
adjustment 21 -- -- 21
Unrealized holding gains
for available-for-sale
securities 160 -- -- 160
Accumulated deficit (333) -- -- (333)
Treasury stock (620) -- -- (620)
------- --- ------ ------
4,663 (52) 52 4,663
------- --- ------ ------
$22,454 51 468 22,973
======= === ====== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-4
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, 1995
-----------------------------------------------------------------------------
TCI TeleCable Cablevision Pro forma TCI
Historical Historical (2) Historical (3) adjustments(1)(2)(3) Pro forma
----------- -------------- -------------- -------------------- ----------
<S> <C> <C> <C> <C> <C>
amounts in millions
Revenue $ 1,524 22 41 -- 1,587
Operating, cost of sales, selling, general and
administrative expenses and compensation
relating to stock appreciation rights (1,057) (13) (27) -- (1,097)
Depreciation and amortization (287) (4) (2) (10) (10) (303)
------- --- --- -------- ---------
Operating income 180 5 12 (10) (187)
Interest expense (240) (4) -- (2) (12) (253)
(4) (14)
(3) (15)
Interest and dividend income 7 3 -- -- 10
Share of losses of affiliates, net (29) -- -- -- (29)
Gain on dispositions 8 -- -- -- 8
Other income (expense), net 10 (6) -- -- 4
------- --- --- -------- ---------
Earnings (loss) before income taxes (64) (2) 12 (19) (73)
Income tax benefit expense 19 -- (4) 7 (17) 22
------- --- --- -------- ---------
Net earnings (loss) (45) (2) 8 (12) (51)
Dividend requirement on redeemable preferred stocks (8) -- -- (1) (18) (9)
------- --- --- -------- ---------
Net earnings (loss) attributable to common
shareholders $ (53) (2) 8 (13) (60)
======= === === ======== =========
Loss per common share $ (.08) $ (.09)(21)
======= =========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-5
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1994
---------------------------------------------------------------------------------------------
TCI Liberty TeleCable Cablevision Pro forma TCI
Historical Historical (1) Historical (2) Historical (3) adjustments(1)(2)(3) Pro forma
----------- -------------- -------------- -------------- -------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
amounts in millions
Revenue $ 4,936 790 302 139 (36) (9) 6,131
Operating, cost of sales, selling,
general and administrative expenses
and compensation relating to stock
appreciation rights (3,130) (726) (171) (90) 36 (9) (4,081)
Depreciation and amortization (1,018) (32) (46) (6) (71) (10) (1,173)
------- ---- ---- --- --------- ------
Operating income (loss) 788 32 85 43 (71) 877
Interest expense (785) (22) (23) 12 (11) (845)
-- (6) (12)
(15) (13)
(6) (15)
Interest and dividend income 36 15 1 -- (12) (11) 40
Share of earnings of Liberty 126 -- -- -- (126) (16) --
Share of earnings (losses) of
affiliates, net (113) 24 -- -- -- (89)
Gain on dispositions 151 183 -- -- -- 334
Loss on early extinguishment of debt (9) -- -- -- -- (9)
Other expense, net (15) (11) (4) (1) -- (31)
------- ---- ---- --- --------- ------
Earnings (loss) before income
taxes 179 221 59 42 (224) 277
Income tax expense (119) (95) (23) (15) 86 (17) (166)
------- ---- ---- --- --------- ------
Net earnings (loss) 60 126 36 27 (138) 111
Dividend requirement on redeemable
preferred stocks (8) (14) -- -- (17) (18) (31)
8 (19)
Net earnings (loss) attributable ------- ---- ---- --- --------- ------
to common shareholders $ 52 112 36 27 (147) 80
======= ==== ==== === ========= ======
Primary earnings per common and
common equivalent share $ .08 $ .12(20)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-6
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
March 31, 1995
(unaudited)
(1) The Old TCI/Liberty Combination, which was consummated on August 4, 1994,
were structured as a tax free exchange whereby the common stock of TCIC and
Liberty and the preferred stock of Liberty were exchanged for like shares
of TCI. The merger agreement provided that each share of TCIC's and
Liberty's common stock (including shares held by TCIC's or Liberty's
subsidiaries) would be converted into one share and 0.975 of a share,
respectively, of the corresponding class of TCI's common stock. Shares of
Liberty Class E Preferred Stock were converted into shares of the Class B
Preferred Stock. Shares of the remaining Liberty preferred stock held by
subsidiaries of TCIC were converted into shares of a class of TCI preferred
stock having an equivalent fair value to that which was given up. All
preferred stock of TCI held by TCIC or its subsidiaries has been eliminated
in consolidation. The Old TCI/Liberty Combination has been accounted for
as a purchase of Liberty by TCI utilizing Liberty's historical predecessor
cost.
(2) As of August 8, 1994, TCI, TCIC and TeleCable entered into a definitive
merger agreement (the "TeleCable Merger Agreement") whereby TeleCable was
merged into TCIC on January 26, 1995. The aggregate $1.6 billion purchase
price was satisfied by TCIC's assumption of approximately $300 million of
TeleCable's net liabilities and the issuance to TeleCable's shareholders of
shares of TCI Class A common stock (approximately 42 million shares) and 1
million shares of Series D Preferred Stock with an aggregate initial
liquidation value of $300 million. The Series D Preferred Stock, which
accrues dividends at a rate of 5.5% per annum, is convertible into 10
million shares of TCI Class A common stock. The Series D Preferred Stock
is redeemable at the option of TCI after five years and at the option of
either TCI or the holder after ten years. The amount of net liabilities
assumed by TCIC and the number of shares of TCI Class A common stock issued
to TeleCable's shareholders are subject to closing adjustments.
(3) On April 25, 1995, the Company consummated the Cablevision Acquisition for
an aggregate purchase price of $286 million, before liabilities assumed and
subject to adjustment. The purchase price was paid with cash consideration
of approximately $199 million (including a previously paid $20 million
deposit that is reflected in other assets in the Company's March 31, 1995
historical consolidated balance sheet) and the Company's issuance of
approximately $87 million principal amount of secured negotiable promissory
notes payable (the "Notes") to the selling shareholders. The purchase
price is subject to adjustment upon final determination of the actual
number of Cablevision's equivalent basic subscribers and liabilities at
March 31, 1995. All amounts presented with respect to Cablevision are
stated in U.S. dollars. During the periods covered by the accompanying
condensed pro forma combined financial statements, an exchange rate of one
U.S. dollar to one Argentine peso was maintained by the Argentine
government.
(4) Represents an allocation of the purchase price of Cablevision to its
tangible and intangible assets. The cost allocations were estimated using
information available at the date of preparation of these condensed pro
forma combined financial statements and will be adjusted upon final
appraisal of the assets acquired. Therefore, the actual allocations may
differ from those allocations reflected herein.
(5) Represents the estimated incremental deferred income tax liability
associated with the Cablevision purchase price allocations, as described in
note (4) above. The adjustment assumes a combined federal and state income
tax rate of 35%.
(6) Represents the issuance of the Cablevision Notes in the Cablevision
Acquisition (see note 3).
(7) Represents borrowings by the Company to pay the remaining cash
consideration in the Cablevision Acquisition.
IV-7
<PAGE>
(8) Represents the elimination of Cablevision's historical stockholders'
deficit.
(9) Represents the elimination of intercompany revenue and operating expenses
between TCIC and Liberty arising from the sale of certain cable television
programming to their respective cable television subscribers. See note (1)
above.
(10) Represents depreciation and amortization of TeleCable's and Cablevision's
allocated excess purchase prices based upon weighted average lives to
12-1/2 years for property and equipment and 40 years for franchise costs
for TeleCable and 20 years for franchise costs for Cablevision.
(11) Represents the elimination of interest on intercompany indebtedness between
TCIC and Liberty. See note (1) above.
(12) Represents assumed interest expense incurred by the Company on the
Cablevision Notes, calculated at an assumed interest rate of 7% per annum.
(13) Represents assumed interest expense on the borrowings of $179 million to
pay the remaining cash portion of the Cablevision purchase price and the
interest expense that would have been incurred had the $20 million deposit
on the Cablevision purchase price been paid on January 1, 1994. Such
interest expense was calculated at the Company's weighted average interest
rate of 7.5% for the year ended December 31, 1994.
(14) Representing assumed interest expense on the borrowings of $179 million to
pay the remaining cash portion of the Cablevision purchase price. Such
interest expense was calculated at the Company's weighted average interest
rate of 8.5% for the three months ended March 31, 1995.
(15) Represents additional interest expense on assumed indebtedness of
Cablevision. Interest expense was not reflected in the historical
financial statements as such borrowings were not utilized to support the
assets to be acquired by the Company. Such interest expense was calculated
at the interest rate in effect at March 31, 1995 for such indebtedness
(14.5% per annum) and the interest rate in effect at December 31, 1994 for
such indebtedness (14.4% per annum).
(16) Represents the elimination of TCIC's share of Liberty's historical
earnings.
(17) Reflects the estimated income tax effect of the pro forma adjustments.
(18) Represents the dividend requirements on TCI's Series D Preferred Stock
issued in connection with the TeleCable Merger--see note 2.
(19) Represents the elimination of the preferred stock dividend requirements on
Liberty preferred stock held by TCIC converted into preferred stock of TCI.
(20) Reflects primary and fully diluted earnings per common and common
equivalent share based upon 651,475,966 weighted average shares. Such
amount is calculated utilizing 540,837,355 weighted average shares of TCI
at December 31, 1994 (such amount representing TCI's weighted average
shares, as disclosed in its historical financial statements), adjusted for
the effect of shares issued in the Old TCI/Liberty Combination as if such
transaction had occurred on January 1 and adjusted for the issuance of 42
million shares of TCI Class A common stock issued in connection with the
TeleCable Merger. Shares issuable upon conversion of the Series D
Preferred Stock (see note 2) have not been included in the computation of
weighted average shares outstanding for the year ended December 31, 1994
because their inclusion would be antidilutive.
(21) Reflects loss per common share based upon 634,494,881 weighted average
shares (such amount representing TCI's weighted average shares, as
disclosed in its historical financial statements).
IV-8
<PAGE>
Tele-Communications, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months ended March 31, 1995 and 1994
Material changes in financial condition.
- ---------------------------------------
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "Old TCI") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies (the
"TCI/Liberty Combination"). The transaction was consummated on August 4, 1994
and was structured as a tax free exchange of Class A and Class B shares of both
companies and preferred stock of Liberty for like shares of a newly formed
holding company, TCI/Liberty Holding Company. In connection with the
TCI/Liberty Combination, Old TCI changed its name to TCI Communications, Inc.
("TCIC") and TCI/Liberty Holding Company changed its name to Tele-
Communications, Inc. Old TCI shareholders received one share of TCI for each of
their shares. Liberty common shareholders received 0.975 of a share of TCI for
each of their common shares. Upon consummation of the TCI/Liberty Combination,
certain subsidiaries of TCIC exchanged their shares of Old TCI Class A common
stock for shares of TCI Class A common stock. Additionally, subsidiaries of TCI
exchanged their shares of Liberty Class A common stock for TCI Class A common
stock and Liberty exchanged its shares of Old TCI Class A and Class B common
stock for like shares of TCI common stock. Such ownership is reflected as
treasury stock at such entities' historical cost in the accompanying
consolidated financial statements. Also, subsidiaries of TCI exchanged their
shares of various preferred stock issuances of Liberty for preferred stock of
TCI. Such preferred stock of TCI eliminates in consolidation.
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and other related
party considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the earnings
or losses generated by Liberty (by recognizing 100% of Liberty's earnings or
losses before deducting preferred stock dividends) through the date the
TCI/Liberty Combination was consummated.
The TCI/Liberty Combination was accounted for using predecessor cost
due to the aforementioned related party considerations.
During the fourth quarter of 1994, the Company was reorganized based
upon four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). The Company reorganized its structure to provide for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While
neither the International Cable and Programming unit nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in nature
to warrant separate focus.
IV-9
<PAGE>
The Board of Directors of TCI has adopted a proposal which, if approved by the
stockholders, would authorize the Board to issue a new class of stock ("Liberty
Group Common Stock") which corresponds to TCI's Programming unit ("Liberty Media
Group"). The programming services include the production, acquisition and
distribution of globally branded entertainment, education and information
programming services and software for distribution through all available formats
and media; and home shopping via television and other interactive media, direct
marketing, advertising sales, infomercials and transaction processing. While
the Liberty Group Common Stock would constitute common stock of TCI, it is
intended to reflect the separate performance of such programming services. TCI
intends to distribute to its security holders one hundred percent of the equity
value of TCI attributable to Liberty Media Group.
During 1994, subsidiaries of the Company, Comcast, Cox and Sprint
formed WirelessCo to engage in the business of providing wireless communications
services on a nationwide basis. Through WirelessCo, the partners have been
participating in PCS Auctions of PCS licenses being conducted by the FCC. In
the first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets, including New
York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth, Boston-
Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The aggregate
license cost for these licenses is approximately $2.1 billion.
WirelessCo has also invested in APC, which holds a PCS license granted
under the FCC's pioneer preference program for the Washington-Baltimore market.
WirelessCo acquired its 49% limited partnership interest in APC for $23 million
and has agreed to make capital contributions to APC equal to 49/51 of the cost
of APC's PCS license. Additional capital contributions may be required in the
event APC is unable to finance the full cost of its PCS license. WirelessCo may
also be required to finance the build-out expenditures for APC's PCS system.
Cox, which holds a pioneer preference PCS license for the Los Angeles-San Diego
market, and WirelessCo have also agreed on the general terms and conditions upon
which Cox (with a 60% interest) and WirelessCo (with a 40% interest) would form
a partnership to hold and develop a PCS system using the Los Angeles-San Diego
license. APC and the Cox partnership would affiliate their PCS systems with
WirelessCo and be part of WirelessCo's nationwide integrated network, offering
wireless communications services under the "Sprint" brand. The Company owns a
30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed
PhillieCo, in which the Company owns a 35.3% interest. PhillieCo was the
winning bidder in the first round auction for a PCS license for the Philadelphia
market at a license cost of $85 million. To the extent permitted by law, the
PCS system to be constructed by PhillieCo would also be affiliated with
WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial. The Company anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
IV-10
<PAGE>
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, to which they contributed their respective interests in
WirelessCo and through which they formed another partnership, NewTelco, to
engage in the business of providing local wireline communications services to
residences and businesses on a nationwide basis. NewTelco will serve its
customers primarily through the cable television facilities of cable television
operators that affiliate with NewTelco in exchange for agreed-upon compensation.
The modification of existing regulations and laws governing the local telephony
market will be necessary in order for NewTelco to provide its proposed services
on a competitive basis in most states. Subject to agreement upon a schedule for
upgrading its cable television facilities in selected markets and certain other
matters, the Company has agreed to affiliate certain of its cable systems with
NewTelco. The capital required for the upgrade of the Company's cable
facilities for the provision of telephony services is expected to be
substantial.
Subsidiaries of the Company, Cox and Comcast, together with
Continental, own Teleport Communications Group, Inc. and TCG Partners, which is
one of the largest competitive access providers in the United States in terms of
route miles. The Company, Cox and Comcast have entered into an agreement with
MajorCo and NewTelco to contribute their interests in TCG and its affiliated
entities to NewTelco. The Company currently owns an approximate 29.9% interest
in TCG. The closing of this contribution is subject to the satisfaction of
certain conditions, including the receipt of necessary regulatory and other
consents and approvals. In addition, the Company, Comcast and Cox intend to
negotiate with Continental, which owns a 20% interest in TCG, regarding their
acquisition of Continental's TCG interest. If such agreement cannot be reached,
they will need to obtain Continental's consent to certain aspects of their
agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo
partners have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which amount
includes the approximately $500 million already contributed by the partners to
WirelessCo. The partners intend for MajorCo and its subsidiary partnerships to
be the exclusive vehicles through which they engage in the wireless and wireline
telephony service businesses, subject to certain exceptions.
At March 31, 1995, the Company was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. The Company pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. During the first quarter of
1995, an initial borrowing aggregating $95 million was made pursuant to the
letter of credit. Subsequent to March 31, 1995, 19,638,508 shares of TCI Class
A common stock held by subsidiaries of the Company were pledged as additional
collateral for the letter of credit.
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI,
and TeleCable consummated the TeleCable Merger. The aggregate $1.6 billion
purchase price was satisfied by TCIC's assumption of approximately $300 million
of TeleCable's net liabilities and the issuance to TeleCable's shareholders of
approximately 42 million shares of TCI Class A common stock and 1 million shares
of the Series D Preferred Stock with an aggregate initial liquidation value of
$300 million. The Series D Preferred Stock, which accrues dividends at a rate
of 5.5% per annum, is convertible into 10 million shares of TCI Class A common
stock. The Series D
IV-11
<PAGE>
Preferred Stock is redeemable for cash at the option of TCI after five years and
at the option of either TCI or the holder after ten years. The amount of net
liabilities assumed by TCIC and the number of shares of TCI Class A common stock
issued to TeleCable's shareholders are subject to post-closing adjustments.
Pursuant to the QVC Merger Agreement, the Purchaser, a corporation
which is jointly owned by Comcast and Liberty, commenced the QVC Tender Offer to
purchase all outstanding shares of common stock and preferred stock of QVC.
The QVC Tender Offer expired at midnight, New York City time, on
February 9, 1995, at which time the Purchaser accepted for payment all shares of
QVC which had been tendered in the QVC Tender Offer. Following consummation of
the QVC Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC.
In connection with the financing of the QVC merger, the Purchaser
entered into a credit facility. The credit facility is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty have pledged their
shares of QVC (as the surviving corporation following the QVC merger) pursuant
to the credit facility. Neither Liberty nor Comcast has provided any guarantees
of the credit facility.
In connection with the transactions contemplated under a stockholders
agreement entered into among Comcast, Liberty and the Purchaser, TCI has
undertaken to cause Liberty to comply with each of its representations,
warranties, covenants, agreements and obligations under the stockholders
agreement. All such undertakings will terminate at such time as equity
securities of Liberty or the Liberty Group Common Stock have been distributed
and such securities impute a market capitalization of Liberty in excess of $2
billion.
Upon consummation of the aforementioned QVC transactions, the Company
is deemed to exercise significant influence over QVC and, as such, adopted the
equity method of accounting. As a result, TCI restated its investment in QVC,
its unrealized gain on available-for-sale securities, its deferred taxes and
retained earnings by $211 million, $127 million, $89 million and $5 million,
respectively, at December 31, 1994. No restatement to the Company's results of
operations for the three months ended March 31, 1994 was required as QVC was
only accounted for under the cost method from May of 1994 through February 9,
1995.
Pursuant to an underwritten public offering, the Company sold
19,550,000 shares of TCI Class A common stock in February of 1995. The Company
received net proceeds of approximately $401 million. Such proceeds were
immediately used to reduce outstanding indebtedness under credit facilities.
The Company's assets consist primarily of investments in its
subsidiaries. The Company's rights, and therefore the extent to which the
holders of the Company's preferred stocks will be able to participate in the
distribution of assets of any subsidiary upon the latter's liquidation or
reorganization, will be subject to prior claims of the subsidiary's creditors,
including trade creditors, except to the extent that the Company may itself be a
creditor with recognized claims against such subsidiary (in which case the
claims of the Company would still be subject to the
IV-12
<PAGE>
prior claims of any secured creditor of such subsidiary and of any holder of
indebtedness of such subsidiary that is senior to that held by the Company).
The Company's ability to pay dividends on any classes or series of
preferred stock is dependent upon the ability of the Company's subsidiaries to
distribute amounts to the Company in the form of dividends, loans or advances or
in the form of repayment of loans and advances from the Company. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay the dividends on any class or series of
preferred stock of TCI or to make any funds available therefor, whether by
dividends, loans or their payments. The payment of dividends, loans or advances
to the Company by its subsidiaries may be subject to statutory or regulatory
restrictions, is contingent upon the cash flows generated by those subsidiaries
and is subject to various business considerations. Further, certain of the
Company's subsidiaries are subject to loan agreements that prohibit or limit the
transfer of funds by such subsidiaries to the Company in the form of dividends,
loans, or advances and require that such subsidiaries' indebtedness to the
Company be subordinate to the indebtedness under such loan agreements. The
amount of net assets of subsidiaries subject to such restrictions exceeds the
Company's consolidated net assets. The Company's subsidiaries currently have
the ability to transfer funds to the Company in amounts exceeding the Company's
dividend requirement on any class or series of preferred stock. Net cash
provided by operating activities of subsidiaries which are not restricted from
making transfers to the parent company have been and are expected to continue to
be sufficient to enable the parent company to meet its cash obligations.
Subsidiaries of the Company had approximately $2.5 billion in unused
lines of credit at March 31, 1995, excluding amounts related to lines of credit
which provide availability to support commercial paper. Although such
subsidiaries of the Company were in compliance with the restrictive covenants
contained in their credit facilities at said date, additional borrowings under
the credit facilities are subject to the subsidiaries' continuing compliance
with the restrictive covenants (which relate primarily to the maintenance of
certain ratios of cash flow to total debt and cash flow to debt service, as
defined in the credit facilities) after giving effect to such additional
borrowings. See note 7 to the accompanying consolidated financial statements for
additional information regarding the material terms of the subsidiaries' lines
of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges)($464 million and $450 million for the three months
ended March 31, 1995 and 1994, respectively) to interest expense ($240 million
and $178 million for the three months ended March 31, 1995 and 1994,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 193% and 253% for the
three months ended March 31, 1995 and 1994, respectively. Management of the
Company believes that the foregoing interest coverage ratio is adequate in light
of the consistency and nonseasonal nature of its cable television operations and
the relative predictability of the Company's interest expense, almost half of
which results from fixed rate indebtedness. Operating Cash Flow is a measure of
value and borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flows provided by operating activities, a
measure of performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
IV-13
<PAGE>
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($198 million and $326 million
for the three months ended March 31, 1995 and 1994, respectively) reflects net
cash from the operations of the Company available for the Company's liquidity
needs after taking into consideration the aforementioned additional substantial
costs of doing business not reflected in Operating Cash Flow. Amounts expended
by the Company for its investing activities exceed net cash provided by
operating activities. However, management believes that net cash provided by
operating activities, the ability of the Company and its subsidiaries to obtain
additional financing (including the subsidiaries available lines of credit and
access to public debt markets), issuances and sales of the Company's equity or
equity of its subsidiaries, proceeds from disposition of assets will provide
adequate sources of short-term and long-term liquidity in the future. See the
Company's consolidated statements of cash flows included in the accompanying
consolidated financial statements.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the Company pays (i) fixed interest rates ranging from 7.2%
to 9.9% on notional amounts of $550 million at March 31, 1995 and (ii) variable
interest rates on notional amounts of $2,605 million at March 31, 1995. During
the three months ended March 31, 1995 and 1994, the Company's net receipts
pursuant to its fixed rate exchange agreements were $5.1 million and $2.1
million, respectively. During the three months ended March 31, 1995 and 1994,
the Company's net receipts pursuant to its variable rate exchange agreements
were $1.4 million and $19.6 million, respectively. The Company's interest rate
hedge agreements fix the maximum variable interest rates on notional amounts of
$325 million at 11%. The Company is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
Approximately thirty-five percent of the franchises held by the
Company, involving approximately 3.8 million basic subscribers, expire within
five years. There can be no assurance that the franchises for the Company's
systems will be renewed as they expire although the Company believes that its
cable television systems generally have been operated in a manner which
satisfies the standards established by the Cable Communications Policy Act of
1984 (the "1984 Cable Act"), as supplemented by the renewal provisions of the
1992 Cable Act, for franchise renewal. However, in the event they are renewed,
the Company cannot predict the impact of any new or different conditions that
might be imposed by the franchising authorities in connection with the renewals.
To date they have not varied significantly from the original terms.
The Company competes with operators who provide, via alternative
methods of distribution, the same or similar video programming as that offered
by the Company's cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC. One such technology is direct
broadcast satellite ("DBS"). DBS services are offered directly to subscribers
owning home satellite dishes that vary in size depending upon the power of the
satellite; two DBS operators recently began offering nationwide video services
that can be received by a satellite that measures approximately eighteen inches
in diameter. DBS operators
IV-14
<PAGE>
can acquire the right to distribute over satellite all of the significant cable
television programming currently available on the Company's cable systems. As
the cost of equipment needed to receive these transmissions declines, the
Company expects that it will experience increased and substantial competition
from DBS operators.
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions are
removed or relaxed, the Company will face increased competition from telephone
companies which, in most cases, have greater financial resources than the
Company. All major telephone companies have announced plans to acquire cable
television systems or provide video services to the home through fiber optic
technology.
The Company's entertainment and information programming services
subsidiaries and 50% owned affiliates lease satellite transponders as follows:
6 full time leases and one shared lease on a "protected" or "transponder
protected" basis, and 15 full time "unprotected" leases for an aggregate of 21
transponders on 10 domestic and 2 international communications satellites.
Domestic communications satellite transponders may be leased full or part time
on a "protected", "transponder protected" or "unprotected" basis. When the
carrier provides services to a customer on a "protected" basis, replacement
transponders are reserved on board the satellite for use in the event the
"protected" transponder fails. Should there be no reserve transponders
available, the "protected" customer will displace an "unprotected" transponder
customer on the same satellite. In certain cases, the carrier also maintains a
protection satellite and should a satellite fail completely, all lessors'
"protected" transponders would be moved to the protection satellite. The
customer who leases an "unprotected" transponder has no reserve transponders
available, and may have its service interrupted for an indefinite period when
its transponder is required to restore a "protected" service.
Although the Company believes it has taken reasonable steps to ensure
its continued satellite transmission capability, there can be no assurance that
termination or interruption of satellite transmissions will not occur. Such a
termination or interruption of service by one or more of these satellites could
have a material adverse effect on the results of operations and financial
condition of the programming group.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which the Company has no
control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites. Many of the commercial satellites now in orbit will have
to be replaced in the next few years. The federal government has placed
restrictions on the launching of commercial satellites by means of the space
shuttle, causing manufacturers of commercial satellites to rely on alternative
delivery systems to place these satellites in orbit. Additional commercial
launching facilities are being developed currently, but there can be no
assurance that the launch systems currently in place, or to be developed, will
be able to replace the domestic communications satellites as their useful lives
end.
IV-15
<PAGE>
The Company is currently the sole satellite carrier of WTBS, a 24-
hour independent UHF television station originated by TBS to cable television
system operators and operators of other non-broadcast distribution media who
receive the signal on their earth stations and offer the service to their
subscribers. Other independent television stations are transmitted by other
carriers. The Company's satellite carrier of WTBS, Southern Satellite Systems,
Inc. ("Southern"), does not have an agreement with TBS with respect to the
retransmission of the WTBS signal and there are no specific statutory or
regulatory restrictions that would prevent any satellite carrier from
transmitting the WTBS signal so long as the carrier meets the passive carrier
requirements of the Copyright Revision Act of 1976, as amended and any
applicable requirements of the Communications Act of 1934, as amended, or, if
the carrier serves home satellite dish owners, so long as the carrier meets the
requirements of the Satellite Home Viewer Act of 1988. Further, Southern has no
control over the programming on such station. TBS produces and distributes other
cable programming services, and TBS has and may be expected to continue to give
priority to the programming needs of such services in allocating programming
owned by it or to which it has national distribution rights. Southern's business
could be adversely affected by any change in the type, mix or quality of the
programming on WTBS that results in the service being less desirable to cable
operators and their subscribers. TBS derives significant revenue from the sale
of advertising time on WTBS, however, and the Company therefore believes that
TBS has an economic incentive to maintain the audience appeal of WTBS's
programming.
The Company is upgrading and installing optical fiber in its cable
systems at a rate such that in two years TCI anticipates that it will be serving
the majority of its customers with state-of-the-art fiber optic cable systems.
The Company made capital expenditures of $1,264 million in 1994 and the Company
expects to expend similar amounts in 1995, among other things, to provide for
the continued rebuilding of its cable systems. However, such proposed
expenditures are subject to reevaluation based upon changes in the Company's
liquidity, including those resulting from rate regulation.
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 aggregate minimum liability under
certain of the license agreements is approximately $387 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 also has guaranteed the obligation of an Australian
affiliate to pay similar fees for the license to exhibit certain films through
the year 2000. If the Company failed to fulfill its obligation under this
guarantee, the beneficiaries have the right to demand an aggregate payment from
the Company of $67 million. Although the aggregate amount of the Australian
affiliate's film license fee obligations is not currently estimable, the Company
believes that the aggregate payments pursuant to such affiliate's obligation
could be significant.
The Company has committed to provide additional debt or equity funding
to certain of its affiliates. At March 31, 1995, such commitments aggregated
$174 million.
IV-16
<PAGE>
The Company also intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. The Company's obligation for certain
sports program rights contracts as of March 31, 1995 was $214 million. It is
expected that sufficient cash will be generated by the programming services to
satisfy these commitments. However, the continued development of such services
may require additional financing and it cannot be predicted whether the Company
will obtain such financing on terms acceptable to the Company.
The Company believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Generally, any
refunds of the excess portion of all other Regulated Services rates would be
retroactive to the later of September 1, 1993, or one year prior to the
implementation of the rate reduction. The amount of refunds, if any, which could
be payable by the Company in the event that any system's rates were to be
successfully challenged, is not considered to be material.
The Company believes that the FCC's comprehensive system of rate
regulation, including regulation of the changes in rates when programming
services are added or deleted from service tiers, also may have an adverse
effect on the programming services in which the Company has an ownership
interest by limiting the carriage of such services and/or the ability and
willingness of cable operators to pay the rights fees for such carriage.
The FCC has adopted rules providing for mandatory carriage by cable
systems after September 1, 1993 of all local full-power commercial television
broadcast signals (up to one-third of all channels), including the signals of
stations carrying home-shopping programming after October 6, 1993, and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals. Alternatively, after October 6, 1993, commercial broadcasters
have the right to deny such carriage unless they grant retransmission consent.
The "must-carry" statutory provisions and regulations remain in effect pending
the outcome of ongoing judicial proceedings to resolve challenges to their
constitutionality. TCI believes that, by requiring such carriage of broadcast
signals, these regulations may adversely affect the ability of TCI's programming
services to obtain carriage on cable systems with limited channel capacity. To
the extent that carriage is thereby limited, the subscriber and advertising
revenues available to TCI's programming services also will be limited. However,
as discussed above, such regulations have resulted in expanded cable
distribution of Home Shopping Network, Inc. ("HSN"), which is carried by a
number of full-power commercial broadcast television stations.
IV-17
<PAGE>
The FCC has adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels or
a 45 percent limit, whichever is greater, provided that the additional channels
carry minority controlled programming services. The regulations grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services. These rules, which currently
are subject to pending petitions for reconsideration before the FCC, may limit
carriage of the Company's programming services on certain cable systems of cable
operators in which TCI has ownership interests.
On September 23, 1993, the FCC also adopted regulations establishing a
30% limit on the number of homes passed nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. Under the FCC regulations, if the ownership limits are determined to be
constitutional, they may limit TCI's future ability to acquire interests in
additional cable systems.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. The Company is uncertain how the courts and/or the FCC
ultimately will rule or whether such rulings will materially change any existing
rules or statutory requirements.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
Material changes in results of operations.
- -----------------------------------------
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such actions,
the Company's Regulated Services are subject to the jurisdiction of local
franchising authorities and the FCC.
The Company estimates that the FCC's 1993 and 1994 rate regulations
will result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such rate regulations. The estimated annualized reduction in
revenue assumes that the FCC will not require further
IV-18
<PAGE>
reductions beyond the current regulations and is prior to any possible
mitigating factors (none of which is assured) such as (i) the provision of
alternate service offerings (ii) the implementation of rate adjustments to non-
regulated services and (iii) the utilization of cost-of-service methodologies,
as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a cost-of-
service showing. Under this methodology, cable operators may be allowed to
recover through the rates they charge for Regulated Services, their normal
operating expenses plus an interim rate of return of 11.25% on the rate base, as
defined, which rate may be subject to change in the future.
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. Such regulations allow an increase of either (i) the sum of a
prescribed channel addition factor, the license fee expense and a 7.5% markup,
or (ii) a flat fee increase per added channel and an aggregate limit on such
increases with an additional license fee reserve. For systems with more than one
tier of cable service, the methodology described in (ii) is not available for
the basic level of service. The FCC's rate regulations also permit cable
operators to "pass through" increases in programming costs and certain other
external costs which exceed the rate of inflation. However, a cable operator may
pass through increases in the cost of programming services affiliated with such
cable operator to the extent such costs exceed the rate of inflation only if the
price charged by the programmer to the affiliated cable operator reflects
prevailing prices offered in the marketplace by the programmer to unaffiliated
third parties or the fair market value of the programming.
The Company believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions. The amount of refunds,
if any, which could be payable by the Company in the event that any system's
rates were to be successfully challenged, is not considered to be material.
Based on the foregoing, the Company believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect on
its results of operations.
Revenue increased by approximately 44% for the three months ended
March 31, 1995 compared to the corresponding period of 1994. Such increase was
the result of the TCI/Liberty Combination (34%), the growth in subscriber levels
within the Company's cable television systems (5%) and the effect of certain
acquisitions, including TeleCable (9%), net of a decrease in revenue (4%) due to
rate reductions required by rate regulation implemented pursuant to the 1992
Cable Act.
Net sales from home shopping services reflects the results of HSN
which became a consolidated subsidiary of the Company in the TCI/Liberty
Combination. Net sales from HSN
IV-19
<PAGE>
represented $244 million or 23% of the increase in revenue from the TCI/Liberty
Combination. HSN believes that future levels of net sales will be dependent, in
large part, on program carriage, market penetration and merchandising
management. Program carriage is defined as the number of cable systems and
broadcast television stations that carry HSN programming. Market penetration
represents the level of active purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSN programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSN programming while evaluating the
expected profitability of each contract.
Revenue of TCI's consolidated entertainment and information
programming services ("Other Programming Services") represented $66 million or
6% of the increase in revenue from the TCI/Liberty Combination. Such increase in
revenue, compared to the corresponding period of 1994, was attributable to
subscription and advertising revenue at TCI's consolidated sports programming
businesses ($47 million), revenue from Netlink, USA, a marketer and distributor
of programming to the United States home satellite dish subscriber market ($5
million) and subscription revenue generated by Southern and Encore Media
Corporation ($14 million). The remainder of the increase in revenue from the
TCI/Liberty Combination is due primarily to revenue generated by the cable
television systems which were acquired in the combination.
The 1992 Cable Act contains "must carry" provisions which mandate that
cable companies within a broadcast television station's reach retransmit its
signal, subject to certain limitations on this obligation depending upon a cable
system's channel capacity. The FCC adopted rules which extend such "must carry"
provisions to broadcast television stations with shop-at-home formats effective
October 6, 1993. As a result of the mandatory carriage of stations carrying
home-shopping programming, HSN has experienced growth in cable carriage.
However, the constitutionality of the "must carry" provisions of the 1992 Cable
Act has been challenged in the courts. Although the "must carry" provisions
were upheld as constitutional by a three-judge panel of the United States
District Court for the District of Columbia, the Supreme Court vacated the
District Court's decision because genuine issues of material fact remain
unresolved. The "must-carry" statutory provisions and regulations remain in
effect pending the outcome of the ongoing proceedings before the District Court.
During the past year, HSN has aggressively pursued and obtained long term
carriage commitments from a number of cable operators. As a result of HSN's
success in obtaining such commitments, the exposure to loss of revenue should
the "must-carry" rules be declared unconstitutional has been largely
mitigated.
Operating costs and expenses have increased by 63% for the three
months ended March 31, 1995 compared to the corresponding period of 1994. The
TCI/Liberty Combination resulted in an increase of $424 million or 51% in
operating, selling, general and administrative expenses. Due to the
aforementioned program to upgrade and install optical fiber in its cable
systems, the Company's capital expenditures and depreciation expense have
increased. The Company cannot determine whether and to what extent increases in
the cost of programming will affect its operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue of Regulated Services.
IV-20
<PAGE>
Cost of sales of HSN represented $187 million or 23% of the increase
resulting from the TCI/Liberty Combination. HSN expects that certain of its
costs will increase in the future. Management believes that selling and
marketing expenses will be at higher levels in future periods as HSN maintains
its efforts to increase the number of cable systems carrying HSC programming,
increase market penetration and develop new electronic opportunities. In
addition, these expenses will increase if program carriage increases. Broadcast
expenses are expected to increase in future periods. "Must carry" legislation,
as discussed above, is expected to result in increases in certain operating
expenses related to cable and broadcast carriage in dollars. However, as a
percentage of sales, the effect is not currently determinable.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
Programming expenses represented $65 million or 8% of total operating
expenses (excluding cost of sales). Additionally, the Company incurred $11
million of programming and marketing costs associated with the launch in
February of 1994 of a new premium programming service to its subscribers. The
Company's Other Programming Services will continue to reflect losses associated
with the new premium service as the Company's programming costs are reflected in
the operations of the Programming group and the revenue from the subscribers of
such service are reflected in the Company's Domestic Cable and Communications
group. However, although there can be no assurance, as the Domestic Cable and
Communications group increases its distribution of this service to its
subscribers, management of the Company believes that the consolidated impact
from such premium service should be positive.
The Company has an ownership interest of approximately 38% in TeleWest
Communications plc ("TeleWest Communications"), a company that is currently
operating and constructing cable television and telephone systems in the United
Kingdom ("UK"). TeleWest Communications, which is accounted for under the
equity method, had a carrying value at March 31, 1995 of $462 million and
comprised $11 million of the Company's share of its affiliates' losses during
the three months ended March 31, 1995. In addition, the Company has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments had a carrying value of $164 million at March 31, 1995 and accounted
for $8 million of the Company's share of its affiliates' losses in 1995.
TeleWest Communications, which is currently constructing broadband
cable television and telephony networks in the UK, has incurred net losses since
its inception. At December 31, 1994, TeleWest Communications had completed
approximately 37% of its network construction and, it is expected that TeleWest
Communications' network construction will be substantially complete within the
next five years. Although there is no assurance, the Company believes (i) that
the continued expansion of TeleWest Communications' networks ultimately will
provide TeleWest Communications with a revenue base that will exceed its
expenses, (ii) that TeleWest Communications' present and future sources of
liquidity (including the (Pounds)401.3 million ($630.0 million using the
November 23, 1994 exchange rate) of net proceeds from TeleWest Communications'
November 23, 1994 initial public offering and certain bank credit facilities)
will be sufficient to meet TeleWest Communications' liquidity requirements. The
Company has no present intention to make significant loans to or investments in
TeleWest Communications.
IV-21
<PAGE>
In connection with its investments in the above-described foreign
entities, the Company is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar against the UK pound sterling ("(Pounds)"), the
Japanese yen ("(Yen)"), and various other foreign currencies that are the
functional currencies of the Company's foreign subsidiaries and affiliates. Any
increase (decrease) in the value of the U.S. dollar against any foreign currency
that is the functional currency of an operating subsidiary or affiliate of
International will cause the Company to experience unrealized foreign currency
translation losses (gains) with respect to amounts already invested in such
foreign currencies. The Company is also exposed to foreign currency risk to the
extent that the Company or its foreign subsidiaries and affiliates enter into
transactions denominated in currencies other than their respective functional
currencies. Because the Company generally views its foreign operating
subsidiaries and affiliates as long-term investments, the Company generally does
not attempt to hedge existing investments in its foreign affiliates and
subsidiaries. With respect to funding commitments that are denominated in
currencies other than the U.S. dollar, the Company historically has sought to
reduce its exposure to short-term (generally no more than 90 days) movements in
the applicable exchange rates once the timing and amount of such funding
commitments becomes fixed. Although the Company monitors foreign currency
exchange rates with the objective of mitigating its exposure to unfavorable
fluctuations in such rates, the Company believes that it is not possible or
practical to completely eliminate the Company's exposure to unfavorable
fluctuations in foreign currency exchange rates.
The Company's net loss (before preferred stock dividends) of $45
million for the three months ended March 31, 1995 represented a decrease of $77
million as compared to the Company's net earnings of $32 million for the
corresponding period of 1994. Such decrease is principally the result of the
effect of the aforementioned reduction in rates charged for Regulated Services,
operating losses incurred by certain programming services including the new
premium programming service launched in 1994, an increase in interest expense
due to an increase in interest rates, net of the increase in operating income
from the acquisition of TeleCable.
IV-22
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994*
--------- -------------
amount in millions
<S> <C> <C>
Assets
- ------
Cash $ 56 74
Trade and other receivables, net 293 301
Inventories, net 112 121
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 1,484 1,285
Investment in Turner Broadcasting
System, Inc.
("TBS") (note 5) 701 660
Property and equipment, at cost:
Land 91 91
Distribution systems 8,652 7,705
Support equipment and buildings 1,164 1,085
Computer and broadcast equipment 61 61
------- ------
9,968 8,942
Less accumulated depreciation 3,264 3,066
------- ------
6,704 5,876
------- ------
Franchise costs 13,150 11,152
Less accumulated amortization 1,779 1,708
------- ------
11,371 9,444
------- ------
Other assets, at cost, net of
amortization 1,733 1,556
------- ------
$22,454 19,317
======= ======
</TABLE>
* Restated - see note 4.
(continued)
IV-23
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994 *
---------- -------------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 311 201
Accrued interest 152 183
Other accrued expenses 701 809
Debt (note 7) 11,371 11,162
Deferred income taxes 4,397 3,524
Other liabilities 183 160
------- ------
Total liabilities 17,115 16,039
------- ------
Minority interests in equity
of consolidated subsidiaries 373 429
Redeemable preferred stock (note 8) 303 --
Stockholders' equity (note 9):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Convertible Preferred Stock, Series C,
$.01 par value -- --
Class A common stock, $1 par value
Authorized 1,100,000,000 shares;
issued 659,323,499 shares in 1995
and 576,979,498 shares in 1994 659 577
Class B common stock, $1 par value
Authorized 150,000,000 shares;
issued 89,037,429 shares in 1995
and 89,287,429 shares in 1994 89 89
Additional paid-in capital 4,687 2,959
Cumulative foreign currency
translation adjustment
Unrealized holding gains for
available-for-sale securities 160 126
Accumulated deficit (333) (288)
------- ------
5,283 3,459
Treasury stock, at cost (86,030,994
and 86,030,992 shares of Class A
common stock in 1995 and 1994 and
4,172,629 shares of Class B common
stock in 1995 and 1994) (620) (610)
------- ------
Total stockholders' equity 4,663 2,849
------- ------
Commitments and contingencies (note 10)
$22,454 19,317
======= ======
</TABLE>
* Restated - see note 4.
See accompanying notes to consolidated financial statements.
IV-24
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months
ended
March 31,
---------
1995 1994
-------- --------
amount in millions,
except per share amounts
<S> <C> <C>
Revenue:
From cable and programming services $1,281 1,060
Net sales from home shopping services 243 --
------ -----
1,524 1,060
------ -----
Operating costs and expenses:
Operating 465 315
Cost of sales 161 --
Selling, general and administrative 434 295
Adjustment to compensation relating
to stock appreciation rights (3) (19)
Depreciation 201 163
Amortization 86 72
------ -----
1,344 826
------ -----
Operating income 180 234
Other income (expense):
Interest expense (240) (178)
Interest and dividend income 7 10
Share of earnings of Liberty Media
Corporation ("Liberty") -- 14
Share of losses of other affiliates,
net (note 4) (29) (9)
Gain on disposition of assets 8 --
Loss on early extinguishment of debt -- (2)
Minority interests in losses
(earnings) of consolidated
subsidiaries, net 11 (2)
Other, net (1) (4)
------ -----
(244) (171)
------ -----
Earnings (loss) before income taxes (64) 63
Income tax benefit (expense) 19 (31)
------ -----
Net earnings (loss) (45) 32
Dividend requirements on preferred stocks (8) --
------ -----
Net earnings (loss) attributable
to common shareholders $ (53) 32
====== =====
Primary and fully diluted earnings (loss)
attributable to common shareholders
per common and common equivalent
share (note 2) $(.08) .07
====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
IV-25
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Cumulative holding
foreign gains for
Class B Series C Common Stock Additional currency available-
Preferred Preferred --------------- paid-in translation for-sale Accumulated
Stock Stock Class A Class B capital adjustment securities* deficit*
--------- --------- ------- ------- ----------- ------------ ----------- ------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- -- 577 89 2,959 (4) 126 (288)
Net loss -- -- -- -- -- -- -- (45)
Issuance of common
stock in public offering -- -- 20 -- 381 -- -- --
Issuance of common
stock in private offering -- -- 1 -- 28 -- -- --
Issuance of common
stock for acquisitions and
investments (note 6) -- -- 61 -- 1,324 -- -- --
Issuance of Class A
common stock to subsidiary
of TCI in Reorganization -- -- -- -- 10 -- -- --
Accreted dividends on
all classes of preferred
stock -- -- -- -- (8) -- -- --
Accreted dividends on
all classes of preferred
stock not subject to
mandatory redemption
requirements -- -- -- -- 5 -- -- --
Payment of preferred
stock dividends -- -- -- -- (12) -- -- --
Foreign currency translation
adjustment -- -- -- -- -- 25 -- --
Change in unrealized holding
gains for available-for-sale
securities -- -- -- -- -- -- 34 --
-------- ------ ---- ---- ------- ------- ------ -----
Balance at March 31, 1995 $ -- -- 659 89 4,687 21 160 (333)
======== ====== ==== ==== ======= ======= ====== =====
<CAPTION>
Total
Treasury stockholders'
stock equity
--------- --------------
<S> <C> <C>
Balance at January 1, 1995 (610) 2,849
Net loss -- (45)
Issuance of common
stock in public offering -- 401
Issuance of common
stock in private offering -- 29
Issuance of common
stock for acquisitions and
investments (note 6) -- 1,385
Issuance of Class A
common stock to subsidiary
of TCI in Reorganization (10) --
Accreted dividends on
all classes of preferred
stock -- (8)
Accreted dividends on
all classes of preferred
stock not subject to
mandatory redemption
requirements -- 5
Payment of preferred
stock dividends -- (12)
Foreign currency translation
adjustment -- 25
Change in unrealized holding
gains for available-for-sale
securities -- 34
-------- -----
Balance at March 31, 1995 ( 620) 4,663
======== =====
</TABLE>
* Restated - see note 4.
See accompanying notes to consolidated financial statements.
IV-26
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994*
----------- -------------
amount in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (45) 32
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 287 235
Adjustment to compensation relating to
stock appreciation rights (3) (19)
Share of earnings of Liberty -- (14)
Share of losses of other affiliates 29 9
Deferred income tax expense (benefit) (20) 13
Minority interests in earnings (losses) (11) 2
Loss on early extinguishment of debt -- 2
Gain on disposition of assets (8) --
Noncash interest and dividend income (2) (2)
Other noncash charges 1 1
Changes in operating assets and
liabilities, net of the effect of
acquisitions:
Change in receivables 19 7
Change in inventories 9 --
Change in accrued interest (35) (26)
Change in other accruals and
payables (23) 86
------- ------
Net cash provided by operating
activities 198 326
------- ------
Cash flows from investing activities:
Cash paid for acquisitions (21) (10)
Capital expended for property and equipment (346) (243)
Proceeds from disposition of assets 13 8
Additional investments in and
loans to affiliates and others (224) (97)
Repayment of loans by affiliates and others 6 31
Return of capital from affiliates 8 --
Other investing activities (75) (71)
------- ------
Net cash used in investing
activities (639) (382)
------- ------
Cash flows from financing activities:
Borrowings of debt 1,064 1,296
Repayments of debt (1,059) (1,188)
Preferred stock dividends of subsidiaries -- (2)
Preferred stock dividends (12) --
Issuance of common stock 430 --
------- ------
Net cash provided by financing
activities 423 106
------- ------
Net increase (decrease) in cash (18) 50
Cash at beginning of period 74 1
------- ------
Cash at end of period $ 56 51
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
IV-27
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1995
(unaudited)
(1) General
-------
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. and those of all majority-owned subsidiaries
("TCI" or the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in TCI's Annual Report on
Form 10-K, as amended, for the year ended December 31, 1994.
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated
on August 4, 1994 and was structured as a tax free exchange of Class A and
Class B shares of both companies and preferred stock of Liberty for like
shares of a newly formed holding company, TCI/Liberty Holding Company. In
connection with the TCI/Liberty Combination, Old TCI changed its name to
TCI Communications, Inc. ("TCIC") and TCI/Liberty Holding Company changed
its name to Tele-Communications, Inc. Old TCI shareholders received one
share of TCI for each of their shares. Liberty common shareholders
received 0.975 of a share of TCI for each of their common shares. Upon
consummation of the TCI/Liberty Combination, certain subsidiaries of TCIC
exchanged their shares of Old TCI Class A common stock for shares of TCI
Class A common stock. Additionally, subsidiaries of TCI exchanged their
shares of Liberty Class A common stock for TCI Class A common stock and
Liberty exchanged its shares of Old TCI Class A and Class B common stock
for like shares of TCI common stock. Such ownership is reflected as
treasury stock at such entities' historical cost in the accompanying
consolidated financial statements. Also, subsidiaries of TCI exchanged
their shares of various preferred stock issuances of Liberty for preferred
stock of TCI. Such preferred stock of TCI eliminates in consolidation.
Due to the significant economic interest held by TCIC through its ownership
of Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the
earnings or losses generated by Liberty (by recognizing 100% of Liberty's
earnings or losses before deducting preferred stock dividends) through the
date the TCI/Liberty Combination was consummated.
IV-28
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the fourth quarter of 1994, the Company was reorganized based upon
four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. In the first quarter
of 1995, TCIC transferred additional assets to the International Cable and
Programming unit.
Certain amounts have been reclassified for comparability with the 1995
presentation.
(2) Earnings (Loss) 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 for the three months ended
March 31, 1994).
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 for the three months ended
March 31, 1994).
The loss per common share for March 31, 1995 was computed by dividing net
loss by the weighted average number of common shares outstanding during the
period (634.5 million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their inclusion
would be anti-dilutive.
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $275 million and $204 million for the three
months ended March 31, 1995 and 1994, respectively. Also, during these
periods, cash paid for income taxes was not material.
IV-29
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1995 1994
---- ----
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 2,791 10
Liabilities assumed (279) --
Deferred tax liability recorded
in acquisitions (875) --
Minority interests in equity of
acquired entities (4) --
Common stock issued in acquisitions (1,312) --
Redeemable preferred stock issued --
in acquisition (300) --
------- ---
Cash paid for acquisitions $ 21 10
======= ===
Conversion of debt into additional minority
interest in consolidated subsidiary $ 14 --
======= ===
Common stock issued to subsidiaries in
Reorganization reflected as
treasury stock $ 10 --
======= ===
Common stock issued in exchange for
interest in consolidated subsidiary $ 73 --
======= ===
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 25 1
======= ===
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities $ 34 113
======= ===
Unrealized gains, net of deferred taxes,
on available-for-sale securities
as of January 1, 1994 $ -- 304
======= ===
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
======= ===
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
======= ===
Accrued preferred stock dividends $ 3 --
======= ===
</TABLE>
IV-30
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Investments in 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
March 31,
------------------
1995 1994
------------------
Combined Operations amounts in millions
-------------------
<S> <C> <C>
Revenue $ 748 195
Operating expenses (602) (173)
Depreciation and amortization (111) (31)
----- ----
Operating income (loss) 35 (9)
Interest expense (54) (9)
Other, net (43) (20)
----- ----
Net loss $ (62) (38)
===== ====
</TABLE>
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at March 31,
1995 are TeleWest Communications plc (carrying value of $462 million),
Discovery Communications, Inc. (carrying value of $115 million) and
Teleport Communications Group, Inc. (carrying value of $144 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 of that partnership in the event liabilities of that partnership were
to exceed its assets.
Pursuant to an Agreement and Plan of Merger dated as of August 4, 1994, as
amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Comcast Corporation
("Comcast") and Liberty, commenced an offer (the "QVC Tender Offer") to
purchase all outstanding shares of common stock and preferred stock of QVC,
Inc. ("QVC").
The QVC Tender Offer expired at midnight, New York City time, on February
9, 1995, the Purchaser accepted for payment all shares of QVC which had
been tendered in the QVC Tender Offer. Following consummation of the QVC
Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate
43% interest of the post-merger QVC.
IV-31
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A credit facility entered into by the Purchaser is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty have pledged
their shares of QVC pursuant to such credit facility.
TCI's ownership of QVC was received in the TCI/Liberty Combination. Liberty
began accounting for its investment in QVC under the cost method in May
1994, upon its determination to remain outside of the previous QVC
shareholders agreement. Prior to such determination, Liberty had accounted
for its investment in QVC under the equity method.
Upon consummation of the aforementioned QVC transactions, the Company is
deemed to exercise significant influence over QVC and, as such, adopted the
equity method of accounting. As a result, TCI restated its investment in
QVC, its unrealized gain on available-for-sale securities, its deferred
taxes and accumulated deficit by $211 million, $127 million, $89 million
and $5 million, respectively, at December 31, 1994. The restatement did
not affect the Company's results of operations for the three months ended
March 31, 1994 as QVC was accounted for under the equity method during that
period.
(5) Investment in Turner Broadcasting System, Inc.
----------------------------------------------
The Company owns shares of a class of preferred stock of 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. 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.
(6) Acquisitions
------------
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI, and
TeleCable Corporation ("TeleCable") consummated a transaction, whereby
TeleCable was merged into TCIC, a wholly-owned subsidiary of TCI. The
aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of
approximately $300 million of TeleCable's net liabilities and the issuance
to TeleCable's shareholders of approximately 42 million shares of TCI Class
A common stock and 1 million shares of Convertible Preferred Stock, Series
D (the "Series D Preferred") with an aggregate initial liquidation value of
$300 million (see note 8).
The acquisition of TeleCable was accounted for by the purchase method.
Accordingly, the results of operations of such acquired entity have been
consolidated with those of the Company since its date of acquisition. On a
pro forma basis, the Company's revenue would have been increased by $25
million, net loss would have been reduced by $1
IV-32
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
million, loss attributable to common shareholders and loss per share would
have remained unchanged for the three months ended March 31, 1995 had such
acquired entity been consolidated with the Company on January 1, 1994. On
a pro forma basis, revenue would have increased by $73 million, net
earnings would have been increased by $2 million, earnings attributable to
common shareholders would have been reduced by $2 million and earnings per
share would have been reduced by $.01 for the three months ended March 31,
1994 had such acquired entity been consolidated with the Company on January
1, 1994. 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 entity since January 1, 1994.
Comcast Corporation ("Comcast") had the right, through December 31, 1994,
to require TCI to purchase or cause to be purchased from Comcast all shares
of Heritage Communications, Inc. ("Heritage") directly or indirectly owned
by Comcast for either cash or assets or, at TCI's election shares of TCI
common stock. On October 24, 1994, the Company and Comcast entered into a
purchase agreement whereby the Company would repurchase the entire 19.9%
minority interest in Heritage owned by Comcast for an aggregate
consideration of approximately $290 million, the majority of which is
payable in shares of TCI Class A common stock. Such acquisition was
consummated in the first quarter of 1995.
(7) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
amounts in millions
<S> <C> <C>
Senior Notes $ 5,382 5,412
Bank credit facilities 4,225 4,045
Commercial paper 527 445
Notes payable 1,013 1,024
Convertible notes (a) 44 45
Other debt 180 191
------- ------
$11,371 11,162
======= ======
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount of
$186 million at March 31, 1995 and December 31, 1994, 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, 1995, the
IV-33
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
notes were convertible, at the option of the holders, into an aggregate of
38,707,574 shares of Class A common stock.
The subsidiaries of 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, TCIC pledged
a portion of the common stock (with a quoted market value of approximately
$512 million at March 31, 1995) it holds of TBS.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed
Rate Agreements") ranging from 7.2% to 9.9% on notional amounts of $550
million at March 31, 1995 and (ii) variable interest rates (the "Variable
Rate Agreements") on notional amounts of $2,605 million at March 31, 1995.
During the three months ended March 31, 1995 and 1994, the Company's net
receipts pursuant to the Fixed Rate Agreements were $5.1 million and $2.1
million, respectively; and the Company's net receipts pursuant to the
Variable Rate Agreements were $1.4 million and $19.6 million,
respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------------------------- ------------------------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
------------- -------------- -------- --------------- --------------- --------
<S> <C> <C> <C> <C> <C>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
July 1996 8.2% 10 July 1996 8.2% 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
---- April 1999 7.4% 100
September 1999 7.2%-7.4% 300
$550 February 2000 5.8%-6.6% 650
==== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,605
======
</TABLE>
IV-34
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the Company
does not anticipate that it will incur any material credit losses because
it does not anticipate nonperformance by the counterparties.
In order to diminish its exposure to extreme increases in variable interest
rates, the Company has entered into various interest rate hedge agreements
on notional amounts of $325 million which fix the maximum variable interest
rates at 11%. Such agreements expire during the third and fourth quarters
of 1995.
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, 1995, taking into consideration current interest rates and the
current creditworthiness of the counterparties. The Company would be
required to pay $121 million at March 31, 1995 to terminate the agreements.
The fair value of the subsidiaries 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 subsidiaries of the Company for debt of the
same remaining maturities. The fair value of debt, which has a carrying
value of $11,371 million, was $11,434 million at March 31, 1995.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
(8) Redeemable Preferred Stock
--------------------------
Convertible Preferred Stock, Series D. The Company issued 1,000,000 shares
of a series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series D", par value $.01 per share, as partial consideration for
the merger between TCIC and TeleCable (see note 6).
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series D Preferred
stock at the rate of 5-1/2% per annum of the liquidation value ($300 per
share). Dividends are cumulative, and in the event that dividends are not
paid in full on two consecutive dividend payment dates or in the event that
TCI fails to effect any required redemption of Series D Preferred Stock,
accrue at the rate of 10% per annum of the liquidation value. The Series D
Preferred Stock ranks on parity with the Class A Preferred Stock, the
Series C Preferred Stock and the Series E Preferred Stock.
IV-35
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Each share of Series D Preferred Stock is convertible into 10 shares of TCI
Class A common stock, subject to adjustment upon certain events specified
in the certificate of designation establishing Series D Preferred Stock. To
the extent any cash dividends are not paid on any dividend payment date,
the amount of such dividends will be deemed converted into shares of TCI
Class A common stock at a conversion rate equal to 95% of the then current
market price of TCI Class A common stock, and upon issuance of TCI Class A
common stock to holders of Series D Preferred Stock in respect of such
deemed conversion, such dividend will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a
price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for
cash at the option of TCI after the fifth anniversary of the issue date at
such redemption price or after the third anniversary of the issue date if
the market value per share of TCI Class A common stock shall have exceeded
$37.50 for periods specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series
D Preferred Stock into TCI Class A common stock at a conversion rate of 95%
of the then current market value of TCI Class A common stock, provided that
such option may not be exercised unless the failure to redeem continues for
more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the shareholders of
TCI.
(9) 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 has adopted the Tele-Communications, Inc. 1994 Stock Incentive
Plan (the "Plan"). The Plan provides for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be
made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof. Pursuant to the
TCI/Liberty Merger Agreement and certain assumption agreements, stock
options and/or stock appreciation rights granted (or assumed) by Old TCI
and stock options and/or stock appreciation rights granted by Liberty were
assumed by the Company and new options and/or stock appreciation rights
were substituted under
IV-36
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the Plan. The following descriptions represent the terms of the assumed
options and/or stock appreciation rights.
Stock options to acquire 162,228 shares of TCI Class A common stock at
adjusted purchase prices ranging from $8.83 to $18.63 per share were
outstanding at March 31, 1995. During the three months ended March 31,
1995, no options were exercised and no options were canceled. Options to
acquire 19,428 shares of TCI Class A common stock expire August 14, 1995.
Options to acquire 142,800 shares of TCI Class A common stock expire
December 15, 1998.
Stock options in tandem with stock appreciation rights to purchase
3,963,000 shares of Class A common stock at a purchase price of $16.75 per
share were outstanding at March 31, 1995. Such options become exercisable
and vest evenly over five years, first became exercisable beginning
November 11, 1993 and expire on November 11, 2002.
Stock options in tandem with stock appreciation rights to purchase
1,940,000 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at March 31, 1995. Such options become
exercisable and vest evenly over four years, first became exercisable
beginning October 12, 1994 and expire on October 12, 2003.
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 were outstanding at March 31, 1995. On November 12, 1993, 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.
Stock options in tandem with stock appreciation rights to acquire 54,600
shares of TCI Class A common stock at an adjusted purchase price of $19.56
were outstanding at March 31, 1995. The options vest in five equal annual
installments commencing June 3, 1994 and expire in June 2003.
Stock appreciation rights with respect to 1,423,500 shares of TCI Class A
common stock were outstanding at March 31, 1995. These rights have an
adjusted strike price of $0.82 per share, become exercisable and vest
evenly over seven years, beginning March 28, 1992. Stock appreciation
rights expire on March 28, 2001.
The Company's Board of Directors has approved, subject to stockholder
approval of the Director Stock Option Plan, the grant effective as of
November 16, 1994, to each person that as of that date was a member of the
Board of Directors and was not an employee of the Company or any of its
subsidiaries, of options to purchase 50,000 shares of Class A common stock.
Such options have an exercise price of $22.00 per share and will vest and
become exercisable over a five-year period, commencing on November 16, 1995
and will expire on November 16, 2004.
(continued)
IV-37
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimated compensation relating to stock appreciation rights has been
recorded through March 31, 1995, but is 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, 1995, there were 68,520,802 shares of TCI Class A common stock
reserved for issuance under exercise privileges related to options and
convertible debt securities. In addition, one share of Class A common
stock is reserved for each share of Class B common stock.
(10) Commitments and Contingencies
-----------------------------
During 1994, subsidiaries of the Company, Comcast, Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") formed a partnership
("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, the
partners have been participating in auctions ("PCS Auctions") of broadband
personal communications services ("PCS") licenses being conducted by the
Federal Communications Commission ("FCC"). In the first round auction,
which concluded during the first quarter of 1995, WirelessCo was the
winning bidder for PSC licenses for 29 markets, including New York, San
Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth, Boston-Providence,
Minneapolis-St. Paul and Miami-Fort Lauderdale. The aggregate license cost
for these licenses is approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and has agreed to make capital
contributions to APC equal to 49/51 of the cost of APC's PCS license.
Additional capital contributions may be required in the event APC is unable
to finance the full cost of its PCS license. WirelessCo may also be
required to finance the build-out expenditures for APC's PCS system. Cox,
which holds a pioneer preference PCS license for the Los Angeles-San Diego
market, and WirelessCo have also agreed on the general terms and conditions
upon which Cox (with a 60% interest) and WirelessCo (with a 40% interest)
would form a partnership to hold and develop a PCS system using the Los
Angeles-San Diego license. APC and the Cox partnership would affiliate
their PCS systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under the
"Sprint" brand. The Company owns a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3%
interest. PhillieCo was
IV-38
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the winning bidder in the first round auction for a PCS license for the
Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also
be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above,
will be substantial.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed their
respective interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("NewTelco") to engage in the business of
providing local wireline communications services to residences and
businesses on a nationwide basis. NewTelco will serve its customers
primarily through the cable television facilities of cable television
operators that affiliate with NewTelco in exchange for agreed-upon
compensation. The modification of existing regulations and laws governing
the local telephony market will be necessary in order for NewTelco to
provide its proposed services on a competitive basis in most states.
Subject to agreement upon a schedule for upgrading its cable television
facilities in selected markets and certain other matters, the Company has
agreed to affiliate certain of its cable systems with NewTelco. The
capital required for the upgrade of the Company's cable facilities for the
provision of telephony services is expected to be substantial.
Subsidiaries of the Company, Cox and Comcast, together with Continental
Cablevision, Inc. ("Continental"), own Teleport Communications Group, Inc.
and TCG Partners (collectively, "TCG"), which is one of the largest
competitive access providers in the United States in terms of route miles.
The Company, Cox and Comcast have entered into an agreement with MajorCo
and NewTelco to contribute their interests in TCG and its affiliated
entities to NewTelco. The Company currently owns an approximate 29.9%
interest in TCG. The closing of this contribution is subject to the
satisfaction of certain conditions, including the receipt of necessary
regulatory and other consents and approvals. In addition, the Company,
Comcast and Cox intend to negotiate with Continental, which owns a 20%
interest in TCG, regarding their acquisition of Continental's TCG interest.
If such agreement cannot be reached, they will need to obtain Continental's
consent to certain aspects of their agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
IV-39
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At March 31, 1995, the Company was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. The Company pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. During the first quarter of
1995, an initial borrowing aggregating $95 million was made pursuant to the
letter of credit. Subsequent to March 31, 1995, 19,638,508 shares of TCI
Class A common stock held by subsidiaries of the Company were pledged as
additional collateral for the letter of credit.
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. 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.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, the Company's rates for regulated services are subject to review
by the FCC, if a complaint has been filed, or the appropriate franchise
authority, if such authority has been certified. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark and
refund the excess portion of rates received. Any refunds of the excess
portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to the later of September 1, 1993 or one
year prior to the certification date of the applicable franchise authority.
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 considered to be material.
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"). The
aggregate minimum liability under certain of the license agreements is
approximately $387 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 also has
guaranteed the obligation of an Australian affiliate to pay similar fees
IV-40
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for the license to exhibit certain films through the year 2000. If the
Company failed to fulfill its obligation under this guarantee, the
beneficiaries have the right to demand an aggregate payment from the
Company of $67 million. Although the aggregate amount of the Australian
affiliate's film license fee obligations is not currently estimable, the
Company believes that the aggregate payments pursuant to such affiliate's
obligations could be significant.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$250 million at March 31, 1995. Although there can be no assurance,
management of the Company believes that it will not be required to meet its
obligations under such guarantees, or if it is required to meet any of such
obligations, that they will not be material to the Company.
The Company has also committed to provide additional debt or equity funding
to certain of its affiliates. At March 31, 1995, such commitments
aggregated $174 million.
In 1993, the President of Home Shopping Network, Inc. ("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. Estimated compensation related to stock appreciation rights
has been recorded through March 31, 1995, but it is subject to future
adjustment based upon market value, and ultimately on the final
determination of market value when the rights are exercised.
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.
IV-41
<PAGE>
Tele-Communications, Inc.
------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations.
- -----------
General
-------
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "Old TCI") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement (the "TCI/Liberty Merger Agreement")
to combine the two companies (the "TCI/Liberty Combination"). The transaction
was consummated on August 4, 1994 and was structured as a tax free exchange of
Class A and Class B shares of both companies and preferred stock of Liberty for
like shares of a newly formed holding company, TCI/Liberty Holding Company. In
connection with the TCI/Liberty Combination, Old TCI changed its name to TCI
Communications, Inc. ("TCIC") and TCI/Liberty Holding Company changed its name
to Tele-Communications, Inc. ("TCI" or the "Company"). Old TCI common
shareholders received one share of TCI for each of their common shares. Liberty
common shareholders received 0.975 of a share of TCI for each of their common
shares. Upon consummation of the TCI/Liberty Combination, certain subsidiaries
of TCIC exchanged the 79,335,038 shares of Old TCI Class A common stock held by
such subsidiaries for 79,335,038 shares of TCI Class A common stock. Such
ownership is reflected as treasury stock at such subsidiaries' historical cost.
TCIC owned 3,477,778 shares of Liberty Class A common stock and 55,070
shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Liberty Class E Preferred Stock"). Upon consummation of the
TCI/Liberty Combination, TCIC received 3,390,833 shares of TCI Class A common
stock and 55,070 shares of TCI Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock ("Class B Preferred Stock"), a new preferred stock of TCI
having designations, preferences, rights and qualifications, limitations and
restrictions that are substantially identical to those of the Liberty Class E
Preferred Stock, except that the holders of the Class B Preferred Stock will be
entitled to one vote per share in any general election of directors of TCI. The
Class B Preferred Stock received by TCIC eliminates in consolidation.
Upon consummation of the TCI/Liberty Combination, the remaining
classes of preferred stock of Liberty held by TCIC were converted into shares of
Class A Preferred Stock, a new series of preferred stock of TCI having a
substantially equivalent fair market value to that which was given up. All such
preferred stock eliminates in consolidation.
Liberty owned 2,988,009 shares of Old TCI Class A common stock and
3,537,712 shares of Old TCI Class B common stock. Such shares were replaced
with the same number of shares of TCI Class A and Class B common stock upon
consummation of the TCI/Liberty Combination.
TCIC's and Liberty's ownership of TCI common stock are reflected as
treasury stock in the accompanying consolidated financial statements. Such
amounts have been recorded at the historical cost previously reflected by TCIC
and Liberty.
IV-42
<PAGE>
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and other related
party considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the earnings
or losses generated by Liberty (by recognizing 100% of Liberty's earnings or
losses before deducting preferred stock dividends) through the date the
TCI/Liberty Combination was consummated.
The TCI/Liberty Combination was accounted for using predecessor cost
due to the aforementioned related party considerations.
During the fourth quarter of 1994, the Company was reorganized based
upon four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). The Company reorganized its structure to provide for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While
neither the International Cable and Programming unit nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in nature
to warrant separate operational focus.
The Board of Directors of TCI has adopted a proposal which, if
approved by the stockholders, would authorize the Board to issue a new class of
stock ("Liberty Group Common Stock") which corresponds to TCI's Programming unit
("Liberty Media Group"). The programming services include the production,
acquisition and distribution of globally branded entertainment, education and
information programming services and software for distribution through all
available formats and media; and home shopping via television and other
interactive media, direct marketing, advertising sales, infomercials and
transaction processing. While the Liberty Group Common Stock would constitute
common stock of TCI, it is intended to reflect the separate performance of such
programming services. TCI intends to distribute to its security holders one
hundred percent of the equity value of TCI attributable to Liberty Media Group.
Summary of Operations
---------------------
The Company operates principally in two industry segments subsequent
to consummation of the TCI/Liberty Combination: cable and communications
services and programming services. Home shopping is a programming service which
includes a retail function. Separate amounts of the aforementioned services
have been provided to enhance the readers understanding of the Company. The
Technology/Venture Capital and the International Cable and Programming portions
of the Company's business have been included with cable and communications
services due to their immateriality. The tables below set forth for the periods
presented, the percentage relationship that certain items bear to revenue. This
summary provides trend data relating to the normal recurring operations of the
Company. Balances in the following table have been presented net of any
intercompany amounts associated with the provision of programming services among
the groups. Other items of significance are discussed separately under separate
IV-43
<PAGE>
captions below. Amounts set forth below reflect the Company's motion picture
theatre exhibition industry segment as discontinued operations.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1994 1993 1992
----------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
amounts in millions, except for percentages
Cable and Communications Services
- ---------------------------------
Revenue 100 $4,247 100% $4,153 100% $3,574
Operating costs and expenses
before depreciation
and amortization 56 2,390 56 2,326 54 1,946
Depreciation and amortization 23 992 22 911 22 764
---- ------ --- ------ --- ------
Operating income 21% $ 865 22% $ 916 24% $ 864
==== ====== === ====== === ======
Programming Services:
- ---------------------
Electronic Retailing Services:
Net revenue 100% $ 482 -- $ -- -- $ --
Cost of sales 65 313 -- -- -- --
Operating costs and expenses
before depreciation
and amortization 30 145 -- -- -- --
Depreciation and amortization 3 15 -- -- -- --
---- ------ --- ------ --- ------
Operating income 2% $ 9 -- $ -- -- $ --
==== ====== === ====== === ======
Other Programming Services:
Revenue 100% $ 207 -- $ -- -- $ --
Operating costs and expenses
before depreciation and
amortization 136 282 -- -- -- --
Depreciation and amortization 5 11 -- -- -- --
---- --- ------ --- ------
Operating income (loss) (41)% $ (86) -- $ -- -- $ --
==== ====== === ====== === ======
</TABLE>
Cable and Communications Services
- ---------------------------------
Revenue increased by approximately 2% from 1993 to 1994. Such
increase was the result of the TCI/Liberty Combination in August of 1994 (1%),
growth in subscriber levels within the Company's cable television systems (5%),
the effect of certain other acquisitions (2%) and certain new services (1%), net
of a decrease in revenue (4%) due to rate reductions required by rate regulation
implemented pursuant to the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") and a decrease in revenue (3%) due to the
transfer of Netlink USA to the Programming unit in the Reorganization. Netlink
USA's operations were included in Cable and Communications Services in 1993 and
1992, but have been reflected in Programming Services for all of 1994. In the
second half of 1994, the Company experienced an additional decrease, in excess
of that which was incurred in 1993, in the price charged for those services that
are subject to rate regulation under the 1992 Cable Act. Revenue increased by
approximately 16% from 1992 to 1993. Such increase was the result of an
acquisition in late 1992 (10%), growth in subscriber levels within the Company's
cable television systems (4%) and increases in prices charged for cable services
(3%), net of a decrease in revenue (1%) due to rate reductions required by rate
regulation implemented pursuant to the 1992 Cable Act. See related discussion
below.
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the Federal Communications Commission ("FCC") adopted certain rate
regulations required by the
IV-44
<PAGE>
1992 Cable Act and imposed a moratorium on certain rate increases. As a result
of such actions, the Company's basic and tier service rates and its equipment
and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC.
The Company estimates that the FCC's 1993 and 1994 rate regulations
will result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such rate regulation. The estimated annualized reduction in
revenue assumes that the FCC will not require further reductions beyond the
current regulations and is prior to any possible mitigating factors (none of
which is assured) such as (i) the provision of alternate service offerings (ii)
the implementation of rate adjustments to non-regulated services and (iii) the
utilization of cost-of-service methodologies, as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a cost-of-
service showing. Under this methodology, cable operators may be allowed to
recover through the rates they charge for Regulated Services, their normal
operating expenses plus an interim rate of return of 11.25% on the rate base, as
defined, which rate may be subject to change in the future.
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. The FCC substantially revised its rules for adding and deleting
services in November 1994 and has provided an alternative methodology for adding
services to cable programming service tiers which includes a flat fee increase
per added channel and an aggregate limit on such increases with an additional
license fee reserve. The FCC's rate regulations also permit cable operators to
"pass through" increases in programming costs and certain other external costs
which exceed the rate of inflation. However, a cable operator may pass through
increases in the cost of programming services affiliated with such cable
operator to the extent such costs exceed the rate of inflation only if the price
charged by the programmer to the affiliated cable operator reflects prevailing
prices offered in the marketplace by the programmer to unaffiliated third
parties or the fair market value of the programming.
Based on the foregoing, the Company believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect on
its results of operations.
Operating costs and expenses before depreciation and amortization have
increased by 3% for the year ended December 31, 1994 compared to the
corresponding period of 1993. The consolidation of Liberty resulted in an
increase of $18 million in operating, selling, general and administrative
expenses from Liberty's cable television systems. The Company cannot determine
whether and to what extent increases in the cost of programming will affect its
future operating costs. However, such programming costs have increased at a
greater percentage than increases in revenue of Regulated Services. In 1993,
the Company incurred certain one-time direct charges relating to the
implementation of the FCC rate regulations. Due to a program to upgrade and
install optical fiber in its cable systems, the Company's capital expenditures
and depreciation expense have increased. The Company recorded an adjustment of
$6 million in 1994 to reduce
IV-45
<PAGE>
its liability for compensation relating to stock appreciation rights resulting
from a decline in the market price of the Company's Class A common stock. The
Company made several separate grants (in 1992 and 1993) of stock options issued
in tandem with stock appreciation rights. The Company recorded compensation
relating to such stock appreciation rights of $31 million and $1 million in 1993
and 1992, respectively. During 1992, the Company streamlined its operating
structure through the consolidation of three of its regional operating divisions
into two divisions. In connection with the consolidation of these divisional
offices, the Company incurred restructuring charges of approximately $8 million
which are reflected in the accompanying consolidated financial statements for
the year ended December 31, 1992.
Effective April 1, 1993, based upon changes in FCC regulations, the
Company revised its estimate of the useful lives of certain distribution
equipment to correspond to the Company's anticipated remaining period of
ownership of such equipment. The revision resulted in a decrease in net
earnings of approximately $12 million (or $.03 per share) for the year ended
December 31, 1993.
Electronic Retailing Services
-----------------------------
This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination. HSN's primary business is the sale of merchandise to
viewers of the home shopping programming produced and distributed by Home
Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of HSN.
Revenue for 1994 represents net sales for HSC. HSN believes that
future levels of net sales of HSC will be dependent, in large part, on program
carriage, market penetration and merchandising management. Program carriage is
defined as the number of cable systems and broadcast television stations that
carry HSC programming. Market penetration represents the level of active
purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSC programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSC programming while evaluating the
expected profitability of each contract.
The 1992 Cable Act contains "must carry" provisions which mandate that
cable companies within a broadcast television station's reach retransmit its
signal, subject to certain limitations on this obligation depending upon a cable
system's channel capacity. The FCC adopted rules which extend such "must carry"
provisions to broadcast television stations with shop-at-home formats effective
October 6, 1993. As a result of the mandatory carriage of stations carrying
home-shopping programming, HSN has experienced growth in cable carriage.
However, the constitutionality of the "must carry" provisions of the 1992 Cable
Act has been challenged in the courts. Although the "must carry" provisions
were upheld as constitutional by a three-judge panel of the United States
District Court for the District of Columbia, the Supreme Court vacated the
District Court's decision because genuine issues of material fact remain
unresolved. The "must-
IV-46
<PAGE>
carry" statutory provisions and regulations remain in effect pending the outcome
of the ongoing proceedings before the District Court. During the past year, HSN
has aggressively pursued and obtained long term carriage commitments from a
number of cable operators. As a result of HSN's success in obtaining such
commitments, the exposure to loss of revenue should the "must-carry" rules be
declared unconstitutional has been largely mitigated.
HSN expects that certain of its costs will increase in the future.
Management believes that selling and marketing expenses will be at higher levels
in future periods as HSN maintains its efforts to increase the number of cable
systems carrying HSC programming, increase market penetration and develop new
electronic opportunities. In addition, these expenses will increase if program
carriage increases. Broadcast expenses are expected to increase in future
periods. "Must carry" legislation, as discussed above, is expected to result in
increases in certain operating expenses related to cable and broadcast carriage
in dollars. However, as a percentage of sales, the effect is not currently
determinable.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
Other Programming Services
--------------------------
Revenue of TCI's consolidated entertainment and information
programming services represented 4% or $207 million, of total consolidated
revenue for 1994. This revenue was attributable to subscription and advertising
revenue at TCI's consolidated sports programming businesses ($58 million),
revenue from Netlink USA, a marketer and distributor of programming to the
United States home satellite dish subscriber market ($132 million) and
subscription revenue generated by Southern Satellite Systems, Inc. ("Southern")
and Encore Media Corporation ("EMC") ($17 million). Programming expenses
represented 4% or $136 million total operating expenses (including cost of
sales). The Company incurred $44 million of programming costs and $7 million of
marketing costs associated with the launch in 1994 of a new premium programming
service to its subscribers. The programming costs of such new premium service
is included in the aforementioned $136 million total programming costs. The
Company's Other Programming Services will continue to reflect losses associated
with the new premium service as the Company's programming costs are reflected in
the operations of the Programming group and the revenue from the subscribers of
such service are reflected in the Company's Cable and Communications group.
However, although there can be no assurance, as the Cable and Communications
group increases its distribution of this service to its subscribers, management
of the Company believes that the consolidated impact from such premium service
should be positive.
Other Income and Expense
------------------------
The Company's weighted average interest rate on borrowings was 7.5%,
7.2% and 7.6% during 1994, 1993 and 1992, respectively. At December 31, 1994,
after considering the net effect of various interest rate hedge and exchange
agreements (see note 7 to the consolidated financial statements) with notional
amounts aggregating $1,730 million, the Company had $4,818
IV-47
<PAGE>
million (or 43%) of fixed-rate debt with a weighted average interest rate of
8.9% and $6,344 million (or 57%) of variable-rate debt with interest rates
approximating the prime rate (8.5% at December 31, 1994).
The Company is a shareholder of TeleWest Communications plc (formerly
TCI/US WEST Cable Communications Group or "TeleWest UK") ("TeleWest
Communications"), a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). TeleWest
Communications, which is accounted for under the equity method, had a carrying
value at December 31, 1994 of $454 million and comprised $43 million, $28
million and $26 million of the Company's share of its affiliates' losses in
1994, 1993 and 1992, respectively. In February 1994, the Company acquired a
consolidated investment in Flextech p.l.c. ("Flextech"). Flextech accounted for
net losses of $24 million (before deducting the minority interests' 40% share of
such losses) in 1994. In addition, the Company has other less significant
equity method investments in video distribution and programming businesses
located in the UK, other parts of Europe, Asia, Latin America and certain other
foreign countries. In the aggregate, such other equity method investments had a
carrying value of $135 million at December 31, 1994 and accounted for $50
million of the Company's share of its affiliates' losses in 1994.
In November of 1994, TCI and US West, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000 ordinary shares
and 76,500,000 convertible preference shares of TeleWest Communications (the
"TeleWest Exchange"). Following the completion of the TeleWest Exchange,
TeleWest Communications conducted an initial public offering in November of 1994
in which it sold 243,740,000 ordinary shares for aggregate net proceeds of
(Pounds)401 million (the "TeleWest IPO"). Upon completion of the TeleWest
Exchange and the TeleWest IPO, TCI and US WEST, Inc. each became the owners of
36% of the ordinary shares and 38% of the total outstanding ordinary and
convertible preference shares of TeleWest Communications. As a result of the
TeleWest IPO and the associated dilution of the Company's ownership interest of
TeleWest Communications, the Company has recognized a nonrecurring gain
amounting to $161 million (before deducting the related tax expense of $75
million). There is no assurance that the Company will realize similar
nonrecurring gains in future periods.
TeleWest Communications, which is currently constructing broadband
cable television and telephony networks in the UK, has incurred net losses since
its inception. At December 31, 1994, TeleWest Communications had completed
approximately 37% of its network construction and, within five years it is
expected that approximately 97% of TeleWest Communications' network construction
will be complete. Although there is no assurance, the Company believes (i) that
the continued expansion of TeleWest Communications' networks ultimately will
provide TeleWest Communications with a revenue base that will exceed its
expenses and (ii) that TeleWest Communications' present and future sources of
liquidity (including the net proceeds from the TeleWest IPO and certain bank
credit facilities) will be sufficient to meet TeleWest Communications' liquidity
requirements for the foreseeable future. The Company has no present intention
to make significant loans to or investments in TeleWest Communications.
IV-48
<PAGE>
In connection with its investments in the above-described foreign
entities, the Company, through its International Cable and Programming unit, is
exposed to the risk that unfavorable and potentially volatile fluctuations in
exchange rates with respect to the UK currency and other foreign currencies will
cause the Company to experience unrealized foreign currency translation losses.
To a much lesser extent, the Company is exposed to the risk that unfavorable and
potentially volatile foreign currency fluctuations will cause the Company to
experience unrealized losses with respect to transactions denominated in
currencies other than the respective functional currencies of the Company and
its various foreign affiliates. Because the Company views its foreign assets as
long-term investments, the Company generally does not hedge its exposure to
short-term movements in foreign amounts of future foreign cash inflows and
outflows associated with the Company's foreign investments. Although the
Company continually evaluates the advantages and disadvantages of hedging its
exposure to currency risk on a long-term basis, the Company historically has not
entered into any significant long-term hedge agreements.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased
49.9% of Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share of
Liberty's earnings prior to the TCI/Liberty Combination.
The Company sold certain investments and other assets for an aggregate
net pre-tax gain of $42 million and $9 million in 1993 and 1992, respectively.
During 1994, 1993 and 1992, the Company recorded losses of $9 million,
$17 million and $67 million, respectively, from early extinguishments of debt.
Included in the 1992 amount was $52 million from the extinguishment of the SCI
Holdings, Inc. ("SCI") indebtedness (see note 4 to the consolidated financial
statements). There may be additional losses associated with early
extinguishments of debt in the future.
Interest and dividend income was $36 million, $34 million and $69
million in 1994, 1993 and 1992, respectively. Included in the 1992 amounts was
$30 million earned on the preferred stock investment that was repurchased by a
subsidiary of SCI in 1992 (see note 4 to the consolidated financial statements).
In connection with such repurchase, the Company received a premium amounting to
$14 million which has been separately reflected in the accompanying consolidated
statements of operations.
Income Taxes
------------
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. Such tax rate change resulted in an increase of $76
million to the Company's income tax expense and deferred income tax liability in
the third quarter of 1993.
IV-49
<PAGE>
Net Earnings (Loss)
-------------------
The Company's net earnings (before preferred stock dividends) of $55
million for the year ended December 31, 1994 represented an increase of $62
million as compared to the Company's net loss (before preferred stock dividends)
of $7 million for the corresponding period of 1993. Such increase is
principally the result of the effect of improved share of earnings from Liberty
prior to the TCI/Liberty Combination (principally resulting from the gain
recognized by Liberty upon the sale of its investment in AMC), the recognition
of a nonrecurring gain resulting from the TeleWest IPO and the associated
dilution of TCI's ownership in TeleWest Communications, and the reduction in
income tax expense (principally resulting from the required recognition in the
third quarter of 1993 of the cumulative effect of the change in the Federal
income tax rate from 34% to 35%), net of the effect of the aforementioned
reduction in rates charged for Regulated Services and the decrease in gain on
disposition of assets.
The Company's loss (before preferred stock dividends) of $7 million
for the year ended December 31, 1993 represented a decrease of $14 million as
compared to the Company's earnings from continuing operations of $7 million for
the corresponding period of 1992. Such decline was due primarily to an increase
in income tax expense arising from the aforementioned tax rate change enacted in
the third quarter of 1993, an increase in compensation relating to stock
appreciation rights and the reduction of interest and dividend income resulting
from the disposition at the end of 1992 of a preferred stock investment, net of
an increase in gain on disposition of assets, a reduction in loss from early
extinguishment of debt and a reduction in minority interest in earnings of
consolidated subsidiaries attributable to the repurchase of certain preferred
stock of a consolidated subsidiary.
On May 12, 1992, the Company sold its motion picture theatre business
and certain theatre-related real estate assets (see note 14 to the accompanying
consolidated financial statements). Accordingly, the operations of the
Company's motion picture theatre exhibition industry segment have been
reclassified and reflected as "discontinued operations" in the accompanying
consolidated financial statements.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1994.
Recent Accounting Pronouncements
--------------------------------
In November of 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("Statement No. 112"). As the Company's
present accounting policies generally are in conformity with the provisions of
Statement No. 112, the Company does not believe that Statement No. 112 will have
a material effect on the Company. Statement No. 112 is effective for years
beginning after December 31, 1994.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities ("Statement No. 115"),
IV-50
<PAGE>
effective for fiscal years beginning after December 15, 1993. Under Statement
No. 115, debt securities that TCI has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that TCI 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 are
carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried net of taxes as a separate
component of stockholders' equity. Unrealized holding gains and losses on
securities classified as trading are reported in earnings.
The Company applied Statement No. 115 beginning in the first quarter
of 1994. Application of Statement No. 115 resulted in a net increase of $304
million to stockholders' equity on January 1, 1994, representing the recognition
of unrealized appreciation, net of taxes, for the Company's investments in
marketable equity securities determined to be available-for-sale. Such amount
was adjusted by $182 million recorded in the TCI/Liberty Combination. The
amount of net unrealized gain was reduced by $233 million through December 31,
1994. The majority of the aggregate unrealized gain is comprised of the
Company's investment in Turner Broadcasting System, Inc. ("TBS") common stock
($100 million) and QVC, Inc. ("QVC") common stock ($127 million). The Company
holds no material debt securities.
The FASB has recently issued other accounting pronouncements which are
not yet effective. The Company does not expect that these pronouncements will
have a material effect on the Company's consolidated financial statements.
Liquidity and Capital Resources
-------------------------------
During 1994, subsidiaries of the Company, Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
formed a partnership ("WirelessCo") to engage in the business of providing
wireless communications services on a nationwide basis. Through WirelessCo, the
partners have been participating in auctions ("PCS Auctions") of broadband
personal communications services ("PCS") licenses being conducted by the FCC.
In the first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PCS licenses for 29 markets, including New
York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth, Boston-
Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The aggregate
license cost for these licenses is approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which
holds a PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and has agreed to make capital contributions to
APC equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the build-
out expenditures for APC's PCS system. Cox, which holds a pioneer preference
PCS license for the Los Angeles-San Diego market, and WirelessCo have also
agreed on the general terms and conditions upon which Cox (with a 60% interest)
and WirelessCo (with a 40% interest) would form a partnership to hold and
develop a PCS system using the Los Angeles-San Diego license. APC and the Cox
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partnership would affiliate their PCS systems with WirelessCo and be part of
WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand. The Company owns a 30% interest in
WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial. The Company anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed their
respective interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("NewTelco") to engage in the business of providing
local wireline communications services to residences and businesses on a
nationwide basis. NewTelco will serve its customers primarily through the cable
television facilities of cable television operators that affiliate with NewTelco
in exchange for agreed-upon compensation. The modification of existing
regulations and laws governing the local telephony market will be necessary in
order for NewTelco to provide its proposed services on a competitive basis in
most states. Subject to agreement upon a schedule for upgrading its cable
television facilities in selected markets and certain other matters, the Company
has agreed to affiliate certain of its cable systems with NewTelco. The capital
required for the upgrade of the Company's cable facilities for the provision of
telephony services is expected to be substantial.
Subsidiaries of the Company, Cox and Comcast, together with
Continental Cablevision, Inc. ("Continental"), own Teleport Communications
Group, Inc. and TCG Partners (collectively, "TCG"), which is one of the largest
competitive access providers in the United States in terms of route miles. The
Company, Cox and Comcast have entered into an agreement with MajorCo and
NewTelco to contribute their interests in TCG and its affiliated entities to
NewTelco. The Company currently owns an approximate 29.9% interest in TCG. The
closing of this contribution is subject to the satisfaction of certain
conditions, including the receipt of necessary regulatory and other consents and
approvals. In addition, the Company, Comcast and Cox intend to negotiate with
Continental, which owns a 20% interest in TCG, regarding their acquisition of
Continental's TCG interest. If such agreement cannot be reached, they will need
to obtain Continental's consent to certain aspects of their agreement with
Sprint.
Subject to agreement upon an initial business plan, the MajorCo
partners have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which amount
includes the approximately $500 million already
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contributed by the partners to WirelessCo. The partners intend for MajorCo and
its subsidiary partnerships to be the exclusive vehicles through which they
engage in the wireless and wireline telephony service businesses, subject to
certain exceptions.
At December 31, 1994, the Company was liable for a $720 million letter
of credit which guarantees contributions to WirelessCo. The Company pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. There were no borrowings
pursuant to such letter of credit at December 31, 1994.
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI,
and TeleCable Corporation ("TeleCable") consummated a transaction whereby
TeleCable was merged into TCIC (the "TeleCable Merger"). The aggregate $1.6
billion purchase price was satisfied by TCIC's assumption of approximately $300
million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of approximately 42 million shares of TCI Class A common stock and
1 million shares of TCI Convertible Preferred stock, Series D (the "Series D
Preferred Stock") with an aggregate initial liquidation value of $300 million.
The Series D Preferred Stock, which accrues dividends at a rate of 5.5% per
annum, is convertible into 10 million shares of TCI Class A common stock. The
Series D Preferred Stock is redeemable for cash at the option of TCI after five
years and at the option of either TCI or the holder after ten years. The amount
of net liabilities assumed by TCIC and the number of shares of TCI Class A
common stock issued to TeleCable's shareholders are subject to post-closing
adjustments.
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV") and RCS
Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase Agreement (the
"Tele-Vue Agreement") pursuant to which RCS Pacific agreed to acquire from Tele-
Vue the assets of cable television systems serving approximately 1 million
subscribers as of December 31, 1994 for total consideration of approximately
$1,983,000,000, subject to adjustment in accordance with the terms of the Tele-
Vue Agreement. A subsidiary of TCI has agreed to loan $600 million in cash to
IP-IV. IP-IV will, in turn, loan such $600 million to RCS Pacific. RCS Pacific
could use the proceeds of the aforementioned loan as a portion of the total cash
consideration to be paid to Tele-Vue, or at the option of TCI, to purchase $600
million of TCI Class A common stock. Should TCI elect to sell such common
stock, RCS Pacific has the option to pay the consideration to Tele-Vue by
delivery of RCS Pacific's short-term note of up to $600 million of the total
consideration with the balance to be paid in cash. Such note, if it is
delivered, will be secured by RCS Pacific's pledge of shares of stock of TCI
having an aggregate market value equal to the principal amount of, and accrued
interest on, the note delivered to Tele-Vue. The consummation of the
transactions contemplated by the Tele-Vue Agreement is conditioned, among other
things, on receipt of approvals of various franchise and other governmental
authorities and receipt of "minority tax certificates" from the FCC. Both
Houses of Congress have passed legislation to repeal previous legislation which
provided for minority tax certificates. The bills are currently in conference.
There can be no assurance that the conditions precedent to closing the asset
purchase will be satisfied, or that the parties will be able to agree on
different terms, if necessary. Separately, TCI and Viacom have reached
agreement regarding the settlement of litigation currently pending between them.
Final settlement of the litigation will be subject, among other things, to the
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effectiveness of a new affiliation agreement covering TCI's long-term carriage
of Showtime and The Movie Channel. Effectiveness of this affiliation agreement,
in turn, is subject to certain conditions, including completion of the cable
transactions described above.
TCI, through its indirect wholly-owned subsidiary, TCID-IP IV, Inc.
("TCID-IP IV"), would hold a 25% limited partnership interest in IP-IV, and IP-
IV would in turn hold a 79% limited partnership interest in RCS Pacific. TCI
would account for its investment in IP-IV under the equity method of accounting.
It is anticipated that if the transactions contemplated by the Tele-Vue
Agreement are consummated, TCI's consolidated net income will be significantly
reduced because of losses allocable to TCID-IP IV from its investment in IP-IV.
As a result of the depreciation and amortization arising from allocation of the
purchase price to the assets to be acquired by RCS Pacific and as a result of
the interest expense resulting from the third party debt incurred by RCS Pacific
to finance the acquisition, it is expected that RCS Pacific will incur losses
for some time after the acquisition.
Pursuant to an Agreement and Plan of Merger dated as of August 4,
1994, as amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc.
(the "Purchaser"), a corporation which is jointly owned by Comcast and Liberty,
commenced an offer (the "QVC Tender Offer") to purchase all outstanding shares
of common stock and preferred stock of QVC, Inc. ("QVC").
The QVC Tender Offer expired at midnight, New York City time, on
February 9, 1995, at which time the Purchaser accepted for payment all shares of
QVC which had been tendered in the QVC Tender Offer. Following consummation of
the QVC Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC.
In connection with the financing of the QVC merger, the Purchaser
entered into a credit facility. The credit facility is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty have pledged their
shares of QVC (as the surviving corporation following the QVC merger) pursuant
to the credit facility. Neither Liberty nor Comcast has provided any guarantees
of the credit facility.
In connection with the transactions contemplated under a stockholders
agreement entered into among Comcast, Liberty and the Purchaser, TCI has
undertaken to cause Liberty to comply with each of its representations,
warranties, covenants, agreements and obligations under the stockholders
agreement. All such undertakings will terminate at such time as equity
securities of Liberty or the Liberty Group Common Stock have been distributed
and such securities impute a market capitalization of Liberty in excess of $2
billion.
Upon consummation of the aforementioned QVC transactions, the Company
is deemed to exercise significant influence over QVC and, as such, will account
for its investment in QVC under the equity method. Had the Company accounted
for its investment under the equity method during 1994, the Company would have
reflected additional share of earnings of QVC of $8 million (of which $1 million
would have been included in the Company's share of Liberty's
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earnings prior to the TCI/Liberty Combination). Additionally, the Company's
investment in QVC, its deferred tax liability and its unrealized gain from
available-for-sale securities would have been reduced by $216 million, $89
million and $127 million, respectively, had the Company accounted for its
investment in QVC under the equity method during 1994. The 1994 consolidated
financial statements will be restated in the first quarter of 1995.
Pursuant to an underwritten public offering, the Company sold
19,550,000 shares of TCI Class A common stock in February of 1995. The Company
received net proceeds of approximately $401 million. Such proceeds were
immediately used to reduce outstanding indebtedness under credit facilities.
The Company's assets consist primarily of investments in its
subsidiaries. The Company's rights, and therefore the extent to which the
holders of the Company's preferred stocks will be able to participate in the
distribution of assets of any subsidiary upon the latter's liquidation or
reorganization, will be subject to prior claims of the subsidiary's creditors,
including trade creditors, except to the extent that the Company may itself be a
creditor with recognized claims against such subsidiary (in which case the
claims of the Company would still be subject to the prior claims of any secured
creditor of such subsidiary and of any holder of indebtedness of such subsidiary
that is senior to that held by the Company).
The Company's ability to pay dividends on any classes or series of
preferred stock is dependent upon the ability of the Company's subsidiaries to
distribute amounts to the Company in the form of dividends, loans or advances or
in the form of repayment of loans and advances from the Company. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay the dividends on any class or series of
preferred stock of TCI or to make any funds available therefor, whether by
dividends, loans or their payments. The payment of dividends, loans or advances
to the Company by its subsidiaries may be subject to statutory or regulatory
restrictions, is contingent upon the cash flows generated by those subsidiaries
and is subject to various business considerations. Further, certain of the
Company's subsidiaries are subject to loan agreements that prohibit or limit the
transfer of funds by such subsidiaries to the Company in the form of dividends,
loans, or advances and require that such subsidiaries' indebtedness to the
Company be subordinate to the indebtedness under such loan agreements. The
amount of net assets of subsidiaries subject to such restrictions exceeds the
Company's consolidated net assets. The Company's subsidiaries currently have
the ability to transfer funds to the Company in amounts exceeding the Company's
dividend requirement on any class or series of preferred stock. Net cash
provided by operating activities of subsidiaries which are not restricted from
making transfers to the parent company have been and are expected to continue to
be sufficient to enable the parent company to meet its cash obligations.
Subsidiaries of the Company had approximately $1.8 billion in unused
lines of credit at December 31, 1994 excluding amounts related to lines of
credit which provide availability to support commercial paper. Although
subsidiaries of the Company were in compliance with the restrictive covenants
contained in their credit facilities at said date, additional borrowings under
the credit facilities are subject to the subsidiaries' continuing compliance
with such restrictive covenants (which relate primarily to the maintenance of
certain ratios of cash flow to total debt
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and cash flow to debt service, as defined). The Company believes that the
aforementioned FCC 1993 and 1994 rate regulations will not materially impact the
availability under its subsidiaries' lines of credit or its ability to repay
indebtedness as it matures. See note 7 to the accompanying consolidated
financial statements for additional information regarding the material terms of
the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges)($1,798 million, $1,858 million and $1,637 million
in 1994, 1993 and 1992, respectively) to interest expense ($785 million, $731
million and $718 million in 1994, 1993 and 1992, respectively), is determined by
reference to the consolidated statements of operations. The Company's interest
coverage ratio was 229%, 254% and 228% for 1994, 1993 and 1992, respectively.
Management of the Company believes that the foregoing interest coverage ratio is
adequate in light of the consistency and nonseasonal nature of its cable
television operations and the relative predictability of the Company's interest
expense, almost half of which results from fixed rate indebtedness. Operating
Cash Flow is a measure of value and borrowing capacity within the cable
television industry and is not intended to be a substitute for cash flows
provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($1,005 million, $1,251
million and $957 million in 1994, 1993 and 1992, respectively) reflects net cash
from the operations of the Company available for the Company's liquidity needs
after taking into consideration the aforementioned additional substantial costs
of doing business not reflected in Operating Cash Flow. Amounts expended by the
Company for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of the Company and its subsidiaries to obtain additional
financing (including the subsidiaries available lines of credit and access to
public debt markets), issuances and sales of the Company's equity or equity of
its subsidiaries, proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See the Company's
consolidated statements of cash flows included in the accompanying consolidated
financial statements.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the Company pays (i) fixed interest rates ranging from 7.2%
to 9.9% on notional amounts of $550 million at December 31, 1994 and (ii)
variable interest rates on notional amounts of $2,605 million at December 31,
1994. During the years ended December 31, 1994, 1993 and 1992, the Company's
net payments pursuant to its fixed rate exchange agreements were $26 million,
$38 million and $46 million, respectively. During the
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years ended December 31, 1994, 1993 and 1992, the Company's net receipts
pursuant to its variable rate exchange agreements were $36 million, $31 million
and $7 million, respectively. The Company's interest rate hedge agreements fix
the maximum variable interest rates on notional amounts of $325 million at 11%.
The Company is exposed to credit losses for the periodic settlements of amounts
due under the interest rate exchange agreements in the event of nonperformance
by the other parties to the agreements. However, the Company does not
anticipate that it will incur any material credit losses because it does not
anticipate nonperformance by the counterparties.
Approximately thirty-five percent of the franchises held by the
Company, involving approximately 3.8 million basic subscribers, expire within
five years. There can be no assurance that the franchises for the Company's
systems will be renewed as they expire although the Company believes that its
cable television systems generally have been operated in a manner which
satisfies the standards established by the Cable Communications Policy Act of
1984 (the "1984 Cable Act"), as supplemented by the renewal provisions of the
1992 Cable Act, for franchise renewal. However, in the event they are renewed,
the Company cannot predict the impact of any new or different conditions that
might be imposed by the franchising authorities in connection with the renewals.
To date they have not varied significantly from the original terms.
The Company competes with operators who provide, via alternative
methods of distribution, the same or similar video programming as that offered
by the Company's cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC. One such technology is direct
broadcast satellite ("DBS"). DBS services are offered directly to subscribers
owning home satellite dishes that vary in size depending upon the power of the
satellite; two DBS operators recently began offering nationwide video services
that can be received by a satellite that measures approximately eighteen inches
in diameter. DBS operators can acquire the right to distribute over satellite
all of the significant cable television programming currently available on the
Company's cable systems. As the cost of equipment needed to receive these
transmissions declines, the Company expects that it will experience increased
and substantial competition from DBS operators.
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions
are removed or relaxed, the Company will face increased competition from
telephone companies which, in most cases, have greater financial resources than
the Company. All major telephone companies have announced plans to acquire
cable television systems or provide video services to the home through fiber
optic technology.
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The FCC authorized the provision of so-called "video-dialtone"
services by which independent video programmers may deliver services to the home
over telephone-provided circuits, thereby by-passing the local cable system or
other video provider. Under the FCC decision, such services would require no
local franchise agreement or payment to the city or local governmental
authority. Although telephone companies providing "video-dialtone" were
originally allowed only a limited financial interest in programming services and
their role was limited largely to that of a traditional "common carrier," the
FCC recently has proposed relaxation of these restrictions and has authorized
some telephone companies to offer programming services directly to subscribers.
Telephone companies have filed numerous applications with the FCC for
authorization to construct video-dialtone systems to provide such services.
This alternative means of distributing video services to the consumer's home
represents a direct competitive threat to the Company.
The Company's entertainment and information programming services
subsidiaries and 50% owned affiliates lease satellite transponders as follows:
6 full time leases and one shared lease on a "protected" or "transponder
protected" basis, and 15 full time "unprotected" leases for an aggregate of 21
transponders on 10 domestic and 2 international communications satellites.
Domestic communications satellite transponders may be leased full or part time
on a "protected", "transponder protected" or "unprotected" basis. When the
carrier provides services to a customer on a "protected" basis, replacement
transponders are reserved on board the satellite for use in the event the
"protected" transponder fails. Should there be no reserve transponders
available, the "protected" customer will displace an "unprotected" transponder
customer on the same satellite. In certain cases, the carrier also maintains a
protection satellite and should a satellite fail completely, all lessors'
"protected" transponders would be moved to the protection satellite. The
customer who leases an "unprotected" transponder has no reserve transponders
available, and may have its service interrupted for an indefinite period when
its transponder is required to restore a "protected" service.
Although the Company believes it has taken reasonable steps to ensure
its continued satellite transmission capability, there can be no assurance that
termination or interruption of satellite transmissions will not occur. Such a
termination or interruption of service by one or more of these satellites could
have a material adverse effect on the results of operations and financial
condition of the programming group.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which the Company has no
control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites. Many of the commercial satellites now in orbit will
have to be replaced in the next few years. The federal government has placed
restrictions on the launching of commercial satellites by means of the space
shuttle, causing manufacturers of commercial satellites to rely on alternative
delivery systems to place these satellites in orbit. Additional commercial
launching facilities are being developed currently, but there can be no
assurance that the launch systems currently in place, or to be developed, will
be able to replace the domestic communications satellites as their useful lives
end.
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The Company is currently the sole satellite carrier of WTBS, a 24-hour
independent UHF television station originated by TBS to cable television system
operators and operators of other non-broadcast distribution media who receive
the signal on their earth stations and offer the service to their subscribers.
Other independent television stations are transmitted by other carriers.
Southern does not have an agreement with TBS with respect to the retransmission
of the WTBS signal and there are no specific statutory or regulatory
restrictions that would prevent any satellite carrier from transmitting the WTBS
signal so long as the carrier meets the passive carrier requirements of the
Copyright Revision Act of 1976, as amended and any applicable requirements of
the Communications Act of 1934, as amended, or, if the carrier serves home
satellite dish owners, so long as the carrier meets the requirements of the
Satellite Home Viewer Act of 1988. Further, Southern has no control over the
programming on such station. TBS produces and distributes other cable
programming services, and TBS has and may be expected to continue to give
priority to the programming needs of such services in allocating programming
owned by it or to which it has national distribution rights. Southern's
business could be adversely affected by any change in the type, mix or quality
of the programming on WTBS that results in the service being less desirable to
cable operators and their subscribers. TBS derives significant revenue from the
sale of advertising time on WTBS, however, and the Company therefore believes
that TBS has an economic incentive to maintain the audience appeal of WTBS's
programming.
The Company is upgrading and installing optical fiber in its cable
systems at a rate such that in two years TCI anticipates that it will be serving
the majority of its customers with state-of-the-art fiber optic cable systems.
The Company made capital expenditures of $1,264 million in 1994 and the Company
expects to expend similar amounts in 1995 to provide for the continued
rebuilding of its cable systems. However, such proposed expenditures are
subject to reevaluation based upon changes in the Company's liquidity, including
those resulting from rate regulation.
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"). The
aggregate minimum liability under certain of the license agreements is
approximately $405 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. Additionally, the Company has guaranteed up to $70 million of
similar license fee obligations of another affiliate.
The Company intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. The Company's obligation for certain
sports program rights contracts as of December 31, 1994 was $170 million. It is
expected that sufficient cash will be generated by the programming services to
satisfy these commitments. However, the continued development of such services
may require additional financing and it cannot be predicted whether the Company
will obtain such financing on terms acceptable to the Company.
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The Company believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Generally, any
refunds of the excess portion of all other Regulated Services rates would be
retroactive to the later of September 1, 1993, or one year prior to the
implementation of the rate reduction. The amount of refunds, if any, which
could be payable by the Company in the event that any system's rates were to be
successfully challenged, is not considered to be material.
The Company believes that the FCC's comprehensive system of rate
regulation, including regulation of the changes in rates when programming
services are added or deleted from service tiers, also may have an adverse
effect on the programming services in which the Company has an ownership
interest by limiting the carriage of such services and/or the ability and
willingness of cable operators to pay the rights fees for such carriage.
The FCC has adopted rules providing for mandatory carriage by cable
systems after September 1, 1993 of all local full-power commercial television
broadcast signals (up to one-third of all channels), including the signals of
stations carrying home-shopping programming after October 6, 1993, and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals. Alternatively, after October 6, 1993, commercial
broadcasters have the right to deny such carriage unless they grant
retransmission consent. The "must-carry" statutory provisions and regulations
remain in effect pending the outcome of ongoing judicial proceedings to resolve
challenges to their constitutionality. TCI believes that, by requiring such
carriage of broadcast signals, these regulations may adversely affect the
ability of TCI's programming services to obtain carriage on cable systems with
limited channel capacity. To the extent that carriage is thereby limited, the
subscriber and advertising revenues available to TCI's programming services also
will be limited. However, as discussed above, such regulations have resulted in
expanded cable distribution of HSN, which is carried by a number of full-power
commercial broadcast television stations.
The FCC has adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels or
a 45 percent limit, whichever is greater, provided that the additional channels
carry minority controlled programming services. The regulations grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services. These rules, which currently
are subject to pending petitions for reconsideration before the FCC, may limit
carriage of the Company's programming services on certain cable systems of cable
operators in which TCI has ownership interests.
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On September 23, 1993, the FCC also adopted regulations establishing a
30% limit on the number of homes passed nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. Under the FCC regulations, if the ownership limits are determined to be
constitutional, they may limit TCI's future ability to acquire interests in
additional cable systems.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. The Company is uncertain how the courts and/or the FCC
ultimately will rule or whether such rulings will materially change any existing
rules or statutory requirements.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
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INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Tele-
Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994.
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, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
IV-62
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
--------- --------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 74 1
Trade and other receivables, net 301 232
Inventories, net 121 --
Investment in Liberty Media Corporation
("Liberty") (note 3) -- 489
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 1,215 645
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 660 491
Investment in QVC, Inc. ("QVC") (note 6) 281 2
Property and equipment, at cost:
Land 91 73
Distribution systems 7,705 6,629
Support equipment and buildings 1,085 818
Computer and broadcast equipment 61 --
------- ------
8,942 7,520
Less accumulated depreciation 3,066 2,585
------- ------
5,876 4,935
------- ------
Franchise costs 11,152 10,620
Less accumulated amortization 1,708 1,423
------- ------
9,444 9,197
------- ------
Other assets, at cost, net of amortization 1,556 528
------- ------
$19,528 16,520
======= ======
</TABLE>
(continued)
IV-63
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets, continued
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ---------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 201 124
Accrued interest 183 157
Other accrued expenses 809 500
Debt (note 7) 11,162 9,900
Deferred income taxes (note 11) 3,613 3,310
Other liabilities 160 114
------- ------
Total liabilities 16,128 14,105
------- ------
Minority interests in equity
of consolidated subsidiaries 429 285
Redeemable preferred stocks (note 8) -- 18
Stockholders' equity (note 9):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Convertible Preferred Stock, Series C,
$.01 par value -- --
Class A common stock, $1 par value
Authorized 1,100,000,000 shares;
issued 576,979,498 shares in 1994
and 481,837,347 shares in 1993 577 482
Class B common stock, $1 par value
Authorized 150,000,000 shares;
issued 89,287,429 shares in 1994
and 47,258,787 shares in 1993 89 47
Additional paid-in capital 2,959 2,293
Cumulative foreign currency
translation adjustment, net of taxes (4) (29)
Unrealized holding gains for
available-for-sale securities, net of taxes 253 --
Accumulated deficit (293) (348)
------- ------
3,581 2,445
Treasury stock, at cost (86,030,992 and
79,335,038 shares of Class A common
stock in 1994 and 1993 and 4,172,629
shares of Class B common stock in 1994) (610) (333)
------- ------
Total stockholders' equity 2,971 2,112
------- ------
Commitments and contingencies (note 12) $19,528 16,520
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
IV-64
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Operations
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- ------- -------
amounts in millions,
except per share amounts
Revenue (note 13):
<S> <C> <C> <C>
From cable and programming services (note 3) $4,454 4,153 3,574
Net sales from home shopping services 482 -- --
------ ----- -----
4,936 4,153 3,574
------ ----- -----
Operating costs and expenses:
Operating (note 3) 1,445 1,190 1,028
Cost of sales 313 -- --
Selling, general and administrative (note 4) 1,380 1,105 909
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating to stock
appreciation rights (8) -- --
Restructuring charge -- -- 8
Depreciation 700 622 512
Amortization 318 289 252
------ ----- -----
4,148 3,237 2,710
------ ----- -----
Operating income (note 13) 788 916 864
Other income (expense):
Interest expense (785) (731) (718)
Interest and dividend income 36 34 69
Share of earnings of Liberty (note 3) 125 4 22
Share of losses of other affiliates, net (note 4) (120) (76) (105)
Gain on sale of stock by equity investee (note 4) 161 -- --
Gain (loss) on disposition of assets (10) 42 9
Premium received on redemption of
preferred stock investment (note 4) -- -- 14
Loss on early extinguishment of debt (9) (17) (67)
Minority interests in losses (earnings) of
consolidated subsidiaries, net 2 (5) (41)
Other, net (17) (6) (2)
------ ----- -----
(617) (755) (819)
------ ----- -----
Earnings from continuing operations
before income taxes 171 161 45
Income tax expense (note 11) (116) (168) (38)
------ ----- -----
Earnings (loss) from continuing operations 55 (7) 7
Loss from discontinued operations,
net of income taxes (note 14) -- -- (15)
------ ----- -----
Net earnings (loss) 55 (7) (8)
Dividend requirements on preferred stocks (8) (2) (15)
------ ----- -----
Net earnings (loss) attributable
to common stockholders $ 47 (9) (23)
====== ===== =====
Primary and fully diluted earnings (loss)
attributable to common stockholders per
common and common equivalent share (note 1):
Continuing operations $.09 (.02) (.01)
Discontinued operations -- -- (.04)
------ ----- -----
$.09 (.02) (.05)
====== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
IV-65
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Class B Series C Common stock Additional
Preferred Preferred ----------------------- paid-in
Stock Stock Class A Class B capital
--------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ -- -- 449 49 1,738
Net loss -- -- -- -- --
Conversion of public debentures
(note 7) -- -- 7 -- 105
Issuance of common stock upon
exercise of options -- -- 1 -- 13
Issuance of Class A common stock
for acquisition and
investment -- -- 5 -- 93
Dividends on redeemable
preferred stocks -- -- -- -- (15)
Foreign currency translation
adjustment -- -- -- -- --
Acquisition and retirement
of common stock -- -- -- (1) (25)
------ ------ ------ ------ ------
Balance at December 31, 1992 -- -- 462 48 1,909
Net loss -- -- -- -- --
Issuance of common stock
upon conversion of notes
(note 7) -- -- 20 -- 383
Issuance of common stock upon
exercise of options -- -- -- -- 7
Dividends on redeemable
preferred stocks -- -- -- -- (2)
Foreign currency translation
adjustment -- -- -- -- --
Acquisition and retirement
of common stock -- -- -- (1) (4)
------ ------ ------ ------ ------
Balance at December 31, 1993 $ -- -- 482 47 2,293
------ ------ ------ ------ ------
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
currency available- from Total
translation for-sale related Accumulated Treasury stockholders'
adjustment securities party deficit stock equity
----------- ---------- ---------- ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 -- -- -- (333) (333) 1,570
Net loss -- -- -- (8) -- (8)
Conversion of public debentures
(note 7) -- -- -- -- -- 112
Issuance of common stock upon
exercise of options -- -- -- -- -- 14
Issuance of Class A common stock
for acquisition and
investment -- -- -- -- -- 98
Dividends on redeemable
preferred stocks -- -- -- -- -- (15)
Foreign currency translation
adjustment (19) -- -- -- -- (19)
Acquisition and retirement
of common stock -- -- -- -- -- (26)
------ ------ ------ ------ ------ ------
Balance at December 31, 1992 (19) -- -- (341) (333) 1,726
Net loss -- -- -- (7) -- (7)
Issuance of common stock
upon conversion of notes
(note 7) -- -- -- -- -- 403
Issuance of common stock upon
exercise of options -- -- -- -- -- 7
Dividends on redeemable
preferred stocks -- -- -- -- -- (2)
Foreign currency translation
adjustment (10) -- -- -- -- (10)
Acquisition and retirement
of common stock -- -- -- -- -- (5)
------ ------ ------ ------ ------ ------
Balance at December 31, 1993 (29) -- -- (348) (333) 2,112
------ ------ ------ ------ ------ ------
</TABLE>
(continued)
IV-66
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Stockholders' Equity, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Class B Series C Common stock Additional
Preferred Preferred ----------------------- paid-in
Stock Stock Class A Class B capital
--------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- -- 482 47 2,293
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 (note 5) -- -- -- -- --
Net earnings -- -- -- -- --
Conversion of redeemable preferred
stock (note 8) -- -- 1 -- 17
Issuance of common stock upon
conversion of notes (note 7) -- -- 3 -- --
Issuance of common stock upon
exercise of stock option -- -- -- -- 3
Acquisition and retirement of
common stock -- -- -- -- (2)
Consummation of the TCI/Liberty
Combination (notes 1 and 3) -- -- 85 42 383
Issuance of Series C Preferred Stock
in acquisition (note 9) -- -- -- -- 168
Accreted dividends on all classes of
preferred stock -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- 8
Payment of preferred stock dividends -- -- -- -- (4)
Foreign currency translation adjustment -- -- -- -- --
Issuance of TCI Class A common
stock to subsidiaries of TCI in
Reorganization -- -- -- -- (23)
Issuance of Class A common stock
for investment -- -- 6 -- 124
Repayment of note receivable from
related party (note 9) -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities (note 5) -- -- -- -- --
------ ------ ------ ------ ------
Balance at December 31, 1994 $ -- -- 577 89 2,959
====== ====== ====== ====== ======
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
currency available- from Total
translation for-sale related Accumulated Treasury stockholders'
adjustment securities party deficit stock equity
----------- ---------- ---------- ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (29) -- -- (348) (333) 2,112
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 (note 5) -- 304 -- -- -- 304
Net earnings -- -- -- 55 -- 55
Conversion of redeemable preferred
stock (note 8) -- -- -- -- -- 18
Issuance of common stock upon
conversion of notes (note 7) -- -- -- -- -- 3
Issuance of common stock upon
exercise of stock option -- -- -- -- -- 3
Acquisition and retirement of
common stock -- -- -- -- -- (2)
Consummation of the TCI/Liberty
Combination (notes 1 and 3) -- 182 (15) -- (285) 392
Issuance of Series C Preferred Stock
in acquisition (note 9) -- -- -- -- -- 168
Accreted dividends on all classes of
preferred stock -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- -- 8
Payment of preferred stock dividends -- -- -- -- -- (4)
Foreign currency translation adjustment 25 -- -- -- -- 25
Issuance of TCI Class A common
stock to subsidiaries of TCI in
Reorganization -- -- -- -- 23 --
Issuance of Class A common stock
for investment -- -- -- -- -- 130
Repayment of note receivable from
related party (note 9) -- -- 15 -- (15) --
Change in unrealized holding gains for
available-for-sale securities (note 5) -- (233) -- -- -- (233)
------ ------ ------ ------ ------ ------
Balance at December 31, 1994 (4) 253 -- (293) (610) 2,971
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
IV-67
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 55 (47) (8)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,018 911 764
Compensation relating to stock appreciation
rights -- 31 1
Adjustment to compensation relating to stock
appreciation rights (8) -- --
Payment for stock appreciation rights -- -- (80)
Share of earnings of Liberty (125) (4) (22)
Share of losses of other affiliates 120 76 105
Gain on sale of stock by equity investee (161) -- --
Deferred income tax expense 33 139 28
Minority interests in earnings (losses) (2) 5 41
Amortization of debt discount 1 27 27
Loss on early extinguishment of debt 9 17 67
Loss (gain) on disposition of assets 10 (42) (9)
Noncash interest expense 5 -- --
Premium received on preferred stock
investment redemption -- -- (14)
Payment of premium received on
preferred stock investment redemption -- 14 --
Noncash interest and dividend income (8) (7) (40)
Discontinued operations -- -- 15
Restructuring charge -- -- 8
Payment on restructuring charge -- (8) --
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 15 (32) (3)
Change in inventories (26) -- --
Change in accrued interest 13 63 --
Change in other accruals and payables 56 68 77
------ ----- ----
Net cash provided by operating 1,005 1,251 957
activities ------ ----- ----
</TABLE>
(continued)
IV-68
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from investing activities:
Cash paid for acquisitions (358) (158) (1,256)
Capital expended for property and equipment (1,264) (947) (526)
Cash proceeds from disposition of assets 39 149 66
Payment received on preferred
stock investment redemption -- 183 --
Cash proceeds from disposition of discontinued
operations -- -- 220
Discontinued operations -- -- 9
Additional investments in and
loans to affiliates and others (445) (361) (205)
Repayment of loans by affiliates and others 148 62 32
Return of capital from affiliates 24 1 1
Other investing activities (136) (99) (155)
------- ------ ------
Net cash used in investing
activities (1,992) (1,170) (1,814)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt 4,676 6,305 5,354
Repayments of debt (3,607) (6,321) (4,435)
Repayment of short-term notes to affiliate -- -- (22)
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends (4) (2) (15)
Repurchases of preferred stock -- (92) (5)
Issuances of common stock 1 6 7
Repurchases of common stock -- (4) (19)
------- ------ ------
Net cash provided (used) by
financing activities 1,060 (114) 859
------- ------ ------
Net increase (decrease) in cash 73 (33) 2
Cash at beginning of year 1 34 32
------- ------ ------
Cash at end of year $ 74 1 34
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
IV-69
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. (formerly TCI/Liberty Holding Company) and those
of all majority-owned subsidiaries ("TCI" or the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The TCI/Liberty Combination
---------------------------
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "Old TCI") and Liberty entered into a definitive
merger agreement (the "TCI/Liberty Merger Agreement") to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated
on August 4, 1994 and was structured as a tax free exchange of Class A and
Class B shares of both companies and preferred stock of Liberty for like
shares of a newly formed holding company, TCI/Liberty Holding Company. In
connection with the TCI/Liberty Combination, Old TCI changed its name to
TCI Communications, Inc. ("TCIC") and TCI/Liberty Holding Company changed
its name to Tele-Communications, Inc. Old TCI shareholders received one
share of TCI for each of their shares. Liberty common shareholders
received 0.975 of a share of TCI for each of their common shares (see note
3). Upon consummation of the TCI/Liberty Combination, certain subsidiaries
of TCIC exchanged the 79,335,038 shares of Old TCI Class A common stock
held by such subsidiaries for 79,335,038 shares of TCI Class A common
stock. Such ownership is reflected as treasury stock at such subsidiaries'
historical cost in the accompanying consolidated financial statements.
Reorganization
--------------
During the fourth quarter of 1994, the Company was reorganized based upon
four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. As consideration
for such transfer of assets by TCIC and Liberty, TCI issued 317,112 shares
of TCI Class A common stock and 246,402 shares of Redeemable Convertible
Preferred Stock, Series E ("Series E Preferred Stock") (see note 9).
IV-70
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1994 and 1993 was not material.
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 $19
million at December 31, 1994.
Investments
-----------
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 Statement No. 115, 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 net of taxes as
a separate component of shareholders' equity. Unrealized holding gains and
losses on securities classified as trading are reported in earnings.
Marketable equity securities held by the Company were reported at the lower
of cost or market prior to the adoption of Statement No. 115, and any
declines in the value which were other than temporary were reflected as a
reduction in the Company's carrying value of such investment.
Other investments in which the ownership interest is less than 20% but do
not fall within the guidelines of Statement No. 115 are generally carried
at cost. For those investments in affiliates in which the Company's voting
interest is 20% to 50%, the equity method of accounting is generally used.
Under this method, the investment, originally recorded at cost, is adjusted
to recognize the Company's share of the net earnings or losses of the
affiliates as they occur rather than as dividends or other distributions
are received, limited to the extent of the Company's investment in,
advances to and guarantees for the investee. The Company's share of net
earnings or losses of affiliates includes the amortization of purchase
adjustments.
IV-71
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as gains or losses in the Company's consolidated statement of
operations.
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 1994, 1993 and 1992, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems, 3 to 40 years for support
equipment and buildings and 6 to 13 years for computer and broadcast
equipment.
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.
Interest Rate Derivatives
-------------------------
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from the Company's financial
liabilities are recognized as interest expense. Gains and losses on early
terminations of derivatives are included in the carrying amount of the
related debt and amortized as yield adjustments over the remaining terms of
the debt. The Company does not use such instruments for trading purposes.
IV-72
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Minority Interests
------------------
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the common equity of those consolidated subsidiaries. Further,
the minority interests' share of losses is not recognized if the minority
holders of common equity of consolidated subsidiaries have the right to
cause the Company to repurchase such holders' common equity.
Included in minority interests in equity of consolidated subsidiaries is
$50 million in each of 1994 and 1993 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.
Net Sales from Home Shopping Services
-------------------------------------
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.
Earnings (Loss) Per Common and Common Equivalent Share
------------------------------------------------------
Primary earnings per common and common equivalent share attributable to
common stockholders was computed by dividing net earnings attributable to
common stockholders by the weighted average number of common and common
equivalent shares outstanding (540.8 million for the year ended December
31, 1994).
Fully diluted earnings per common and common equivalent share attributable
to common stockholders was computed by dividing earnings attributable to
common stockholders by the weighted average number of common and common
equivalent shares outstanding (540.8 million for the year ended December
31, 1994). Shares issuable upon conversion of the Convertible Preferred
Stock, Series C ("Series C Preferred Stock") (see note 9)
IV-73
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
have not been included in the computation of weighted average shares
because their effect would be anti-dilutive.
Loss per common share attributable to common stockholders for the years
ended December 31, 1993 and 1992 was computed by dividing net loss
attributable to common stockholders by the weighted average number of
common shares outstanding (432.6 million for the year ended December 31,
1993 and 424.1 million for the year ended December 31, 1992). 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 1994
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $758 million, $641 million and $689 million for
the years ended December 31, 1994, 1993 and 1992, respectively. Also,
during these periods, cash paid for income taxes was not material.
IV-74
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $1,921 172 1,231
Liabilities assumed, net of current assets (648) (7) 21
Deferred tax liability recorded
in acquisitions (190) (7) 7
Minority interests in equity of
acquired entities (35) -- --
Note receivable from related party
assumed 15 -- --
Common stock and preferred stock
issued in acquisitions (808) -- (3)
Common stock issued to TCIC and
Liberty in the TCI/Liberty Combination
reflected as treasury stock (note 3) 285 -- --
Unrealized gains on available-for-sale
securities of acquired entities (182) -- --
------ ---- -----
Cash paid for acquisitions $ 358 158 1,256
====== ==== =====
Common stock issued upon conversion
of redeemable preferred stock $ 18 -- --
====== ==== =====
Effect of foreign currency translation
adjustment on book value of foreign
consolidated subsidiaries and equity
method investments $ 25 10 19
====== ==== =====
TCI common stock issued to subsidiaries
in Reorganization reflected as
treasury stock $ 23 -- --
====== ==== =====
</TABLE>
IV-75
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Unrealized gains, net of deferred income
taxes, on available-for-sale securities
as of January 1, 1994 $ 304 -- --
===== ===== =====
Reduction in unrealized gains, net of deferred
income taxes, on available-for-sale
securities exclusive of unrealized gains
recorded in the TCI/Liberty Combination $ 233 -- --
===== ===== =====
Common stock issued upon conversion
of notes (with accrued interest
through conversion) $ 3 403 112
===== ===== =====
Repayment of note receivable from related
party with shares of TCI Class A
common stock $ 15 -- --
===== ===== =====
Receipt of notes receivable upon
disposition of Liberty common
stock and preferred stock $ -- 182 --
===== ===== =====
Noncash exchange of equity investment
for consolidated subsidiary and
equity investment $ -- 22 --
===== ===== =====
Noncash capital contribution to
Community Cable Television ("CCT") $ -- 22 --
===== ===== =====
Common stock surrendered in lieu of cash
upon exercise of stock options $ 2 1 7
===== ===== =====
Value of TCI Class A common stock issued
as part of purchase price of equity
investment $ -- -- 95
===== ===== =====
Note received upon disposition of assets $ -- -- 15
===== ===== =====
</TABLE>
IV-76
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(3) Investment in Liberty Media Corporation
---------------------------------------
TCIC owned 3,477,778 shares of Liberty Class A common stock and 55,070
shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Liberty Class E Preferred Stock"). Upon consummation of
the TCI/Liberty Combination, TCIC received 3,390,833 shares of TCI Class A
common stock and 55,070 shares of TCI Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock ("Class B Preferred Stock"), a new
preferred stock of TCI having designations, preferences, rights and
qualifications, limitations and restrictions that are substantially
identical to those of the Liberty Class E Preferred Stock, except that the
holders of the Class B Preferred Stock will be entitled to one vote per
share in any general election of directors of TCI (see note 9). The Class
B Preferred Stock received by TCIC eliminates in consolidation.
Upon consummation of the TCI/Liberty Combination, the remaining classes of
preferred stock of Liberty held by TCIC were converted into shares of Class
A Preferred Stock, a new series of preferred stock of TCI having a
substantially equivalent fair market value to that which was given up. All
such preferred stock eliminates in consolidation (See note 9.)
Liberty owned 2,988,009 shares of Old TCI Class A common stock and
3,537,712 shares of Old TCI Class B common stock. Such shares were
replaced with the same number of shares of TCI Class A and Class B common
stock upon consummation of the TCI/Liberty Combination.
TCIC's and Liberty's ownership of TCI common stock are reflected as
treasury stock in the accompanying consolidated financial statements. Such
amounts have been recorded at the historical cost previously reflected by
TCIC and Liberty.
Due to the significant economic interest held by TCIC through its ownership
of Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the
earnings or losses generated by Liberty (by recognizing 100% of Liberty's
earnings or losses before deducting preferred stock dividends) through the
date the TCI/Liberty Combination was consummated.
The TCI/Liberty Combination was accounted for using predecessor cost due to
the aforementioned related party considerations. The results of operations
of such acquired entity have been consolidated with those of the Company
since the date the TCI/Liberty Combination was consummated. On a pro forma
basis, the Company's revenue would have been increased by approximately
$790 million and $1,153 million for the years
IV-77
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
ended December 31, 1994 and 1993, respectively, had the acquisition
occurred prior to January 1, 1993. On a pro forma basis, the Company's net
earnings would have remained unchanged as the Company had recognized 100%
of Liberty's earnings or losses through the date the TCI/Liberty
Combination was consummated. On a pro forma basis, the Company's earnings
per share would have decreased by $.01 for the year ended December 31, 1994
and the Company's loss per share would have remained unchanged for the year
ended December 31, 1993 had the acquisition occurred prior to January 1,
1993. 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 entity prior to January 1, 1993.
Summarized unaudited financial information of Liberty as of December 31,
1993 and for the period from January 1, 1994 through August 4, 1994 and for
the years ended December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1993
----
Consolidated Financial Position amounts in millions
-------------------------------
<S> <C>
Cash and cash equivalents $ 91
Investment in TCI common stock 104
Other investments and
related receivables 372
Other assets, net 870
------
Total assets $1,437
======
Debt $ 446
Deferred income taxes 2
Other liabilities 307
Minority interests 175
Redeemable preferred stocks 155
Stockholders' equity 352
------
Total liabilities and
stockholders' equity $1,437
======
</TABLE>
IV-78
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
Consolidated Operations amounts in millions
-----------------------
<S> <C> <C> <C>
Revenue $ 790 1,153 157
Operating expenses (726) (1,105) (144)
Depreciation and amortization (32) (49) (16)
----- ------ ----
Operating income (loss) 32 (1) (3)
Interest expense (22) (31) (7)
Other, net 115 36 32
----- ------ ----
Net earnings $ 125 4 22
===== ====== ====
</TABLE>
Prior to the TCI/Liberty Combination, TCIC purchased sports and other
programming from certain subsidiaries of Liberty. Charges to TCIC (which
were based upon customary rates charged to others) for such programming
were $27 million, $44 million and $44 million for the period from January
1, 1994 through August 4, 1994 and for the years ended December 31, 1993
and 1992, respectively. Such amounts are included in operating expenses in
the accompanying consolidated statements of operations. Certain
subsidiaries of Liberty purchased from TCIC, at TCIC's cost plus an
administrative fee, certain pay television and other programming. In
addition, a consolidated subsidiary of Liberty paid a commission to TCIC
for merchandise sales to customers who were subscribers of TCIC's cable
systems. Aggregate commission and charges for such programming were $9
million, $11 million and $3 million for the period from January 1, 1994
through August 4, 1994 and for the years ended December 31, 1993 and 1992,
respectively. Such amounts are recorded in revenue in the accompanying
consolidated statements of operations.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9% of
Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share
of Liberty's earnings prior to the TCI/Liberty Combination.
In January 1992, the Company and Liberty 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.
Pursuant to a cable television
IV-79
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
management agreement, a subsidiary of TCI provided management services for
cable television systems owned by CCT. The subsidiary received a fee equal
to 3% of the gross cable television revenue of the partnership prior to the
TCI/Liberty Combination.
(4) Investments in Affiliates
-------------------------
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at December
31, 1994 are TeleWest Communications plc ("TeleWest Communications")
(carrying value of $454 million), Discovery Communications, Inc. (carrying
value of $113 million) and Teleport Communications Group, Inc. ("TCG")
(carrying value of $126 million).
The Company is a shareholder of TeleWest Communications plc (formerly
TCI/US WEST Cable Communications Group or "TeleWest UK") ("TeleWest
Communications"), a company that is currently operating and constructing
cable television and telephone systems in the United Kingdom ("UK").
TeleWest Communications, which is accounted for under the equity method,
had a carrying value at December 31, 1994 of $454 million and comprised $43
million, $28 million and $26 million of the Company's share of its
affiliates' losses in 1994, 1993 and 1992, respectively. In February 1994,
the Company acquired a consolidated investment in Flextech p.l.c.
("Flextech"). Flextech accounted for net losses of $24 million (before
deducting the minority interests' 40% share of such losses) in 1994. In
addition, the Company has other less significant equity method investments
in video distribution and programming businesses located in the UK, other
parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying value
of $135 million at December 31, 1994 and accounted for $50 million of the
Company's share of its affiliates' losses in 1994.
On November 22, 1994, TCI and US West, Inc. each exchanged their respective
50% ownership interest in TeleWest UK for 302,250,000 ordinary shares and
76,500,000 convertible preference shares of TeleWest Communications (the
"TeleWest Exchange"). Following the completion of the TeleWest Exchange,
TeleWest Communications conducted an initial public offering on November
23, 1994 in which it sold 243,740,000 ordinary shares for aggregate net
proceeds of (Pounds)401 million (the "TeleWest IPO"). Upon completion of
the TeleWest Exchange and the TeleWest IPO, TCI and US West, Inc. each
became the owners of 36% of the ordinary shares and 38% of the total
outstanding ordinary and convertible preference shares of TeleWest
Communications. As a result of the TeleWest IPO and the associated
dilution of the Company's ownership interest of TeleWest Communications,
Inc., the Company has recognized a nonrecurring gain amounting to $161
million (before deducting the related tax expense of $57 million).
IV-80
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 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.
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
extinguish 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 assets of the Holding Companies were
recorded at predecessor cost.
IV-81
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 for the period ended December 2, 1992. The Company's share of
losses of SCI, prior to the Split-Off for the period ended December 2, 1992
amounted to $51 million, as adjusted for the effect of interest and
dividends accounted for by Storer as capital transactions due to their
related party nature.
Summarized unaudited financial information for affiliates other than
Liberty is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $2,243 1,059
Franchise costs, net 1,231 266
Feature film inventory 115 --
Other assets, net 1,512 727
------ ------
Total assets $5,101 2,052
====== ======
Debt $2,579 593
Due to (from) TCI (2) 78
Feature film rights payable 16 --
Other liabilities 681 338
Owners' equity 1,827 1,043
------ ------
Total liabilities and equity $5,101 2,052
====== ======
</TABLE>
IV-82
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1993 1992
---- ---- ----
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 2,015 713 1,224
Operating expenses (1,674) (648) (786)
Depreciation and amortization (398) (127) (303)
------- ------ -------
Operating income (loss) (57) (62) 135
Interest expense (169) (37) (295)
Other, net 82 98 (234)
------- ------ -------
Net loss $ (144) (1) (394)
======= ====== =======
</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.
(5) Investment in Turner Broadcasting System, Inc.
----------------------------------------------
The Company owns shares of a class of preferred stock of 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. 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 (which exceeded cost by $485 million) at December 31, 1993.
IV-83
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Company applied Statement No. 115 beginning in the first quarter of 1994.
Application of Statement No. 115 resulted in a net increase of $304 million to
stockholders' equity on January 1, 1994, representing the recognition of
unrealized appreciation, net of taxes, for the Company's investment in
marketable equity securities determined to be available-for-sale. Such amount
was adjusted by $182 million recorded in the TCI/Liberty Combination. The
amount of net unrealized gain was reduced by $233 million through December 31,
1994. The majority of such unrealized gain is comprised of the Company's
investment in TBS common stock ($100 million) and QVC common stock ($127
million) (see note 6). The Company holds no material debt securities.
The Company's investment in TBS preferred stock, carried at cost, had an
aggregate market value of $579 million and $954 million, based upon the market
value of the common stock into which it is convertible, (which exceeded cost
by $406 million and $781 million) at December 31, 1994 and 1993, respectively.
(6) Investment in QVC, Inc.
-----------------------
Pursuant to an Agreement and Plan of Merger dated as of August 4, 1994, as
amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Comcast Corporation
("Comcast") and Liberty, commenced an offer (the "QVC Tender Offer") to
purchase all outstanding shares of common stock and preferred stock of QVC,
Inc. ("QVC").
The QVC Tender Offer expired at midnight, New York City time, on February 9,
1995, the Purchaser accepted for payment all shares of QVC which had been
tendered in the QVC Tender Offer. Following consummation of the QVC Tender
Offer, the Purchaser was merged with and into QVC with QVC continuing as the
surviving corporation. The Company owns an approximate 43% interest of the
post-merger QVC.
A credit facility entered into by the Purchaser is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty have pledged their
shares of QVC pursuant to such credit facility.
TCI's ownership of QVC was received in the TCI/Liberty Combination. Liberty
had begun accounting for its investment in QVC under the cost method in May
1994, upon its determination to remain outside of the previous QVC
shareholders agreement. Prior to such determination, Liberty had accounted
for its investment in QVC under the equity method.
Upon consummation of the aforementioned QVC transactions, the Company is
deemed to exercise significant influence over QVC and, as such, will account
for its investment in QVC under the equity method. Had the Company accounted
for its investment under the equity method during 1994, the Company would have
reflected additional share of earnings of QVC
IV-84
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
of $8 million (of which $1 million would have been included in the Company's
share of Liberty's earnings prior to the TCI/Liberty Combination).
Additionally, the Company's investment in QVC, its deferred tax liability
and its unrealized gain from available-for-sale securities would have been
reduced by $216 million, $89 million and $127 million, respectively, had the
Company accounted for its investment in QVC under the equity method during
1994. The 1994 consolidated financial statements will be restated in the
first quarter of 1995.
(7) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ------------
December 31, 1994 1994 1993
----------------- ---- ----
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Senior notes 8.5% $ 5,412 5,052
Bank credit facilities 7.3% 4,045 3,344
Commercial paper 6.6% 445 44
Notes payable 10.2% 1,024 1,321
Convertible notes (a) 9.5% 45 47
Other debt -- 191 92
------- -----
$11,162 9,900
======= =====
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount of
$186 million and $197 million at December 31, 1994 and 1993,
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 TCI Class A common stock. During the year ended
December 31, 1994, certain of these notes were converted into 2,350,000
shares of TCI Class A common stock. At December 31, 1994, the notes were
convertible, at the option of the holders, into an aggregate of
38,710,990 shares of TCI Class A common stock.
On October 28, 1993, the Company called for redemption of its remaining Liquid
Yield Option(TM) Notes. In connection with such call for redemption, Notes
aggregating $405 million were converted into 18,694,377 shares of TCI Class A
common stock and Notes aggregating less than $1 million were redeemed together
with accrued interest to the redemption date.
IV-85
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Prior to the aforementioned redemption, Notes aggregating $6 million were
converted into 259,537 shares of TCI Class A common stock during 1993.
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 TCI 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.
The bank credit facilities and various other debt instruments of the Company's
subsidiaries generally contain restrictive covenants which require, among
other things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and cash
flow to debt service, as defined), and include certain limitations on
indebtedness, investments, guarantees, dispositions, stock repurchases and/or
dividend payments.
As security for borrowings under one of its credit facilities, TCI pledged a
portion of the common stock (with a quoted market value of approximately $479
million at December 31, 1994) it holds of TBS.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.2% to 9.9% on notional amounts of $550 million at
December 31, 1994 and (ii) variable interest rates (the "Variable Rate
Agreements") on notional amounts of $2,605 million at December 31, 1994.
During the years ended December 31, 1994, 1993 and 1992, the Company's net
payments pursuant to the Fixed Rate Agreements were $26 million, $38 million
and $47 million, respectively; and the Company's net receipts pursuant to the
Variable Rate Agreements were $36 million, $31 million and $7 million,
respectively. After giving effect to the Company's interest rate exchange
agreements, approximately 43% of the Company's indebtedness bears interest at
fixed rates.
IV-86
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------------------------- -----------------------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
------------- -------------- -------- -------------- --------------- --------
<S> <C> <C> <C> <C> <C>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
July 1996 8.2% 10 July 1996 8.2% 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
---- April 1999 7.4% 100
September 1999 7.2%-7.4% 300
$550 February 2000 5.8%-6.6% 650
==== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,605
======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the Company
does not anticipate that it will incur any material credit losses because it
does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
December 31, 1994, taking into consideration current interest rates and
assuming the current creditworthiness of the counterparties. The Company
would pay an estimated $195 million at December 31, 1994 to terminate the
agreements.
In order to diminish its exposure to extreme increases in variable interest
rates, the Company has entered into various interest rate hedge agreements on
notional amounts of $325 million which fix the maximum variable interest rates
at 11%. Such agreements expire during the third and fourth quarters of 1995.
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 $11,162 million, was $11,065 million at December
31, 1994.
IV-87
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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.
TCI has not assumed any of TCIC's or Liberty's indebtedness or other
obligations that were outstanding at the time the TCI/Liberty Combination was
consummated.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1995 $1,206*
1996 890
1997 839
1998 813
1999 823
</TABLE>
* Includes $445 million of commercial paper.
(8) Redeemable Preferred Stocks
---------------------------
4-1/2% Convertible Preferred Stock. The 4-1/2% Convertible Preferred Stock
was stated at its redemption value of $3,000 per share, and each share was
convertible into 204 shares of TCI Class A common stock. In February of 1994,
all of the shares of such convertible preferred stock were tendered to the
Company for conversion and, on March 3, 1994, 1,265,004 shares of TCI Class A
common stock were issued to the holders of such preferred stock.
Convertible Preferred Stock, Series D. Subsequent to December 31, 1994, the
Company issued 1,000,000 shares of a series of TCI Series Preferred Stock (see
note 9) designated "Convertible Preferred Stock, Series D" (the "Series D
Preferred Stock"), par value $.01 per share, as partial consideration for the
merger between TCIC and TeleCable Corporation ("TeleCable") (see note 16).
The holders of the Series D Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors out of unrestricted funds legally
available therefor, cumulative dividends, in preference to dividends on any
stock that ranks junior to the Series D Preferred Stock (currently the Class A
common stock, the Class B common stock and the Class B Preferred Stock), that
shall accrue on each share of Series D Preferred stock at the rate of 5-1/2%
per annum of the liquidation value ($300 per share). Dividends are
cumulative, and in the event that dividends are not paid in full on two
consecutive dividend payment dates or in the event that TCI fails to effect
any required redemption of Series D Preferred Stock, accrue at the rate of 10%
per annum of the liquidation value. The Series D Preferred Stock
IV-88
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
ranks on parity with the Class A Preferred Stock, the Series C Preferred Stock
and the Series E Preferred Stock.
Each share of Series D Preferred Stock is convertible into 10 shares of TCI
Class A common stock, subject to adjustment upon certain events specified in
the certificate of designation establishing Series D Preferred Stock. To the
extent any cash dividends are not paid on any dividend payment date, the
amount of such dividends will be deemed converted into shares of TCI Class A
common stock at a conversion rate equal to 95% of the then current market
price of TCI Class A common stock, and upon issuance of TCI Class A common
stock to holders of Series D Preferred Stock in respect of such deemed
conversion, such dividend will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a
price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for cash
at the option of TCI after the fifth anniversary of the issue date at such
redemption price or after the third anniversary of the issue date if the
market value per share of TCI Class A common stock shall have exceeded $37.50
for periods specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series D
Preferred Stock into TCI Class A common stock at a conversion rate of 95% of
the then current market value of TCI Class A common stock, provided that such
option may not be exercised unless the failure to redeem continues for more
than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the shareholders of
TCI.
(9) 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
IV-89
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 $19 million, $16 million
and $13 million for 1994, 1993 and 1992, respectively.
Preferred Stock
---------------
Class A Preferred Stock. The Company is authorized to issue 700,000 shares of
Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI hold
all of the issued and outstanding shares of such stock, amounting to 592,797
shares. Such preferred stock is eliminated in consolidation. The holders of
the Class A Preferred Stock are entitled to receive, when and as declared by
the Board of Directors, out of unrestricted funds legally available therefor,
cumulative dividends, in preference to dividends on any stock that ranks
junior to the Class A Preferred Stock (currently the Class A common stock, the
Class B common stock and the Class B Preferred Stock), that accrue on each
share of the Class A Preferred Stock at the rate of 9-3/8% per annum of the
Stated Liquidation Value of such share ($322.84 per share). Dividends are
fully cumulative and are payable in cash. The Class A Preferred Stock ranks
on a parity basis with the Series C Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock as to dividend rights, rights of
redemption or rights on liquidation. The Class A Preferred Stock is subject
to mandatory redemption by the Company on the twelfth anniversary of the issue
date. The Class A Preferred Stock may be redeemed at the option of the
Company. The holders of the Class A Preferred Stock have the right to vote at
any annual or special meeting of stockholders for the purpose of electing
directors. Each share of Class A Preferred Stock shall have one vote for such
purpose.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The
Company is authorized to issue 1,675,096 shares of Class B Preferred Stock.
All such shares are issued and outstanding. Subsidiaries of TCIC hold 55,070
of such issued and outstanding shares.
Dividends accrue cumulatively (but without compounding) at an annual rate of
6% of the stated liquidation value of $100 per share (the "Stated Liquidation
Value"), whether or not such dividends are declared or funds are legally
available for payment of dividends. Accrued dividends will be payable
annually on March 1 of each year (or the next succeeding business day if March
1 does not fall on a business day), commencing March 1, 1995, and, in the sole
discretion of the TCI Board, may be declared and paid in cash, in shares of
TCI Class A common stock or in any combination of the foregoing. Accrued
dividends not paid as provided above on any dividend payment date will
accumulate and such accumulated unpaid dividends may be declared and paid in
cash, shares of TCI Class A common stock or any combination thereof at any
time (subject to the rights of any senior stock and, if applicable, to the
concurrent satisfaction of any dividend arrearages on any class or series of
TCI preferred stock ranking on a parity with the Class B Preferred Stock with
respect to dividend rights) with reference to any regular dividend payment
date, to holders of record of Class B
IV-90
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Preferred Stock as of a special record date fixed by the TCI Board (which date
may not be more than 45 days nor less than 10 days prior to the date fixed for
the payment of such accumulated unpaid dividends). The Class B Preferred
Stock ranks junior to the Class A Preferred Stock with respect to the
declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the issuance
and delivery of shares of TCI Class A common stock, the number of such shares
to be issued and delivered will be determined by dividing the amount of the
dividend to be paid in shares of TCI Class A common stock by the Average
Market Price of the TCI Class A common stock. For this purpose, "Average
Market Price" means the average of the daily last reported sale prices (or, if
no sale price is reported on any day, the average of the high and low bid
prices on such day) of a share of TCI Class A common stock for the period of
20 consecutive trading days ending on the tenth trading day prior to the
regular record date or special record date, as the case may be, for the
applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the holders
of Class B Preferred Stock will be entitled, after payment of preferential
amounts on any class or series of stock ranking prior to the Class B Preferred
Stock with respect to liquidating distributions, to receive from the assets of
TCI available for distribution to stockholders an amount in cash or property
or a combination thereof, per share, equal to the Stated Liquidation Value
thereof, plus all accumulated and accrued but unpaid dividends thereon to and
including the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option of the
holders or otherwise.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock, the Class B Preferred Stock will be exchangeable at the
option of TCI in whole but not in part at any time for junior subordinated
debt securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes
will be issued pursuant to an indenture (the "Indenture"), to be executed by
TCI and a qualified trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal amount
of which will be equal to the aggregate Stated Liquidation Value of the shares
of Class B Preferred Stock so exchanged by such holder, plus all accumulated
and accrued but unpaid dividends thereon to and including the exchange date.
The Junior Exchange Notes will be issuable only in principal amounts of $100
or any integral multiple thereof and a cash adjustment will be paid to the
holder for any excess principal that would otherwise be issuable. The Junior
Exchange Notes will mature on the fifteenth anniversary of the date of
issuance and will be subject to earlier redemption at the option of TCI, in
whole or in part, for a redemption price equal to the principal amount thereof
plus accrued but unpaid interest. Interest will accrue, and be payable
annually, on the principal amount
IV-91
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
of the Junior Exchange Notes at a rate per annum to be determined prior to
issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury
Rate" (as defined in the Indenture). Interest will accrue on overdue
principal at the same rate, but will not accrue on overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of TCI
and will be subordinated in right of payment to all Senior Debt (as defined in
the Indenture). Accordingly, holders of Class B Preferred Stock who receive
Junior Exchange Notes in exchange therefor may have difficulty selling such
Notes.
For so long as any dividends are in arrears on the Class B Preferred Stock or
any class or series of TCI preferred stock ranking pari passu with the Class B
Preferred Stock which is entitled to payment of cumulative dividends prior to
the redemption, exchange, purchase or other acquisition of the Class B
Preferred Stock, and until all dividends accrued up to the immediately
preceding dividend payment date on the Class B Preferred Stock and such parity
stock shall have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, neither TCI nor any
subsidiary thereof may redeem, exchange, purchase or otherwise acquire any
shares of Class B Preferred Stock, any such parity stock or any class or
series of its capital stock ranking junior to the Class B Preferred Stock
(including the TCI common stock), or set aside any money or assets for such
purpose, unless all of the outstanding shares of Class B Preferred Stock and
such parity stock are redeemed. If TCI fails to redeem or exchange shares of
Class B Preferred Stock on a date fixed for redemption or exchange, and until
such shares are redeemed or exchanged in full, TCI may not redeem or exchange
any parity stock or junior stock, declare or pay any dividend on or make any
distribution with respect to any junior stock or set aside money or assets for
such purpose and neither TCI nor any subsidiary thereof may purchase or
otherwise acquire any Class B Preferred Stock, parity stock or junior stock or
set aside money or assets for any such purpose. The failure of TCI to pay any
dividends on any class or series of parity stock or to redeem or exchange on
any date fixed for redemption or exchange any shares of Class B Preferred
Stock shall not prevent TCI from (i) paying any dividends on junior stock
solely in shares of junior stock or the redemption purchase or other
acquisition of junior stock solely in exchange for (together with cash
adjustment for fractional shares, if any) or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; or (ii) the payment of
dividends on any parity stock solely in shares of parity stock and/or junior
stock or the redemption, exchange, purchase or other acquisition of Class B
Preferred Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of failure
to pay dividends on any parity stock) through the application of the proceeds
from the sale of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of directors,
will have one vote per share for such purpose and will vote as a single class
with the TCI common stock, the
IV-92
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Class A Preferred Stock and any other class or series of TCI preferred stock
entitled to vote in any general election of directors. The Class B Preferred
Stock will have no other voting rights except as required by the Delaware
General Corporation Law ("DGCL").
Series Preferred Stock. The TCI Series Preferred Stock is issuable, from time
to time, in one or more series, with such designations, preferences and
relative participating, option or other special rights, qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of such series adopted by
the TCI Board.
All shares of any one series of the TCI Series Preferred Stock are required to
be alike for every particular and all shares are required to rank equally and
be identical in all respects, except insofar as they may vary with respect to
matters which the TCI Board is expressly authorized by the TCI Charter to
determine in the resolution or resolutions providing for the issue of any
series of the TCI Series Preferred Stock.
Convertible Preferred Stock, Series C. TCI has issued 70,559 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred Stock,
Series C," par value $.01 per share, as partial consideration for an
acquisition by TCI.
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 100 shares of TCI Class A common stock, subject to anti-dilution
adjustments. The dividend, liquidation and redemption features of the Series
C Preferred Stock will be determined by reference to the liquidation value of
the TCI Series C Preferred Stock, which as of any date of determination is
equal, on a per share basis, to the sum of (i) $2,375, plus (ii) all dividends
accrued on such share through the dividend payment date on or immediately
preceding such date of determination to the extent not paid on or before such
date, plus (iii), for purposes of determining liquidation and redemption
payments, all unpaid dividends accrued on the sum of clauses (i) and (ii)
above, to such date of determination.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock ranking pari passu with the Series C Preferred Stock, the
holders of Series C Preferred Stock are entitled to receive and, subject to
any prohibition or restriction contained in any instrument evidencing
indebtedness of TCI, TCI is obligated to pay preferential cumulative cash
dividends out of funds legally available therefor. Dividends accrue
cumulatively at an annual rate of 5-1/2% of the liquidation value per share,
whether or not such dividends are declared or funds are legally or
contractually available for payment of dividends, except that if TCI fails to
redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, dividends will thereafter accrue cumulatively at an annual
rate of 15% of the liquidation value per share. Accrued dividends are payable
quarterly on January 1, April 1, July 1 and October 1 of each year, commencing
on the first dividend payment date after the issuance of the Series C
Preferred Stock. Dividends not paid on any dividend
IV-93
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
payment date will be added to the liquidation value on such date and remain a
part thereof until such dividends and all dividends accrued thereon are paid
in full. Dividends accrue on unpaid dividends at the rate of 5-1/2% per
annum, unless such dividends remain unpaid for two consecutive quarters in
which event such rate will increase to 15% per annum. The Series C Preferred
Stock ranks prior to the TCI common stock and Class B Preferred Stock and pari
passu with the Class A Preferred Stock with respect to the declaration and
payment of dividends.
Upon the dissolution, liquidation or winding up of TCI, holders of the Series
C Preferred Stock will be entitled to receive from the assets of TCI available
for distribution to stockholders an amount in cash, per share, equal to the
liquidation value. The Series C Preferred Stock will rank prior to the TCI
common stock and Class B Preferred Stock and pari passu with the Class A
Preferred Stock as to any such distributions.
The Series C Preferred Stock is subject to optional redemption at any time
after the seventh anniversary of its issuance, in whole or in part, by TCI at
a redemption price, per share, equal to the then liquidation value of the
Series C Preferred Stock.
For so long as any dividends are in arrears on the Series C Preferred Stock or
any class or series of TCI preferred stock ranking pari passu (including the
Class A Preferred Stock) with the Series C Preferred Stock and until all
dividends accrued up to the immediately preceding dividend payment date on the
Series C Preferred Stock and such parity stock shall have been paid or
declared and set apart so as to be available for payment in full thereof and
for no other purpose, TCI may not redeem or otherwise acquire any shares of
Series C Preferred Stock, any such parity stock or any class or series of its
preferred stock ranking junior (including the TCI common stock and Series C
Preferred Stock) unless all then outstanding shares of Series C Preferred
Stock and such parity stock are redeemed. If TCI fails to redeem shares of
Series C Preferred Stock required to be redeemed on a redemption date, and
until all such shares are redeemed in full, TCI may not redeem any such parity
stock or junior stock, or otherwise acquire any shares of such stock or Series
C Preferred Stock. Nothing contained in the two immediately preceding
sentences shall prevent TCI from acquiring (i) shares of Series C Preferred
Stock and any such parity stock pursuant to a purchase or exchange offer made
to holders of all outstanding shares of Series C Preferred Stock and such
parity stock, if (a) as to holders of all outstanding shares of Series C
Preferred Stock, the terms of the purchase or exchange offer for all such
shares are identical, (b) as to holders for all outstanding shares of a
particular series or class of parity stock, the terms of the purchase or
exchange offer for all such shares are identical and (c) as among holders of
all outstanding shares of Series C Preferred Stock and parity stock, the terms
of each purchase or exchange offer are substantially identical relative to the
respective liquidation prices of the shares of Series C Preferred Stock and
each series or class of such parity stock, or (ii) shares of Series C
Preferred Stock, parity stock or junior stock in exchange for, or through the
application of the proceeds of the sale of, shares of junior stock.
IV-94
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Series C Preferred Stock is subject to restrictions on transfer although
it has certain customary registration rights with respect to the underlying
shares of TCI Class A common stock. The Series C Preferred Stock may vote on
all matters submitted to a vote of the holders of the TCI common stock, has
one vote for each share of TCI Class A common stock into which the shares of
Series C Preferred Stock are converted for such purpose, and may vote as a
single class with the TCI common stock. The Series C Preferred Stock has no
other voting rights except as required by the DGCL and except that the consent
of the holders of record of shares representing at least two-thirds of the
liquidation value of the outstanding shares of the Series C Preferred Stock is
necessary to (i) amend the designation, rights, preferences and limitations of
the Series C Preferred Stock as set forth in the TCI Charter and (ii) to
create or designate any class or series of TCI preferred stock that would rank
prior to the Series C Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. In connection with the
Reorganization, the Board of Directors created and authorized the issuance of
the Redeemable Convertible Preferred Stock, Series E, par value $.01 per
share. The Company is authorized to issue 400,000 shares. Subsidiaries of TCI
hold all of the issued and outstanding shares of such stock, amounting to
246,402 shares. All such preferred stock eliminates in consolidation.
The holders of the Series E Preferred Stock are entitled to receive, when and
as declared by the Board of Directors, out of unrestricted funds legally
available therefor, cumulative dividends, in preference to dividends on any
stock that ranks junior to the Series E Preferred Stock (currently the Class A
common stock, the Class B common stock and the Class B Preferred Stock), that
shall accrue on each share of Series E Preferred Stock at the rate of 5.0% per
annum of the Stated Liquidation Value ($22,303 per share). Dividends are
fully cumulative and are payable in cash. The Series E Preferred Stock ranks
on parity with the Class A Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock as to dividend rights, rights of redemption or
rights on liquidation.
The Series E Preferred Stock may be redeemed at the option of the Company.
The Company may elect to pay the redemption price by issuing to the holder
thereof a number of shares of Class A common stock equal to the aggregate
redemption price of such shares divided by the Average Quoted Price (as
defined) of a share of Class A common stock.
Unless previously called for redemption, shares of Series E Preferred Stock
shall be convertible, at the option of the holder thereof, into shares of
Class A common stock at any time subsequent to a duly approved amendment to
the Company's Restated Certificate of Incorporation increasing the number of
Class A shares to a number that would permit conversion of all shares of
Series E Preferred Stock then outstanding into Class A common stock. The
Series E Preferred Stock may be converted into Class A common stock at the
initial conversion rate of 1,000 shares of Class A common stock for one share
of the Series E Preferred Stock.
IV-95
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The holders of the Series E Preferred Stock have the right to vote at any
annual or special meeting of stockholders for the purpose of electing
directors. Each share of Series E Preferred Stock shall have one vote for such
purpose.
Stock Options
-------------
The Company has adopted the Tele-Communications, Inc. 1994 Stock Incentive
Plan (the "Plan"). The Plan provides for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be made
as grants of stock options, stock appreciation rights, restricted shares,
stock units or any combination thereof. Pursuant to the TCI/Liberty Merger
Agreement and certain assumption agreements, stock options and/or stock
appreciation rights granted (or assumed) by Old TCI and stock options and/or
stock appreciation rights granted by Liberty were assumed by the Company and
new options and/or stock appreciation rights were substituted under the Plan.
The following descriptions represent the terms of the assumed options and/or
stock appreciation rights and additional awards under the Plan.
TCI assumed certain options which were exercisable through November 9, 1994.
During the years ended December 31, 1994, 1993 and 1992, options to acquire
203,508, 96,242 and 321,406 shares, respectively, were exercised at prices
ranging from $10.00 to $17.25 per share and options for 3,500, 25,000 and
12,000 shares, respectively, were canceled.
TCI assumed certain stock options which are currently exercisable,
representing the right, as of December 31, 1994, to acquire 162,228 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, 1994, options to acquire
5,100 shares were exercised and no options were canceled. Options to acquire
19,428 shares of TCI Class A common stock expire August 14, 1995. Options to
acquire 142,800 shares of TCI Class A common stock expire December 15, 1998.
Stock options in tandem with stock appreciation rights to purchase 3,963,000
shares of Class A common stock at a purchase price of $16.75 per share were
outstanding at December 31, 1994. 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, 1994,
stock appreciation rights covering 7,000 shares of Class A common stock were
exercised and the tandem stock options were canceled. During the year ended
December 31, 1993, stock options covering 50,000 shares of Class A common
stock were canceled upon termination of employment of the option holder.
Stock options in tandem with stock appreciation rights to purchase 1,940,000
shares of TCI Class A common stock at a purchase price of $16.75 per share
were outstanding at December 31, 1994. Such options become exercisable and
vest evenly over four years, first became exercisable beginning October 12,
1994 and expire on October 12, 2003. During the year
IV-96
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
ended December 31, 1994, stock options covering 1,875 shares of Class A common
stock were exercised and stock options covering 13,125 shares of Class A
common stock were canceled upon termination of employment of the option
holder.
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
were outstanding at December 31, 1994. On November 12, 1993, 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.
Stock options in tandem with stock appreciation rights to acquire 54,600
shares of TCI Class A common stock at an adjusted purchase price of $19.56
were outstanding at December 31, 1994. The options vest in five equal annual
installments commencing June 3, 1994 and expire in June 2003.
Stock appreciation rights with respect to 1,423,500 shares of TCI Class A
common stock were outstanding at December 31, 1994. These rights have an
adjusted strike price of $0.82 per share, become exercisable and vest evenly
over seven years, beginning March 28, 1992. Stock appreciation rights expire
on March 28, 2001.
On November 17, 1994, stock options in tandem with stock appreciation rights
to purchase 3,214,000 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
$22.00 per share. Such options become exercisable and vest evenly over five
years, first become exercisable beginning November 17, 1995 and expire on
November 17, 2004.
The Company's Board of Directors has approved, subject to stockholder approval
of the Director Stock Option Plan, the grant effective as of November 16,
1994, to each person that as of that date was a member of the Board of
Directors and was not an employee of the Company or any of its subsidiaries,
of options to purchase 50,000 shares of Class A common stock. Such options
have an exercise price of $22.00 per share and will vest and become
exercisable over a five-year period, commencing on November 16, 1995 and will
expire on November 16, 2004.
Estimated compensation relating to stock appreciation rights has been recorded
through December 31, 1994, but is subject to future adjustment based upon
market value, and ultimately, on the final determination of market value when
the rights are exercised.
An officer of the Company 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. Another officer received payment
IV-97
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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.
Other
-----
In connection with the exercise of a stock option by an officer/director of
Liberty, a note was given to Liberty as partial payment of the exercise
price. This note bore interest at 7.54% per annum. At the date of the
TCI/Liberty Combination, the Company recorded the net assumed note
receivable, amounting to approximately $15 million, from such officer as a
reduction of stockholders' equity. On October 27, 1994, such officer
tendered to the Company 634,917 shares of TCI Class B common stock in full
payment of principal and interest amounting to $15 million. Such Class B
common stock is reflected as treasury stock in the accompanying
consolidated balance sheet.
The shares issued by Liberty upon exercise of the aforementioned Liberty
option, together with all subsequent dividends and distributions thereon
(collectively totaling 16,000,000 shares of Liberty Class B common stock
and 200,000 shares of Liberty Class E Preferred Stock, the "Option Units"),
were subject to repurchase by Liberty under certain circumstances. Such
shares were exchanged for 15,600,000 shares of TCI Class A common stock and
200,000 shares of Class B Preferred Stock in the TCI/Liberty Combination.
The Company's repurchase right terminates as to 20% of the Option Units per
year, commencing March 28, 1992, and will terminate as to all of the Option
Units on March 28, 1996 or in the event of death, disability or under
certain other circumstances.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1994, there were 58,534,218 shares of TCI Class A common
stock reserved for issuance under exercise privileges related to options,
convertible debt securities and convertible preferred stock described in
this note 9 and in note 7. Additionally, subsequent to December 31, 1994,
the Company issued the Series D Preferred Stock (see note 8) which is
convertible into 10,000,000 shares of TCI Class A common stock. In
addition, one share of Class A common stock is reserved for each share of
outstanding Class B common stock.
(10) 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
IV-98
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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.
(11) 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, "Accounting for
Income Taxes" ("Statement No. 109") requires the use of 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.
IV-99
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Income tax expense attributable to income or loss from continuing operations
for the years ended December 31, 1994, 1993 and 1992 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- --------- ------
<S> <C> <C> <C>
amounts in millions
Year ended December 31, 1994:
Federal $(69) (25) (94)
State and local (14) (8) (22)
---- ---- ----
$(83) (33) (116)
==== ==== ====
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)
==== ==== ====
</TABLE>
IV-100
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The significant components of deferred income tax expense for the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
------- ------ -----
<S> <C> <C> <C>
amounts in millions
Deferred tax expense
(exclusive of effects of other
components listed below) $ (33) (63) (28)
Adjustment to deferred tax assets
and liabilities for enacted change
in tax rates -- (76) --
----- ---- ----
$ (33) (139) (28)
===== ==== ====
</TABLE>
IV-101
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Income tax expense attributable to income or loss from continuing operations
differs from the amounts computed by applying the Federal income tax rate of
35% in 1994 and 1993 and 34% in 1992 as a result of the following:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
-------- ----- -----
<S> <C> <C> <C>
amounts in millions
Computed "expected" tax
expense $ (60) (56) (15)
Adjustment to deferred tax assets
and liabilities for enacted change
in Federal income tax rate -- (76) --
Dividends excluded for income
tax purposes 1 4 10
Amortization not deductible for
tax purposes (13) (12) (8)
Minority interest in earnings of
consolidated subsidiaries (3) (1) (14)
Recognition of losses of
consolidated partnership (10) (8) --
State and local income taxes,
net of Federal income
tax benefit (20) (23) (9)
Valuation allowance on
foreign corporation (10) -- --
Other (1) 4 (2)
----- ---- ----
$(116) (168) (38)
===== ==== ====
</TABLE>
IV-102
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
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, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
------ ------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 490 590
Less - valuation allowance (100) (90)
Investment tax credit carryforwards 122 140
Less - valuation allowance (36) (36)
Alternative minimum tax credit
carryforwards 90 19
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 294 266
Future deductible amounts principally
due to non-deductible accruals 52 27
Other 19 13
------ -----
Net deferred tax assets 931 929
------ -----
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,197 1,193
Franchise costs, principally due to
differences in amortization 2,600 2,784
Investment in affiliates, due
principally to undistributed
earnings of affiliates 556 256
Intangible assets, principally due to
differences in amortization 108 --
Other 83 6
------ -----
Total gross deferred tax liabilities 4,544 4,239
------ -----
Net deferred tax liability $3,613 3,310
====== =====
</TABLE>
IV-103
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The valuation allowance for deferred tax assets as of December 31, 1994 was
$136 million. Such balance increased by $10 million from December 31, 1993
resulting from a valuation allowance established against net operating losses
of foreign corporations. Subsequently recognized tax benefits relating to
$126 million of the valuation allowance for deferred tax assets as of December
31, 1994 will be recorded as reductions of franchise costs.
At December 31, 1994, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $927 million of which, if not
utilized to reduce taxable income in future periods, $11 million expires
through 2002, $151 million in 2003, $121 million in 2004, $364 million in
2005, $269 million in 2006, $8 million in 2008 and $3 million in 2009. Certain
subsidiaries of the Company had additional net operating loss carryforwards
for income tax purposes aggregating approximately $247 million and these net
operating losses are subject to certain rules limiting their usage.
At December 31, 1994, the Company had remaining available investment tax
credits of approximately $67 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 elected not to further appeal the decision to the Supreme Court. The
Company has entered into a closing agreement with the IRS which settles these
matters for all open tax years. A subsidiary of the Company has filed a
petition in United States Tax Court protesting the disallowance of certain
Transitional Investment Tax Credits and such issue should be litigated by
early 1996.
Certain of the Federal income tax returns of a less than 80% owned subsidiary
of the Company (the "Subsidiary") were examined by the IRS for the
Subsidiary's 1986 through 1989 fiscal years and several adjustments were
proposed. On June 8, 1994, the Subsidiary and the IRS agreed to settle all of
the outstanding issues with the exception of the Subsidiary's deduction of
certain royalty payments to a related party. In August of 1994, the
Subsidiary paid $15 million, including interest, in settlement of all the
assessments related to all the issues brought upon examination except the
royalty payments issue. The payment
IV-104
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
covered all of the Subsidiary's tax returns through August 31, 1993. The
assessments had previously been accrued.
On September 9, 1994, the IRS issued a Statutory Notice of Deficiency for the
Subsidiary's fiscal years 1986 through 1989 related to the royalty payments
issue. In December 1994, the Subsidiary paid the assessments, totaling $5
million, including interest. The assessments had previously been accrued.
The Subsidiary continues to maintain that it has meritorious positions
regarding the deductibility of the payments and intends to file a refund claim
with the IRS during 1995.
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.
(12) Commitments and Contingencies
-----------------------------
During 1994, subsidiaries of the Company, Comcast, Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") formed a partnership ("WirelessCo")
to engage in the business of providing wireless communications services on a
nationwide basis. Through WirelessCo, the partners have been participating in
auctions ("PCS Auctions") of broadband personal communications services
("PCS") licenses being conducted by the Federal Communications Commission
("FCC"). In the first round auction, which concluded during the first quarter
of 1995, WirelessCo was the winning bidder for PCS licenses for 29 markets,
including New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort
Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The
aggregate license cost for these licenses is approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a PCS
license granted under the FCC's pioneer preference program for the Washington-
Baltimore market. WirelessCo acquired its 49% limited partnership interest in
APC for $23 million and has agreed to make capital contributions to APC equal
to 49/51 of the cost of APC's PCS license. Additional capital contributions
may be required in the event APC is unable to finance the full cost of its PCS
license. WirelessCo may also be required to finance the build-out
expenditures for APC's PCS system. Cox, which holds a pioneer preference PCS
license for the Los Angeles-San Diego market, and WirelessCo have also agreed
on the general terms and conditions upon which Cox (with a 60% interest) and
WirelessCo (with a 40% interest) would form a partnership to hold and develop
a PCS system using the Los Angeles-San Diego license. APC and the Cox
partnership would affiliate their PCS systems with WirelessCo and be part of
WirelessCo's nationwide integrated network, offering wireless
IV-105
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
communications services under the "Sprint" brand. The Company owns a 30%
interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction for a
PCS license for the Philadelphia market at a license cost of $85 million. To
the extent permitted by law, the PCS system to be constructed by PhillieCo
would also be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest in,
affiliate with or acquire licenses from other successful bidders. The capital
that WirelessCo will require to fund the construction of the PCS systems, in
addition to the license costs and investments described above, will be
substantial.
At the end of the first quarter of 1995, subsidiaries of the Company, Comcast,
Cox and Sprint formed two new partnerships, of which the principal partnership
is MajorCo, L.P. ("MajorCo"), to which they contributed their respective
interests in WirelessCo and through which they formed another partnership,
NewTelco, L.P. ("NewTelco") to engage in the business of providing local
wireline communications services to residences and businesses on a nationwide
basis. NewTelco will serve its customers primarily through the cable
television facilities of cable television operators that affiliate with
NewTelco in exchange for agreed-upon compensation. The modification of
existing regulations and laws governing the local telephony market will be
necessary in order for NewTelco to provide its proposed services on a
competitive basis in most states. Subject to agreement upon a schedule for
upgrading its cable television facilities in selected markets and certain
other matters, the Company has agreed to affiliate certain of its cable
systems with NewTelco. The capital required for the upgrade of the Company's
cable facilities for the provision of telephony services is expected to be
substantial.
Subsidiaries of the Company, Cox and Comcast, together with Continental
Cablevision, Inc. ("Continental"), own Teleport Communications Group, Inc. and
TCG Partners (collectively, "TCG"), which is one of the largest competitive
access providers in the United States in terms of route miles. The Company,
Cox and Comcast have entered into an agreement with MajorCo and NewTelco to
contribute their interests in TCG and its affiliated entities to NewTelco.
The Company currently owns an approximate 29.9% interest in TCG. The closing
of this contribution is subject to the satisfaction of certain conditions,
including the receipt of necessary regulatory and other consents and
approvals. In addition, the Company, Comcast and Cox intend to negotiate with
Continental, which owns a 20% interest in TCG, regarding their acquisition of
Continental's TCG interest. If such agreement cannot be reached, they will
need to obtain Continental's consent to certain aspects of their agreement
with Sprint.
IV-106
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to $4.4
billion in the aggregate over a three- to five-year period, which amount
includes the approximately $500 million already contributed by the partners to
WirelessCo. The partners intend for MajorCo and its subsidiary partnerships
to be the exclusive vehicles through which they engage in the wireless and
wireline telephony service businesses, subject to certain exceptions.
At December 31, 1994, the Company was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. The Company pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. There were no borrowings
pursuant to such letter of credit at December 31, 1994.
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV") and RCS
Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase Agreement (the
"Tele-Vue Agreement") pursuant to which RCS Pacific agreed to acquire from
Tele-Vue the assets of certain cable television systems for total
consideration of approximately $1,983 million, subject to adjustment in
accordance with the terms of the Tele-Vue Agreement. A subsidiary of TCI has
agreed to loan $600 million in cash to IP-IV. IP-IV will, in turn, loan such
$600 million to RCS Pacific. RCS Pacific could use the proceeds of the
aforementioned loan as a portion of the total cash consideration to be paid to
Tele-Vue, or at the option of TCI, to purchase $600 million of TCI Class A
common stock. Should TCI elect to sell such common stock, RCS Pacific has the
option to pay the consideration to Tele-Vue by delivery of RCS Pacific's
short-term note of up to $600 million of the total consideration with the
balance to be paid in cash. Such note, if it is delivered, will be secured by
RCS Pacific's pledge of shares of stock of TCI having an aggregate market
value equal to the principal amount of, and accrued interest on, the note
delivered to Tele-Vue. The consummation of the transactions contemplated by
the Tele-Vue Agreement is conditioned, among other things, on receipt of
approvals of various franchise and other governmental authorities and receipt
of "minority tax certificates" from the FCC. Both Houses of Congress have
passed legislation to repeal previous legislation which provided for minority
tax certificates. The bills are currently in conference. There can be no
assurance that the conditions precedent to closing the asset purchase will be
satisfied, or that the parties will be able to agree on different terms, if
necessary.
TCI, through an indirect wholly-owned subsidiary, would hold a 25% limited
partnership interest in IP-IV, and IP-IV would in turn hold a 79% limited
partnership interest in RCS Pacific. TCI would account for its investment in
IP-IV under the equity method of accounting.
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the FCC
adopted certain rate regulations required by the 1992 Cable Act and imposed a
moratorium on certain rate
IV-107
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
increases. As a result of such actions, the Company's basic and tier service
rates and its equipment and installation charges (the "Regulated Services")
are subject to the jurisdiction of local franchising authorities and the FCC.
Basic and tier service rates are evaluated against competitive benchmark rates
as published by the FCC, and equipment and installation charges are based on
actual costs. Any rates for Regulated Services that exceeded the benchmarks
were reduced as required by the 1993 and 1994 rate regulations. The rate
regulations do not apply to the relatively few systems which are subject to
"effective competition" or to services offered on an individual service basis,
such as premium movie and pay-per-view services.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, the Company's rates for Regulated Services are subject to review by
the FCC, if a complaint has been filed, or the appropriate franchise
authority, if such authority has been certified. If, as a result of the
review process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of
the excess portion of all other Regulated Service rates would be retroactive
to the later of September 1, 1993 or one year prior to the certification date
of the applicable franchise authority. 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 considered to be
material.
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"). The
aggregate minimum liability under certain of the license agreements is
approximately $405 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. Additionally, the Company has guaranteed up to $70 million of
similar license fee obligations of another affiliate.
The Company has long-term sports program rights contracts which require
payments through 2006. Future payments for each of the next five years are as
follows (amounts in millions):
<TABLE>
<S> <C>
1995 $32
1996 32
1997 28
1998 25
1999 22
</TABLE>
IV-108
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Company has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $234 million at
December 31, 1994. Although there can be no assurance, management of the
Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such obligations, that
they will not be material to the Company.
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 $70 million, $59
million and $57 million in 1994, 1993 and 1992, 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>
1995 $48
1996 43
1997 41
1998 34
1999 31
</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 1995.
In 1993, the President of Home Shopping Network, Inc. ("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. Estimated compensation
related to stock appreciation rights has been recorded through December 31,
1994, but it is subject to future adjustment based upon market value, and
ultimately on the final determination of market value when the rights are
exercised.
IV-109
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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.
(13) Information about the Company's Operations
------------------------------------------
Subsequent to the consummation of the TCI/Liberty Combination, the Company
operates primarily in two industry segments: cable and communications
services ("Cable") and programming services. The programming services
include the production, acquisition and distribution of globally branded
entertainment, education and information programming services and software
for distribution through all available formats and media; and home shopping
via television and other interactive media, direct marketing, advertising
sales, infomercials and transaction processing ("Programming"). Home
shopping is a programming service which includes a retail function.
Separate amounts of the aforementioned home shopping service have been
provided to enhance the readers understanding of the Company. The
Technology/Venture Capital and the International Cable and Programming
portions of the Company's business have been included in Cable due to their
immateriality. 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 the Company's operations in each industry. The Company has
investments, accounted for under the equity method and the cost method,
which also operate in the Cable and Programming industries. The following
is selected information about the Company's operations for the year ended
December 31, 1994:
<TABLE>
<CAPTION>
Programming
------------------------
Electronic Other
Cable Retailing Programming Total
-------- ---------- ------------ ------
amounts in millions
<S> <C> <C> <C> <C>
Revenue $ 4,247 482 207 4,936
======= === ===== ======
Operating income $ 865 9 (86) 788
(loss) ======= === ===== ======
Depreciation and $ 992 15 11 1,018
amortization ======= === ===== ======
Capital expenditures $ 1,239 19 6 1,264
======= === ===== ======
Identifiable assets $16,959 948 1,583 19,490
======= === ===== ======
</TABLE>
IV-110
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(14) 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 are reported separately in the consolidated
statements of operations under the caption "Loss from discontinued
operations" and include:
<TABLE>
<CAPTION>
1992
------
amounts in millions
<S> <C>
Revenue $ 211
Loss before income taxes $ (16)
Income tax benefit $ 1
Net loss $ (15)
</TABLE>
IV-111
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(15) Quarterly Financial Information (Unaudited)
-------------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- -------- -------- --------
<S> <C> <C> <C> <C>
amounts in millions,
1994: except per share amounts
-----
Revenue $ 1,060 1,081 1,286 1,509
Operating income $ 234 205 186 163
Income tax expense $ (31) (21) (33) (31)
Net earnings (loss) $ 32 6 25 (8)
Primary and fully diluted
earnings (loss) attributable to
common shareholders per
common and common
equivalent share $ .07 .01 .04 (.02)
1993:
-----
Revenue $ 1,018 1,042 1,044 1,049
Operating income $ 247 246 236 187
Income tax benefit (expense) $ (38) (17) (114) 1
Net earnings (loss) $ 53 26 (65) (21)
Primary and fully diluted
earnings (loss) attributable to
common shareholders per
common and common
equivalent share $ .11 .06 (.14) (.05)
</TABLE>
IV-112
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(16) Subsequent Events (Unaudited)
-----------------------------
Comcast had the right, through December 31, 1994, to require TCI to purchase
or cause to be purchased from Comcast all shares of Heritage Communications,
Inc. ("Heritage") directly or indirectly owned by Comcast for either cash or
assets or, at TCI's election shares of TCI common stock. On October 24, 1994,
the Company and Comcast entered into a purchase agreement whereby the Company
would repurchase the entire 19.9% minority interest in Heritage owned by
Comcast for an aggregate consideration of approximately $290 million, the
majority of which is payable in shares of TCI Class A common stock. Such
acquisition was consummated subsequent to December 31, 1994.
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI, and
TeleCable consummated a transaction, whereby TeleCable was merged into TCIC, a
wholly-owned subsidiary of TCI. The aggregate $1.6 billion purchase price was
satisfied by TCIC's assumption of approximately $300 million of TeleCable's
net liabilities and the issuance to TeleCable's shareholders of approximately
42 million shares of TCI Class A common stock and 1 million shares of Series D
Preferred Stock with an aggregate initial liquidation value of $300 million
(see note 8).
The Board of Directors of TCI has adopted a proposal which, if approved by the
stockholders, would authorize the Board to issue a new class of stock
("Liberty Group Common Stock") which corresponds to TCI's Programming segment
("Liberty Media Group") (see note 13). While the Liberty Group Common Stock
would constitute common stock of TCI, it is intended to reflect the separate
performance of such programming services. TCI intends to distribute to its
security holders one hundred percent of the equity value of TCI attributable
to Liberty Media Group.
IV-113
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(1) Material Changes in Financial Condition
---------------------------------------
Liquidity and Capital Resources
-------------------------------
The Board of Directors of Tele-Communications, Inc. ("TCI") has adopted a
proposal (the "Liberty Group Stock Proposal") which, if approved by
shareholders, would authorize the Board to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of TCI's
business which produces and distributes cable television programming services
("Liberty Media Group"). However, the Liberty Group Stock would constitute
common stock of TCI. The Liberty Group Stock Proposal would not result in any
transfer of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt. TCI intends to
distribute (the "Distribution") to its security holders Liberty Group Stock
representing one hundred percent of the equity value attributable to the Liberty
Media Group.
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies (the
"Mergers"). The transaction was consummated on August 4, 1994. Due to the
significant economic interest held by TCIC through its ownership of Liberty
preferred stock and Liberty common stock and other related party considerations,
TCIC accounted for its investment in Liberty under the equity method prior to
the consummation of the Mergers. Accordingly, TCIC had recognized 100% of
Liberty's earnings or losses before deducting preferred stock dividends. The
Mergers were accounted for using predecessor cost due to related party
considerations. Accordingly, the accompanying combined financial statements of
Liberty Media Group reflect the combination of the historical financial
information of the assets of TCI and Liberty which produce and distribute cable
television programming attributed to the Liberty Media Group.
The subsidiaries of TCI and Liberty attributed to Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless otherwise
denoted, such subsidiaries and investments were held separately by Liberty
through August 4, 1994, the date the Mergers were consummated):
Subsidiaries
------------
Encore Media Corporation ("Encore")
TV Network Corporation ("tv!")(formed in 1994)
Home Shopping Network ("HSN")
Southern Satellite Systems, Inc. ("Southern")
Netlink USA ("Netlink")(owned by TCIC prior to the Mergers)
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd.
Vision Group Incorporated (owned by TCIC prior to the Mergers)
Americana Television Productions LLC (acquired in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports-West (Formerly Prime Ticket Networks, L.P.)
(acquired in 1994)
Communications Capital Corp. ("CCC") (owned by TCIC prior to the
Mergers)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network - Northwest
IV-114
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
Investments
-----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery Communications, Inc. (owned by TCIC prior to the
Mergers)
DMX Inc. (owned by TCIC prior to the Mergers)
E! Entertainment Television, Inc. (owned by TCIC prior to the
Mergers)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
International Cable Channels Partnership, Ltd. (acquired in
1994)
QE+ Ltd ("Starz!") (formed in 1994) (owned by TCIC prior to the
Mergers)
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc. (owned by TCIC prior to the
Mergers)
Turner Broadcasting Systems, Inc. ("TBS") (owned by TCIC prior to
the Mergers)
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership
SportsChannel Chicago Associates
SportsChannel Pacific Associates
SportsChannel Prism Associates
Prime Sports Network - Upper Midwest
SportsSouth Network, L.P.
Sunshine Network
American Movie Classics Company ("AMC")
Republic Pictures Television (owned by TCIC prior to the Mergers)
Sillerman Communications Management Corporation (owned by TCIC
prior to the Mergers)
Technology Programming Ventures (formed in 1994)
Prime Sports Australia (launched in 1995)
Silver King Communications, Inc.
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate performance
of the TCI Group, which is generally comprised of (a) the subsidiaries and
assets not attributed to the Liberty Media Group, including (i) TCI's Domestic
Cable and Communications unit, (ii) TCI's International Cable and Programming
unit and (iii) TCI's Technology/Venture Capital unit, (b) any interest in the
Liberty Media Group other than the interest represented by any outstanding
shares of Liberty Group Stock and (c) any interest in the Liberty Media Group
represented by outstanding shares of Liberty Group Stock. The businesses of TCI
not attributed to the Liberty Media Group, together with any interest is
referred to as the "TCI Group". Intercompany balances resulting from
transactions with such units are reflected as borrowings from or loans to TCI
and, prior to the implementation of the Liberty Group Stock Proposal, are
included in combined equity in the accompanying combined financial statements.
See note 8.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
contemplated by the Liberty Group Stock Proposal would not affect the ownership
or the respective legal title to assets or responsibility for liabilities of TCI
or any of its subsidiaries. TCI and its subsidiaries would each continue to be
responsible for their respective liabilities. Holders of Liberty Group Stock
would be holders of common stock of TCI and would continue to be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities. The Liberty Group Stock Proposal would not affect the rights of
creditors of TCI.
IV-115
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the Liberty Media
Group and the market price of shares of the Liberty Group Stock. In addition,
net losses of any portion of TCI, dividends and distributions on, or repurchases
of, any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce funds of TCI legally available for dividends on all
series of common stock. Accordingly, Liberty Media Group financial information
should be read in conjunction with the TCI and Liberty consolidated financial
information.
Under the terms of Liberty Group Stock, dividends on the Liberty Group
Stock would be payable at the sole discretion of the Board out of the lesser of
(i) all assets of TCI legally available for dividends and (ii) the available
dividend amount with respect to the Liberty Media Group, as defined.
Determinations to pay dividends on Liberty Group Stock would be based primarily
upon the financial condition, results of operations and business requirements of
Liberty Media Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will be delivered upon their conversion or exchange the
number of shares of Series A Liberty Group Stock that would have been issuable
in the Distribution with respect to the TCI Class A common stock issuable upon
conversion or exchange had such conversion or exchange occurred prior to the
record date for the Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Distribution will be adjusted by issuing to the
holders of such options separate options to purchase that number of shares of
Series A Liberty Group Stock which the holder would have been entitled to
receive had the holder exercised such option to purchase TCI Class A common
stock prior to the record date for the Distribution and reallocating a portion
of the aggregate exercise price of the previously outstanding options to the
newly issued options to purchase Series A Liberty Group Stock. Such convertible
or exchangeable preferred stock and debt securities and options outstanding on
the record date for the Distribution are referred to as "Pre-Distribution
Convertible Securities." The issuance of shares of Series A Liberty Group Stock
upon such conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets from the
TCI Group to the Liberty Media Group in consideration of such issuance. In the
case of the exercise of Pre-Distribution Convertible Securities consisting of
options to purchase Series A Liberty Group Stock, the proceeds received upon the
exercise of such options will be attributed to Liberty Media Group. If
Pre-Distribution Convertible Securities remain outstanding at the time of any
disposition of all or substantially all of the properties and assets of Liberty
Media Group and TCI elects to distribute to holders of Liberty Group Stock their
proportionate interest in the net proceeds of the disposition, the proportionate
interest of the holders of Liberty Group Stock will be determined on a basis
that allocates to the TCI Group a portion of such net proceeds, sufficient to
provide for the payment of the portion of the consideration payable by TCI on
any post-Distribution conversion, exercise or exchange of Pre-Distribution
Convertible Securities that becomes so payable in substitution for shares of
Liberty Group Stock that would have been issuable upon such conversion, exercise
or exchange if it had occurred prior to the record date for the disposition.
Likewise, if Pre-Distribution Convertible Securities remain outstanding at the
time of any redemption for all the outstanding shares of Liberty Group Stock in
exchange for stock of any one or more wholly-owned subsidiaries of TCI which
hold all of the assets and liabilities of the Liberty Media Group, the portion
of the shares of such subsidiaries deliverable in redemption of the outstanding
shares of Liberty Group Stock will be determined on a basis that allocates to
the TCI Group a portion of the shares of such subsidiaries, sufficient to
provide for the payment of the portion of the consideration payable by TCI upon
any post-redemption conversion, exercise or exchange of Pre-Distribution
Convertible Securities that becomes so payable in substitution for shares of
Liberty Group Stock that would have been issuable upon such conversion, exercise
or exchange if it had occurred prior to such redemption.
Subsequent to the Mergers, TCI manages certain treasury activities for
Liberty Media Group on a centralized basis. Cash receipts of certain businesses
attributed to Liberty Media Group are funded by TCI on a daily basis. Prior to
the implementation of the Liberty Group Stock Proposal, but subsequent to the
Mergers, the net amounts of such cash activities are included in combined equity
in the accompanying combined financial statements. Prior to the Mergers,
Liberty separately managed the treasury activities of its subsidiaries.
Subsequent to the implementation of the Liberty Group Stock Proposal, such cash
activities will be included in borrowings from and loans to TCI or, if
determined by the Board of Directors, as an equity contribution to the Liberty
Media Group.
The Board of Directors could determine from time to time that debt of TCI
not incurred by entities attributed to the Liberty Media Group or preferred
stock and the proceeds thereof should be specifically attributed to and
reflected on the combined financial statements of Liberty Media Group to the
extent that the debt is incurred or the preferred stock is issued for the
benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI. After the Distribution, all financial
impacts of issuances of additional shares of Class A common stock and Class B
common stock will be attributed entirely to TCI, all financial impacts of
issuances of additional shares of Liberty Group Stock the proceeds of
which are attributed to the Liberty Media Group will be reflected entirely in
the combined financial statements of the Liberty Media Group. Financial impacts
of dividends or other distributions on, and purchases of, Class A common stock
and Class B common stock will be attributed entirely to TCI, and financial
impacts of dividends or other distributions of Liberty Media Group will be
attributed entirely to the Liberty Media Group. Financial impacts of
repurchases of Liberty Media Group Stock the consideration for which is charged
to the Liberty Media Group will be reflected entirely in the combined financial
statements of the Liberty Media Group, and financial impacts of repurchases of
Liberty Group Stock the consideration for which is charged to TCI will be
attributed entirely to TCI.
IV-116
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI would bear interest at such rates and have
repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the use of proceeds by and creditworthiness of the recipient
group, the capital expenditure plans and investment opportunities available to
each group and the availability, cost and time associated with alternative
financing sources.
Liberty Media Group, Comcast Corporation ("Comcast"), QVC Programming
Holdings, Inc. (the "Purchaser"), a corporation which is jointly owned by
Liberty Media Group and Comcast, and QVC are parties to the QVC Merger
Agreement. Pursuant to an Agreement and Plan of Merger dated August 4, 1994, as
amended (the "QVC Merger Agreement"), the Purchaser commenced an offer (the "QVC
Tender Offer") to purchase all outstanding shares of common stock and preferred
stock of QVC. The QVC Tender Offer expired on February 9, 1995, at which time
the Purchaser accepted for payment all shares of QVC which had been tendered
into the QVC Tender Offer. Following consummation of the QVC Tender Offer, the
Purchaser was merged with and into QVC with QVC continuing as the surviving
corporation. Liberty Media Group owns an approximate 43% interest of the post-
merger QVC. A credit facility entered into by the Purchaser is secured by
substantially all of the assets of QVC. In addition, Comcast and Liberty Media
Group have pledged their shares of QVC pursuant to such credit facility.
In connection with the transactions contemplated under a stockholder's
agreement entered into among Comcast, Liberty Media Group and the Purchaser, TCI
has undertaken to cause Liberty Media Group to comply with each of its
representations, warranties, agreements and obligations under the stockholders
agreement. All such undertakings will terminate at such time as equity
securities of Liberty Media Group or the Liberty Group Stock have been
distributed and such securities impute a market capitalization of Liberty Media
Group in excess of $2 billion.
Upon consummation of the aforementioned QVC transactions, Liberty Media
Group was deemed to exercise significant influence over QVC and, as such,
accounts for its investment in QVC under the equity method. The 1994 combined
balance sheet included herein has been restated to reflect the equity method of
accounting in the first quarter of 1995.
Liberty Media Group's sources of funds include its available cash balances,
cash generating from operating activities, cash distributions from affiliates,
dividend and interest payments, asset sales, availability under certain credit
facilities, and loans and/or equity contributions from TCI. To the extent cash
needs of the Liberty Media Group exceed cash provided by the Liberty Media
Group, TCI may transfer funds to the Liberty Media Group. Conversely, to the
extent cash provided by the Liberty Media Group exceeds cash needs of the
Liberty Media Group, the Liberty Media Group may transfer funds to TCI.
Many of Liberty Media Group's subsidiaries' loan agreements contain
restrictions regarding transfers of funds to other members of Liberty Media
Group in the form of loans, advances or cash dividends. However, other
subsidiaries, principally Southern (which is the satellite carrier for the
signal of WTBS, a 24-hour independent UHF television station originated by TBS)
and CCC are not restricted from making transfers of funds to other members of
the group. The cash provided by operating activities of Southern, is a primary
source of cash available for distribution to Liberty Media Group. However,
Southern does not have an agreement with WTBS with respect to the retransmission
of its signal and there are no specific statutory restrictions per se which
would prevent any other satellite carriers from retransmitting such signal to
cable operators and others. If the business of Southern is adversely affected
by competitive or other factors, it may have an adverse effect on the ability of
Liberty Media Group to generate adequate cash to meet its obligations.
IV-117
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
Several entities included in Liberty Media Group have credit facilities.
CCC, a wholly owned subsidiary, has a $325 million credit facility with a group
of banks, $240 million of which was outstanding at March 31, 1995. This facility
is secured by a pledge of a portion of Liberty Media Group's holding of stock in
TBS. The CCC facility does not restrict the transfer of funds to other members
of Liberty Media Group or TCI. HSN has a revolving credit facility for $150
million, $70 million of which was outstanding on March 31, 1995. ARC Holding,
Ltd. ("ARCH") has a $45 million revolving credit facility with a group of banks,
$18 million of which was outstanding at March 31, 1995. Another subsidiary,
Prime Sports-West, has a $24 million credit facility with a bank, $18.7 million
of which was outstanding at March 31, 1995. The HSN, ARCH and Prime Sports-West
facilities restrict the transfer of funds to affiliated companies, and include
various financial covenants, including maintenance of certain financial ratios.
Various partnerships and other affiliates of Liberty Media Group accounted
for under the equity method finance a substantial portion of their acquisitions
and capital expenditures through borrowings under their own credit facilities
and net cash provided by their operating activities.
Liberty Media Group intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of March 31, 1995, Liberty Media
Group's future minimum obligation related to certain film licensing agreements
was $180 million. The amount of the total obligation 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. Liberty Media Group's
obligations for certain sports program rights contracts as of March 31, 1995 was
$222 million. It is expected that sufficient cash will be generated by the
programming services to satisfy these commitments. However, continued
development may require additional financing and it cannot be predicted whether
Liberty Media Group will obtain such financing. If additional financing cannot
be obtained, Liberty Media Group could attempt to sell assets but there can be
no assurance that asset sales, if any, can be consummated at a price and on
terms acceptable to Liberty Media Group. Further, Liberty Media Group and/or
TCI could attempt to sell equity securities but, again, there can be no
certainty that such a sale could be accomplished on acceptable terms.
HSN has significant working capital needs for inventory and accounts
receivable. However, HSN expects to meet its recurring working capital needs
primarily through internally generated funds and its existing credit facilities.
IV-118
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
The 1992 Cable Act provides for comprehensive federal and local regulation
of the cable television industry, including Liberty Media Group's programming
operations. The Federal Communications Commission ("FCC") has adopted extensive
rate regulations governing cable systems not subject to "effective competition".
The FCC has established standards and procedures governing regulation of rates
for basic cable service and equipment to be implemented by state and local cable
franchising authorities and for the FCC's review of the "reasonableness" of
rates for additional tiers of cable service upon complaint from a franchising
authority or a cable subscriber. The FCC also has adopted interim "cost-of-
service" rules governing attempts by cable operators to justify higher than
benchmark rates based on unusually high costs. Separately offered services, such
as pay television and pay-per-view services, are not currently subject to rate
regulation although packages or collective offerings of such services may be
subject to rate regulation. The FCC also has identified and established
regulations for New Product Tiers, which are tiers of services not subject to
rate regulation. Through a series of orders, the FCC had "frozen" cable rates,
except for those cable systems already subject to effective competition, from
April 5, 1993 through May 15, 1994.
The FCC's rate regulations also govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. The FCC substantially revised its rules for adding and deleting
services in November 1994 and has provided an alternative methodology for adding
services to cable programming service tiers which includes a flat fee increase
per added channel and an aggregate limit on such increases with an additional
license fee reserve. The FCC's rate regulations also permit cable operators to
"pass through" increases in programming costs and certain other external costs
which exceed the rate of inflation subject to the aggregate limit through 1996.
However, a cable operator may pass through increases in the cost of programming
services affiliated with such cable operator to the extent such costs exceed the
rate of inflation only if the price charged by the programmer to the affiliated
cable operator reflects prevailing prices offered in the marketplace by the
programmer to unaffiliated third parties or the fair market value of the
programming.
Liberty Media Group believes that the FCC's comprehensive system of rate
regulation, including regulation of the changes in rates when programming
services are added or deleted from service tiers, has had and will continue to
have an adverse effect on the programming services in which Liberty Media Group
has an ownership interest by limiting the carriage of such services and/or the
ability and willingness of cable operators to pay the rights fees for such
carriage.
The FCC has adopted rules providing for mandatory carriage by cable systems
after September 1, 1993 of all local full-power commercial television broadcast
signals (up to one-third of all channels), including the signals of stations
carrying home-shopping programming after October 6, 1993, and, depending on a
cable system's channel capacity, at least one non-commercial television
broadcast signal. Alternatively, after October 6, 1993, commercial broadcasters
have the right to deny such carriage unless they grant retransmission consent.
The "must carry" statutory provisions and regulations remain in effect pending
the outcome of ongoing judicial proceedings to resolve challenges to their
constitutionality. Liberty Media Group believes that, by requiring such
carriage of broadcast signals, these regulations may adversely affect the
ability of Liberty Media Group's programming services to obtain carriage on
cable systems with limited channel capacity. To the extent that carriage is
thereby limited, the subscriber and advertising revenues available to Liberty
Media Group's programming services also will be limited. However, as discussed
above, such regulations have resulted in expanded cable distribution of HSN,
which is carried by a number of full-power commercial broadcast television
stations.
IV-119
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
--------------------------------------------------
The FCC has adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels
or a 45 percent limit, whichever is greater, provided that the additional
channels carry minority controlled programming services. The regulations also
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations. Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services. These rules may limit
carriage of Liberty Media Group's programming services on certain cable systems
of TCI and its affiliates.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") directed the FCC to promulgate regulations regarding the sale
and acquisition of cable programming between multichannel video program
distributors (including cable operators) and programming services in which a
cable operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude virtually all exclusive
programming contracts with cable operators (unless the FCC first determines the
contract serves the public interest) and generally prohibit a cable operator
which has an attributable interest in a programmer from improperly influencing
the terms and conditions of sale to unaffiliated multichannel video
distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as multichannel multi-point distribution
systems ("MMDS") and DBS services on terms and conditions that do not unfairly
discriminate among such technologies.
In response to numerous petitions for review of the FCC's rate
regulations, the United States Court of Appeals for the District of Columbia
Circuit upheld the material provisions of those regulations in Time Warner
Entertainment Co., L.P. v. F.C.C. on June 6, 1995. The Court upheld the
constitutionality of the FCC's regulations and generally ruled that they were
authorized by the 1992 Cable Act.
The regulation of cable television systems at the federal, state and local
levels is subject to the political process and has been in constant flux over
the past decade. This process continues in the context of legislative proposals
for new laws and the adoption or deletion of administrative regulations and
policies. For example, Congress presently is considering telecommunications
legislation which, if enacted into law, would substantially change existing law,
including among other things, the rate regulation of cable television systems
and the restrictions on telephone companies in the provision of cable television
service. The Senate approved the Telecommunications Competition and Deregulation
Act of 1995 on June 15, 1995. The House Commerce Committee approved the
Communications Act of 1995 on May 25, 1995, and the full House is expected to
vote on that bill within the next few months. Further material changes in the
law and regulatory requirements must be anticipated and there can be no
assurance that the Liberty Media Group's business will not be affected adversely
by future legislation, new regulation or deregulation.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. Liberty Media Group is uncertain how the courts and/or the FCC
ultimately will rule or whether such rulings will materially change any existing
rules or statutory requirements.
IV-120
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations
-----------------------------------------
Liberty Media Group is engaged in two principal lines of business: (i)
production, acquisition and distribution through all available formats and media
of branded entertainment, educational and informational programming and
software, including multimedia products, ("Entertainment and Information
Programming Services") and (ii) electronic retailing, direct marketing,
advertising sales, infomercials and transaction processing ("Electronic
Retailing Services"). To enhance the reader's understanding, separate financial
data have been provided below for Electronic Retailing Services, which include a
retail function, and other Entertainment and Information Programming Services.
The table below sets forth, for the periods indicated, certain financial
information and the percentage relationship that certain items bear to revenue.
This summary provides trend data related to the normal recurring operations of
the Liberty Media Group. Corporate expenses have not been reflected in the
following table but are included in the following discussion. Liberty Media
Group holds significant equity investments the results of which are not a
component of operating income, but are discussed below under "Other Income and
Expense". Other items of significance are discussed separately under their own
captions below.
<TABLE>
<CAPTION>
Quarters ended March 31,
------------------------------------
1995 1994
-------------- --------------
Dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
- -----------------------------
Programming Services
- --------------------
Revenue 100% $ 114,260 100% $ 76,640
Operating, selling, general &
administrative 100% 114,537 86% 65,899
Depreciation and amortization 5% 5,993 4% 3,210
----- --------- ----- ---------
Operating income (loss) (5%) $ (6,270) 10% $ 7,531
===== ========= ===== =========
Electronic Retailing Services
- -----------------------------
Revenue 100% $ 243,697 100% $ 274,215
Cost of sales 66% 160,007 64% 175,615
Operating, selling, general and
administrative 37% 90,100 30% 82,994
Depreciation and amortization 4% 9,929 3% 6,781
----- --------- ----- ---------
Operating income (loss) (7%) $ (16,339) 3% $ 8,825
===== ========= ===== =========
</TABLE>
Entertainment and Information Programming Services
- --------------------------------------------------
Revenue from Entertainment and Information Programming Services increased
by 49%, or $37.6 million, in the quarter ended March 31, 1995 compared with the
quarter ended March 31, 1994. Prime Sports-West was acquired by Liberty Media
Group in August 1994, and was responsible for $17.0 million of the increase in
the first quarter of 1995 revenue. Liberty Media Group's remaining regional
sports programming businesses experienced an $8.5 million increase in revenue,
primarily the result of subscriber growth and rate increases. Encore's six new
thematic multiplex services (three launched in July 1994 and three launched in
September 1994) and tv! (launched in July 1994) accounted for a combined
increase in revenue of $7 million. Revenue from Netlink increased by $5.8
million as a result of growth in the number of subscribers.
IV-121
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
----------------------------------------------------
Operating expenses, exclusive of depreciation and amortization, increased
by 74%, or $48.6 million, in the 1995 first quarter compared with the 1994 first
quarter. The new businesses acquired and new services launched during 1994 were
responsible for $10 million of the increase. Prime Sports-West was responsible
for $13.2 million of the increase in the first quarter of 1995 operating
expenses. Expenses at Liberty Media Group's sports programming businesses,
excluding the impact of new businesses, increased by $7.4 million. This increase
was caused by programming rights fees for a higher number of subscribers, new
rights fees, and increased production costs due to a larger number of events.
Netlink's expenses increased by $8.1 million, the result of higher programming
costs caused by additional subscribers and, rate increases that were effective
January 1, 1995.
Operating income for Entertainment and Information Programming Services was
a loss of $6.3 million in the 1995 first quarter compared with earnings of $7.5
million in the 1994 first quarter. The increased loss was primarily a result of
the startup of several new sports programming services. In addition, Netlink
incurred an operating loss in the first quarter as a result of an increase
effective January 1, 1995 in its cost of programming. Corresponding rate
increases for Netlink were not effective until April 1, 1995.
Electronic Retailing Services
- -----------------------------
This information reflects the results of HSN, which became a consolidated
subsidiary of Liberty Media Group in February 1993. HSN's primary business is
electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-
owned subsidiary of HSN.
For the quarter ended March 31, 1995, revenue for HSN decreased $30.5
million, or 11% compared with the same period in 1994. Net sales of HSC
decreased $46.3 million, or 18.4% for the quarter ended March 31, 1995,
reflecting a 16.5% decrease in the number of packages shipped and a 2.0%
decrease in the average price per unit sold compared to the same period in 1994.
The decrease in HSC sales for the quarter ended March 31, 1995 was primarily
offset by sales of $11.8 million by HSN's infomercial joint venture, HSN Direct
Joint Venture ("HSND"), which commenced operations during the third quarter of
1994.
Management attributes the decline in net sales for the quarter ended March
31, 1995, to the initial impact of HSN's new merchandising and programming
strategies. Since September 1994, HSN has appointed new senior management
personnel with expertise in merchandising and has also instituted procedures
intended to improve purchasing and other merchandising practices. Management's
emphasis in this area includes offering a greater variety of products,
developing strong private label lines, selling higher margin items and offering
name brand and other high quality merchandise.
HSN has continued to significantly restyle its programming. This includes
new on-air presentations, an increase in the number of items aired per hour and
the display of item numbers which enables a customer to order an item when it is
off the air. During the remainder of 1995, HSN plans additional changes
including converting HSN 1, HSN 2 and HSN Spree into two networks renamed HSN
and Spree and additional improvements in merchandising and programming. These
changes are expected to be introduced in the second and third quarters of 1995
and may not be fully implemented until the end of 1995.
IV-122
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
----------------------------------------------------
HSN has made significant progress in executing these strategies, which are
aimed at long-term improvements in sales by attempting to attract new customers
and increase the frequency of sales. However, the initial impact of these
changes was a slowdown in sales during the fourth quarter of 1994 and, as
anticipated, a decline in sales and operating results during the first quarter
of 1995. Sales and operating results through mid-1995 are expected to continue
to be negatively affected by these changes. While management believes HSN's new
merchandising and programming strategy will ultimately improve results, it is
estimated the earliest that sales will be positively affected will be the latter
half of 1995. There can be no assurance that these changes will achieve
management's intended results.
HSN has engaged the services of consultants to assist in developing its
planned shopping service, Television Shopping Mall, which it expects to launch
by early 1996. These business activities did not have a material negative
impact on HSN's results of operations during the quarter ended March 31, 1995.
A full year of these business activities may have a material negative impact on
HSN's results of operations in 1995.
For the quarter ended March 31, 1995, cost of sales decreased $15.6
million, or 8.9%, from the same quarter in 1994. As a percentage of net sales,
cost of sales increased to 66% from 64% compared with the quarter ended March
31, 1994. The dollar decreases in cost of sales relate to the lower sales
volumes, and the increases in cost of sales percentages compared with the first
quarter of 1994 relate primarily to promotional price discounts.
Operating expenses, exclusive of depreciation and amortization, increased
by $7.1 million, to 37% of sales in the 1995 first quarter, compared with 30% of
sales in the 1994 first quarter. Most of this increase was a result of selling,
marketing, engineering and programming expenses related to HSND. These costs
are expected to remain at this level for the remainder of 1995. In addition,
HSN incurred a $2.0 million restructuring charge associated with the anticipated
consolidation of its distribution facilities.
Corporate Expenses
- ------------------
Corporate expenses are not reflected in the preceding table. In the 1995
first quarter, corporate expenses were $4.2 million, compared with a net
reversal of expense in the 1994 first quarter of $8.6 million. This change was
primarily attributable to reversals of previously accrued expenses associated
with stock appreciation rights of $.8 million and $9.9 million in the first
quarters of 1995 and 1994, respectively. The amount of expense associated with
stock appreciation rights is based on the market price of the underlying common
stock as of the date of the financial statements. The expense is subject to
future adjustment based on market price fluctuations and, ultimately, on the
final determination of market value when the rights are exercised. Stock
options and/or stock appreciation rights granted by Liberty prior to the Mergers
have been assumed by TCI.
Excluding the impact of the stock appreciation rights, corporate expenses
increased by $3.5 million from the 1994 first quarter to the 1995 first quarter.
This increase was primarily the result of litigation settlement expense and
overhead charges from TCI.
IV-123
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, continued
----------------------------------------------------
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for that
year. The utilization-based charges will be set at levels that management
believes to be reasonable and that would approximate the costs Liberty Media
Group would incur for comparable services on a stand alone basis. The
accompanying combined statements of operations through the date of the Mergers
do not reflect the allocation of corporate general and administrative costs in
the aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty through such
dates. During the three months ended March 31, 1995, Liberty Media Group was
allocated $767,000 in corporate general and administrative costs by TCI.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of time
TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend on
Liberty Media Group matters. TCI management evaluated several alternate
allocation methods including assets, revenue, operating income, and employees.
Management did not believe that any of these methods would reflect an
appropriate allocation of corporate expenses given the diverse nature of TCI's
operating subsidiaries, the relative maturity of certain of the operating
subsidiaries, and the way in which corporate resources are utilized.
Entities included in Liberty Media Group lease office space and satellite
transponder facilities from TCI. Charges by TCI for such arrangements for the
three months ended March 31, 1995 and 1994, aggregated $3,210,000 and
$1,293,000, respectively.
Certain subsidiaries attributed to Liberty Media Group 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.
HSN paid a commission to TCI for merchandise sales to customers who are
subscribers of TCI's cable systems. Aggregate commissions and charges by TCI
were approximately $1,928,000 and $346,000 for the three months ended March 31,
1995 and 1994, respectively.
Other Income and Expense
- ------------------------
Interest expense was $6.0 million and $3.4 million for the quarter ended
March 31, 1995 and 1994, respectively. Most of this increase was the result of
higher borrowings under a revolving line of credit of CCC. This line of credit
was used primarily for general working capital purposes, and the average balance
outstanding was $128 million and $18 million for the 1995 and 1994 first
quarters, respectively.
Dividend and interest income was $2.1 million and $6.2 million for the
quarters ended March 31, 1995 and 1994, respectively. The decrease was
primarily the result of the repayment of an HSN note receivable in August 1994.
Liberty Media Group's share of losses from affiliates was $1.8 million in
the first quarter of 1995 compared with share of earnings from affiliates of
$7.3 million in the first quarter of 1994. This decrease was partially the
result of the sale of substantially all of Liberty Media Group's interest in AMC
in July 1994, which investment had contributed $4.3 million of the 1994
earnings. Liberty Media Group's share of earnings in affiliates attributable to
its interest in QVC decreased from earnings of $1.8 million in the 1994 first
quarter to a loss of $2.8 million in the 1995 first quarter. This was primarily
the result of compensation resulting from stock option redemptions in the QVC
Merger.
IV-124
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,*
1995 1994
---------- -------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash $ 22,864 62,963
Trade and other receivables, net 103,363 95,081
Inventories, net 112,316 119,814
Prepaid expenses 14,170 14,560
Prepaid program rights 22,552 11,257
Committed film inventory 22,096 22,097
Investments in affiliates, accounted
for under the equity method, and
related receivables (note 3) 271,819 268,292
Investment in Turner Broadcasting
System, Inc. ("TBS") (note 4) 694,365 653,691
Other investments, at cost, and related
receivables (note 5) 173,822 158,846
Property and equipment, at cost:
Land 21,978 21,934
Support equipment and buildings 156,605 150,165
Computer and broadcast equipment 61,170 60,525
---------- ---------
239,753 232,624
Less accumulated depreciation 43,687 38,313
---------- ---------
196,066 194,311
---------- ---------
Excess cost over acquired net assets 573,307 549,770
Less accumulated amortization 26,491 22,217
---------- ---------
546,816 527,553
---------- ---------
Other intangibles 77,842 77,925
Less accumulated amortization 55,928 54,936
---------- ---------
21,914 22,989
---------- ---------
Cable distribution fees 85,591 71,871
Less accumulated amortization 6,414 3,893
---------- ---------
79,177 67,978
---------- ---------
Other assets, at cost, net of
amortization 14,801 12,279
---------- ---------
$2,296,141 2,231,711
========== =========
</TABLE>
* Restated - see note 3.
(continued)
IV-125
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, Continued
<TABLE>
<CAPTION>
March 31, December 31,*
1995 1994
----------- -------------
Liabilities and Combined Equity amounts in thousands
- -------------------------------
<S> <C> <C>
Accounts payable $ 136,972 111,239
Accrued liabilities 67,491 112,196
Film licenses payable 31,121 26,719
Accrued litigation settlements 4,850 27,450
Accrued compensation relating to stock
appreciation rights 26,326 28,422
Deferred revenue 49,932 46,845
Due to Tele-Communications, Inc. ("TCI")
from Home Shopping Network, Inc.
("HSN") 28,076 28,724
Debt (note 6) 364,215 329,944
Deferred tax liability 171,284 150,601
Other liabilities 9,264 4,320
---------- ---------
Total liabilities 889,531 866,460
---------- ---------
Minority interests 116,100 115,165
Combined equity (note 8):
Combined equity 1,131,793 1,119,634
Unrealized gains on
available-for-sale
securities, net of taxes 158,717 130,452
---------- ---------
1,290,510 1,250,086
---------- ---------
Commitments and contingencies (note 9)
$2,296,141 2,231,711
========== =========
</TABLE>
* Restated - see note 3.
See accompanying notes to combined financial statements.
IV-126
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1995 1994
---- ----
amounts in thousands
<S> <C> <C>
Revenue:
Net sales from home shopping services $243,697 274,215
Programming services:
From TCI (note 8) 19,319 12,587
From others 94,941 64,053
-------- -------
357,957 350,855
-------- -------
Cost of sales, operating costs and
expenses:
Cost of sales 160,007 175,615
Operating 105,583 70,717
Selling, general and administrative 98,176 77,883
Charges by TCI (note 8) 5,905 1,639
Adjustment to compensation relating
to stock appreciation rights (note 8) (2,096) (10,302)
Depreciation 6,214 5,475
Amortization 9,706 4,536
-------- -------
383,495 325,563
-------- -------
Operating earnings (loss) (25,538) 25,292
Other income (expense):
Interest expense (5,305) (2,918)
Interest expense to TCI (note 8) (743) (480)
Dividend and interest income,
primarily from affiliates 2,112 6,167
Share of earnings (losses) of
affiliates, net (note 3) (1,851) 7,314
Minority interest in losses
(earnings) of consolidated
subsidiaries 5,941 (4,179)
Loss on disposition of assets -- (2,233)
Other, net 753 168
-------- -------
907 3,839
-------- -------
Earnings (loss) before income
taxes (24,631) 29,131
Income tax benefit (expense) 12,417 (14,012)
-------- -------
Net earnings (loss) $(12,214) 15,119
======== =======
</TABLE>
See accompanying notes to combined financial statements.
IV-127
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Three months ended March 31, 1995
<TABLE>
<CAPTION>
Unrealized
holding gains Total
Combined on available-for- combined
equity * sale securities equity *
------------ ----------------- ----------
amounts in thousands
<S> <C> <C> <C>
Balance at January 1, 1995* $1,119,634 130,452 1,250,086
Net loss (12,214) -- (12,214)
Sale of programming to TCI (19,319) -- (19,319)
Cost allocations from TCI 5,905 -- 5,905
Interest expense allocation from TCI 743 -- 743
Intergroup tax allocation (12,634) -- (12,634)
Net cash transfers from TCI 38,178 -- 38,178
Contribution to combined equity for
acquisitions 11,500 -- 11,500
Change in unrealized holding gains
for available-for-sale securities -- 28,265 28,265
---------- ------- ---------
Balance at March 31, 1995 $1,131,793 158,717 1,290,510
========== ======= =========
</TABLE>
* Restated - see note 3.
See accompanying notes to combined financial statements
IV-128
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1995 1994
---- ----
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (12,214) 15,119
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 15,920 10,011
Adjustment to compensation relating
to stock appreciation rights (2,096) (10,302)
Share of losses (earnings) of
affiliates, net 1,851 (7,314)
Deferred income tax expense 217 5,027
Minority interests in earnings
(losses) (5,941) 4,179
Payments of litigation settlements (22,600) --
Loss on disposition of assets -- 2,233
Changes in operating assets and
liabilities, net of acquisitions:
Change in receivables (8,171) (2,312)
Change in inventories 7,499 4,279
Change in prepaid expenses (10,892) (3,837)
Change in payables, accruals, due
to TCI from HSN and deferred
revenue 220 3,938
--------- --------
Net cash provided (used) by
operating activities (36,207) 21,021
--------- --------
Cash flows from investing activities:
Cash paid for acquisitions (33,739) --
Capital expended for property and
equipment (8,152) (4,608)
Additional investments in and loans to
affiliates and others (13,000) (7,446)
Return of capital from affiliates 7,720 2,040
Collections on loans to affiliates and
others 1,109 5,814
Cash paid for cable distribution fees (13,720) --
Other investing activities 1,509 4,815
--------- --------
Net cash provided (used) by
investing activities (58,273) 615
--------- --------
Cash flows from financing activities:
Borrowings of debt 175,300 250,000
Repayments of debt (126,982) (250,065)
Change in cash transfers from TCI 6,656 (15,924)
Contributions by minority shareholders -- 3,946
of subsidiaries
Distributions to minority shareholders (593) (400)
of subsidiaries --------- --------
Net cash provided (used) by
financing activities 54,381 (12,443)
--------- --------
Net increase (decrease) in cash
and cash equivalents (40,099) 9,193
Cash and cash equivalents at
beginning of period 62,963 82,544
--------- --------
Cash and cash equivalents at
end of period $ 22,864 91,737
========= ========
</TABLE>
See accompanying notes to combined financial statements.
IV-129
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1995
(unaudited)
(1) Basis of Presentation
---------------------
The Board of Directors of TCI has adopted a proposal (the "Liberty Group
Stock Proposal") which, if approved by shareholders, would authorize the
Board to issue a new class of stock ("Liberty Group Stock") which is
intended to reflect the separate performance of TCI's business which
produces and distributes cable television programming services ("Liberty
Media Group"). However, the Liberty Group Stock would constitute common
stock of TCI. The Liberty Group Stock Proposal would not result in any
transfer of assets or liabilities of TCI or any of its subsidiaries or
affect the rights of holders of TCI's or any of its subsidiaries' debt.
TCI intends to distribute (the "Distribution") to its security holders
Liberty Group Stock representing one hundred percent of the equity value
attributable to the Liberty Media Group.
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies
(the "Mergers"). The transaction was consummated on August 4, 1994. Due
to the significant economic interest held by TCIC through its ownership of
Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method prior to the consummation of the Mergers. Accordingly, TCIC
had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The Mergers were accounted for using
predecessor cost due to related party considerations. Accordingly, the
accompanying combined financial statements of Liberty Media Group reflect
the combination of the historical financial information of the assets of
TCI and Liberty which produce and distribute cable television programming
attributed to the Liberty Media Group.
The subsidiaries of TCI and Liberty attributed to Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless
otherwise denoted, such subsidiaries and investments were held separately
by Liberty through August 4, 1994, the date the Mergers were consummated):
Subsidiaries
------------
Encore Media Corporation ("Encore")
TV Network Corporation (formed in 1994)
HSN
Southern Satellite Systems, Inc.
Netlink USA (owned by TCIC prior to the Mergers)
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd. ("ARC")
Vision Group Incorporated (owned by TCIC prior to the Mergers)
Americana Television Productions LLC (acquired in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports-West (Formerly Prime Ticket Networks, L.P.)
(acquired in 1994)
Communication Capital Corp. ("CCC") (owned by TCIC prior to the
Mergers)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network - Northwest
(continued)
IV-130
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Investments
-----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery Communications, Inc. ("Discovery") (owned by TCIC prior
to the Mergers)
DMX Inc. (owned by TCIC prior to the Mergers)
E! Entertainment Television, Inc. (owned by TCIC prior to the
Mergers)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
International Cable Channels Partnership, Ltd. ("ICCP") (acquired
in 1994)
QE+ Ltd ("Starz!") (formed in 1994) (owned by TCIC prior to the
Mergers)
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc. (owned by TCIC prior to the
Mergers)
TBS (owned by TCIC prior to the Mergers)
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership ("HTS")
SportsChannel Chicago Associates ("Sports")
SportsChannel Pacific Associates
SportsChannel Prism Associates
Prime Sports Network - Upper Midwest
SportsSouth Network, L.P.
Sunshine Network ("Sunshine")
American Movie Classics Company ("AMC")
Republic Pictures Television (owned by TCIC prior to the Mergers)
Sillerman Communications Management Corporation (owned by
TCIC prior to the Mergers)
Technology Programming Ventures (formed in 1994)
Prime Sports Australia (launched in 1995)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of (a) the
subsidiaries and assets not attributed to the Liberty Media Group,
including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's
International Cable and Programming unit and (iii) TCI's Technology/Venture
Capital unit, (b) any interest in the Liberty Media Group other than the
interest represented by any outstanding shares of Liberty Group Stock and
(c) any interest in the Liberty Media Group represented by outstanding
shares of Liberty Group Stock. The businesses of TCI not attributed to the
Liberty Media Group, together with any interest is referred to as the "TCI
Group". Intercompany balances resulting from transactions with such units
are reflected as borrowings from or loans to TCI and, prior to the
implementation of the Liberty Group Stock Proposal, are included in
combined equity in the accompanying combined financial statements. See
note 8.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
contemplated by the Liberty Group Stock Proposal would not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
would each continue to be responsible for their respective liabilities.
Holders of Liberty Group Stock would be holders of common stock of TCI and
would continue to be subject to risks associated with an investment in TCI
and all of its businesses, assets and liabilities. The Liberty Group Stock
Proposal would not affect the rights of creditors of TCI.
(continued)
IV-131
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of the
Liberty Media Group and the market price of shares of the Liberty Group
Stock. In addition, net losses of any portion of TCI, dividends and
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce funds
of TCI legally available for dividends on all series of common stock.
Accordingly, Liberty Media Group financial information should be read in
conjunction with the TCI and Liberty consolidated financial information.
Under the terms of Liberty Group Stock, dividends on the Liberty Group
Stock would be payable at the sole discretion of the Board out of the
lesser of (i) all assets of TCI legally available for dividends and (ii)
the available dividend amount with respect to the Liberty Media Group, as
defined. Determinations to pay dividends on Liberty Group Stock would be
based primarily upon the financial condition, results of operations and
business requirements of Liberty Media Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will be delivered upon their conversion or exchange
the number of shares of Series A Liberty Group Stock that would have been
issuable in the Distribution with respect to the TCI Class A common stock
issuable upon conversion or exchange had such conversion or exchange
occurred prior to the record date for the Distribution. Options to purchase
TCI Class A common stock outstanding at the time of the Distribution will
be adjusted by issuing to the holders of such options separate options to
purchase that number of shares of Series A Liberty Group Stock which the
holder would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date for
the Distribution and reallocating a portion of the aggregate exercise price
of the previously outstanding options to the newly issued options to
purchase Series A Liberty Group Stock. Such convertible or exchangeable
preferred stock and debt securities and options outstanding on the record
date for the Distribution are referred to as "Pre-Distribution Convertible
Securities." The issuance of shares of Series A Liberty Group Stock upon
such conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets from
TCI to the Liberty Media Group in consideration of such issuance. In the
case of the exercise of Pre-Distribution Convertible Securities consisting
of options to purchase Series A Liberty Group Stock, the proceeds received
upon the exercise of such options will be attributed to Liberty Media
Group. If Pre-Distribution Convertible Securities remain outstanding at the
time of any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders of
Liberty Group Stock their proportionate interest in the net proceeds of the
disposition, the proportionate interest of the holders of Liberty Group
Stock will be determined on a basis that allocates to the TCI Group a
portion of such net proceeds, sufficient to provide for the payment of the
portion of the consideration payable by TCI on any post-Distribution
conversion, exercise or exchange of Pre-Distribution Convertible Securities
that becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or exchange if
it had occurred prior to the record date for the disposition. Likewise, if
Pre-Distribution Convertible Securities remain outstanding at the time of
any redemption for all the outstanding shares of Liberty Group Stock in
exchange for stock of any one or more wholly-owned subsidiaries of TCI
which hold all of the assets and liabilities of the Liberty Media Group,
the portion of the shares of such subsidiaries deliverable in redemption of
the outstanding shares of Liberty Group Stock will be determined on a basis
that allocates to the TCI Group a portion of the shares of such
subsidiaries, sufficient to provide for the payment of the portion of the
consideration payable by TCI upon any post-redemption conversion, exercise
or exchange of Pre-Distribution Convertible Securities that becomes so
payable in substitution for shares of Liberty Group Stock that would have
been issuable upon such conversion, exercise or exchange if it had occurred
prior to such redemption.
The accompanying interim combined 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 combined
financial statements should be read in conjunction with the audited
combined financial statements of Liberty Media Group for the year ended
December 31, 1994.
(2) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $4,404,000 and $1,841,000 for the three months
ended March 31, 1995 and 1994, respectively. Cash paid for income taxes
during the three months ended March 31, 1995 and 1994 was $348,000 and
$480,000, respectively.
(continued)
IV-132
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1995 1994
---- ----
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions: $ 25,928 --
Fair value of assets acquired (926) --
Net liabilities assumed
Contribution to combined equity from
TCI for acquisition (11,500) --
Minority interests in equity of
acquired entities 20,237 --
--------- --------
$ 33,739 --
========= ========
Unrealized gains, net of deferred
income taxes, on available-for-sale
securities as of January 1, 1994 $ -- 335,177
========= ========
Change in unrealized gains, net of
deferred income taxes, on
available-for-sale securities $ 28,265 (120,308)
========= ========
Conversion of debt into additional
minority interest in consolidated
subsidiary $ 14,215 --
========= ========
</TABLE>
(3) Investments in Affiliates
-------------------------
Summarized unaudited results of operations for affiliates accounted for
under the equity method is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1995 1994
---- ----
amounts in thousands
<S> <C> <C>
Combined Operations
-------------------
Revenue $ 411,866 442,332
Operating expenses (356,756) (379,901)
Depreciation and amortization (30,963) (25,529)
--------- --------
Operating income 24,147 36,902
Interest expense (14,644) (2,558)
Other, net (32,719) (28,751)
--------- --------
Net earnings (loss) $ (23,216) 5,593
========= ========
</TABLE>
(continued)
IV-133
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the carrying value of Liberty Media Group's
investments, accounted for under the equity method, including related
receivables:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
amounts in thousands
<S> <C> <C>
Discovery $118,388 113,182
QVC 79,337 72,100
Sunshine 7,376 7,174
Sports 29,649 30,163
HTS 4,288 4,292
ICCP 12,745 13,686
Other investments 20,036 27,695
-------- -------
$271,819 268,292
======== =======
</TABLE>
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1995 1994
---- ----
amounts in thousands
<S> <C> <C>
Discovery $ 5,206 1,773
QVC (2,848) 1,776
Sunshine 202 (296)
Sports 1,486 1,729
HTS (4) 66
ICCP (809) --
AMC -- 4,329
Starz! -- (10)
Other (5,084) (2,053)
------- ------
$(1,851) 7,314
======= ======
</TABLE>
Liberty Media Group has a 49.9% partnership interest in QE+Ltd Limited
Partnership ("QE+"), which distributes STARZ!, a first-run movie premium
programming service launched in 1994. Entities attributed to the TCI Group
hold the remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that the TCI Group will be
required to make special capital contributions to QE+ through 2005, up to
a maximum amount of $350 million, $90 million of which is required in 1995.
QE+ is obligated to pay TCI Group a preferred return of 10% per annum on
its special capital contributions of up to $200 million beginning five
years from the date of the contribution or January 1, 1996, whichever is
later. Any TCI Group special capital contributions in excess of $200
million will be entitled to a preferred return of 10% per annum from the
date of the contribution. QE+ is required to apply 75% of its available
cash flow, as defined, to repay the TCI Group special capital contributions
and any preferred return payable thereon. To the extent such special
capital contributions are insufficient to fund the cash requirements of
QE+, the TCI Group and the Liberty Media Group will each be obligated to
fund such cash requirements in proportion to their respective ownership
percentages.
The TCI Group has also entered into a long-term affiliation agreement with
QE+ in respect of the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for 1995 are
anticipated to aggregate approximately $30 million to $40 million. The
affiliation agreement also provides that QE+ will not grant materially more
favorable terms and conditions to other cable system operators unless such
more favorable terms and conditions are made available to the TCI Group.
The affiliation agreement also requires the TCI Group to make payments to
QE+ with respect to a guaranteed minimum number of subscribers totaling
approximately $339 million for the years 1996, 1997, and 1998.
In connection with the launch of the STARZ! service, the TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may be
due to pursuant to motion picture output, distribution, and license
agreements. As of March 31, 1995, the maximum amount of such obligations or
guarantees was approximately $151 million. The future obligations of the
TCI Group with respect to these agreements is not currently determinable
because such amount is dependent on 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.
Liberty Starz! also has the right to acquire an additional 10.1% general
partnership interest in QE+ based on a formula designed to approximate the
fair value of the interest. Such right is exercisable for a period of ten
years beginning January 1, 1999 after QE+ has had positive cash flow for
two consecutive calendar quarters. The right is exercisable only after all
special capital contributions from the TCI Group have been repaid,
including the preferred return thereon.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined.
Payment of such fees is subordinated to the repayment of the TCI Group
special capital contributions and the preferred return thereon. In
addition, effective July 1, 1995, Liberty Media Group will earn a "Content
Fee" for certain services provided to QE+ equal to 4% of the gross revenue
of QE+, estimated to be approximately $1.2 million for the six months ended
December 31, 1995. The Content Fee agreement expires on June 30, 2001,
subject to renewal on an annual basis thereafter. Payment of the Content
Fee will be subordinated to the repayment of the contributions made by the
TCI Group and the preferred return thereon.
Liberty Media Group accounts for its interest in QE+ under the equity
method of accounting.
On November 11, 1993, Liberty Media Group entered into an agreement with
the staff of the Federal Trade Commission pursuant to which Liberty Media
Group agreed to divest all of its equity investments 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
influence over QVC until such time as QVC withdrew its offer for Paramount.
Simultaneously, Liberty Media Group agreed to withdraw from a stockholders
agreement pursuant to which Liberty Media Group and certain other
stockholders exercised control over QVC (the "Previous Stockholders'
Agreement"). On February 15, 1994, QVC terminated its offer for Paramount.
Upon termination of such offer, Liberty Media Group had the right to be
reinstated as a party to the Previous Stockholders' Agreement so long as
such option was exercised within 90 days after such termination.
(continued)
IV-134
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On November 16, 1993, Liberty Media Group 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 Media
Group's interest in QVC common stock (on a fully diluted basis) from 21.9%
to 18.8%. Liberty Media Group continued to account for its investment in
QVC under the equity method, although it no longer exercised significant
influence over such affiliate, due to the pending determination of whether
it would rejoin the control group under the Previous Stockholders'
Agreement. As a result of the election on May 13, 1994 by Liberty Media
Group to forego the exercise of its option to be reinstated as a party to
the Previous Stockholders' Agreement, Liberty Media Group began, as of that
date, to account for its investment in QVC under the cost method of
accounting.
Pursuant to an Agreement and Plan of Merger dated August 4, 1994, as
amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Comcast and Liberty
Media Group, commenced an offer (the "QVC Tender Offer") to purchase all
outstanding shares of common stock and preferred stock of QVC.
The QVC Tender Offer expired at midnight, New York City time, on February
9, 1995, the Purchaser accepted for payment all shares of QVC which had
been tendered in the QVC Tender Offer. Following consummation of the QVC
Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. Liberty Media Group owns an
approximate 43% interest in the post-merger QVC.
A credit facility entered into by the Purchaser is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty Media Group
have pledged their shares of QVC pursuant to such credit facility.
Upon consummation of the aforementioned QVC transactions, Liberty Media
Group is deemed to exercise significant influence over QVC and, as such,
has adopted the equity method of accounting. As a result, Liberty Media
Group restated its investment in QVC, its unrealized gain on available-for-
sale securities, its deferred taxes and accumulated deficit by $208
million, $127 million, $86 million and $5 million, respectively, at
December 31, 1994. The restatement did not affect Liberty Media Group's
results of operations for the three months ended March 31, 1994 as QVC was
accounted for under the equity method during that period.
In connection with the transaction contemplated under the current
stockholders agreement, TCI has undertaken to cause Liberty Media Group to
comply with each of its representations, warranties, covenants, agreements
and obligations under the current stockholders agreement. Such undertaking
will terminate at such time as equity securities of Liberty Media
Corporation or the Liberty Group Stock have been distributed, and such
securities impute a market capitalization in excess of $2 billion.
Certain of Liberty Media Group's affiliates are general partnerships and
any subsidiary of Liberty Media Group that is a general partner in a
general partnership is, as such, liable as a matter of partnership law for
all debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(continued)
IV-135
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investment in Turner Broadcasting System, Inc.
----------------------------------------------
Liberty Media Group owns shares of a class of preferred stock of 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 Liberty Media
Group appoints three such representatives. However, voting control over
TBS continues to be held by its chairman and the board and chief executive
officer. Liberty Media Group's total holdings of TBS common and preferred
stocks represents an approximate 12% voting interest for those matters for
which preferred and common stock vote as a single class.
Liberty Media Group's investment in TBS preferred stock, carried at cost,
had an aggregate market value of $618 million, based upon the market value
of the common stock into which it is convertible (which exceeded cost by
$440 million) at March 31, 1995.
(5) Other Investments
-----------------
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
amounts in thousands
<S> <C> <C>
Marketable equity securities $102,352 87,276
Convertible debt, accrued interest
and preferred stock investment 45,883 46,109
Other investments and related receivables 25,587 25,461
-------- -------
$173,822 158,846
======== =======
</TABLE>
Management of Liberty Media Group estimates that the market value,
calculated utilizing a variety of approaches, including multiple of cash
flow, per subscriber value, value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's other investments aggregated $267 million and $225 million at March
31, 1995 and December 31, 1994, 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.
(continued)
IV-136
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
amounts in thousands
<S> <C> <C>
Convertible note payable (a) $ -- 14,141
Notes payable to bank (b) 70,000 25,000
Bank credit facility (c) 240,000 237,000
Note payable to bank (d) 18,000 18,000
Note payable to bank (e) 18,700 16,400
Note payable to partnership (f) 9,675 11,253
Other debt, with varying rates and maturities 7,840 8,150
-------- -------
$364,215 329,944
======== =======
</TABLE>
(a) Payable by ARC.
--------------
These notes were converted in January 1995 into an additional 11.65%
limited partnership interest by ARC.
(b) Payable to HSN.
--------------
On March 29, 1995, this revolving credit facility, which expires on
August 30, 1997, was amended and increased from $100 million to $150
million. Borrowings under the credit facility may be used for general
corporate purposes. The interest rate on borrowings under the credit
facility is tied to the London Interbank Offered Rate ("LIBOR") plus a
margin based on HSN's total debt to operating cash flow ratio.
(c) Payable by CCC
---------------------------------------
This revolving line of credit was amended on August 19, 1994 and
provides for borrowings of up to $325,000,000 through August 19, 1997.
The revolving credit facility permits borrowings subject to compliance
with the restrictive covenants contained in the loan agreement
governing the facility. As security for borrowings under this credit
facility, Liberty Media Group pledged a portion of the TBS common
stock (with a quoted market value of approximately $512 million at
March 31, 1995) it holds.
(continued)
IV-137
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(d) Payable by ARC Holding, Ltd.
----------------------------
In 1994, ARC Holding, Ltd., a wholly-owned subsidiary of ARC entered
into a credit agreement, as amended, with a group of banks providing
for up to $45,000,000 of borrowings. Borrowings bear interest at the
agent bank's base rate, LIBOR, a CD rate or a combination thereof
as selected by ARC Holding, Ltd. plus a margin depending on ARC
Holding, Ltd.'s ratio of total debt to cash flow (as defined).
Beginning June 30, 1995 and quarterly thereafter through December 31,
2000, the commitment amount will be reduced in equal quarterly amounts
to achieve annual reductions in the credit facility ranging from a 10%
reduction in 1995 to the final 17% in 2000. Liberty Media Group must
pay an annual commitment fee of .375% of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured by the
assets of ARC Holding, Ltd., including joint venture interests, and
the stock and assets of its existing and future subsidiaries.
The credit agreement contains certain provisions which limit ARC
Holding, Ltd. as to additional indebtedness, sale of assets, liens,
guarantees and distributions. Additionally, ARC Holding, Ltd. must
attain certain specified financial ratios.
(e) Payable by Prime Sports-West
----------------------------
Prime Sports-West has a credit agreement (the "Agreement") with a bank
that provides for borrowings in the form of revolving term loans
aggregating up to a maximum commitment of $24,000,000 at December 31,
1994. The maximum commitment will be reduced to $20,000,000 and
$15,000,000 at September 30, 1995 and 1996, respectively, and the
Agreement expires on September 30, 1997. Prime Sports-West may specify
the interest rate on the loans under various prime and Eurodollar rate
options plus an applicable margin, as defined. The loans are secured
by a pledge of the partnership interests.
The Agreement contains, among other things, requirements as to
indebtedness obligations, restrictions on distributions and capital
expenditures, as well as maintenance of certain specified financial
ratios. Prime Sports-West was in compliance with the debt covenants or
obtained waivers from the bank at December 31, 1994.
(f) Payable by Encore ICCP, Inc.
----------------------------
Encore ICCP, Inc. acquired a 50% general partner interest in ICCP in
exchange for a note payable to the partnership with an initial
principal amount of $15,000,000. The note payable accrues interest at
10% per annum and is guaranteed by Encore.
Certain of Liberty Media Group'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.
(continued)
IV-138
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The fair value of Liberty Media Group's debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to Liberty Media Group for debt of the same remaining maturities.
The fair market value of such debt approximated its carrying value at March
31, 1995.
(7) Income Taxes
------------
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which TCI owns less
than 80% each file a separate tax return. TCI and such subsidiaries
calculate their respective tax liabilities on a separate return basis.
Prior to the Mergers, Liberty filed a consolidated Federal income tax
return with all of its 80% or more owned subsidiaries. Consolidated
subsidiaries in which Liberty owned less than 80% each filed a separate
income tax return. Liberty and such subsidiaries calculated their
respective tax liabilities on a separate return basis. Prior to the
Mergers, income tax expense for Liberty Media Group was based upon those
items in the consolidated tax calculation of TCI and Liberty which are
applicable to Liberty Media Group. Subsequent to the Mergers, income tax
expense for Liberty Media Group will be based upon those items in the
consolidated tax calculations of TCI applicable to Liberty Media Group.
Intergroup tax allocation represents an apportionment of tax expense or
benefit (other than deferred taxes) and alternative minimum taxes to
Liberty Media Group in relation to its amount of taxable earnings or
losses. The payable or receivable arising from the intergroup tax
allocation is recorded as an increase or decrease in combined equity.
Federal income taxes and certain state and local taxes will be paid on a
consolidated basis by TCI. However, pursuant to a tax sharing agreement,
federal income taxes will be calculated, with certain adjustments, on a
separate return basis for each corporation in each Group (applying
provisions of the Internal Revenue Code of 1986, as amended, and related
regulations as if such corporation filed a separate return for federal
income tax purposes). In addition, pursuant to such agreement, state and
local income taxes will be calculated on a separate return basis for each
Group (applying provisions of state and local tax law and related
regulations as if the Group were a separate unitary or combined group for
tax purposes). Based upon these separate calculations, an allocation of tax
liabilities will be made such that the Liberty Media Group (or each
separate corporation within the Liberty Media Group, as the case may be) is
responsible to TCI for its gross share of TCI's consolidated, combined or
unitary tax liabilities, such gross share being determined without regard
to (a) tax benefits that are attributable to the TCI Group or (b) certain
tax benefits that are attributable to the Liberty Media Group (or its
constituent corporations) but that are taken into account in determining
TCI's consolidated, combined or unitary tax benefit carryovers. Similarly,
TCI is responsible to the Liberty Media Group (or its constituent
corporations) for tax benefits attributable to the Liberty Media Group (or
its constituent corporations) and actually used by TCI in determining its
consolidated, combined or unitary tax liability. Tax attributes, including
but not limited to net operating losses, investment tax credits,
alternative minimum tax net operating losses, alternative minimum tax
credits, deferred intercompany gains and tax basis in assets will be
inventoried and tracked for the entities comprising each Group. TCI will
retain the right to file all returns, make all elections and control all
audits and contests.
Certain of the Federal income tax returns of TCI are presently under
examination by the Internal Revenue Service ("IRS") including the years
1979 through 1992. These examinations may result in proposed adjustments
for additional income taxes relating to Liberty Media Group.
(continued)
IV-139
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain of the Federal income tax returns of a less than 80% owned
subsidiary of Liberty Media Group (the "Subsidiary") were examined for the
Subsidiary's 1986 through 1989 fiscal years and several adjustments were
proposed. On June 8, 1994, the Subsidiary and the IRS agreed to settle all
of the outstanding issues with the exception of the Subsidiary's deduction
of certain royalty payments to a related party. In August of 1994, the
Subsidiary paid $15,000,000, including interest in settlement of all the
assessments related to all the issues brought upon examination except the
royalty payment issue. The payment covered all of the Subsidiary's tax
returns through August 31, 1993. The assessments had previously been
accrued.
On September 9, 1994, the IRS issued a statutory Notice of Deficiency for
the Subsidiary's fiscal years 1986 through 1989 related to the royalty
payments issue. In December 1994, the Subsidiary paid the assessments,
totaling $4,600,000 including interest. The assessments had previously
been accrued. The Subsidiary continues to maintain that it has meritorious
positions regarding the deductibility of the payments and intends to file a
refund claim with the IRS during 1995. The Subsidiary also made royalty
payments in its fiscal years 1990 through 1994 which will be challenged by
the IRS upon audit. The Subsidiary has made adequate provision for these
years.
(8) Combined Equity
---------------
Stock Options and Stock Appreciation Rights
-------------------------------------------
Liberty had granted certain stock options and/or stock appreciation rights
prior to the Mergers. All such options and/or stock appreciation rights
were assumed by TCI in conjunction with the Mergers. Estimates of the
compensation relating to the options and/or stock appreciation rights
granted to employees of Liberty Media Group have been recorded in the
accompanying combined financial statements, but are subject to future
adjustment based upon the market value of TCI Class A common stock and,
ultimately, on the final determination of market value when the rights are
exercised.
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.
Estimated compensation relating to these stock appreciation rights has been
recorded through March 31, 1995, but is subject to future adjustment based
upon market value, and ultimately, on the final determination of market
value when the rights are exercised.
(continued)
IV-140
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with TCI and Other Related Parties
-----------------------------------------------
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for
that year. The utilization-based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone
basis. The accompanying combined statements of operations through the date
of the Mergers do not reflect the allocation of corporate general and
administrative costs in the aforementioned manner because the majority of
the entities attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty through such dates. During the three months ended
March 31, 1995, Liberty Media Group was allocated $767,000 in corporate
general and administrative costs by TCI.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of
time TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend
on Liberty Media Group matters. TCI management evaluated several
alternative allocation methods including assets, revenue, operating income,
and employees. Management did not believe that any of these methods would
reflect an appropriate allocation of corporate expenses given the diverse
nature of TCI's operating subsidiaries, the relative maturity of certain of
the operating subsidiaries, and the way in which corporate resources are
utilized.
Entities included in Liberty Media Group lease office space and satellite
transponder facilities from TCI. Charges by TCI for such arrangements for
the three months ended March 31, 1995 and 1994, aggregated $3,994,000 and
$1,557,000, respectively.
Certain subsidiaries attributed to Liberty Media Group 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.
HSN paid 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 $1,928,000 and $346,000 for the three months ended
March 31, 1995 and 1994, respectively.
Subsequent to the Mergers, TCI manages certain treasury activities for
Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are funded by TCI on a daily
basis. Prior to the implementation of the Liberty Group Stock Proposal, but
subsequent to the Mergers, the net amounts of such cash activities are
included in combined equity in the accompanying combined financial
statements. Prior to the Mergers, Liberty separately managed the treasury
activities of its subsidiaries. Subsequent to the implementation of the
Liberty Group Stock Proposal, such cash activities will be included in
borrowings from and loans to TCI or, if determined by the Board of
Directors, as an equity contribution to the Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI
not incurred by entities attributed to the Liberty Media Group or preferred
stock and the proceeds thereof should be specifically attributed to and
reflected on the combined financial statements of Liberty Media Group to
the extent that the debt is incurred or the preferred stock is issued for
the benefit of Liberty Media Group.
(continued)
IV-141
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI. After the Distribution, all
financial impacts of issuances of additional shares of Class A common stock
and Class B common stock will be attributed entirely to TCI, all financial
impacts of issuances of additional shares of Liberty Media Group Stock the
proceeds of which are attributed to the Liberty Media Group will be
reflected entirely in the combined financial statements of the Liberty
Media Group. Financial impacts of dividends or other distributions on, and
purchases of, Class A common stock and Class B common stock will be
attributed entirely to TCI, and financial impacts of dividends or other
distributions of Liberty Media Group will be attributed entirely to the
Liberty Media Group. Financial impacts of repurchases of Liberty Media
Group Stock the consideration for which is charged to the Liberty Media
Group will be reflected entirely in the combined financial statements of
the Liberty Media Group, and financial impacts of repurchases of Liberty
Media Group Stock the consideration for which is charged to TCI will be
attributed entirely to TCI.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI would bear interest at such rates and have
repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the use of proceeds by and
creditworthiness of the recipient group, the capital expenditure plans and
investment opportunities available to each group and the availability, cost
and time associated with alternative financing sources.
(9) Commitments and Contingencies
-----------------------------
Liberty Media Group 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 Licensing
Obligations"). As of March 31, 1995, the aggregate minimum liability under
certain of the license agreements is approximately $180 million. The
aggregate amount of the Film Licensing Obligations under other license
agreements is not currently estimable because such amount is dependent upon
the number of qualifying films produced by the motion picture studios, the
amount of United States theatrical film rentals for such qualifying films,
and certain other factors. Nevertheless, required aggregate payments under
the Film Licensing Obligations could prove to be significant.
Liberty Media Group leases business offices, has entered into pole rental
agreements and transponder lease agreements, and uses certain equipment
under lease arrangements. In addition, as of March 31, 1995, Liberty Media
Group has long-term sports program rights contracts which require payments
through 1999 aggregating approximately $222 million.
Liberty Media Group has agreed to participate in the investor group which
was awarded a major league baseball franchise for the Tampa Bay area.
Liberty Media Group's commitment is contingent upon its securing certain
merchandising and broadcasting rights with respect to the franchise. If
Liberty Media Group obtains those rights, it has agreed to contribute $10
million as a general and limited partner.
IV-142
<PAGE>
Liberty Media Group
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Years ended December 31, 1994, 1993 and 1992.
The Board of Directors of Tele-Communications, Inc., ("TCI") has
adopted a proposal (the "Liberty Media Group Stock Proposal") which, if approved
by stockholders, would authorize the Board to issue a new class of stock
("Liberty Group Stock") which is intended to reflect the separate performance
of TCI's business which produces and distributes cable television programming
services ("Liberty Media Group"). However, the Liberty Group Stock would
constitute common stock of TCI. The Liberty Group Stock Proposal would not
result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. TCI intends to distribute (the "Distribution") to its
security holders Liberty Group Stock representing one hundred percent of the
equity value of TCI attributable to the Liberty Media Group.
As of January 27, 1994 TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies (the
"Mergers"). The Mergers were consummated on August 4, 1994. Due to the
significant economic interest held by TCIC through its ownership of Liberty
preferred stock and Liberty common stock and other related party considerations,
TCIC accounted for its investment in Liberty under the equity method prior to
the consummation of the Mergers. Accordingly, TCIC had recognized 100% of
Liberty's earnings or losses before deducting preferred stock dividends. The
Mergers were accounted for using predecessor cost due to related party
considerations. Accordingly, the accompanying combined financial statements of
Liberty Media Group reflect the combination of the historical financial
information of the assets of TCI and Liberty which produce and distribute cable
television programming attributed to the Liberty Media Group.
The subsidiaries of TCI and Liberty attributed to the Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless otherwise
denoted, such subsidiaries and investments were held separately by Liberty
through August 4, 1994, the date the Mergers were consummated):
Subsidiaries
- ------------
Encore Media Corporation ("Encore")
TV Network, Inc. (formed in 1994)
Home Shopping Network, Inc. ("HSN")
Southern Satellite Systems, Inc. ("Southern Satellite")
Netlink USA (owned by TCIC prior to the Mergers)
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd. ("ARC")
Vision Group Incorporated (owned by TCIC prior to the Mergers)
Americana Television Productions LLC (formed in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports - West(formerly Prime Ticket Networks, L.P.)
(acquired in 1994)
Communications Capital Corp ("CCC") (owned by TCIC prior to the
Mergers)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network - Northwest
IV-143
<PAGE>
Investments
- -----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery Communications, Inc. ("Discovery") (owned by TCIC prior to
the Mergers)
DMX Inc. (owned by TCIC prior to
the Mergers)
E! Entertainment Television, Inc. (owned by TCIC prior to the Mergers)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
International Cable Channels Partnership, Ltd.("ICCP") (acquired in
1994)
QE+ Ltd ("Starz!") (owned by TCIC prior to the Mergers)
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc. (owned by TCIC prior to the Mergers)
TBS (owned by TCIC prior to the Mergers)
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership ("HTS")
SportsChannel Chicago Associates
SportsChannel Pacific Associates
SportsChannel Prism Associates
Prime Sports Network - Upper Midwest
SportsSouth Network, L.P.
Sunshine Network ("Sunshine")
American Movie Classics ("AMC")
Republic Pictures Television (owned by TCIC prior to the Mergers)
Sillerman Communications Management Corporation (owned by TCIC prior to
the Mergers)
Technology Programming Ventures (formed in 1994)
Prime Sports Australia (launched in 1995)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of (a) the
subsidiaries and assets not attributed to the Liberty Media Group,
including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's
International Cable and Programming unit and (iii) TCI's Technology/Venture
Capital unit, (b) any interest in the Liberty Media Group other than the
interest represented by any outstanding shares of Liberty Group Stock and
(c) any interest in the Liberty Media Group represented by outstanding
shares of Liberty Group Stock. The businesses of TCI not attributed to the
Liberty Media Group, together with any interest is referred to as the "TCI
Group". Intercompany balances resulting from transactions with such units
are reflected as borrowings from or loans to TCI and, prior to the
implementation of the Liberty Group Stock Proposal, are included in
combined equity in the accompanying combined financial statements. See
note 11.
Summary of Operations
- ---------------------
Liberty Media Group is engaged in two principal lines of business:
(i) production, acquisition and distribution through all available formats and
media of globally branded entertainment, educational and informational
programming and software, including multimedia products, for distribution
("Entertainment and Information Programming Services") and (ii) electronic
retailing, direct marketing, advertising sales, infomercials and transaction
processing ("Electronic Retailing Services"). To enhance the reader's
understanding, separate financial data have been provided below for Electronic
Retailing Services, which include a retail function, and other Entertainment and
Information Programming Services. In February 1993, Liberty Media Group
acquired a controlling voting interest in Home Shopping Network, Inc. ("HSN").
As a result, HSN became a consolidated subsidiary of Liberty Media Group for
financial reporting purposes at that time. The Electronic Retailing Services
financial data reflect the results of HSN. The table below sets forth, for the
periods indicated, the percentage relationship that certain items bear to
revenue. This summary provides trend data related to the normal recurring
operations of the Liberty Media Group. Corporate expenses have not been
reflected in the following table but are included in the following discussion.
Liberty Media Group holds significant equity investments (see Investments above)
the results of which are not a component of operating income, but are discussed
below under "Other Income and Expense". Other items of significance are
discussed separately under their own captions below.
IV-144
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1994 1993 1992
---------------- -------------- --------------
Dollar amounts in thousands.
----------------------------
<S> <C> <C> <C> <C> <C> <C>
Entertainment and Information
- -----------------------------
Programming Services
- --------------------
Revenue 100% $ 357,031 100% $263,960 100% $208,988
Operating, selling, general and
administrative 93% 332,060 85% 224,647 92% 192,863
Depreciation and amortization 5% 17,006 6% 16,112 7% 14,088
--- ---------- ---- -------- ---- --------
Operating income 2% $ 7,965 9% $ 23,201 1% $ 2,037
=== ========== ==== ======== ==== ========
Electronic
- ----------
Retailing Services
- ------------------
Revenue 100% $1,125,917 100% $942,940 - -
Cost of sales 65% 730,505 65% 611,526 - -
Operating, selling, general and
administrative 30% 341,015 31% 288,576 - -
Depreciation and amortization 3% 32,244 2% 24,029 - -
--- ---------- ---- -------- ---- --------
Operating income 2% $ 22,153 2% $ 18,809 - -
=== ========== ==== ======== ==== ========
</TABLE>
Entertainment and Information Programming Services
- --------------------------------------------------
Revenue from Entertainment and Information Programming Services
increased by 35%, or $93.1 million, from 1993 to 1994. Liberty's sports
programming businesses were responsible for $47.2 million of this increase, the
combined result of the August 1994 acquisition of Prime Ticket, a regional
sports network primarily serving Southern California ($21.3 million of the
increase) and higher subscription and advertising revenue from Liberty's other
sports networks. Netlink USA, a marketer and distributor of programming to the
United States home satellite dish subscriber market ("Netlink") accounts for
$28.9 million of the increase in revenue, the result of growth in the number of
subscribers and rate increases. Also contributing to the increased revenue in
1994 was revenue from tv! Network, a new 24-hour basic cable service launched in
May 1994.
Revenue from Entertainment and Information Programming Services
increased by 26%, or $55.0 million, from 1992 to 1993. Higher revenue from
Netlink, responsible for $35.2 million of this change, was a result of growth in
the number of subscribers. The remainder of the increase was attributable
primarily to additional subscription and advertising revenue for the sports
networks and higher subscription revenue from Encore.
Operating expenses, exclusive of depreciation and amortization,
increased by 48%, or $107.4 million, from 1993 to 1994. New business activities
(Prime Sports-West and tv! Network) accounted for $37.8 million of this
increase. Higher costs at Netlink, primarily the result of license fees for a
greater number of subscribers, accounted for $28.1 million of the increase.
Higher costs at Encore were associated primarily with the launch of
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<PAGE>
six new thematic multiplex services during 1994. Liberty's sports networks
also experienced higher costs, primarily the result of higher rights expenses
associated with a greater number of subscribers, escalation under existing
rights contracts, and new rights contracts.
Operating expenses, exclusive of depreciation and amortization,
increased by 16% or $31.8 million from 1992 to 1993. This increase was the
result of a $28.4 million increase in costs for Netlink, the result of higher
license fees due to subscriber growth.
Operating income for Entertainment and Information Programming
Services was $8.0 million in 1994, $23.2 million in 1993, and income of $2.0
million in 1992. The decline from 1993 to 1994 was primarily the result of
losses related to new businesses, Prime Sports-West ($8.0 million) and tv!
Network ($6.7 million). tv! Network was launched during 1994. The loss at Prime
Sports-West was partially attributable to a non-recurring charge of $4 million
related to the termination of a contract to provide advertising sales services.
This was the result of a decision by Liberty Sports to form its own national ad
sales organization, which would handle ad sales for Prime Sports-West as well as
other Liberty Sports networks. Prime Sports-West also launched a new service
during 1994, La Cadena Deportiva, a Spanish language sports network. The
remaining loss is primarily attributable to the start-up of this new service.
The increase in operating income from 1992 to 1993 was primarily the result of
improved results from Netlink, Southern Satellite and the sports programming
businesses.
Electronic Retailing Services
- -----------------------------
This information reflects the results of HSN, which became a
consolidated subsidiary of Liberty in February 1993. HSN's primary business is
the sale of merchandise to viewers of the home shopping programming produced and
distributed by Home Shopping Club, Inc. ("HSC"), a wholly owned subsidiary of
HSN.
Revenue from Electronic Retailing Services was $1.126 billion for
1994, a 19% increase over 1993 revenue of $942.9 million. The most
significant reason for this increase was a full year of HSN revenue in 1994,
compared with approximately 10 1/2 months of HSN revenue in 1993 (subsequent to
Liberty's acquisition of HSN in February 1993.) HSN revenue also increased in
1994 as a result of several factors, most significantly the addition of new
cable subscribers due to the "must carry" provisions of the cable re-regulation
law. See "Impact of Regulation" below. Cable television households reached by
HSC programming increased from 33.8 million at the end of 1993 to 39.0 million
at the end of 1994. The cable television household growth was achieved
primarily through increased cable system carriage of HSC's broadcast signal due
to the implementation of "must carry" beginning in September 1993 and HSN's
aggressive campaign to obtain contracts for cable carriage of HSC programming.
Because HSC programming is now on a cable channel line-up, former broadcast
households can more easily access HSC programming.
During 1995, 5.0 million cable subscribers are covered by cable system
contracts that are subject to termination or renewal. This represents 12.7% of
the total number of unduplicated cable households receiving HSC programming,
exclusive of "must carry" subscribers. HSN is pursuing both renewals and
additional cable television system contracts, but channel availability,
competition, cost of carriage, cable re-regulation and ownership or affiliation
of HSN's competitors with cable system operators are some of the factors
affecting the negotiations for cable television system contracts. HSN
management cannot determine the percentage of expiring contracts that will be
renewed or the number of households that will be added through new contracts.
During 1994, HSN appointed new senior management with expertise in
merchandising, improved its purchasing and merchandising practices, and restyled
HSC programming. While HSN management believes that the new merchandising and
programming strategy will improve results ultimately, the initial impact of
these changes was a slowdown in sales growth, such that consolidated net sales
for the quarter ended December 31, 1994 increased only 1.8% over the same period
in 1993. Sales and earnings through mid-1995 are expected to be negatively
affected
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<PAGE>
by these changes and HSN management estimates the earliest that sales will be
positively affected will be the latter half of 1995. There can be no assurance
that these changes will achieve the intended results.
Cost of sales increased by 19%, or $119.0 million, from 1993 to 1994.
Operating expenses, exclusive of depreciation and amortization, increased by
18%, or $52.4 million, from 1993 to 1994. These increases were primarily
attributable to the full year of 1994 results compared with 10 1/2 months in
1993. As a percentage of sales, cost of sales remained flat at 65% for both
1994 and 1993, and operating expenses declined slightly, from 31% in 1994 to 30%
in 1993. HSN management believes that certain of its costs will increase in the
future. Selling and marketing expenses, which accounted for $161.9 million of
operating expenses in 1994, are expected to be at higher levels in future
periods as HSN maintains its efforts to increase the number of cable systems
carrying HSC programming, increase market penetration, and develop new
electronic retailing opportunities. Engineering and programming expenses, which
accounted for $98.8 million of operating expenses in 1994, are also expected to
increase in 1995 as HSN develops new programming and telemarketing opportunities
and attempts to expand its broadcast television reach for existing programming.
"Must-carry" legislation, as discussed below, is expected to result in increases
in certain operating expenses related to cable and broadcast carriage. However,
as a percentage of sales, the offset is not currently determinable.
Corporate Expenses
- ------------------
Corporate expenses are not reflected in the preceding table. Such
amounts are primarily attributable to changes in compensation expense associated
with management incentive stock appreciation rights. In 1994, there was a
reversal of $7.0 million of previously accrued expense associated with stock
appreciation rights. In 1993 and 1992, the related expense was $37.5 million
and $16.9 million, respectively. In addition to the corporate stock
appreciation right expense, HSN accrued $2.8 million of compensation related to
stock appreciation rights in 1993 and reversed $1.5 million of that amount in
1994. The amount of expense associated with stock appreciation rights is based
on the market price of the underlying common stock as of the date of the
financial statements. This expense is subject to future adjustment based on
market price fluctuations and, ultimately, on the final determination of market
value when the rights are exercised. Stock options and/or stock appreciation
rights granted by Liberty prior to the Mergers have been assumed by TCI.
Upon implementation of the Liberty Media Group Stock Proposal, certain
TCI corporate general and administrative costs would be charged to Liberty Media
Group at rates set at the beginning of each year based on projected utilization
for that year. The utilization based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
The accompanying combined statements of operations do not reflect the allocation
of TCI corporate general and administrative costs in the aforementioned manner
because the majority of the entities attributable to Liberty Media Group were
owned, directly or indirectly, by Liberty Media Corporation for the majority of
the periods presented herein. During such periods, Liberty Media Corporation
was not allocated corporate general and administrative costs.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of time
TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend on Liberty
Media Group matters. TCI management evaluated several alternative allocation
methods including assets, revenue, operating income, and employees. Management
did not believe that any of these methods would reflect an appropriate
allocation of corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating subsidiaries,
and the way in which corporate resources are utilized.
Liberty Media Corporation and TCI were parties to a services agreement
pursuant to which TCI agreed to provide certain administrative services to
Liberty Media Corporation. In addition, the employees of certain of Liberty's
subsidiaries remained on the TCI payroll until December 31, 1992. Liberty Media
Corporation reimbursed TCI for their salaries and related employment expenses.
A subsidiary of Liberty Media Corporation also leases office space and satellite
transponder facilities from TCI. Charges by TCI for such arrangements for the
years ended December 31, 1994, 1993 and 1992, aggregated $7,542,000, $4,455,000
and $7,586,000, respectively. From January 1, 1993 through the Mergers, no
employees of Liberty Media Corporation's subsidiaries remained on the TCI
payroll.
IV-147
<PAGE>
Other Income and Expenses
- -------------------------
Interest expense was $14.7 million, $14.4 million, and $14.4 million
in 1994, 1993 and 1992. Interest expense in 1994 increased slightly from 1993
as the effect of HSN's repayment of certain loans in August 1994 was offset by
interest expense at Prime Sports-West, acquired in August 1994, and an increase
in interest expense at ARC, related to borrowings under a bank credit facility
that was put in place in April 1994. The consolidation of HSN's indebtedness in
1993 was responsible for an $8.7 million increase in interest expense that year.
This was offset by a decrease in interest expense on a revolving line of credit
of CCC, also a subsidiary of Liberty Media Group. Average borrowings under the
CCC facility were $164 million in 1992, decreasing to $31 million in 1993.
Virtually all of Liberty Media Group's combined indebtedness bears
interest at rates that fluctuate with market rates. Consequently, a general
increase in interest rates would increase combined interest expense.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI would bear interest at such rates and have
repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans and investment oppportunities available to
each Group and the availability, cost and time associated with alternative
financing sources.
Dividend and interest income was $20.2 million, $23.1 million and
$12.0 million in 1994, 1993 and 1992, respectively. The decrease in 1994 was
primarily the result of the repayment of an HSN note receivable in August 1994.
The increase in 1993 was primarily the result of the acquisition and
consolidation of HSN in February 1993.
Liberty Media Group's share of earnings in affiliates decreased to
$20.0 million in 1994 from $24.0 million in 1993. Earnings from QVC decreased
to $3.0 million in 1994 from $14.1 million in 1993 primarily as a result of a
change to the cost method of accounting for Liberty Media Group's investment in
QVC. In November 1993, Liberty Media Group sold approximately 1.7 million
shares of common stock of QVC to Comcast Corporation ("Comcast") for aggregate
consideration of approximately $31.5 million. The sale to Comcast reduced
Liberty Media Group's interest in QVC common stock (on a fully diluted basis)
from 21.9% to 18.9%. Liberty Media Group continued to account for its
investment in QVC under the equity method, although it no longer exercised
significant influence over such affiliate, due to the pending determination of
whether it would rejoin the control group under a stockholder's agreement. As a
result of the election on May 13, 1994 by Liberty Media Group to forego the
exercise of its option to be reinstated as a party to the stockholder's
agreement, Liberty Media Group began, as of that date, to account for its
investment in QVC under the cost method of accounting.
Liberty Media Group, Comcast, QVC Programming Holdings, Inc., a
corporation which is jointly owned by Liberty Media Group and Comcast, and QVC
are parties to an Agreement and Plan of Merger dated as of August 4, 1994 as
amended (the "QVC Merger Agreement"). As a result of transactions under the QVC
Merger Agreement, in February 1995, Liberty Media Group's investment in QVC was
restated to reflect such investment under the equity method. (See Demands on
Liquidity below.)
Liberty Media Group's share of earnings from affiliates related to
American Movie Classics Company ("AMC") decreased from $11.3 million in 1993 to
$8.8 million in 1994, the result of the sale of substantially all of Liberty
Media Group's interest in AMC in July 1994. Partially offsetting these
decreases was a $7.6 million improvement in earnings in 1994 from Home Team
Sports Limited Partnership ("HTS"). Liberty's share of earnings from HTS was a
loss of $7.1 million in 1993, the result of an adjustment by Liberty Media Group
to amortization of its excess cost assigned to certain programming rights
contracts.
Liberty Media Group's share of earnings in affiliates remained
approximately level from 1992 to 1993. Several of Liberty Media Group's equity
affiliates showed improved results in 1993, including AMC and SportsChannel
Chicago Associates, but these improvements were offset by a loss in 1993 related
to HTS, described above.
IV-148
<PAGE>
Liberty Media Group's gain on disposition of assets was $183.3 million
in 1994, $32.0 million in 1993, and $8.2 million in 1992. The 1994 gain was
primarily the result of the sale of substantially all of Liberty Media Group's
interest in AMC.
Litigation settlement expense of $7.5 million in 1993 related to
agreements in principle reached in December 1993 to settle certain lawsuits in
which Liberty Media Group and HSN were parties. Additional amounts payable
under the settlement were capitalized by Liberty Media Group as part of its cost
to acquire its interest in HSN.
Income Taxes
- ------------
Federal income taxes and certain state and local taxes will be paid on
a consolidated basis by TCI. However, pursuant to a tax sharing agreement,
federal income taxes will be calculated, with certain adjustments, on a separate
return basis for each corporation in each Group (applying provisions of the
Internal Revenue Code of 1986, as amended, and related regulations as if such
corporation filed a separate return for federal income tax purposes). In
addition, pursuant to such agreement, state and local income taxes will be
calculated on a separate return basis for each Group (applying provisions of
state and local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes). Based upon these separate
calculations, an allocation of tax liabilities will be made such that the
Liberty Media Group (or each separate corporation within the Liberty Media
Group, as the case may be) is responsible to TCI for its gross share of TCI's
consolidated, combined or unitary tax liabilities, such gross share being
determined without regard to (a) tax benefits that are attributable to the TCI
Group or (b) certain tax benefits that are attributable to the Liberty Media
Group (or its constituent corporations) but that are taken into account in
determining TCI's consolidated, combined or unitary tax benefit carryover.
Similarly, TCI is responsible to the Liberty Media Group (or its constituent
corporations) for tax benefits attributable to the Liberty Media Group (or its
constituent corporations) and actually used by TCI in determining its
consolidated, combined or unitary tax liability. Tax attributes, including but
not limited to net operating losses, investment tax credits, alternative minimum
tax net operating losses, alternative minimum tax credits, deferred intercompany
gains and tax basis in assets will be inventoried and tracked for the entities
comprising each Group. TCI will retain the right to file all returns, make all
elections and control all audits and contests.
Certain of the Federal income tax returns of TCI are presently under
examination by the Internal Revenue Service including the years of 1979 through
1992. These examinations may result in proposed adjustments for additional
income taxes relating to Liberty Media Group.
Recent Accounting Pronouncements
- --------------------------------
In November of 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("Statement No. 112"). As Liberty
Media Group's present accounting policies generally are in conformity with the
provisions of Statement No. 112, Liberty Media Group does not believe that
Statement No. 112 will have a material effect on the Liberty Media Group.
Statement No. 112 is effective for years beginning after December 31, 1994.
In May 1993, the FASB 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 Statement No. 115, debt securities that Liberty Media
Group has both the positive intent and ability to hold to maturity are carried
at amortized cost. Debt securities that Liberty Media Group 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 are carried at
fair value. Unrealized holding gains and losses on securities classified as
available-for-sale are carried net of taxes as a separate component of combined
equity. Unrealized holding gains and losses on securities classified as trading
are reported in earnings.
Liberty Media Group applied Statement No. 115 beginning in the first
quarter of 1994. Application of Statement No. 115 resulted in a net increase of
$335 million to combined equity on January 1, 1994, representing the recognition
of unrealized appreciation, net of taxes, for Liberty Media Group's investments
in marketable equity
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<PAGE>
securities determined to be available-for-sale. The amount of net unrealized
gain was reduced by $78 million through December 31, 1994. The majority of the
aggregate unrealized gain is comprised of Liberty Media Group's investment in
Turner Broadcasting System Inc. ("TBS") common stock ($98 million) and QVC, Inc.
("QVC") common stock ($127 million). Liberty Media Group holds no material debt
securities.
The FASB has recently issued other accounting pronouncements which are
not yet effective. Liberty Media Group does not expect that these
pronouncements will have a material affect on Liberty Media Group's combined
financial statements.
Liquidity and Capital Resources
- -------------------------------
During 1994, Liberty Media Group entered into transactions which
significantly impacted its liquidity. The net result of such activities during
1994, along with cash flow from operations, was a 24% or $19.6 million decrease
in its cash balance, resulting in combined cash and cash equivalents of $63.0
million as of December 31, 1994. The following provides a brief description of
the significant non-operating items that impacted liquidity during 1994:
In July 1994, Rainbow Program Enterprises ("Rainbow") purchased 49% of
Liberty Media Group's 50% general partnership interest in AMC from Liberty Media
Group under the terms of a buy/sell provision contained in the AMC partnership
agreement for total cash proceeds of approximately $180 million.
In August 1994, HSN received $129.7 million from the repayment by
Silver King Communications, Inc. of indebtedness to HSN plus accrued interest on
such indebtedness. On the same date, HSN repaid the $85 million outstanding
balance on its senior term loans. The remaining proceeds were invested in cash
equivalents.
On August 8, 1994, Liberty Media Group acquired all the partnership
interests of Prime Sports-West from an independent third party and Forum
Partners for aggregate consideration of $220,000,000. On the closing date, TCI
paid $33 million in cash to Forum in consideration of the purchase of the
16.667% partnership interest held by Forum and the payment of partnership
indebtedness owed to Forum. Also on the closing date, a subsidiary of Liberty
Media Group was merged with and into CVN, Inc. ("CVN"), and all outstanding
stock of CVN, which was held by the independent third party, was converted into
70,559 shares of TCI Convertible Preferred Stock, Series C. CVN owned the
remaining 83.333% general partnership interest in Prime Sports-West. The
consideration paid by TCI on behalf of Liberty Media Group has been reflected in
combined equity of Liberty Media Group.
A commonly used measure of liquidity is "interest coverage", which is
the ratio of operating income before non-cash charges to interest expense.
Liberty Media Group's interest coverage ratios were 242%, 376% and 137% for the
years ended December 31, 1994, 1993 and 1992, respectively. The improvement
from 1992 to 1993 was primarily the result of the acquisition of HSN in 1993,
which had a higher interest coverage ratio than the other Liberty Media Group
subsidiaries. In addition, lower average borrowing during 1993 under the CCC
line of credit contributed to the improvement. The decline in 1994 was the
result of lower operating income before non-cash changes.
Subsequent to the Mergers, TCI manages certain treasury activities for
Liberty Media Group on a centralized basis. Cash receipts of certain businesses
attributed to Liberty Media Group are remitted to TCI and certain cash
disbursements of Liberty Media Group are funded by TCI on a daily basis. Prior
to the implementation of the Liberty Group Stock Proposal, but subsequent to the
Mergers, the net amounts of such cash activities are included in combined equity
in the accompanying combined financial statements. Prior to the Mergers,
Liberty Media Corporation separately managed the treasury activities of its
subsidiaries. Subsequent to the implementation of the Liberty Group Stock
Proposal, such cash activities will be included in borrowings from and loans to
TCI or, if determined by the Board of Directors, as an equity contribution to
the Liberty Media Group.
Notwithstanding the allocation of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of preparing its
financial statements, the change in the capital structure of TCI
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<PAGE>
contemplated by the Liberty Group Stock Proposal would not affect the ownership
of the respective legal title to assets or responsibility for liabilities of TCI
or any of its subsidiaries. TCI and its subsidiaries would each continue to be
responsible for their respective liabilities. Holders of Liberty Group Common
Stock would be holders of common stock of TCI and would continue to be subject
to risks associated with an investment in TCI and all of its businesses, assets
and liabilities. The Liberty Group Stock Proposal would not affect the rights
of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the Liberty Media Group
and the market price of shares of the Liberty Group Stock. In addition, net
losses of any portion of TCI, dividends and distributions on any series of
common stock or preferred stock, repurchases of any series of common stock and
certain repurchases of preferred stock would reduce funds of Liberty Media Group
legally available for dividends on all series of common stock. Accordingly,
Liberty Media Group financial information should be read in conjunction with the
TCI and Liberty consolidated financial information.
Under the terms of Liberty Group Stock, dividends would be payable at
the sole discretion of the Board out of the lesser of (i) all assets of TCI
legally available for dividends and (ii) the available dividend amount with
respect to the Liberty Media Group, as defined. Determinations to pay
dividends on Liberty Group Common Stock would be based primarily upon the
financial condition, results of operations and business requirements of Liberty
Media Group and TCI as a whole.
Sources of Liquidity
- --------------------
Liberty Media Group's sources of funds include its available cash
balances, cash generated from operating activities, cash distributions from
affiliates, dividend and interest payments, asset sales, availability under
certain credit facilities, and loans and/or equity contributions from TCI. To
the extent cash needs of the Liberty Media Group exceed cash provided by the
Liberty Media Group, TCI may transfer funds to the Liberty Media Group.
Conversely, to the extent cash provided by the Liberty Media Group exceeds cash
needs of the Liberty Media Group, the Liberty Media Group may transfer funds to
TCI.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to Liberty Media Group would bear interest at such
rates and have repayment schedules and other terms as are established by the
Board of Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the use of proceeds by and creditworthiness of
the recipient Group, the capital expenditure plans and investment opportunities
available to each Group and the availability, cost and time associated with
alternative financing sources.
Many of Liberty Media Group's subsidiaries' loan agreements contain
restrictions regarding transfers of funds to other members of Liberty Media
Group in the form of loans, advances or cash dividends. However, other
subsidiaries, principally Southern Satellite (which is the satellite carrier for
the signal of WTBS, a 24-hour independent UHF television station originated by
TBS) and CCC are not restricted from making transfers of funds to other members
of the group. The cash provided by operating activities of Southern Satellite,
is a primary source of cash available for distribution to Liberty Media Group.
However, Southern Satellite does not have an agreement with WTBS with respect to
the retransmission of its signal and there are not specific statutory
restrictions per se which would prevent any other satellite carriers from
retransmitting such signal to cable operators and others. If the business of
Southern Satellite is adversely affected by competitive or other factors, it may
have an adverse effect on the ability of Liberty Media Group to generate
adequate cash to meet its obligations.
Several entities included in Liberty Media Group have credit
facilities. CCC, a wholly owned subsidiary, has a $325 million credit facility
with a group of banks, $237 million of which was outstanding at December 31,
1994. This facility is secured by a pledge of a portion of Liberty Media Group's
holding of stock in Turner Broadcasting Systems, Inc. The CCC facility does not
restrict the transfer of funds to other members of Liberty Media Group or TCI.
In August 1994, HSN's revolving credit facility was increased to $100 million,
$25 million of which was
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outstanding on December 31, 1994. In March 1994, ARC Holding, Ltd. ("ARCH")
established a $30 million revolving credit facility with a group of banks. The
amount of this facility was increased to $45 million in December 1994, $18
million of which was outstanding on December 31, 1994. Another subsidiary,
Prime Sports-West, has a $24 million credit facility with a bank, $16.4 million
of which was outstanding an December 31, 1994. The HSN, ARCH and Prime Sports-
West facilities restrict the transfer of funds to affiliated companies, and
include various financial covenants, including maintenance of certain financial
ratios.
Various partnerships and other affiliates of Liberty Media Group
accounted for under the equity method finance a substantial portion of their
acquisitions and capital expenditures through borrowings under their own credit
facilities and net cash provided by their operating activities.
Demands on Liquidity
- --------------------
Liberty Media Group, Comcast, QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Liberty Media Group and
Comcast, and QVC are parties to an Agreement and Plan of Merger dated August 4,
1994, as amended (the "QVC Merger Agreement"). Pursuant to the QVC Merger
Agreement, The Purchaser commenced an offer (the "QVC Tender Offer") to purchase
all outstanding shares of common stock and preferred stock of QVC. The QVC
Tender Offer expired on February 9, 1995, at which time the Purchaser accepted
for payment all shares of QVC which had been tendered in the QVC Tender Offer.
Following consummation of the QVC Tender Offer, the Purchaser was merged with
and into QVC with QVC continuing as the surviving corporation. Liberty Media
Group owns an approximate 43% interest of the post-merger QVC. A credit facility
entered into by the Purchaser is secured by substantially all of the assets of
QVC. In addition, Comcast and Liberty Media Group have pledged their shares of
QVC pursuant to such credit facility.
In connection with the transactions contemplated under a stockholders
agreement entered into among Comcast, Liberty Media Group and the Purchaser, TCI
has undertaken to cause Liberty Media Group to comply with each of its
representations, warranties, agreements and obligations under the stockholders
agreement. All such undertakings will terminate at such time as equity
securities of Liberty Media Group or the Liberty Group Stock have been
distributed and such securities impute a market capitalization of Liberty Media
Group in excess of $2 billion.
Upon consummation of the aforementioned QVC transactions, Liberty
Media Group was deemed to exercise significant influence over QVC and, as such,
will account for its investment in QVC under the equity method. Had Liberty
Media Group accounted for its investment under the equity method during 1994, it
would have reflected additional share of earnings of QVC of $8 million before
income taxes. Additionally, Liberty Media Group's investment in QVC, its
deferred tax liability and its unrealized gain from available-for-sale
securities would have been reduced by $216 million, $89 million and $127
million, respectively, had Liberty Media Group accounted for its investments in
QVC under the equity method during 1994. The 1994 combined financial statements
will be restated in the first quarter of 1995.
As of December 31, 1994, Liberty Media Group had combined debt
maturities of $31 million in 1995, $2 million in 1996 and $279 million in 1997.
In 1994, HSN's Board of Directors authorized the repurchase of up to
$75.0 million of HSN common stock. In 1994, HSN repurchased 1.3 million shares
at a total cost of $13.1 million and in 1995, through February 28, HSN
repurchased an additional 2.6 million shares at a total additional cost of $21.6
million. HSN may, subject to cash availability, debt covenants and market
conditions, continue to repurchase its common stock within the limits set by
it's Board of Directors. HSN borrowed under its bank credit facility to finance
these purchases, and expects to finance any future purchases in the same way.
Liberty Media Group reached agreements in principle in December 1993
to settle certain lawsuits in which Liberty Media Group and HSN are parties. In
accordance with these agreements, HSN paid approximately $10.2
IV-152
<PAGE>
million, and Liberty Media Group paid approximately $16.3 million during 1995,
and HSN expects to pay an additional approximate $4.9 million in 1995.
Liberty Media Group intends to continue to develop its Entertainment
and Information Programming Services and has made certain financial commitments
related to the acquisition of programming. As of December 31, 1994, Liberty
Media Group's future minimum obligation related to certain film licensing
agreements was $405 million. The amount of the total obligation 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. Liberty Media Group's obligations over the next five years for certain
sports program rights contracts as of December 31, 1994 was $230 million. It
is expected that sufficient cash will be generated by the programming services
to satisfy these commitments. However, continued development may require
additional financing and it cannot be predicted whether Liberty Media Group will
obtain such financing. If additional financing cannot be obtained, Liberty
Media Group could attempt to sell assets but there can be no assurance that
asset sales, if any, can be consummated at a price and on terms acceptable to
Liberty Media Group. Further, TCI could attempt to sell equity securities but,
again, there can be no certainty that such a sale could be accomplished on
acceptable terms.
HSN has significant working capital needs for inventory and accounts
receivable. However, HSN expects to meet its recurring working capital needs
primarily through internally generated funds and its existing credit facilities.
Impact of Regulation
- --------------------
The Cable Television and Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") provides for comprehensive federal and local
regulation of the cable television industry, including Liberty Media Group's
programming operations. The FCC has adopted extensive rate regulations governing
cable systems not subject to "effective competition". The FCC has established
standards and procedures governing regulation of rates for basic cable service
and equipment to be implemented by state and local cable franchising authorities
and for the FCC's review of the "reasonableness" of rates for additional tiers
of cable service upon complaint from a franchising authority or a cable
subscriber. The FCC also has adopted interim "cost-of-service" rules governing
attempts by cable operators to justify higher than benchmark rates based on
unusually high costs. Separately offered services, such as pay television and
pay-per-view services, are not currently subject to rate regulation although
packages or collective offerings of such services may be subject to rate
regulation. The FCC also has identified and established regulations for New
Product Tiers, which are tiers of services not subject to rate regulation.
Through a series of orders, the FCC had "frozen" cable rates, except for those
cable systems already subject to effective competition, from April 5, 1993
through May 15, 1994.
The FCC's rate regulations also govern changes in the rates which
cable operators may charge when adding or deleting a service from a regulated
tier of service. The FCC substantially revised its rules for adding and
deleting services in November 1994 and has provided an alternative methodology
for adding services to cable programming service tiers which includes a flat fee
increase per added channel and an aggregate limit on such increases with an
additional license fee reserve. The FCC's rate regulations also permit cable
operators to "pass through" increases in programming costs and certain other
external costs which exceed the rate of inflation subject to the aggregate limit
through 1996. However, a cable operator may pass through increases in the cost
of programming services affiliated with such cable operator to the extent such
costs exceed the rate of inflation only if the price charged by the programmer
to the affiliated cable operator reflects prevailing prices offered in the
marketplace by the programmer to unaffiliated third parties or the fair market
value of the programming.
Liberty Media Group believes that the FCC's comprehensive system of
rate regulation, including regulation of the changes in rates when programming
services are added or deleted from service tiers, has had and will continue to
have an adverse effect on the programming services in which Liberty Media Group
has an ownership interest by limiting the carriage of such services and/or the
ability and willingness of cable operators to pay the rights fees for such
carriage.
IV-153
<PAGE>
The FCC has adopted rules providing for mandatory carriage by cable
systems after September 1, 1993 of all local full-power commercial television
broadcast signals (up to one-third of all channels), including the signals of
stations carrying home-shopping programming after October 6, 1993, and,
depending on a cable system's channel capacity, at least one non-commercial
television broadcast signal. Alternatively, after October 6, 1993, commercial
broadcasters have the right to deny such carriage unless they grant
retransmission consent. The "must carry" statutory provisions and regulations
remain in effect pending the outcome of ongoing judicial proceedings to resolve
challenges to their constitutionality. Liberty Media Group believes that, by
requiring such carriage of broadcast signals, these regulations may adversely
affect the ability of Liberty Media Group's programming services to obtain
carriage on cable systems with limited channel capacity. To the extent that
carriage is thereby limited, the subscriber and advertising revenues available
to Liberty Media Group's programming services also will be limited. During the
past year, HSN has aggressively pursued and obtained long-term carriage
commitments from a number of cable operators. As a result of HSN's success in
obtaining such commitments, the exposure to loss of revenue should the "must-
carry" rules be declared unconstitutional has been largely mitigated.
The FCC has adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels
or a 45 percent limit, whichever is greater, provided that the additional
channels carry minority controlled programming services. The regulations also
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations. Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services. These rules may limit
carriage of Liberty Media Group's programming services on certain cable systems
of TCI and its affiliates.
The 1992 Cable Act directed the FCC to promulgate regulations
regarding the sale and acquisition of cable programming between multichannel
video program distributors (including cable operators) and programming services
in which a cable operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude virtually all exclusive
programming contracts between cable operators (unless the FCC first determines
the contract serves the public interest) and generally prohibit a cable operator
which has an attributable interest in a programmer from improperly influencing
the terms and conditions of sale to unaffiliated multichannel video
distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as multichannel multi-point distribution
systems ("MMDS") and DBS services on terms and conditions that do not unfairly
discriminate among such technologies.
In response to numerous petitions for review of the FCC's rate
regulations, the United States Court of Appeals for the District of Columbia
Circuit upheld the material provisions of those regulations in Time Warner
Entertainment Co., L.P. v. F.C.C. on June 6, 1995. The Court upheld the
constitutionality of the FCC's regulations and generally ruled that they were
authorized by the 1992 Cable Act.
The regulation of cable television systems at the federal, state and
local levels is subject to the political process and has been in constant flux
over the past decade. This process continues in the context of legislative
proposals for new laws and the adoption or deletion of administrative
regulations and policies. For example, Congress presently is considering
telecommunications legislation which, if enacted into law, would substantially
change existing law, including among other things, the rate regulation of cable
television systems and the restrictions on telephone companies in the provision
of cable television service. The Senate approved the Telecommunications
Competition and Deregulation Act of 1995 on June 15, 1995. The House Commerce
Committee approved the Communications Act of 1995 on May 25, 1995, and the full
House is expected to vote on that bill within the next few months. Further
material changes in the law and regulatory requirements must be anticipated and
there can be no assurance that the Liberty Media Group's business will not be
affected adversely by future legislation, new regulation or deregulation.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. Liberty Media Group is uncertain how the courts and/or the FCC
ultimately will rule or whether such rulings will materially change any existing
rules or statutory requirements.
IV-154
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1994
and 1993 and for each of the years in the three-year period ended December 31,
1994.
We have also audited the accompanying combined balance sheets of Liberty Media
Group (a combination of certain assets of Tele-Communications, Inc. and its
affiliate, Liberty Media Corporation, as defined in note 1) as of December 31,
1994 and 1993, and the related combined statements of operations, equity, and
cash flows for each of the years in the three-year period ended December 31,
1994. These combined financial statements are the responsibility of the
Companies' managements. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of Liberty Media Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Liberty Media Group are intended to reflect
the performance of the businesses of Tele-Communications, Inc. and its
affiliate, Liberty Media Corporation, which produce and distribute cable
television programming services. The combined financial statements of Liberty
Media Group should be read in conjunction with the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries and Liberty Media
Corporation and subsidiaries.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Media Group
as of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 5 to the combined financial statements, Liberty
Media Group adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," in 1994.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
IV-155
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
amounts in thousands
Assets
- ------
<S> <C> <C>
Cash and cash equivalents $ 62,963 82,544
Trade and other receivables, net 95,081 70,283
Inventories, net 119,814 112,008
Prepaid expenses 14,560 12,431
Prepaid program rights 11,257 1,422
Committed film inventory 22,097 11,448
Investments in affiliates, accounted for under
the equity method, and related receivables
(note 4) 196,192 229,292
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 653,691 487,073
Other investments, at cost, and related
receivables (note 6) 438,783 235,425
Deferred tax asset (note 10) -- 15,426
Property and equipment, at cost (note 7):
Land 21,934 20,374
Support equipment and buildings 150,165 130,207
Computer and broadcast equipment 60,525 61,825
---------- ---------
232,624 212,406
Less accumulated depreciation 38,313 28,710
---------- ---------
194,311 183,696
---------- ---------
Excess cost over acquired net assets (note 7) 549,770 264,723
Less accumulated amortization 22,217 10,375
---------- ---------
527,553 254,348
---------- ---------
Other intangibles 77,925 99,751
Less accumulated amortization 54,936 67,095
---------- ---------
22,989 32,656
---------- ---------
Cable distribution fees 71,871 --
Less accumulated amortization 3,893 --
---------- ---------
67,978 --
---------- ---------
Other assets, at cost, net of amortization 12,279 5,192
---------- ---------
$2,439,548 1,733,244
========== =========
(continued)
</TABLE>
IV-156
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Combined Balance Sheets, continued
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
amounts in thousands
Liabilities and Combined Equity
- -------------------------------
<S> <C> <C>
Accounts payable $ 111,239 100,672
Accrued liabilities 112,196 98,607
Film licenses payable 26,719 13,850
Accrued litigation settlements (note 8) 27,450 29,000
Accrued compensation relating to stock
appreciation rights (note 11) 28,422 36,996
Due to TCI from HSN 28,724 2,738
Deferred revenue 46,845 43,839
Debt (note 9) 329,944 399,680
Deferred tax liability (note 10) 235,814 --
Other liabilities 4,320 1,522
---------- ---------
Total liabilities 951,673 726,904
---------- ---------
Minority interests in equity of consolidated 115,165 112,319
subsidiaries
Combined equity (note 11):
Combined equity 1,115,039 894,021
Unrealized gains on available-for-sale
securities, net of taxes 257,671 --
---------- ---------
1,372,710 894,021
---------- ---------
$2,439,548 1,733,244
========== =========
</TABLE>
Commitments and contingencies (notes 4, 10 and 12)
See accompanying notes to combined financial statements.
IV-157
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Combined Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Revenue:
Net sales from home shopping services $1,125,917 942,940 --
Programming services:
From TCI (note 11) 59,897 47,448 45,970
From others 297,134 216,512 163,018
---------- --------- -------
1,482,948 1,206,900 208,988
---------- --------- -------
Cost of sales, operating costs and expenses:
Cost of sales 730,505 611,526 --
Operating 319,591 246,299 137,371
Selling, general and administrative
(note 11) 346,436 266,860 43,888
Charges by TCI (note 11) 14,180 5,655 7,586
Compensation relating to stock
appreciation rights (note 11) -- 40,366 16,939
Adjustment to compensation relating to
stock appreciation rights (8,574) -- --
Depreciation 22,574 19,384 2,933
Amortization 26,762 20,808 11,168
---------- --------- -------
1,451,474 1,210,898 219,885
---------- --------- -------
Operating income (loss) 31,474 (3,998) (10,897)
Other income (expense):
Interest expense (12,386) (12,683) (12,275)
Interest expense to TCI (2,348) (1,703) (2,168)
Dividend and interest income, primarily
from affiliates 20,249 23,145 11,974
Share of earnings of affiliates, net
(note 4) 19,974 24,045 24,355
Gain on disposition of assets (note 4) 181,088 31,972 8,240
Loss on early extinguishment of debt (1,491) (3,554) --
Minority interests in losses
(earnings) of consolidated subsidiaries (10,083) 32 5,511
Litigation settlements (note 8) -- (7,475) --
Other, net (884) (1,586) (1,277)
---------- --------- -------
194,119 52,193 34,360
---------- --------- -------
Earnings before income taxes 225,593 48,195 23,463
Income tax expense (note 10) (98,647) (21,330) (8,959)
---------- --------- -------
Net earnings $ 126,946 26,865 14,504
========== ========= =======
</TABLE>
See accompanying notes to combined financial statements.
IV-158
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized holding Total
gains on available- combined
Combined equity for-sale securities equity
---------------- -------------------- ----------
amounts in thousands
<S> <C> <C> <C>
Balance at January 1, 1992 $ 642,711 -- 642,711
Net earnings 14,504 -- 14,504
Sale of programming to TCI (45,970) -- (45,970)
Cost allocations from TCI 7,586 -- 7,586
Interest expense allocation
from TCI 2,168 -- 2,168
Intergroup tax allocations 107 -- 107
Net cash transfers from TCI 6,681 -- 6,681
---------- ---------- ---------
Balance at December 31, 1992 627,787 -- 627,787
Net earnings 26,865 -- 26,865
Sale of programming to TCI (47,448) -- (47,448)
Cost allocations from TCI 5,655 -- 5,655
Interest expense allocation
from TCI 1,703 -- 1,703
Intergroup tax allocations 24,387 -- 24,387
Acquisition of HSN 123,000 -- 123,000
Net cash transfers from TCI 132,072 -- 132,072
---------- ---------- ---------
Balance at December 31, 1993 894,021 -- 894,021
Unrealized holding gains
for available-for-sale
securities as of January 1,
1994 (note 5) -- 335,177 335,177
Net earnings 126,946 -- 126,946
Sale of programming to TCI (59,897) -- (59,897)
Cost allocations from TCI 14,180 -- 14,180
Interest expense allocation
from TCI 2,348 -- 2,348
Intergroup tax allocation 77,396 -- 77,396
Acquisition of Prime Ticket
(note 7) 210,796 -- 210,796
Net cash transfers to TCI (150,751) -- (150,751)
Change in unrealized holding
gains for available-for-sale
securities (note 5) -- (77,506) (77,506)
---------- ---------- ---------
Balance at December 31, 1994 $1,115,039 257,671 1,372,710
========== ========== =========
</TABLE>
See accompanying notes to combined financial statements.
IV-159
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1994 1993 1992
------------- ----------- ---------
<S> <C> <C> <C>
amounts in thousands
(see note 3)
Cash flows from operating activities:
Net earnings $ 126,946 26,865 14,504
Adjustments to reconcile net
earnings to net cash provided (used)
by operating activities:
Depreciation and amortization 49,336 40,192 14,101
Compensation relating to stock
appreciation rights -- 40,366 16,939
Adjustment to compensation
relating to stock appreciation rights (8,574) -- --
Payment of compensation relating to
stock appreciation rights -- (21,541) (166)
Share of earnings of affiliates, net (19,974) (24,045) (24,355)
Loss on early extinguishment
of debt 1,491 3,554 --
Deferred income tax expense
(benefit) 21,251 (3,057) 8,852
Minority interests in earnings
(losses) 10,083 (32) (5,511)
Gain on disposition of assets (181,088) (31,972) (8,240)
Litigation settlements -- 7,475 --
Amortization of debt discount -- -- 520
Changes in operating assets and
liabilities, net of effect
of acquisitions:
Change in receivables (13,437) (34,532) 3,226
Change in inventories (18,455) (8,672) 80
Change in prepaid expenses (10,418) (10,678) 1,296
Change in payables,
accruals, due to TCI and
deferred revenue 49,018 55,285 23,592
--------- ---------- --------
Net cash provided
by operating
activities 6,179 39,208 44,838
--------- ---------- --------
Cash flows from investing activities:
Cash paid for acquisitions -- (160,440) (32,930)
Capital expended for property and
equipment (32,455) (18,627) (2,116)
Additional investments in and loans
to affiliates and others (23,856) (48,457) (45,010)
Return of capital from affiliates 9,880 4,750 42,295
Collections on loans to affiliates
and others 149,162 20,136 4,148
Proceeds from disposition of assets 180,429 44,061 --
Cash paid for cable distribution fees (71,871) -- --
Other investing activities, net (371) (3,569) (3,751)
--------- ---------- --------
Net cash provided
(used) by investing
activities 210,918 (162,146) (37,364)
--------- ---------- --------
Cash flows from financing activities:
Borrowings of debt 283,859 1,140,400 344,066
Repayments of debt (389,096) (1,197,181) (337,628)
Change in borrowings from or loans
to TCI (137,313) 118,738 (18,773)
Contributions by minority
shareholders of subsidiaries 6,272 48,932 2,773
Distributions to minority
shareholders of subsidiaries (400) -- --
--------- ---------- --------
Net cash provided
(used) by financing
activities (236,678) 110,889 (9,562)
--------- ---------- --------
Net decrease in cash
and cash equivalents (19,581) (12,049) (2,088)
Cash and cash equivalents
at beginning of year 82,544 94,593 96,681
--------- ---------- --------
Cash and cash equivalents
at end of year $ 62,963 82,544 94,593
========= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
IV-160
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
December 31, 1994, 1993 and 1992
(1) Basis of Presentation
---------------------
The Board of Directors of Tele-Communications, Inc. ("TCI") has adopted a
proposal (the "Liberty Group Stock Proposal") which, if approved by
stockholders, would authorize the Board to issue a new class of stock
("Liberty Group Stock") which is intended to reflect the separate
performance of TCI's business which produces and distributes cable
television programming services ("Liberty Media Group"). However, the
Liberty Group Stock would constitute common stock of TCI. The Liberty
Group Stock Proposal would not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. TCI intends to
distribute (the "Distribution") to its security holders Liberty Group Stock
representing one hundred percent of the equity value attributable to the
Liberty Media Group.
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies
(the "Mergers"). The transaction was consummated on August 4, 1994. Due
to the significant economic interest held by TCIC through its ownership of
Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method prior to the consummation of the Mergers. Accordingly, TCIC
had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The Mergers were accounted for using
predecessor cost due to related party considerations. Accordingly, the
accompanying combined financial statements of Liberty Media Group reflect
the combination of the historical financial information of the assets of
TCI and Liberty which produce and distribute cable television programming
attributed to the Liberty Media Group.
The subsidiaries of TCI and Liberty attributed to Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless
otherwise denoted, such subsidiaries and investments were held separately
by Liberty through August 4, 1994, the date the Mergers were consummated):
Subsidiaries
------------
Encore Media Corporation ("Encore")
TV Network, Inc. (formed in 1994)
Home Shopping Network, Inc. ("HSN")
Southern Satellite Systems, Inc.
Netlink USA (owned by TCIC prior to the Mergers)
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd. ("ARC")
Vision Group Incorporated (owned by TCIC prior to the Mergers)
Americana Television Productions LLC (acquired in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports-West (formerly Prime Ticket Networks, L.P.) (acquired in
1994)
Communications Capital Corp ("CCC") (owned by TCIC prior to the
Mergers)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network - Northwest
(continued)
IV-161
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Investments
-----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery Communications, Inc. ("Discovery") (owned by TCIC
prior to the Mergers)
DMX Inc.
E! Entertainment Television, Inc. (owned by TCIC prior to the Mergers)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
International Cable Channels Partnership, Ltd. ("ICCP") (acquired in
1994)
QE+ LTD ("Starz!") (owned by TCIC prior to the Mergers)
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc. (owned by TCIC prior to the Mergers)
TBS (owned by TCIC prior to the Mergers)
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership ("HTS")
SportsChannel Chicago Associates ("Sports")
SportsChannel Pacific Associates
Sports Channel Prism Associates
Prime Sports Network - Upper Midwest
SportsSouth Network, L.P.
Sunshine Network ("Sunshine")
American Movie Classics Company ("AMC")
Republic Pictures Television (owned by TCIC prior to the Mergers)
Sillerman Communications Management Corporation (owned by TCIC prior
to the Mergers)
Technology Programming Ventures (formed in 1994)
Prime Sports Australia (launched in 1995)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of (a) the
subsidiaries and assets not attributed to the Liberty Media Group,
including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's
International Cable and Programming unit and (iii) TCI's Technology/Venture
Capital unit, (b) any interest in the Liberty Media Group other than the
interest represented by any outstanding shares of Liberty Group Stock and
(c) any interest in the Liberty Media Group represented by outstanding
shares of Liberty Group Stock. The businesses of TCI not attributed to the
Liberty Media Group, together with any interest is referred to as the "TCI
Group". Intercompany balances resulting from transactions with such units
are reflected as borrowings from or loans to TCI and, prior to the
implementation of the Liberty Group Stock Proposal, are included in
combined equity in the accompanying combined financial statements. See
note 11.
(continued)
IV-162
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
contemplated by the Liberty Group Stock Proposal would not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
would each continue to be responsible for their respective liabilities.
Holders of Liberty Group Stock would be holders of common stock of TCI and
would continue to be subject to risks associated with an investment in TCI
and all of its businesses, assets and liabilities. The Liberty Group Stock
Proposal would not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of the
Liberty Media Group and the market price of shares of the Liberty Group
Stock. In addition, net losses of any portion of TCI, dividends or
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce the
funds of TCI legally available for dividends on all series of common stock.
Accordingly, Liberty Media Group financial information should be read in
conjunction with the TCI and Liberty consolidated financial information.
Under the terms of Liberty Group Stock, dividends on the Liberty Group
Stock would be payable at the sole discretion of the Board out of the
lesser of (i) all assets of TCI legally available for dividends and (ii)
the available dividend amount with respect to the Liberty Media Group, as
defined. Determinations to pay dividends on Liberty Group Stock would be
based primarily upon the financial condition, results of operations and
business requirements of Liberty Media Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will be delivered upon their conversion or exchange
the number of shares of Series A Liberty Group Stock that would have been
issuable in the Distribution with respect to the TCI Class A common stock
issuable upon conversion or exchange had such conversion or exchange
occurred prior to the record date for the Distribution. Options to purchase
TCI Class A common stock outstanding at the time of the Distribution will
be adjusted by issuing to the holders of such options separate options to
purchase that number of shares of Series A Liberty Group Stock which the
holder would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date for
the Distribution and reallocating a portion of the aggregate exercise price
of the previously outstanding options to the newly issued options to
purchase Series A Liberty Group Stock. Such convertible or exchangeable
preferred stock and debt securities and options outstanding on the record
date for the Distribution are referred to as "Pre-Distribution Convertible
Securities." The issuance of shares of Series A Liberty Group Stock upon
such conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets from
TCI to the Liberty Media Group in consideration of such issuance. In the
case of the exercise of Pre-Distribution Convertible Securities consisting
of options to purchase Series A Liberty Group Stock, the proceeds received
upon the exercise of such options will be attributed to Liberty Media
Group. If Pre-Distribution Convertible Securities remain outstanding at the
time of any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders of
Liberty Group Stock their proportionate interest in the net proceeds of the
disposition, the proportionate interest of the holders of Liberty Group
Stock will be determined on a basis that allocates to TCI a portion of such
net proceeds, sufficient to provide for the payment of the portion of the
consideration payable by TCI on any post-Distribution conversion, exercise
or exchange of Pre-Distribution Convertible Securities that becomes so
payable in substitution for shares of Liberty Group Stock that would have
been issuable upon such conversion, exercise or exchange if it had occurred
prior to the record date for the disposition. Likewise, if Pre-Distribution
Convertible Securities remain outstanding at the time of any redemption for
all the outstanding shares of Liberty Group Stock in exchange for stock of
any one or more wholly-owned subsidiaries of TCI which hold all of the
assets and liabilities of the Liberty Media Group, the portion of the
shares of such subsidiaries deliverable in redemption of the outstanding
shares of Liberty Group Stock will be determined on a basis that allocates
to TCI a portion of the shares of such subsidiaries, sufficient to provide
for the payment of the portion of the consideration payable by TCI upon any
post-redemption conversion, exercise or exchange of Pre-Distribution
Convertible Securities that becomes so payable in substitution for shares
of Liberty Group Stock that would have been issuable upon such conversion,
exercise or exchange if it had occurred prior to such redemption.
Subsequent to the Liberty Group Stock Proposal, existing securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will also be delivered upon their conversion or
exchange the number of shares of Series A Liberty Media Group Stock that
would have been issuable in the distribution with respect to the TCI Class
A common stock that would have been issuable upon their conversion or
exchange prior to the distribution. The issuance of shares of Series A
Liberty Media Group Stock upon such conversion or exchange will not result
in any transfer of funds or other assets from TCI to the Liberty Media
Group.
(2) 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 home shopping sales program with a deferred payment arrangement ("flex-
pay") allows customers to charge their purchases to third party credit
cards in installments, generally over three consecutive months. Flex-pay
receivables totaled $23,621,000 and $15,547,000 at December 31, 1994 and
1993, respectively. An allowance for doubtful accounts is provided based
on Liberty Media Group's past experience.
(continued)
IV-163
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Inventories, net
----------------
Merchandise inventories 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 net realizable value, giving consideration to
obsolescence and other factors. Inventories are presented net of a
carrying adjustment of $18,791,000 and $25,246,000 at December 31, 1994 and
1993, respectively.
Investments
-----------
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 Statement No. 115, debt
securities that Liberty Media Group has both the positive intent and
ability to hold to maturity are carried at amortized cost. Debt securities
that Liberty Media Group 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 net of taxes as a separate component of combined equity.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings. Marketable equity securities held by Liberty Media
Group were reported at the lower of cost or market prior to the adoption of
Statement No. 115, and any declines in the value which were other than
temporary were reflected as a reduction in Liberty Media Group's carrying
value of such investment.
Investments in which the ownership interest is less than 20% but do not
fall within the guidelines of Statement No. 115 are generally carried at
cost. For those investments in affiliates in which Liberty Media Group's
voting interest is 20% to 50%, the equity method of accounting is generally
used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize Liberty Media Group's share of net earnings or losses
of the affiliates as they occur rather than as dividends or other
distributions are received, limited to the extent of Liberty Media Group's
investment in, advances to and guarantees for the investee. Liberty Media
Group's share of net earnings or losses of affiliates includes the
amortization of purchase adjustments. However, recognition of gains on
sales of properties to affiliates accounted for under the equity method is
deferred in proportion to Liberty Media Group's ownership interest in such
affiliates.
Changes in Liberty Media Group's proportionate share of the underlying
equity of a subsidiary or equity method investee, which result from the
issuance of additional equity securities by such subsidiary or equity
investee, are recognized as gains or losses in Liberty Media Group's
combined statement of operations.
(continued)
IV-164
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
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 3 to 40 years for support equipment and buildings (furniture and
other equipment are depreciated from 3 to 8 years and buildings and
improvements are depreciated from 20 to 40 years) and 3 to 7 years for
computer and broadcast equipment (computer equipment is depreciated from 3
to 5 years and broadcast equipment is depreciated from 5 to 7 years).
Repairs and maintenance and any gains or losses on disposition of assets in
their entirety are included in operations.
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.
Other Intangible Assets
-----------------------
Other intangible assets include 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.
Cable Distribution Fees
-----------------------
During 1994, Liberty Media Group committed to long-term cable contracts for
carriage of Liberty Media Group's home shopping programming. These
contracts provide for payments of distribution fees to cable system
operators totalling $71,871,000. Amounts payable under these agreements
totaled $40,559,000 as of December 31, 1994.
Cable distribution fees are amortized to expense on a straight-line basis,
over the terms of the respective contracts, which range from 5 to 15 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 Liberty Media Group to repurchase such holders' common equity.
(continued)
IV-165
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Deferred Revenue
----------------
Deferred revenue represents advance billings primarily to home satellite
dish owners. Such revenue is recognized in the month service is provided.
Net Sales
---------
Revenue includes merchandise sales and shipping and handling revenue, and
is reduced by incentive discounts and sales returns to arrive at net sales.
Revenue is recorded for credit card sales upon transaction authorization,
and for check sales upon receipt of customer payment, which does not vary
significantly from the time goods are shipped. Liberty Media Group's sales
policy allows merchandise to be returned at the customer's discretion,
generally up to 30 days. An allowance for returned merchandise is provided
based upon past experience.
Earnings Per Common and Common Equivalent Share
-----------------------------------------------
Historical earnings per share are omitted from the statements of operations
as Liberty Group Stock was not part of the capital structure of TCI for the
periods presented. Following implementation of the Liberty Group Stock
Proposal, the method of calculating earnings per share for TCI common stock
and the Liberty Group Stock would reflect the terms of the certificate of
amendment to the Restated Certificate of Incorporation of TCI which provide
that Liberty Media Group's Available Dividend Amount, as defined, would be
the source for payment of dividends, although liquidation rights of these
series of stock and legally available assets of TCI may be more or less
than these amounts. TCI would compute earnings per share of Liberty Group
Stock by dividing Earnings Attributable to Liberty Media Group, as defined,
by the weighted average number of shares of Liberty Group Stock and
dilutive Liberty Group Stock equivalents outstanding during the applicable
period. Earnings Attributable to Liberty Media Group would generally equal
the Liberty Media Group's results of operations.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $10,698,000, $16,519,000 and $10,583,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. Cash paid for
income taxes during the years ended December 31, 1994, 1993 and 1992 was
$83,267,000, $8,642,000 and $953,000, respectively.
(continued)
IV-166
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1993 1991
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 302,043 540,254 32,930
Net liabilities assumed (21,350) (195,648) --
Deferred tax asset (liability) recorded
upon acquisition (69,897) 1,115 --
Contribution to combined equity from
TCI for acquisition (210,796) (123,000) --
Minority interests in equity of
acquired entities -- (62,281) --
--------- -------- ------
$ -- 160,440 32,930
========= ======== ======
Noncash proceeds on disposition $ -- -- 12,643
========= ======== ======
Unrealized gains, net of deferred
income taxes, on available-for-sale
securities as of January 1, 1994 $ 335,177 -- --
========= ======== ======
Reduction in unrealized gains, net of
deferred income taxes, on
available-for-sale securities $ 77,506 -- --
========= ======== ======
</TABLE>
(continued)
IV-167
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
-------------------------
Summarized unaudited financial information for affiliates accounted for
under the equity method is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---- ----
amounts in thousands
<S> <C> <C>
Combined Financial Position
- ---------------------------
Property and equipment, net $ 58,521 136,144
Feature film inventory 140,044 112,183
Cable distribution rights -- 99,579
Due from Liberty Media Group 11,253 --
Excess cost, other intangibles and other assets 296,703 1,044,261
----------- ----------
Total assets $ 506,521 1,392,167
=========== ==========
Debt $ 169,037 203,813
Due to Liberty Media Group 1,712 4,254
Feature film rights payable 43,216 104,096
Other liabilities 121,083 458,614
Owners' equity 171,473 621,390
----------- ----------
Total liabilities and equity $ 506,521 1,392,167
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1993 1992
----- ---- ----
amounts in thousands
<S> <C> <C> <C>
Combined Operations
- -------------------
Revenue $ 599,128 1,799,780 1,518,508
Operating expenses (493,885) (1,515,697) (1,272,238)
Depreciation and amortization (73,908) (50,157) (80,941)
--------- ----------- ----------
Operating income 31,335 233,926 165,329
Interest expense (10,114) (12,582) (26,005)
Other, net (28,599) (118,281) (53,098)
--------- ----------- ----------
Net earnings (loss) $ (7,378) 103,063 86,226
========= =========== ==========
</TABLE>
(continued)
IV-168
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the carrying value of Liberty Media Group's
investments, accounted for under the equity method, including related
receivables:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1993
---- ----
amounts in thousands
<S> <C> <C>
Discovery $113,182 106,089
QVC -- 61,545
Sunshine 7,174 9,131
AMC -- (11,026)
Sports 30,163 32,561
HTS 4,292 4,610
ICCP 13,686 --
Other investments 27,695 26,382
-------- -------
$196,192 229,292
======== =======
</TABLE>
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Discovery $ 7,093 5,454 5,721
QVC 3,042 14,078 13,322
Sunshine 1,376 (957) (1,055)
AMC 8,805 11,313 7,839
Sports 6,465 5,859 3,348
HTS 531 (7,076) 748
ICCP (1,469) -- --
Starz! (10) -- --
Other (5,859) (4,626) (5,568)
------- ------ ------
$19,974 24,045 24,355
======= ====== ======
</TABLE>
Liberty Media Group has a 49.9% partnership interest in QE+Ltd Limited
Partnership ("QE+"), which distributes STARZ!, a first-run movie premium
programming service launched in 1994. Entities attributed to the TCI Group hold
the remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that the TCI Group will be
required to make special capital contributions to QE+ through 2005, up to a
maximum amount of $350 million, $90 million of which is required in 1995. QE+ is
obligated to pay TCI Group a preferred return of 10% per annum on its special
capital contributions of up to $200 million beginning five years from the date
of the contribution or January 1, 1996, whichever is later. Any TCI Group
special capital contributions in excess of $200 million will be entitled to a
preferred return of 10% per annum from the date of the contribution. QE+ is
required to apply 75% of its available cash flow, as defined, to repay the TCI
Group special capital contributions and any preferred return payable thereon. To
the extent such special capital contributions are insufficient to fund the cash
requirements of QE+, the TCI Group and the Liberty Media Group will each be
obligated to fund such cash requirements in proportion to their respective
ownership percentages.
The TCI Group has also entered into a long-term affiliation agreement with
QE+ in respect of the distribution of the STARZ! service. Rates per subscriber
specified in the agreement are based upon customary rates charged to other cable
system operators. Payments to QE+ for 1995 are anticipated to aggregate
approximately $30 million to $40 million. The affiliation agreement also
provides that QE+ will not grant materially more favorable terms and conditions
to other cable system operators unless such more favorable terms and conditions
are made available to the TCI Group. The affiliation agreement also requires the
TCI Group to make payments to QE+ with respect to a guaranteed minimum number of
subscribers totaling approximately $339 million for the years 1996, 1997, and
1998.
In connection with the launch of the STARZ! service, the TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may be due
pursuant to motion picture output, distribution, and license agreements. As of
December 31, 1994, the maximum amount of such obligations or guarantees was
approximately $162 million. The future obligations of the TCI Group with respect
to these agreements is not currently determinable because such amount is
dependent on 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.
Liberty Starz! also has the right to acquire an additional 10.1% general
partnership interest in QE+ based on a formula designed to approximate the fair
value of the interest. Such right is exercisable for a period of ten years
beginning January 1, 1999 after QE+ has had positive cash flow for two
consecutive calendar quarters. The right is exercisable only after all special
capital contributions from the TCI Group have been repaid, including the
preferred return thereon.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. Payment of
such fees is subordinated to the repayment of the TCI Group special capital
contributions and the preferred return thereon. In addition, effective July 1,
1995, Liberty Media Group will earn a "Content Fee" for certain services
provided to QE+ equal to 4% of the gross revenue of QE+, estimated to be
approximately $1.2 million for the six months ended December 31, 1995. The
Content Fee agreement expires on June 30, 2001, subject to renewal on an annual
basis thereafter. Payment of the Content Fee will be subordinated to the
repayment of the contributions made by the TCI Group and the preferred return
thereon.
Liberty Media Group accounts for its interest in QE+ under the equity method.
On November 11, 1993, Liberty Media Group entered into an agreement with
the staff of the Federal Trade Commission pursuant to which Liberty Media Group
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 influence over QVC until
such time as QVC withdrew its offer for Paramount. Simultaneously, Liberty
Media Group agreed to withdraw from a stockholders agreement pursuant to which
Liberty Media Group and certain other stockholders exercised control over QVC
(the "Previous Stockholders' Agreement"). On February 15, 1994, QVC terminated
its offer for Paramount. Upon termination of such offer, Liberty Media Group
had the right to be reinstated as a party to the Previous Stockholders'
Agreement so long as such option was exercised within 90 days after such
termination.
(continued)
IV-169
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
On November 16, 1993, Liberty Media Group 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 Media
Group's interest in QVC common stock (on a fully diluted basis) from 21.9%
to 18.9%. Liberty Media Group continued to account for its investment in
QVC under the equity method, although it no longer exercised significant
influence over such affiliate, due to the pending determination of whether
it would rejoin the control group under the Previous Stockholders'
Agreement. As a result of the election on May 13, 1994 by Liberty Media
Group to forego the exercise of its option to be reinstated as a party to
the Previous Stockholders' Agreement, Liberty Media Group began, as of that
date, to account for its investment in QVC under the cost method of
accounting.
Pursuant to an Agreement and Plan of Merger dated as of August 4, 1994, as
amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Comcast Corporation
("Comcast") and Liberty Media Group, commenced an offer (the "QVC Tender
Offer") to purchase all outstanding shares of common stock and preferred
stock of QVC.
The QVC Tender Offer expired at midnight, New York City time, on February
9, 1995, the Purchaser accepted for payment all shares of QVC which had
been tendered in the QVC Tender Offer. Following consummation of the QVC
Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. Liberty Media Group owns an
approximate 43% interest of the post-merger QVC.
A credit facility entered into by the Purchaser is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty Media Group
have pledged their shares of QVC pursuant to such credit facility.
Upon consummation of the aforementioned QVC transactions, Liberty Media
Group is deemed to exercise significant influence over QVC and, as such,
will account for its investment in QVC under the equity method. Had
Liberty Media Group accounted for its investment under the equity method
during 1994, Liberty Media Group would have reflected additional share of
earnings of QVC of $8 million. Additionally, Liberty Media Group's
investment in QVC, its deferred tax liability and its unrealized gain from
available-for-sale securities would have been reduced by $216 million, $89
million and $127 million, respectively, had Liberty Media Group accounted
for its investment in QVC under the equity method during 1994. The 1994
consolidated financial statements will be restated in the first quarter of
1995.
(continued)
IV-170
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
In connection with the transactions contemplated under the current
stockholders agreement, TCI has undertaken to cause Liberty Media Group to
comply with each of its representations, warranties, covenants, agreements
and obligations under the current stockholders agreement. Such undertaking
will terminate at such time as equity securities of Liberty Media
Corporation or the Liberty Group Stock have been distributed, and such
securities impute a market capitalization in excess of $2 billion.
During 1992, AMC distributed $39,000,000 to Liberty Media Group. Liberty
Media Group recorded the amount received as a reduction of its investment
in AMC. On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased
49.9% of Liberty Media Group's 50% general partnership interest in AMC
under the terms of a buy/sell provision contained in the AMC partnership
agreement. In connection with the purchase, Rainbow acquired an option to
purchase the remaining 0.1% general partnership interest in AMC from
Liberty Media Group for approximately $373,000. The proceeds of
$180,429,000 included the economic benefit of Liberty Media Group's
consulting agreement with AMC assigned by Liberty Media Group to
Cablevision Systems Corporation, the parent company of Rainbow. Liberty
Media Group recognized a gain of approximately $183 million on the sale of
its interest in AMC.
Certain of Liberty Media Group's affiliates are general partnerships and
any subsidiary of Liberty Media Group that is a general partner in a
general partnership is, as such, liable as a matter of partnership law for
all debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(5) Investment in Turner Broadcasting System, Inc.
----------------------------------------------
Liberty Media Group owns shares of a class of preferred stock of 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 Liberty Media
Group appoints three such representatives. However, voting control over
TBS continues to be held by its chairman of the board and chief executive
officer. Liberty Media Group'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.
Liberty Media Group's investment in TBS common stock had an aggregate
market value of $792 million (which exceeded cost by $478 million) at
December 31, 1993.
Liberty Media Group applied Statement No. 115 beginning in the first
quarter of 1994. Application of Statement No. 115 resulted in a net
increase of $335 million to combined equity on January 1, 1994,
representing the recognition of unrealized appreciation, net of taxes, for
Liberty Media Group's investment in marketable equity securities determined
to be available-for-sale. The amount of net unrealized gain was reduced by
$78 million through December 31, 1994. The majority of such unrealized
gain is comprised of Liberty Media Group's investment in TBS common stock
($98 million) and QVC common stock ($127 million) (see note 4). Liberty
Media Group holds no material debt securities.
(continued)
IV-171
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Liberty Media Group's investment in TBS preferred stock, carried at cost,
had an aggregate market value of $579 million and $954 million, based upon
the market value of the common stock into which it is convertible, (which
exceeded cost by $406 million and $781 million) at December 31, 1994 and
1993, respectively.
(6) Other Investments
-----------------
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
---- ----
amounts in thousands
<S> <C> <C>
Marketable equity securities (a) $367,213 35,237
Convertible debt, accrued interest and preferred
stock investment 46,109 46,457
Note receivable including accrued interest (b) -- 132,303
Other investments and related receivables 25,461 21,428
-------- -------
$438,783 235,425
======== =======
</TABLE>
(a) The marketable equity securities, which were accounted for at the
lower of cost or market at December 31, 1993, had an aggregate market
value of $122,628,000 (which exceeded cost by $87,391,000) at that
date.
(b) In December 1992, HSN, a cost investment of Liberty Media Group at
that time and a consolidated subsidiary of Liberty Media Group at
December 31, 1993 (see note 7), distributed the capital stock of SKC,
formerly a wholly owned subsidiary of HSN, to their stockholders of
record, including Liberty Media Group. 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 Liberty Media Group). Such loan was
evidenced by a promissory note, the terms of which were governed by a
loan agreement and the liability evidenced thereby was secured by
substantially all of SKC's assets, and bore interest on the unpaid
principal amount at 9.5% per annum. On August 1, 1994, SKC repaid the
outstanding principal and accrued interest to HSN.
Management of Liberty Media Group estimates that the market value,
calculated utilizing a multiple of cash flow approach or publicly quoted
market prices, of all of Liberty Media Group's other investments aggregated
$504 million and $432 million at December 31, 1994 and 1993, 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.
(continued)
IV-172
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(7) Acquisitions
------------
On August 8, 1994, Liberty Media Group acquired all the partnership
interests of Prime Sports-West from an independent third party and Forum
Partners ("Forum") for aggregate consideration of $220 million. On the
closing date, TCI paid $33 million in cash to Forum in consideration of the
purchase of the 16.667% partnership interest held by Forum and the payment
of partnership indebtedness owed to Forum. Also on the closing date, a
subsidiary of Liberty Media Group was merged with and into CVN, Inc.
("CVN"), and all outstanding stock of CVN, which was held by the
independent third party, was converted into 70,559 shares of TCI
Convertible Preferred Stock, Series C. CVN owned the remaining 83.333%
general partnership interest in Prime Sports-West. The consideration paid
by TCI on behalf of Liberty Media Group has been reflected in combined
equity of Liberty Media Group.
The acquisition of Prime Sports-West was accounted for by the purchase
method. Accordingly, the results of operations have been combined with
those of Liberty Media Group since the date of acquisition. On a pro forma
basis Liberty Media Group's revenue would have been increased by
approximately $32,498,000 and $50,521,000 for the years ended December 31,
1994 and 1993 respectively, had the acquisition occurred prior to January
1, 1993. Net earnings would have increased by $4,491,000 for the year ended
December 31, 1994. Net earnings would have decreased by $514,000 for the
year ended December 31, 1993. The foregoing unaudited pro forma financial
information was based on historical results of operations adjusted for
acquisition costs, and in the opinion of management, is not necessarily
indicative of the results had Liberty Media Group operated the acquired
entity since prior to January 1, 1993.
On February 11, 1993, Liberty Media Group acquired 20,000,000 shares of the
Class B Stock of HSN from RMS Limited Partnership ("RMS") for aggregate
consideration of $181,000,000. Liberty Media Group 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 Liberty Media Group for
financial reporting purposes.
On June 1, 1993, Liberty Media Group 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 Liberty Media Group in April 1993.
(continued)
IV-173
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(8) Litigation Settlements
----------------------
Liberty Media Group has reached agreements in principle to settle certain
lawsuits related to HSN. Under the terms of the settlements, Liberty Media
Group has paid or is expected to pay approximately the following (amounts
in thousands):
<TABLE>
<CAPTION>
<S> <C>
Civil actions, pending before state and Federal
courts paid by Liberty in 1995 $13,000
Civil actions, pending before Federal court in
Florida, paid by HSN in 1995 (including $1
million settlement payment to HSN to be paid by Roy M. Speer) 9,600
Derivative litigation involving HSN, pending before a Federal
court in Florida, to be paid by HSN (including $2 million
settlement payment to HSN to be paid by Roy M. Speer) 4,850
-----
Accrued litigation settlements $27,450
=======
</TABLE>
Any attorneys' fees awarded by the Courts to the plaintiffs' attorneys in
such actions have been or will be charged to the above accruals. Pursuant
to the terms of the settlements approved by the courts, Liberty Media Group
paid $16.3 million, including accrued interest, and HSN paid $10.2 million,
including accrued interest, in 1995. The portion of the accrued litigation
settlements which will be paid to the class who sold shares of HSN common
stock to Liberty Media Group as part of the June 1, 1993 purchase
(approximately $5.5 million) (see note 7), was capitalized as additional
acquisition costs. The portion of the accrued litigation settlements to be
paid by HSN were capitalized by Liberty Media Group as additional
acquisition consideration. A receivable amounting to $3 million has been
recorded by Liberty Media Group in anticipation of reimbursement by Roy M.
Speer.
(9) Debt
----
<TABLE>
<CAPTION>
Debt is summarized as follows:
Weighted average December 31,
interest rate at ----------------------
December 31, 1994 1994 1993
----------------- ---- ----
amounts in thousands
<S> <C> <C> <C>
Liability to seller (a) -- $ -- 19,637
Unsecured note payable (b) -- -- 545
Convertible note payable (c) 10.0% 14,141 13,131
Notes payable to bank (d) 6.9% 25,000 110,000
Bank credit facility (e) 8.5% 237,000 250,000
Note payable to bank (f) 6.9% 18,000 --
Note payable to bank (g) 8.9% 16,400 --
Note payable to partnership (h) 10.0% 11,253 --
Other debt, with varying rates and
maturities 8,150 6,367
-------- -------
$329,944 399,680
======== =======
</TABLE>
(continued)
IV-174
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(a) Payable by ARC
--------------
This amount was repaid April 30, 1994 with borrowings under a new bank
credit facility entered into in 1994.
(b) Payable by LMC Regional Sports, Inc.
------------------------------------
This note was repaid on June 30, 1994.
(c) Payable by ARC.
---------------
These notes were due December 30, 2000. The notes were converted in
January 1995 into an additional 11.65% limited partnership interest in
ARC.
(d) Payable by HSN.
--------------
This note payable consists of a $100 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. Restrictions
contained in the 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 retired $143,252,000 principal amount
of its 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.
On May 11, 1993, HSN retired $16,915,000 principal balance of its
unsecured 5-1/2% Convertible Subordinated Debentures, due April 22,
2002 (the "Debentures"), at 101.83% of the principal amount plus
accrued interest to the redemption date.
(e) Payable by CCC
--------------
This revolving line of credit was amended on August 19, 1994 and
provides for borrowings of up to $325,000,000 through August 19, 1997.
The revolving credit facility permits borrowings subject to compliance
with the restrictive covenants contained in the loan agreement
governing the facility. As security for borrowings under this credit
facility, Liberty Media Group pledged a portion of the TBS common
stock (with a quoted market value of approximately $481 million at
December 31, 1994) it holds.
(f) Payable by ARC Holding, Ltd.
----------------------------
In 1994, ARC Holding, Ltd., a wholly-owned subsidiary of ARC entered
into a credit agreement, as amended, with a group of banks providing
for up to $45,000,000 of borrowings. Borrowings bear interest at the
agent bank's base rate, the London Interbank Offered Rate (LIBOR), a
CD rate or a combination thereof as selected by ARC Holding, Ltd. plus
a margin depending on ARC Holding, Ltd.'s ratio of total debt to cash
flow (as defined). Beginning June 30, 1995, and quarterly thereafter
through December 31, 2000, the commitment amount will be reduced in
equal quarterly amounts to achieve annual reductions in the credit
facility ranging from a 10% reduction
(continued)
IV-175
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
in 1995 to the final 17% in 2000. Liberty Media Group must pay an
annual commitment fee of .375% of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured by the
assets of ARC Holding, Ltd., including joint venture interests, and
the stock and assets of its existing and future subsidiaries. The
proceeds from the initial borrowings under the credit agreement were
used to make the final payment on the Payable by ARC (see (a)).
The credit agreement contains certain provisions which limit ARC
Holding, Ltd. as to additional indebtedness, sale of assets, liens,
guarantees and distributions. Additionally, ARC Holding, Ltd. must
attain certain specified financial ratios.
(g) Payable by Prime Sports - West
------------------------------
Prime Sports - West has a credit agreement (the "Agreement") with a
bank that provides for borrowings in the form of revolving term loans
aggregating up to a maximum commitment of $24,000,000 at December 31,
1994. The maximum commitment will be reduced to $20,000,000 and
$15,000,000 at September 30, 1995 and 1996, respectively, and the
Agreement expires on September 30, 1997. Prime Sports - West may
specify the interest rate on the loans under various prime and
Eurodollar rate options plus an applicable margin, as defined. The
loans are secured by a pledge of the partnership interests.
The Agreement contains, among other things, requirements as to
indebtedness obligations, restrictions on distributions and capital
expenditures, as well as maintenance of certain specified financial
ratios. Prime Sports - West was in compliance with the debt covenants
or obtained waivers from the bank at December 31, 1994.
(h) Payable by Encore ICCP, Inc.
----------------------------
Encore ICCP, Inc. acquired a 50% general partner interest in ICCP in
exchange for a note payable to the partnership with an initial
principal amount of $15,000,000. The note payable is guaranteed by
Encore Media Corporation.
Certain of Liberty Media Group'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.
Liberty Media Group pays 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.
The fair value of Liberty Media Group's debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to Liberty Media Group for debt of the same remaining maturities.
The fair market value of such debt approximated its carrying value at
December 31, 1994.
Debt maturities are as follows: 1995 - $30,649,000; 1996 - $1,839,000; 1997
- $278,767,000; 1998 -$1,750,000 and 1999 - $9,290,000.
(continued)
IV-176
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(10) Income Taxes
------------
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which TCI owns less
than 80% each file a separate tax return. TCI and such subsidiaries
calculate their respective tax liabilities on a separate return basis.
Prior to the Mergers, Liberty filed a consolidated Federal income tax
return with all of its 80% or more owned subsidiaries. Consolidated
subsidiaries in which Liberty owned less than 80% each filed a separate
income tax return. Liberty and such subsidiaries calculated their
respective tax liabilities on a separate return basis. Prior to the
Mergers, income tax expense for Liberty Media Group was based upon those
items in the consolidated tax calculation of TCI and Liberty which are
applicable to Liberty Media Group. Subsequent to the Mergers, income tax
expense for Liberty Media Group is based upon those items in the
consolidated tax calculations of TCI applicable to Liberty Media Group.
Intergroup tax allocation represents an apportionment of tax expense or
benefit (other than deferred taxes) and alternative minimum taxes to
Liberty Media Group in relation to its amount of taxable earnings or
losses. Prior to the implementation of the Liberty Group Stock Proposal,
the payable or receivable arising from the intergroup tax allocation has
been reflected as an increase or decrease in combined equity. Subsequent
to the implementation of the Liberty Group Stock Proposal, such amounts
would be reflected as borrowing from or loans to TCI.
Pursuant to a tax sharing agreement, federal income taxes will be
calculated, with certain adjustments, on a separate return basis for each
corporation in each Group (applying provisions of the Internal Revenue Code
of 1986, as amended, and related regulations as if such corporation filed a
separate return for federal income tax purposes). In addition, pursuant to
such agreement, state and local income taxes will be calculated on a
separate return basis for each Group (applying provisions of state and
local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes). Based upon these separate
calculations, an allocation of tax liabilities will be made such that the
Liberty Media Group (or each separate corporation within the Liberty Media
Group, as the case may be) is responsible to TCI for its gross share of
TCI's consolidated, combined or unitary tax liabilities, such gross share
being determined without regard to certain tax benefits that are
attributable to the Liberty Media Group (or its constituent corporations)
but that are taken into account in determining TCI's consolidated, combined
or unitary tax liability. Similarly, TCI is responsible to the Liberty
Media Group (or its constituent corporations) for tax benefits attributable
to the Liberty Media Group (or its constituent corporations) and actually
used by TCI in determining its consolidated, combined or unitary tax
liability. Tax attributes, including but not limited to net operating
losses, investment tax credits, alternative minimum tax net operating
losses, alternative minimum tax credits, deferred intercompany gains and
tax basis in assets will be inventoried and tracked for the entities
comprising each Group. TCI will retain the right to file all returns, make
all elections and control all audits and contests.
Certain of the Federal income tax returns of TCI are presently under
examination by the Internal Revenue Service ("IRS") including the years
1979 through 1992. These examinations may result in proposed adjustments
for additional income taxes relating to Liberty Media Group.
Certain of the Federal income tax returns of a less than 80% owned
subsidiary of Liberty Media Group (the "Subsidiary") were examined by the
IRS for the Subsidiary's 1986 through 1989 fiscal years and several
adjustments were proposed. On June 8, 1994, the Subsidiary and the IRS
agreed to settle all of the outstanding issues with the exception of the
deductibility of royalty payments to a then related party. In August of
1994, the Subsidiary paid the assessments, totaling $15,000,000 including
interest, relating to all the issues except the royalty payments covering
all of the Subsidiary's taxable periods through August 31, 1993. The
assessments had previously been accrued.
(continued)
IV-177
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
On September 9, 1994, the IRS issued a statutory Notice of Deficiency for
the Subsidiary's fiscal years 1986 through 1989 related to the royalty
payments issue. In December 1994, the Subsidiary paid the assessments,
totaling $4,600,000 including interest, which had previously been accrued.
The Subsidiary continues to maintain that it has meritorious positions
regarding the deductibility of these payments and intends to file a refund
claim with the IRS during 1995.
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("Statement No. 109") requires the use of 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.
Income tax benefit (expense) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
---------- --------- --------
amounts in thousands
<S> <C> <C> <C>
Year ended December 31, 1994:
State and local intergroup tax
expense $(16,514) (4,297) (20,811)
Federal intergroup tax expense
allocation (60,882) (16,954) (77,836)
Intergroup alternative minimum
tax allocation -- -- --
-------- ------- -------
$(77,396) (21,251) (98,647)
======== ======= =======
Year ended December 31, 1993:
State and local intergroup tax
expense allocation $ (3,052) (1,190) (4,242)
Federal intergroup tax benefit
(expense) allocation (20,781) 3,693 (17,088)
Intergroup alternative minimum
tax allocation (554) 554 --
-------- ------- -------
$(24,387) 3,057 (21,330)
======== ======= =======
Year ended December 31, 1992:
State and local intergroup tax
expense allocation $ (21) (1,331) (1,352)
Federal intergroup tax expense
allocation (63) (7,544) (7,607)
Intergroup alternative minimum
tax allocation (23) 23 --
-------- ------- -------
$ (107) (8,852) (8,959)
======== ======= =======
</TABLE>
(continued)
IV-178
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Income tax expense differs from the amounts computed by the Federal tax
rate of 35% in 1994 and 1993 and 34% in 1992 as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Computed expected tax expense $(78,958) (16,807) (7,977)
Dividends excluded for income tax
purposes 1,134 1,104 766
Minority interest of consolidated
subsidiaries (3,548) (398) --
Amortization not deductible for income
tax purposes (4,774) (2,886) --
Excess executive compensation -- (688) --
State and local income taxes, net of
Federal income tax benefit (14,204) (2,774) (892)
Sale of wholly-owned subsidiary 920 -- --
Other, net 783 1,119 (856)
-------- ------- ------
$(98,647) (21,330) (8,959)
======== ======= ======
</TABLE>
(continued)
IV-179
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1993
---- ----
amounts in thousands
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $ 11,629 15,503
Charitable contribution carryforward 666 910
Allocated alternative minimum tax paid
credit carryforward 2,444 2,444
Inventory costing 5,918 7,248
Provision for returns and allowance 8,729 10,949
Future deductible amount attributable to accrued stock
appreciation rights and deferred compensation 12,951 16,660
Future deductible amount related to accrued litigation
settlements 3,065 3,065
Other future deductible amounts primarily due to
non-deductible accruals 1,056 3,635
-------- -------
Deferred tax assets 46,458 60,414
-------- -------
Deferred tax liabilities:
Property and equipment, principally due to differences
in depreciation 11,916 11,482
Intangible assets, primarily due to differences in
amortization 4,172 5,393
Investments in affiliates, due principally to
undistributed earnings of affiliates 266,184 28,113
-------- -------
Deferred tax liabilities 282,272 44,988
-------- -------
Net deferred tax liabilities (assets) $235,814 (15,426)
======== =======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31, 1994
and 1993.
At December 31, 1994, Liberty Media Group had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $28,364,000
which, if not utilized to reduce taxable income in future periods, expire as
follows: $1,127,000 in 2001, $2,335,000 in 2002, $2,502,000 in 2003, $780,000
in 2004, $11,721,000 in 2005 and $9,899,000 in 2006. At December 31, 1994,
Liberty Media Group had allocated alternative minimum tax paid credit
carryforwards aggregating approximately $2,444,000.
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%.
Liberty Media Group has reflected the tax rate changes in its combined
statements of operations in accordance with the treatment prescribed by
Statement No. 109. Such tax rate changes resulted in a net increase of $314,000
in income tax expense in 1993.
(continued)
IV-180
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
(11) Combined Equity
---------------
Stock Options and Stock Appreciation Rights
-------------------------------------------
Liberty had granted certain stock options and/or stock appreciation rights
prior to the Mergers. All such options and/or stock appreciation rights were
assumed by TCI in conjunction with the Mergers. Estimates of the compensation
relating to the options and/or stock appreciation rights granted to employees
of Liberty Media Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the
market value of TCI Class A common stock and, ultimately, on the final
determination of market value when the rights are exercised.
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. 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. Estimated compensation relating to these stock appreciation
rights has been recorded through December 31, 1994, but is subject to future
adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised.
Transactions with TCI and Other Related Parties
-----------------------------------------------
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for
that year. The utilization-based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone
basis. The accompanying combined statements of operations do not reflect the
allocation of corporate general and administrative costs in the
aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty Media
Corporation for the majority of the periods presented herein. During such
periods, Liberty Media Corporation was not allocated corporate general and
administrative costs.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of
time TCI corporate employees (e.g. legal, corpoprate, payroll, ect.) expend
on Liberty Media Group matters. TCI management evaluated several alternate
allocation methods including assets, revenue, operating income, and
employees. Management did not believe that any of these methods would reflect
an appropriate allocation of corporate expenses given the diverse nature of
TCI's operating subsidiaries, the relative maturity of certain of the
operating subsidiaries, and the way in which corporate resources are
utilized.
(continued)
IV-181
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Liberty Media Corporation and TCI were parties to a services agreement
pursuant to which TCI agreed to provide certain administrative services to
Liberty Media Corporation. In addition, the employees of certain of Liberty's
subsidiaries remained on the TCI payroll until December 31, 1992. Liberty
Media Corporation reimbursed TCI for their salaries and related employment
expenses. Subsidiaries of Liberty Media Corporation also lease office space
and satellite transponder facilities from TCI. Charges by TCI for such
arrangements for the years ended December 31, 1994, 1993 and 1992, aggregated
$7,542,000 $4,455,000 and $7,586,000, respectively. From January 1, 1993
through the TCI/Liberty Combination, no employees of Liberty Media
Corporation's subsidiaries remained on the TCI payroll.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI) and others. Charges by TCI are based upon customary rates
charged to others.
HSN paid 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 $6,638,000 and $1,200,000 in 1994 and 1993, respectively.
Subsequent to the Mergers, TCI manages certain treasury activities for
Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are remitted to TCI and certain
cash disbursements of Liberty Media Group are funded by TCI on a daily basis.
Prior to the implementation of the Liberty Group Stock Proposal, but
subsequent to the Mergers, the net amounts of such cash activities are
included in combined equity in the accompanying combined financial
statements. Prior to the Mergers, Liberty Media Corporation separately
managed the treasury activities of its subsidiaries. Subsequent to the
implementation of the Liberty Group Stock Proposal, such cash activities will
be included in borrowings from and loans to TCI or, if determined by the
Board of Directors, as an equity contribution to the Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI not
incurred by entities attributed to the Liberty Media Group or preferred stock
and the proceeds thereof should be specifically attributed to and reflected
on the combined financial statements of Liberty Media Group to the extent
that the debt is incurred or the preferred stock is issued for the benefit of
Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI. After the Distribution, all
financial impacts of issuances of additional shares of Class A common stock
and Class B common stock will be attributed entirely to TCI, all financial
impacts of issuances of additional shares of Liberty Media Group Stock the
proceeds of which are attributed to the Liberty Media Group will be reflected
entirely in the combined financial statements of the Liberty Media Group.
Financial impacts of dividends or other distributions on, and purchases of,
Class A common stock and Class B common stock will be attributed entirely to
TCI, and financial impacts of dividends or other distributions on Liberty
Media Group Stock will be attributed entirely to the Liberty Media Group.
Financial impacts of repurchases of Liberty Media Group Stock the
consideration for which is charged to the Liberty Media Group will be
reflected entirely in the combined financial statements of the Liberty Media
Group, and financial impacts of repurchases of Liberty Media Group Stock the
consideration for which is charged to TCI will be attributed entirely to TCI.
(continued)
IV-182
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation,
as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI would bear interest at a rate to be
established by the Board of Directors. It is intended that the rate would be
set so as to approximate the rate at which Liberty Media Group or TCI could
obtain comparable financing from an unrelated financing source.
(12) Commitments and Contingencies
-----------------------------
Liberty Media Group 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, 1994, these agreements require minimum payments
aggregating approximately $178 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, required aggregate
payments under the Film License Obligations could prove to be significant.
Liberty Media Group has long-term sports program rights contracts which
require payments through 1999. Future payments by year are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1995 $45,823
1996 48,781
1997 48,086
1998 45,288
1999 41,999
</TABLE>
Liberty Media Group 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 $34,274,000, $29,250,000 and $19,568,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
Liberty Media Group has agreed to participate in the investor group which was
awarded a major league baseball franchise for the Tampa Bay area. Liberty
Media Group's commitment is contingent upon its securing certain
merchandising and broadcasting rights with respect to the franchise. If
Liberty Media Group obtains those rights, it has agreed to contribute
$10,000,000 as a general and limited partner.
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>
1995 $27,390
1996 26,657
1997 26,981
1998 21,410
1999 19,641
</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 1995.
IV-183
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Financial Statements
March 31, 1995
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
TCI Group, dated as of March 31, 1995, assumes that the acquisition of
controlling interests in Cablevision S.A., Televisora Belgrano S.A., Construred
S.A. and Univent's S.A. (collectively "Cablevision") (the "Cablevision
Acquisition") had occurred as of such date. See note (2).
The following unaudited condensed pro forma combined statements of
operations of TCI Group for the three months ended March 31, 1995 and the year
ended December 31, 1994 assume that (i) the Cablevision Acquisition and (ii) the
merger with TeleCable Corporation ("TeleCable") (the "TeleCable Merger") had
occurred as of January 1, 1994. See notes 1 and 2.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the TeleCable Merger and
the Cablevision Acquisition had occurred as of January 1, 1994. These condensed
pro forma combined financial statements of TCI Group should be read in
conjunction with the historical combined financial statements and the related
notes thereto of TCI Group and the historical consolidated financial statements
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation.
IV-184
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 1995
----------------------------------------
TCI
Cablevision Pro forma Group
TCI Group Historical adjustments Pro
Historical (2) (2) forma
----------- ------------- ------------ --------
<S> <C> <C> <C> <C>
amounts in millions
Assets
- ------
Cash, receivables and
other current assets $ 250 13 -- 263
Investment in affiliates
and Turner Broadcasting
System, Inc., and
related receivables 1,212 -- -- 1,212
Property and equipment,
net of accumulated
depreciation 6,508 36 16 (3) 6,560
Franchise costs,
intangibles and other
assets, net of 12,251 2 302 (3)
amortization 150 (4) 12,705
------ --- --- ------
$20,221 51 468 20,740
====== === === ======
Liabilities and Combined
Equity
- ------------------------
Payables and accruals $ 898 26 -- 924
Debt 11,006 70 87 (5) 11,342
179 (6)
Deferred income taxes 4,226 7 150 (4) 4,383
Other liabilities 159 -- -- 159
------ --- --- ------
Total liabilities 16,289 103 416 16,808
------ --- --- ------
Minority interests 257 -- -- 257
Series D Preferred Stock 303 -- -- 303
Combined equity:
Combined equity (deficit) 4,482 (52) 52 (7) 4,482
Cumulative foreign
currency translation
adjustment 21 -- -- 21
TCI Group unrealized
holding gains for
available-for-sale
securities 1 -- -- 1
Liberty Media Group
unrealized holding gains
for available-for-sale
securities 159 -- -- 159
Inter-Group interests in
Liberty Media Group (1,291) -- -- (1,291)
------ --- --- ------
3,372 (52) 52 3,372
------ --- --- ------
$20,221 51 468 20,740
====== === === ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-185
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, 1995
------------------------------------------------------------------------
TCI Group TeleCable Cablevision Pro forma TCI
Historical Historical (1) Historical (2) adjustments(1)(2) Group
----------- -------------- -------------- ----------------- Pro
forma
-----
<S> <C> <C> <C> <C> <C>
amount in millions
Revenue $1,185 22 41 -- 1,248
Operating, cost of sales, selling, general and
administrative expenses and adjustment to
compensation relating to stock appreciation rights (696) (13) (27) -- (736)
Programming charges from Liberty Media Group (19) -- -- -- (19)
Charges to Liberty Media Group 6 -- -- -- 6
Depreciation and amortization (271) (4) (2) (10) (8) (287)
------ --- --- ------- -----
Operating income 205 5 12 (10) 212
Interest expense (235) (4) -- (2) (9) (248)
(4) (11)
(3) (12)
Interest and dividend income 5 3 -- -- 8
Interest income from Liberty Media Group 1 -- -- -- 1
Share of losses of affiliates, net (27) -- -- -- (27)
Gain on dispositions 8 -- -- -- 8
Other income (expense), net 3 (6) -- -- (3)
------ --- --- ------- -----
Earnings (loss) before income taxes (40) (2) 12 (19) (49)
Income tax benefit (expense) 7 -- (4) 7 (13) 10
------ --- --- ------- -----
Loss before loss of Liberty Media Group (33) (2) 8 (12) (39)
Loss of Liberty Media Group (12) -- -- -- (12)
------ --- --- ------- -----
Net earnings (loss) (45) (2) 8 (12) (51)
Dividend requirement on preferred stocks (8) -- -- (1) (14) (9)
====== === === ======= =====
Net earnings (loss) attributable to common $ (53) (2) 8 (13) (60)
shareholders ====== === === ======= =====
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-186
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1994
---------------------------------------------------------------------------
TCI Group TeleCable Cablevision Pro forma TCI Group
Historical Historical (1) Historical (2) adjustments(1)(2) Pro forma
----------- -------------- -------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
amounts in millions
Revenue $ 4,269 302 139 -- 4,710
Operating, cost of sales, selling, general and
administrative expenses and adjustment to
compensation relating to stock appreciation
rights (2,434) (171) (90) -- (2,695)
Programming charges from Liberty Media Group (60) -- -- -- (60)
Charges to Liberty Media Group 14 -- -- -- 14
Depreciation and amortization (1,001) (46) (6) (71) (8) (1,124)
------- ---- --- -------- ------
Operating income 788 85 43 (71) 845
Interest expense (784) (23) -- (6) (9) (834)
(15) (10)
(6) (12)
Interest and dividend income 21 1 -- -- 22
Interest income from Liberty Media Group 2 -- -- -- 2
Share of losses of affiliates, net (117) -- -- -- (117)
Gain on dispositions 148 -- -- -- 148
Loss on early extinguishment of debt (9) -- -- -- (9)
Other expense, net (9) (4) (1) -- (14)
------- ---- --- -------- ------
Earnings (loss) before income taxes 40 59 42 (98) 43
Income tax benefit (expense) (61) (23) (15) 36 (13) (63)
------- ---- --- -------- ------
Earnings (loss) before earnings of Liberty
Media Group (21) 36 27 (62) (20)
Earnings of Liberty Media Group 127 -- -- -- 127
------- ---- --- -------- ------
Net earnings (loss) 106 36 27 (62) 107
Dividend requirement on preferred
stocks (14) -- -- (17) (14) (31)
------- ---- --- -------- ------
Net earnings (loss) attributable to common $ 92 36 27 (79) 76
shareholders ======= ==== === ======== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-187
<PAGE>
"TCI GROUP"
Notes to Condensed Pro Forma Combined Financial Statements
March 31, 1995
(unaudited)
(1) As of August 8, 1994, TCI Group and TeleCable entered into a definitive
merger agreement (the "TeleCable Merger Agreement") whereby TeleCable was
merged into the TCI Group on January 26, 1995. The aggregate $1.6 billion
purchase price was satisfied by TCI Group's assumption of approximately
$300 million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of shares of TCI Class A common stock (approximately 42
million shares) and 1 million shares of Series D Preferred Stock with an
aggregate initial liquidation value of $300 million. The Series D
Preferred Stock, which accrues dividends at a rate of 5.5% per annum, is
convertible into 10 million shares of TCI Class A common stock. The Series
D Preferred Stock is redeemable at the option of TCI after five years and
at the option of either TCI or the holder after ten years. The amount of
net liabilities assumed by TCI Group and the number of shares of TCI Class
A common stock issued to TeleCable's shareholders are subject to closing
adjustments.
(2) On April 25, 1995, the TCI Group consummated the Cablevision Acquisition
for an aggregate purchase price of $286 million, before liabilities assumed
and subject to adjustment. The purchase price was paid with cash
consideration of approximately $199 million (including a previously paid
$20 million deposit that is reflected in other assets in TCI Group's March
31, 1995 historical combined balance sheet) and TCI Group's issuance of
approximately $87 million principal amount of secured negotiable promissory
notes payable (the "Cablevision Notes") to selling shareholders. The
purchase price is subject to adjustment upon final determination of the
actual number of Cablevision's equivalent basic subscribers and liabilities
at March 31, 1995. All amounts presented with respect to Cablevision are
stated in U.S. dollars. During the periods covered by the accompanying
condensed pro forma combined financial statements, an exchange rate of one
U.S. dollar to one Argentine peso was maintained by the Argentine
government.
(3) Represents an allocation of the purchase price of Cablevision to its
tangible and intangible assets. The cost allocations were estimated using
information available at the date of preparation of these condensed pro
forma combined financial statements and will be adjusted upon final
appraisal of the assets acquired. Therefore, the actual allocations may
differ from those allocations reflected herein.
(4) Represents the estimated incremental deferred income tax liability
associated with the Cablevision purchase price allocations, as described in
note (3) above. The adjustment assumes a combined federal and state income
tax rate of 35%.
(5) Represents the issuance of the Cablevision Notes in the Cablevision
Acquisition (see note 2).
(6) Represents borrowings by the TCI Group to pay the remaining cash
consideration in the Cablevision Acquisition.
(7) Represents the elimination of Cablevision's historical stockholders'
deficit.
(8) Represents depreciation and amortization of TeleCable's and Cablevision's
allocated excess purchase prices based upon weighted average lives to
12-1/2 years for property and equipment and 40 years for franchise costs
for TeleCable and 20 years for franchise costs for Cablevision.
(9) Represents assumed interest expense incurred by the TCI Group on the
Cablevision Notes, calculated at an assumed rate of 7% per annum.
(10) Represents assumed interest expense on the borrowings of $179 million to
pay the remaining cash portion of the Cablevision purchase price and the
interest expense that would have been incurred had the
IV-188
<PAGE>
$20 million deposit on the Cablevision purchase price been paid on January
1, 1994. Such interest expense was calculated at the TCI Group's weighted
average interest rate of 7.5% for the year ended December 31, 1994.
(11) Represents assumed interest expense on the borrowings of $179 to pay the
remaining cash portion of the Cablevision purchase price. Such interest
expense was calculated at the TCI Group's weighted average interest rate of
8.5% for the three months ended March 31, 1995.
(12) Represents additional interest expense on assumed indebtedness of
Cablevision. Interest expense was not reflected in the historical
financial statements as such borrowings were not utilized to support the
assets to be acquired by the TCI Group. Such interest expense was
calculated at the interest rate in effect at March 31, 1995 for such
indebtedness (14.5% per annum) and the interest rate in effect at December
31, 1994 for such indebtedness (14.4% per annum).
(13) Reflects the estimated income tax effect of the pro forma adjustments.
(14) Represents the dividend requirements on TCI's Series D Preferred Stock
issued in connection with the TeleCable Merger--see note 1.
IV-189
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
(1) Material changes in financial condition:
---------------------------------------
The Board of Directors of Tele-Communications, Inc. ("TCI") have adopted a
proposal (the "Liberty Group Stock Proposal") which, if approved by
stockholders, would authorize the Board to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of TCI's
business which produces and distributes cable television programming services
("Liberty Media Group"). While the Liberty Group Stock constitutes common stock
of TCI, the Liberty Group Stock Proposal would not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. TCI intends to distribute one
hundred percent of the equity value attributable to the Liberty Media Group.
Additionally, the Liberty Group Stock Proposal, if approved by stockholders,
would redesignate the previously authorized Class A and Class B common stock of
TCI into Series A TCI Group and Series B TCI Group common stock.
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate performance
of the TCI Group, which is generally comprised of (a) the subsidiaries and
assets not attributed to the Liberty Media Group, including (i) TCI's Cable and
Communications unit, (ii) TCI's International Cable and Programming unit and
(iii) TCI's Technology/Venture Capital unit, (b) any interest in the Liberty
Media Group other than the interest represented by any outstanding shares of
Liberty Group Stock (an "Inter-Group Interest") and (c) any interest in the
Liberty Media Group represented by outstanding shares of Liberty Group Stock.
The businesses of TCI not attributed to the Liberty Media Group, together with
any Interest is referred to as the "TCI Group".
On January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies (the
"Mergers"). The transaction was consummated on August 4, 1994. Due to the
significant economic interest held by TCIC through its ownership of Liberty
preferred stock and Liberty common stock and other related party considerations,
TCIC accounted for its investment in Liberty under the equity method prior to
the consummation of the Mergers. Accordingly, TCIC had recognized 100% of
Liberty's earnings or losses before deducting preferred stock dividends. The
Mergers were accounted for using predecessor cost due to related party
considerations. Accordingly, the accompanying combined financial statements of
TCI Group reflect the combination of the historical financial information of the
assets of TCI and Liberty which have not been attributed to Liberty Media Group.
For periods prior to the Mergers, the combined financial statements of TCI Group
and Liberty Media Group comprise all the accounts included in the corresponding
consolidated financial statements of TCI and subsidiaries and Liberty and
subsidiaries. For periods subsequent to the Mergers, the combined financial
statements of TCI Group and Liberty Media Group comprise all the accounts
included in the corresponding consolidated financial statements of TCI and
subsidiaries.
IV-190
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI contemplated by
the Liberty Group Stock Proposal would not affect the ownership or the
respective legal title to assets or responsibility for liabilities of TCI or any
of its subsidiaries. TCI and its subsidiaries would each continue to be
responsible for their respective liabilities. Holders of TCI Group common stock
would be holders of common stock of TCI and would continue to be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities. The Liberty Group Stock Proposal would not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the TCI Group and
the market price of shares of the TCI Group common stock. In addition, net
losses of any portion of TCI, dividends or distributions on, or repurchases of,
any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce the funds of TCI legally available for dividends on
all series of common stock. Accordingly, TCI Group financial information should
be read in conjunction with the TCI and Liberty consolidated financial
information.
Under the terms of the Liberty Group Stock Proposal, dividends on the
TCI Group common stock would be payable at the sole discretion of the Board out
of the lesser of assets of TCI legally available for dividends and the available
dividend amount with respect to the TCI Group, as defined. Determinations to
pay dividends on TCI Group common stock would be based primarily upon the
financial condition, results of operations and business requirements of TCI
Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common stock
will, as a result of the operation of antidilution provisions, be adjusted so
that there will be delivered upon their conversion or exchange (in addition to
the same number of shares of redesignated Series A TCI Group Common Stock as
were theretofore issuable thereunder) the number of shares of Series A Liberty
Group Stock that would have been issuable in the Distribution with respect to
the TCI Class A common stock issuable upon conversion or exchange had such
conversion or exchange occurred prior to the record date for the Distribution.
Options to purchase TCI Class A common stock outstanding at the time of the
Distribution will be adjusted by issuing to the holders of such options separate
options to purchase that number of shares of Series A Liberty Group Stock which
the holder would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date for the
Distribution and reallocating a portion of the aggregate exercise price of the
previously outstanding options to the newly issued options to purchase Series A
Liberty Group Stock. Such convertible or exchangeable preferred stock and debt
securities and options outstanding on the record date for the Distribution are
referred to as "Pre-Distribution Convertible Securities." The issuance of
shares of Series A Liberty Group Stock upon such conversion, exchange or
exercise of Pre-Distribution Convertible Securities will not result in any
transfer of funds or other assets from the TCI Group to the Liberty Media Group
or a reduction in any Inter-Group Interest that then may exist, in consideration
of such issuance. In the case of the exercise of Pre-Distribution Convertible
Securities consisting of options to purchase Series A Liberty Group Stock, the
proceeds received upon the exercise of such options will be attributed to
Liberty Media Group. If Pre-Distribution Convertible Securities remain
outstanding at the time of any disposition of all or substantially all of the
properties and assets of Liberty Media Group and TCI elects to distribute to
holders of Liberty Group Stock their proportionate interest in the net proceeds
of the disposition, the proportionate interest of the holders of Liberty Group
Common Stock will be determined on a basis that allocates to the TCI Group a
portion of such net proceeds, in addition to the portion attributable to any
Inter-Group Interest, sufficient to provide for the payment of the portion of
the consideration payable by TCI on any post-Distribution conversion, exercise
or exchange of Pre-Distribution Convertible Securities that becomes so payable
in substitution for shares of Liberty Group Stock that would have been issuable
upon such conversion, exercise or exchange if it had occurred prior to the
record date for the disposition. Likewise, if Pre-Distribution Convertible
Securities remain outstanding at the time of any redemption for all the
outstanding shares of Liberty Group Stock in exchange for stock of any one or
more wholly-owned subsidiaries of TCI which hold all of the assets and
liabilities of the Liberty Media Group, the portion of the shares of such
subsidiaries deliverable in redemption of the outstanding shares of Liberty
Group Stock will be determined on a basis that allocates to the TCI Group a
portion of the shares of such subsidiaries, in addition to the number of shares
so allocated in respect to any Inter-Group Interest, sufficient to provide for
the payment of the portion of the consideration payable by TCI upon any post-
redemption conversion, exercise or exchange of Pre-Distribution Convertible
Securities that becomes so payable in substitution for shares of Liberty Group
Stock that would have been issuable upon such conversion, exercise or exchange
if it had occurred prior to such redemption.
IV-191
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
Under the Liberty Group Stock Proposal, prior to any distributions of
Liberty Media Group Stock, TCI Group would have a 100% Inter-Group Interest in
Liberty Media Group. Following the initial distribution of Liberty Media Group
Stock, it is currently anticipated that TCI Group would have no Inter-Group
Interest in Liberty Media Group. For periods in which an Inter-Group Interest
exists, TCI Group would account for its Inter-Group Interest in a manner similar
to the equity method of accounting. For periods after the distribution and
before the creation of a Inter-Group Interest, TCI Group would not reflect any
interest in Liberty Media Group. An Inter-Group Interest would be created only
if a subsequent transfer of cash or other property from the TCI Group to the
Liberty Media Group is specifically designated by the Board of Directors as
being made to create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to the TCI Group. However,
Liberty Media Group is under the sole control of TCI. Management of TCI believes
that generally accepted accounting principles require that Liberty Media Group
be consolidated with the TCI Group. If Liberty Media Group were consolidated
with TCI Group, the financial position, results of operations, and cash flows of
TCI Group would equal the financial position, results of operations and cash
flows of TCI and subsidiaries, which financial statements are included
separately herein. Management of TCI has elected to present the accompanying
combined financial statements in a manner that does not comply with generally
accepted accounting principles.
Subsequent to the Mergers, TCI Group manages certain treasury activities
for Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are remitted to TCI Group and
certain cash disbursements of Liberty Media Group are funded by TCI Group on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal,
but subsequent to the Mergers, the net amounts of such cash activities are
included in investment in Liberty Media Group in the accompanying combined
financial statements. Prior to the Mergers, Liberty Media Corporation separately
managed the treasury activities of its subsidiaries. Subsequent to the
implementation of the Liberty Group Stock Proposal, such cash activities will be
included in borrowings from and loans to TCI Group or, if determined by the
Board of Directors, as an equity contribution to be reflected as an Inter-Group
Interest to the Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI
Group not incurred by entities attributed to the Liberty Media Group or
preferred stock and the proceeds thereof should be specifically attributed to
and reflected on the combined financial statements of Liberty Media Group to the
extent that the debt is incurred or the preferred stock is issued for the
benefit of Liberty Media Group.
IV-192
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of Series A TCI Group common
stock and Series B TCI Group common stock will be attributed entirely to TCI
Group, all financial impacts of issuances of additional shares of Liberty Group
Stock the proceeds of which are attributed to the Liberty Media Group will be
reflected entirely in the combined financial statements of the Liberty Media
Group. Financial impacts of dividends or other distributions on, and purchases
of, Class A common stock and Class B common stock will be attributed entirely to
TCI Group, and financial impacts of dividends or other distributions on Liberty
Group Stock will be attributed entirely to the Liberty Media Group. Financial
impacts of repurchases of Liberty Group Stock the consideration for which is
charged to the Liberty Group will be reflected entirely in the combined
financial statements of the Liberty Media Group, the financial impacts of
repurchases of Liberty Group Stock the consideration for which is charged to TCI
Group will be attributed entirely to TCI Group.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI Group would bear interest at such rates and have
repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans and investment opportunities available to
each Group and the availability, cost and time associated with alternative
financing sources.
TCI Group is obligated to pay fees for the license to exhibit certain films
that are released theatrically by various motion picture studios through
December 31, 2002 (the "Film License Obligations"). As of December 31, 1994,
these agreements require minimum payments aggregating approximately $207
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,
TCI Group's required aggregate payments under the Film Licensing Obligations
could prove to be significant.
During 1994, the TCI Group, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Sprint Corporation ("Sprint") formed a
partnership ("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, the partners
have been participating in auctions ("PCS Auctions") of broadband personal
communications services ("PCS") licenses being conducted by the Federal
Communications Commission ("FCC"). In the first round auction, which concluded
during the first quarter of 1995, WirelessCo was the winning bidder for PSC
licenses for 29 markets, including New York, San Francisco-Oakland-San Jose,
Detroit, Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-
Fort Lauderdale. The aggregate license cost for these licenses is approximately
$2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and has agreed to make capital contributions to
APC equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the build-
out expenditures for APC's PCS system. Cox, which holds a pioneer preference PCS
license for the Los Angeles-San Diego market, and WirelessCo have also agreed on
the general terms and conditions upon which Cox (with a 60% interest) and
WirelessCo (with a 40% interest) would form a partnership to hold and develop a
PCS system using the Los Angeles-San Diego license. APC and the Cox partnership
would affiliate their PCS systems with WirelessCo and be part of WirelessCo's
nationwide integrated network, offering wireless communications services under
the "Sprint" brand. The TCI Group owns a 30% interest in WirelessCo.
IV-193
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
During 1994, subsidiaries of Cox, Sprint and the TCI Group also formed a
separate partnership ("PhillieCo"), in which the TCI Group owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction for a PCS
license for the Philadelphia market at a license cost of $85 million. To the
extent permitted by law, the PCS system to be constructed by PhillieCo would
also be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial. The TCI Group anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
At the end of the first quarter of 1995, TCI Group, Comcast, Cox and Sprint
formed two new partnerships, of which the principal partnership is MajorCo, L.P.
("MajorCo"), to which they contributed their respective interests in WirelessCo
and through which they formed another partnership, NewTelco, L.P. ("NewTelco")
to engage in the business of providing local wireline communications services to
residences and businesses on a nationwide basis. NewTelco will serve its
customers primarily through the cable television facilities of cable television
operators that affiliate with NewTelco in exchange for agreed-upon compensation.
The modification of existing regulations and laws governing the local telephony
market will be necessary in order for NewTelco to provide its proposed services
on a competitive basis in most states. Subject to agreement upon a schedule for
upgrading its cable television facilities in selected markets and certain other
matters, the TCI Group has agreed to affiliate certain of its cable systems with
NewTelco. The capital required for the upgrade of TCI Group's cable facilities
for the provision of telephony services is expected to be substantial.
TCI Group, Cox and Comcast, together with Continental Cablevision, Inc.
("Continental"), own Teleport Communications Group, Inc. and TCG Partners
(collectively, "TCG"), which is one of the largest competitive access providers
in the United States in terms of route miles. TCI Group, Cox and Comcast have
entered into an agreement with MajorCo and NewTelco to contribute their
interests in TCG and its affiliated entities to NewTelco. TCI Group currently
owns an approximate 29.9% interest in TCG. The closing of this contribution is
subject to the satisfaction of certain conditions, including the receipt of
necessary regulatory and other consents and approvals. In addition, TCI Group,
Comcast and Cox intend to negotiate with Continental, which owns a 20% interest
in TCG, regarding their acquisition of Continental's TCG interest. If such
agreement cannot be reached, they will need to obtain Continental's consent to
certain aspects of their agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to $4.4
billion in the aggregate over a three- to five-year period, which amount
includes the approximately $500 million already contributed by the partners to
WirelessCo. The partners intend for MajorCo and its subsidiary partnerships to
be the exclusive vehicles through which they engage in the wireless and wireline
telephony service businesses, subject to certain exceptions.
IV-194
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
At March 31, 1995, the TCI Group was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. TCI Group pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the TCI
Group as collateral for the letter of credit. During the first quarter of 1995,
an initial borrowing aggregating $95 million was made pursuant to the letter of
credit. Subsequent to March 31, 1995, 19,638,508 shares of TCI Class A common
stock held by subsidiaries of the TCI Group were pledged as additional
collateral for the letter of credit.
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. In the first quarter of
1995, TCIC transferred additional assets to the International Cable and
Programming unit.
As of January 26, 1995, the TCI Group and TeleCable Corporation
("TeleCable") consummated a transaction whereby TeleCable was merged into TCI
Group (the "TeleCable Merger"). The aggregate $1.6 billion purchase price was
satisfied by TCI Group's assumption of approximately $300 million of TeleCable's
net liabilities and the issuance to TeleCable's shareholders of approximately 42
million shares of Class A common stock and 1 million shares of TCI Convertible
Preferred Stock, Series D (the "Series D Preferred Stock") with an aggregate
initial liquidation value of $300 million. The Series D Preferred Stock, which
accrues dividends at a rate of 5.5% per annum, is convertible into 10 million
shares of TCI Class A common stock. The Series D Preferred Stock is redeemable
for cash at the option of TCI after five years and at the option of either TCI
or the holder after ten years. The amount of net liabilities assumed by TCI
Group and the number of shares of TCI Class A common stock issued to TeleCable's
shareholders are subject to post-closing adjustments.
During the first quarter of 1995, the Liberty Media Group acquired an
additional interest in an investment previously accounted for under the cost
method. Upon consummation of such transaction, the Liberty Media Group is
deemed to exercise significant influence over such entity and, as such, adopted
the equity method of accounting. As a result, TCI Group restated its Inter-
Group Interest in the Liberty Media Group, its unrealized gain on available-for-
sale securities and accumulated deficit by $122 million, $127 million and $5
million, respectively, at December 31, 1994. The restatement did not affect the
earnings from the Liberty Media Group for the three months ended March 31, 1994
as this investment was accounted for by the Liberty Media Group under the equity
method during that period.
Pursuant to an underwritten public offering, TCI sold 19,550,000 shares of
TCI Class A common stock in February of 1995. TCI Group received net proceeds of
approximately $401 million. Such proceeds were immediately used to reduce
outstanding indebtedness under credit facilities.
IV-195
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
TCI's ability to pay dividends on any classes or series of preferred
stock attributable to the TCI Group is dependent upon the ability of
subsidiaries attributable to the TCI Group to distribute amounts to TCI in the
form of dividends, loans or advances or in the form of repayment of loans and
advances from TCI. The subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay the dividends on any
class or series of preferred stock of TCI or to make any funds available
therefor, whether by dividends, loans or their payments. The payment of
dividends, loans or advances to TCI by its subsidiaries may be subject to
statutory or regulatory restrictions, is contingent upon the cash flows
generated by those subsidiaries and is subject to various business
considerations. Further, certain of TCI Group's subsidiaries are subject to
loan agreements that prohibit or limit the transfer of funds by such
subsidiaries to TCI in the form of dividends, loans, or advances and require
that such subsidiaries' indebtedness to TCI be subordinate to the indebtedness
under such loan agreements. The amount of net assets of subsidiaries subject to
such restrictions exceeds TCI's consolidated net assets. TCI Group's
subsidiaries currently have the ability to transfer funds to TCI in amounts
exceeding TCI's dividend requirement on any class or series of preferred stock.
Net cash provided by operating activities of subsidiaries which are not
restricted from making transfers to the parent company have been and are
expected to continue to be sufficient to enable the parent company to meet its
cash obligations.
The TCI Group had approximately $2.3 billion in unused lines of credit
at March 31, 1995, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although the TCI Group were in
compliance with the restrictive covenants contained in their credit facilities
at said date, additional borrowings under the credit facilities are subject to
the subsidiaries' continuing compliance with the restrictive covenants (which
relate primarily to the maintenance of certain ratios of cash flow to total debt
and cash flow to debt service, as defined in the credit facilities) after giving
effect to such additional borrowings. See note 5 to the accompanying combined
financial statements for additional information regarding the material terms of
the lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash operating
credits or charges)($475 million and $455 million for the three months ended
March 31, 1995 and 1994, respectively) to interest expense ($235 million and
$178 million for the three months ended March 31, 1995 and 1994, respectively),
is determined by reference to the combined statements of operations. TCI Group's
interest coverage ratio was 202% and 256% for the three months ended March 31,
1995 and 1994, respectively. Management of the TCI Group believes that the
foregoing interest coverage ratio is adequate in light of the consistency and
nonseasonal nature of its cable television operations and the relative
predictability of TCI Group's interest expense, almost half of which results
from fixed rate indebtedness. Operating Cash Flow is a measure of value and
borrowing capacity within the cable television industry and is not intended to
be a substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
IV-196
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($222 million and $313 million for the
three months ended March 31, 1995 and 1994, respectively) reflects net cash from
the operations of the TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by the
TCI Group for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of the TCI Group to obtain additional financing
(including the available lines of credit and access to public debt markets),
issuances and sales of TCI's equity or equity of its subsidiaries, proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the TCI Group has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the TCI Group pays (i) fixed interest rates ranging from
7.2% to 9.9% on notional amounts of $550 million at March 31, 1995 and (ii)
variable interest rates on notional amounts of $2,605 million at March 31, 1995.
During the three months ended March 31, 1995 and 1994, TCI Group's net receipts
pursuant to its fixed rate exchange agreements were $5.1 million and $2.1
million, respectively. During the three months ended March 31, 1995 and 1994,
TCI Group's net receipts pursuant to its variable rate exchange agreements were
$1.4 million and $19.6 million, respectively. TCI Group's interest rate hedge
agreements fix the maximum variable interest rates on notional amounts of $325
million at 11%. TCI Group is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, TCI
Group does not anticipate that it will incur any material credit losses because
it does not anticipate nonperformance by the counterparties.
Approximately thirty-five percent of the franchises held by TCI Group,
involving approximately 3.8 million basic subscribers, expire within five years.
There can be no assurance that the franchises for TCI Group's systems will be
renewed as they expire although TCI Group believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for
franchise renewal. However, in the event they are renewed, TCI Group cannot
predict the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with the renewals. To date they have
not varied significantly from the original terms.
IV-197
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
The TCI Group competes with operators who provide, via alternative
methods of distribution, the same or similar video programming as that offered
by TCI Group's cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC. One such technology is direct
broadcast satellite ("DBS"). DBS services are offered directly to subscribers
owning home satellite dishes that vary in size depending upon the power of the
satellite dish; two DBS operators recently began offering nationwide video
services that can be received by a satellite that measures approximately
eighteen inches in diameter. DBS operators can acquire the right to distribute
over satellite all of the significant cable television programming currently
available on TCI Group's cable systems. As the cost of equipment needed to
receive these transmissions declines, TCI Group expects that it will experience
increased and substantial competition from DBS operators.
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions
are removed or relaxed, TCI Group will face increased competition from telephone
companies which, in most cases, have greater financial resources than TCI Group.
All major telephone companies have announced plans to acquire cable television
systems or provide video services to the home through fiber optic technology.
TCI Group is upgrading and installing optical fiber in its cable
systems at a rate such that in two years TCI Group anticipates that it will be
serving the majority of its customers with state-of-the-art fiber optic cable
systems. TCI Group made capital expenditures of $1,249 million in 1994 and TCI
Group expects to expend similar amounts in 1995, among other things, to provide
for the continued rebuilding of its cable systems. However, such proposed
expenditures are subject to reevaluation based upon changes in TCI Group's
liquidity, including those resulting from rate regulation.
TCI Group has guaranteed the obligation of an Australian affiliate to
pay fees for the license to exhibit certain films through the year 2000. If TCI
Group failed to fulfill its obligation under this guarantee, the beneficiaries
have the right to demand an aggregate payment from TCI Group of $67 million.
Although the aggregate amount of the Australian affiliate's film license fee
obligations is not currently estimable, TCI Group believes that the aggregate
payments pursuant to such affiliate's obligation could be significant.
TCI Group has committed to provide additional debt or equity funding
to certain of its affiliates. At March 31, 1995, such commitments aggregated
$174 million.
IV-198
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
---------------------------------------------------
TCI Group believes that it has complied, in all material respects, with the
provisions of the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), including its rate setting provisions. However, TCI
Group's basic and tier service rates and its equipment and installation charges
(the "Regulated Services") are subject to adjustment upon review, as described
above. If, as a result of the review process, a system cannot substantiate its
rates, it could be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date of
complaint. Generally, any refunds of the excess portion of all other Regulated
Services rates would be retroactive to the later of September 1, 1993, or one
year prior to the implementation of the rate reduction. The amount of refunds,
if any, which could be payable by TCI Group in the event that any system's rates
were to be successfully challenged, is not considered to be material.
On September 23, 1993, the FCC also adopted regulations establishing a
30% limit on the number of homes passed nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. Under the FCC regulations, if the ownership limits are determined to be
constitutional, they may limit TCI Group's future ability to acquire interests
in additional cable systems.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. TCI Group is uncertain how the courts and/or the FCC ultimately
will rule or whether such rulings will materially change any existing rules or
statutory requirements.
TCI Group's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by TCI Group)
and through net cash provided by their own operating activities.
(2) Material changes in results of operations:
-----------------------------------------
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, TCI Group's Regulated Services are subject to the jurisdiction of local
franchising authorities and the FCC.
IV-199
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
-----------------------------------------------------
TCI Group estimates that the FCC's 1993 and 1994 rate regulations will
result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such rate regulations. The estimated annualized reduction in
revenue assumes that the FCC will not require further reductions beyond the
current regulations and is prior to any possible mitigating factors (none of
which is assured) such as (i) the provision of alternate service offerings (ii)
the implementation of rate adjustments to non-regulated services and (iii) the
utilization of cost-of-service methodologies, as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a cost-of-
service showing. Under this methodology, cable operators may be allowed to
recover through the rates they charge for Regulated Services, their normal
operating expenses plus an interim rate of return of 11.25% on the rate base, as
defined, which rate may be subject to change in the future.
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. Such regulations allow an increase of either (i) the sum of a
prescribed channel addition factor, the license fee expense and a 7.5% markup,
or (ii) a flat fee increase per added channel and an aggregate limit on such
increases with an additional license fee reserve. For systems with more than
one tier of cable service, the methodology described in (ii) is not available
for the basic level of service. The FCC's rate regulations also permit cable
operators to "pass through" increases in programming costs and certain other
external costs which exceed the rate of inflation. However, a cable operator
may pass through increases in the cost of programming services affiliated with
such cable operator to the extent such costs exceed the rate of inflation only
if the price charged by the programmer to the affiliated cable operator reflects
prevailing prices offered in the marketplace by the programmer to unaffiliated
third parties or the fair market value of the programming.
TCI Group believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCI Group's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions. The amount of refunds,
if any, which could be payable by TCI Group in the event that any system's rates
were to be successfully challenged, is not considered to be material.
Based on the foregoing, TCI Group believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect on
its results of operations.
Revenue increased by approximately 14% for the three months ended
March 31, 1995 compared to the corresponding period of 1994. Such increase was
the result of the growth in subscriber levels within TCI Group's cable
television systems (9%) and the effect of certain acquisitions, including
TeleCable (9%), net of a decrease in revenue (4%) due to rate reductions
required by rate regulation implemented pursuant to the 1992 Cable Act.
IV-200
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
-----------------------------------------------------
Operating costs and expenses have increased by 22% for the three months
ended March 31, 1995 compared to the corresponding period of 1994. Due to the
aforementioned program to upgrade and install optical fiber in its cable
systems, TCI Group's capital expenditures and depreciation expense have
increased. TCI Group cannot determine whether and to what extent increases in
the cost of programming will affect its operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue of Regulated Services.
Upon implementation of the Liberty Group Stock Proposal, certain
corporate general and administrative costs would be charged to Liberty Media
Group at rates set at the beginning of each year based on projected utilization
for that year. The utilization-based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
The accompanying combined statements of operations do not reflect the allocation
of corporate general and administrative costs through the date of the Mergers in
the aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty Media
Corporation for the majority of the periods presented herein. During the three
months ended March 31, 1995, Liberty Media was allocated $767,000 in corporate
general and administrative costs by TCI Group.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of time
TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend on Liberty
Media Group matters. TCI management evaluated several alternative allocation
methods including assets, revenue, operating income, and employees. Management
did not believe that any of these methods would reflect an appropriate
allocation of corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating subsidiaries,
and the way in which corporate resources are utilized.
TCI Group has an ownership interest of approximately 38% in TeleWest
Communications plc ("TeleWest Communications"), a company that is currently
operating and constructing cable television and telephone systems in the United
Kingdom ("UK"). TeleWest Communications, which is accounted for under the
equity method, had a carrying value at March 31, 1995 of $462 million and
comprised $11 million of TCI Group's share of its affiliates' losses during the
three months ended March 31, 1995. In addition, TCI Group has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments had a carrying value of $164 million at March 31, 1995 and accounted
for $8 million of TCI Group's share of its affiliates' losses in 1995.
TeleWest Communications, which is currently constructing broadband cable
television and telephony networks in the UK, has incurred net losses since its
inception. At December 31, 1994, TeleWest Communications had completed
approximately 37% of its network construction and, it is expected that TeleWest
Communications' network construction will be substantially complete within the
next five years. Although there is no assurance, TCI Group believes (i) that the
continued expansion of TeleWest Communications' networks ultimately will provide
TeleWest Communications with a revenue base that will exceed its expenses, (ii)
that TeleWest Communications' present and future sources of liquidity (including
the (Pounds)401.3 million ($630 million using the November 23, 1994 exchange
rate) of net proceeds from TeleWest Communications' November 23, 1994 initial
public offering and certain bank credit facilities) will be sufficient to meet
TeleWest Communications' liquidity requirements. TCI Group has no present
intention to make significant loans to or investments in TeleWest
Communications.
IV-201
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
-----------------------------------------------------
In connection with its investments in the above-described foreign entities,
TCI Group is exposed to unfavorable and potentially volatile fluctuations of the
U.S. dollar against the UK pound sterling ("(Pounds)"), the Japanese yen
("(Yen)"), and various other foreign currencies that are the functional
currencies of TCI Group's foreign subsidiaries and affiliates. Any increase
(decrease) in the value of the U.S. dollar against any foreign currency that is
the functional currency of an operating subsidiary or affiliate of International
will cause TCI Group to experience unrealized foreign currency translation
losses (gains) with respect to amounts already invested in such foreign
currencies. TCI Group is also exposed to foreign currency risk to the extent
that TCI Group or its foreign subsidiaries and affiliates enter into
transactions denominated in currencies other than their respective functional
currencies. Because TCI Group generally views its foreign operating subsidiaries
and affiliates as long-term investments, TCI Group generally does not attempt to
hedge existing investments in its foreign affiliates and subsidiaries. With
respect to funding commitments that are denominated in currencies other than the
U.S. dollar, TCI Group historically has sought to reduce its exposure to short-
term (generally no more than 90 days) movements in the applicable exchange rates
once the timing and amount of such funding commitments becomes fixed. Although
TCI Group monitors foreign currency exchange rates with the objective of
mitigating its exposure to unfavorable fluctuations in such rates, TCI Group
believes that it is not possible or practical to completely eliminate TCI
Group's exposure to unfavorable fluctuations in foreign currency exchange rates.
TCI Group's net loss (before the net loss of Liberty Media Group and
preferred stock dividends) of $33 million for the three months ended March 31,
1995 represented a decrease of $50 million as compared to TCI Group's net
earnings (before net earnings of Liberty Media Group) of $17 million for the
corresponding period of 1994. Such decrease is principally the result of the
effect of the aforementioned reduction in rates charged for Regulated Services,
an increase in interest expense due to an increase in interest rates, net of the
increase in operating income from the acquisition of TeleCable.
IV-202
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994 *
------------- -------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 33 11
Trade and other receivables, net 189 206
Due from Home Shopping Network, Inc. (note 8) 28 29
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 3) 1,212 1,019
Property and equipment, at cost:
Land 69 69
Distribution systems 8,652 7,705
Support equipment and buildings 1,007 935
------- ------
9,728 8,709
Less accumulated depreciation 3,220 3,027
------- ------
6,508 5,682
------- ------
Franchise costs 13,150 11,152
Less accumulated amortization 1,779 1,708
------- ------
11,371 9,444
------- ------
Other assets, at cost, net of amortization 880 759
------- ------
$20,221 17,150
======= ======
</TABLE>
* Restated - see note 8.
(continued)
IV-203
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994 *
-------------- ------------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 174 90
Accrued expenses 724 798
Debt (note 5) 11,006 10,831
Deferred income taxes 4,226 3,377
Other liabilities (note 8) 159 142
------- ------
Total liabilities 16,289 15,238
------- ------
Minority interests in equity
of consolidated subsidiaries 257 314
Redeemable preferred stock (note 6) 303 --
Combined equity (note 7):
Combined equity, including preferred
stocks 4,482 2,727
Cumulative foreign currency
translation adjustment 21 (4)
TCI Group unrealized holding gains (losses)
for available-for-sale securities 1 (5)
Liberty Media Group unrealized holding
gains for available-for-sale securities 159 131
Interest in Liberty Media Group (1,291) (1,251)
------- ------
Combined equity 3,372 1,598
------- ------
Commitments and contingencies (note 9)
$20,221 17,150
======= ======
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
IV-204
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months
ended
March 31,
-------------
1995 1994
------- --------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 1,185 1,040
Operating costs and expenses:
Operating 362 282
Programming charges from Liberty Media Group
(note 8) 19 13
Selling, general and administrative 335 292
Charges to Liberty Media Group (note 8) (6) (2)
Adjustment to compensation relating to
stock appreciation rights (1) (19)
Depreciation 195 165
Amortization 76 73
------ -----
980 804
------ -----
Operating income 205 236
Other income (expense):
Interest expense (235) (178)
Interest and dividend income 5 4
Interest income from Liberty Media Group (note 8) 1 --
Share of losses of other affiliates, net (note 3) (27) (7)
Gain on disposition of assets 8 --
Loss on early extinguishment of debt -- (2)
Minority interests in losses (earnings) of
consolidated subsidiaries, net 5 (2)
Other, net (2) (4)
------ -----
(245) (189)
------ -----
Earnings (loss) before income taxes (40) 47
Income tax benefit (expense) 7 (30)
------ -----
Earnings (loss) before earnings (loss)
of Liberty Media Group (33) 17
Earnings (loss) of Liberty Media Group (12) 15
------ -----
Net earnings (loss) (45) 32
Dividend requirements on
preferred stocks (8) --
------ -----
Net earnings (loss) attributable
to common shareholders $ (53) 32
====== =====
</TABLE>
See accompanying notes to combined financial statements.
IV-205
<PAGE>
"TCI Group"
(a combination of certain assets as defined in note 1)
Combined Statement of Equity
Three months ended March 31, 1995
(unaudited)
<TABLE>
<CAPTION>
TCI
Group Liberty
unrealized Media
holding Group
Combined Cumulative gains unrealized Interest
equity, foreign (losses) for gains for in
including currency available- available- Liberty
preferred translation for-sale for-sale Media Combined
stocks adjustment securities securities Group * equity
------ ---------- ---------- ---------- ------- ------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 * $2,727 (4) (5) 131 (1,251) 1,598
Net earnings (loss) (45) -- -- -- 12 (33)
Purchase of programming from
Liberty Media Group -- -- -- -- 19 19
Cost allocations to Liberty
Media Group -- -- -- -- (6) (6)
Interest income from Liberty
Media Group -- -- -- -- (1) (1)
Intergroup tax allocation -- -- -- -- 13 13
Net cash transfers to Liberty
Media Group -- -- -- -- (37) (37)
Change in unrealized gains
for available-for-sale
securities -- -- 6 28 (28) 6
Foreign currency translation
adjustment -- 25 -- -- -- 25
Accreted dividends on TCI
preferred stock subject to
mandatory redemption
requirements (3) -- -- -- -- (3)
Payment of TCI preferred stock
dividends (12) -- -- -- -- (12)
Issuance of TCI Class A
common stock for
acquisitions and investments 1,373 -- -- -- -- 1,373
Issuance of TCI Class A
common stock for acquisition
by Liberty Media Group 12 -- -- -- (12) --
Proceeds from issuances of
TCI Class A common stock
in public and private
offerings 430 -- -- -- -- 430
------ ------- ------- ------- ------- -------
Balance at March 31, 1995 $4,482 21 1 159 (1,291) 3,372
====== ======= ======= ======= ====== =====
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
IV-206
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------
1995 1994
------ ------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before net earnings
or losses of Liberty Media Group* $ (33) 17
Adjustments to reconcile net earnings (loss) before
net earnings or losses of Liberty Media Group to
net cash provided by operating activities:
Depreciation and amortization 271 238
Adjustment to compensation relating to stock
appreciation rights (1) (19)
Share of losses of other affiliates 27 7
Deferred income tax expense (benefit) (20) 13
Minority interests in earnings (losses) (5) 2
Loss on early extinguishment of debt -- 2
Gain on disposition of assets (8) --
Noncash interest and dividend income (2) (3)
Other noncash charges 1 --
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 27 2
Change in accruals and payables (35) 54
------ -----
Net cash provided by operating activities 222 313
------ -----
Cash flows from investing activities:
Cash received in acquisitions 13 --
Cash paid for acquisitions -- (10)
Capital expended for property and equipment (338) (242)
Proceeds from disposition of assets 13 8
Additional investments in and
loans to affiliates and others (211) (91)
Changes in interest in Liberty Media Group (6) 16
Repayment of loans by affiliates and others 5 21
Other investing activities (51) (72)
------ -----
Net cash used in investing activities (575) (371)
------ -----
Cash flows from financing activities:
Borrowings of debt 889 1,046
Repayments of debt (932) (938)
Preferred stock dividends of subsidiaries -- (2)
Preferred stock dividends (12) --
Issuance of common stock 430 --
------ -----
Net cash provided by financing activities 375 106
------ -----
Net increase (decrease) in cash 22 48
Cash at beginning of period 11 9
------ -----
Cash at end of period $ 33 57
====== =====
</TABLE>
* Net earnings or loss of Liberty Media Group does not provide or use funds.
See accompanying notes to combined financial statements.
IV-207
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1995
(unaudited)
(1) Liberty Group Stock Proposal
----------------------------
The Board of Directors of Tele-Communications, Inc. ("TCI") have adopted
a proposal (the "Liberty Group Stock Proposal") which, if approved by
stockholders, would authorize the Board to issue a new class of stock
("Liberty Group Stock") which is intended to reflect the separate
performance of TCI's business which produces and distributes cable
television programming services ("Liberty Media Group"). While the Liberty
Group Stock constitutes common stock of TCI, the Liberty Group Stock
Proposal would not result in any transfer of assets or liabilities of TCI
or any of its subsidiaries or affect the rights of holders of TCI's or any
of its subsidiaries' debt. TCI intends to distribute one hundred percent
of the equity value attributable to the Liberty Media Group. Additionally,
the Liberty Group Stock Proposal, if approved by stockholders, would
redesignate the previously authorized Class A and Class B common stock into
Series A TCI Group and Series B TCI Group common stock.
Upon the initial distribution of the Liberty Group Stock, the existing
TCI Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of (a) the
subsidiaries and assets not attributed to the Liberty Media Group,
including (i) TCI's Cable and Communication unit, (ii) TCI's International
Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit,
(b) any interest in the Liberty Media Group other than the interest
represented by any outstanding shares of Liberty Group Stock (an "Inter-
Group Interest") and (c) any interest in Liberty Media Group represented by
outstanding shares of Liberty Group Stock. Liberty Media Group includes the
businesses of Tele-Communications, Inc. and Liberty Media Corporation which
produce and distribute cable television programming services. The
businesses of TCI not attributed to the Liberty Media Group, together with
any Interest is referred to as the "TCI Group".
On January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies
(the "Mergers"). The transaction was consummated on August 4, 1994. Due
to the significant economic interest held by TCIC through its ownership of
Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method prior to the consummation of the Mergers. Accordingly, TCIC
had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The Mergers were accounted for using
predecessor cost due to related party considerations. Accordingly, the
accompanying combined financial statements of TCI Group reflect the
combination of the historical financial information of the assets of TCI
and Liberty which have not been attributed to Liberty Media Group. For
periods prior to the Mergers, the combined financial statements of TCI
Group and Liberty Media Group comprise all the accounts included in the
consolidated financial statements of TCI and subsidiaries and the separate
consolidated financial statements of Liberty and subsidiaries. For periods
subsequent to the Mergers, the combined financial statements of TCI Group
and Liberty Media Group comprise all the accounts included in the
corresponding consolidated financial statements of TCI and subsidiaries.
(continued)
IV-208
<PAGE>
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI
contemplated by the Liberty Group Stock Proposal would not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
would each continue to be responsible for their respective liabilities.
Holders of TCI Group common stock would be holders of common stock of TCI
and would continue to be subject to risks associated with an investment in
TCI and all of its businesses, assets and liabilities. The Liberty Group
Stock Proposal would not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of the TCI
Group and the market price of shares of the TCI Group common stock. In
addition, net losses of any portion of TCI, dividends or distributions on,
or repurchases of, any series of common stock, and dividends on, or certain
repurchases of preferred stock would reduce the funds of TCI legally
available for dividends on all series of common stock. Accordingly, TCI
Group financial information should be read in conjunction with the TCI and
Liberty consolidated financial information.
Under the terms of the Liberty Group Stock Proposal, dividends on the TCI
Group common stock would be payable at the sole discretion of the Board out
of the lesser of assets of TCI legally available for dividends and the
available dividend amount with respect to the TCI Group, as defined.
Determinations to pay dividends on TCI Group common stock would be based
primarily upon the financial condition, results of operations and business
requirements of TCI Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will be delivered upon their conversion or exchange
(in addition to the same number of shares of redesignated Series A TCI
Group Common Stock as were theretofore issuable thereunder) the number of
shares of Series A Liberty Group Stock that would have been issuable in the
Distribution with respect to the TCI Class A common stock issuable upon
conversion or exchange had such conversion or exchange occurred prior to
the record date for the Distribution. Options to purchase TCI Class A
common stock outstanding at the time of the Distribution will be adjusted
by issuing to the holders of such options separate options to purchase that
number of shares of Series A Liberty Group Stock which the holder would
have been entitled to receive had the holder exercised such option to
purchase TCI Class A common stock prior to the record date for the
Distribution and reallocating a portion of the aggregate exercise price of
the previously outstanding options to the newly issued options to purchase
Series A Liberty Group Stock. Such convertible or exchangeable preferred
stock and debt securities and options outstanding on the record date for
the Distribution are referred to as "Pre-Distribution Convertible
Securities." The issuance of shares of Series A Liberty Group Stock upon
such conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets from
the TCI Group to the Liberty Media Group or a reduction in any Inter-Group
Interest that then may exist in consideration of such issuance. In the case
of the exercise of Pre-Distribution Convertible Securities consisting of
options to purchase Series A Liberty Group Stock, the proceeds received
upon the exercise of such options will be attributed to Liberty Media
Group. If Pre-Distribution Convertible Securities remain outstanding at the
time of any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders of
Liberty Group Stock their proportionate interest in the net proceeds of the
disposition, the proportionate interest of the holders of Liberty Group
Common Stock will be determined on a basis that allocates to the TCI Group
a portion of such net proceeds, in addition to the portion attributable to
any Inter-Group Interest, sufficient to provide for the payment of the
portion of the consideration payable by TCI on any post-Distribution
conversion, exercise or exchange of Pre-Distribution Convertible Securities
that becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or exchange if
it had occurred prior to the record date for the disposition. Likewise, if
Pre-Distribution Convertible Securities remain outstanding at the time of
any redemption for all the outstanding shares of Liberty Group Stock in
exchange for stock of any one or more wholly-owned subsidiaries of TCI
which hold all of the assets and liabilities of the Liberty Media Group,
the portion of the shares of such subsidiaries deliverable in redemption of
the outstanding shares of Liberty Group Stock will be determined on a basis
that allocates to the TCI Group a portion of the shares of such
subsidiaries, in addition to the number of shares so allocated in respect
to any Inter-Group Interest, sufficient to provide for the payment of the
portion of the consideration payable by TCI upon any post-redemption
conversion, exercise or exchange of Pre-Distribution Convertible Securities
that becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or exchange if
it had occurred prior to such redemption.
(continued)
IV-209
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Under the Liberty Group Stock Proposal, prior to any distributions of
Liberty Media Group Stock, TCI Group would have a 100% Inter-Group Interest
in Liberty Media Group. Following the initial distribution of Liberty Media
Group Stock, it is currently anticipated that TCI Group would have no
Inter-Group Interest in Liberty Media Group. For periods in which an Inter-
Group Interest exists, TCI Group would account for its Inter-Group Interest
in a manner similar to the equity method of accounting. For periods after
the distribution and before the creation of a Inter-Group Interest, TCI
Group would not reflect any interest in Liberty Media Group. An Inter-Group
Interest would be created only if a subsequent transfer of cash or other
property from the TCI Group to the Liberty Media Group is specifically
designated by the Board of Directors as being made to create an Inter-Group
Interest or if outstanding shares of Liberty Group Stock are purchased with
funds attributable to the TCI Group. However, Liberty Media Group is under
the sole control of TCI. Management of TCI believes that generally accepted
accounting principles require that Liberty Media Group be consolidated with
the TCI Group. If Liberty Media Group were consolidated with TCI Group, the
combined financial position, combined results of operations, and combined
cash flows of TCI Group would equal the consolidated financial position,
consolidated results of operations and consolidated cash flows of TCI and
subsidiaries, which financial statements are included separately herein.
Management of TCI has elected to present the accompanying combined
financial statements in a manner that does not comply with generally
accepted accounting principles.
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. In the first quarter
of 1995, TCIC transferred additional assets to the International Cable and
Programming unit.
The accompanying interim combined 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 combined
financial statements should be read in conjunction with the audited
combined financial statements of TCI Group for the year ended December 31,
1994.
(continued)
IV-210
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $271 million and $205 million for the three
months ended March 31, 1995 and 1994, 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,
---------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash received in acquisitions:
Fair value of assets acquired $ 2,777 --
Liabilities assumed (278) --
Deferred tax liability recorded
in acquisitions (875) --
Minority interests in equity of
acquired entities (25) --
Common stock issued in acquisitions (1,312) --
Redeemable preferred stock issued
in acquisition (300) --
------- ------
Cash received in acquisitions $ (13) --
======= ======
Common stock issued to subsidiaries in
Reorganization reflected as
treasury stock $ 10 --
======= ======
Common stock issued in exchange for
cost investment $ 73 --
======= ======
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 25 1
======= ======
Unrealized gains, net of deferred income
taxes, on available-for-sale securities
as of January 1, 1994 $ -- 356
======= ======
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities $ 34 121
======= ======
Accrued preferred stock dividends $ 3 --
======= ======
</TABLE>
(continued)
IV-211
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Unrealized gains, net of deferred taxes,
on available-for-sale securities
as of January 1, 1994 $ -- 304
======== ===
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
======== ===
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
======== ===
</TABLE>
(3) Investments in Affiliates
-------------------------
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Three months
ended
Combined Operations March 31,
-------------------- ---------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 343 277
Operating expenses (271) (212)
Depreciation and amortization (80) (54)
----- -----
Operating income (loss) (8) 11
Interest expense (40) (35)
Other, net ( 10) (11)
----- -----
Net loss $ (58) (35)
===== =====
</TABLE>
TCI Group has various investments accounted for under the equity method.
Some of the more significant investments held by TCI Group at March 31,
1995 are TeleWest Communications plc (carrying value of $462 million) and
Teleport Communications Group, Inc. and TCG Partners (collectively,
"TCG")(carrying value of $144 million).
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general partnership
is, as such, liable as a matter of partnership law for all debts of that
partnership in the event liabilities of that partnership were to exceed its
assets.
(continued)
IV-212
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Acquisitions
------------
As of January 26, 1995, TCI Group and TeleCable Corporation ("TeleCable")
consummated a transaction, whereby TeleCable was merged into TCI Group. The
aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of
approximately $300 million of TeleCable's net liabilities and the issuance
to TeleCable's shareholders of approximately 42 million shares of TCI Class
A common stock and 1 million shares of TCI Convertible Preferred Stock,
Series D (the "Series D Preferred") with an aggregate initial liquidation
value of $300 million (see note 6).
The acquisition of TeleCable was accounted for by the purchase method.
Accordingly, the results of operations of such acquired entity have been
consolidated with those of TCI Group since its date of acquisition. On a
pro forma basis, TCI Group's revenue would have been increased by $25
million, net loss would have been reduced by $1 million and loss
attributable to common shareholders would have remained unchanged for the
three months ended March 31, 1995 had such acquired entity been
consolidated with TCI Group on January 1, 1994. On a pro forma basis,
revenue would have increased by $73 million, net earnings would have been
increased by $2 million and earnings attributable to common shareholders
would have been reduced by $2 million for the three months ended March 31,
1994 had such acquired entity been combined with TCI Group on January 1,
1994. 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 TCI Group operated the acquired entity since January 1, 1994.
Comcast Corporation ("Comcast") had the right, through December 31, 1994,
to require TCI Group to purchase or cause to be purchased from Comcast all
shares of Heritage Communications, Inc. ("Heritage") directly or indirectly
owned by Comcast for either cash or assets or, at TCI Group's election
shares of TCI common stock. On October 24, 1994, TCI Group and Comcast
entered into a purchase agreement whereby TCI Group would repurchase the
entire 19.9% minority interest in Heritage owned by Comcast for an
aggregate consideration of approximately $290 million, the majority of
which is payable in shares of TCI Class A common stock. Such acquisition
was consummated in the first quarter of 1995.
(continued)
IV-213
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- -------------
amounts in millions
<S> <C> <C>
Senior notes $ 5,312 5,387
Bank credit facilities 3,948 3,774
Commercial paper 527 445
Notes payable 1,013 1,024
Convertible notes (a) 44 45
Other debt 162 156
------- ------
$11,006 10,831
======= ======
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $186 million at March 31, 1995 and December 31, 1994, 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, 1995, the notes
were convertible, at the option of the holders, into an aggregate of
38,707,574 shares of TCI Class A common stock.
The bank credit facilities and various other debt instruments attributable
to the TCI Group generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt
and cash flow to debt service, as defined), and include certain limitations
on indebtedness, investments, guarantees, dispositions, stock repurchases
and/or dividend payments.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the TCI Group has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed
Rate Agreements") ranging from 7.2% to 9.9% on notional amounts of $550
million at March 31, 1995 and (ii) variable interest rates (the "Variable
Rate Agreements") on notional amounts of $2,605 million at March 31, 1995.
During the three months ended March 31, 1995 and 1994, the TCI Group's net
receipts pursuant to the Fixed Rate Agreements were $5.1 million and $2.1
million, respectively; and TCI Group's net receipts pursuant to the
Variable Rate Agreements were $1.4 million and $19.6 million, respectively.
(continued)
IV-214
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
---------- ------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
July 1996 8.2% 10 July 1996 8.2% 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
----
April 1999 7.4% 100
$550 September 1999 7.2%-7.4% 300
====
February 2000 5.8%-6.6% 650
March 2000 5.8%-6.0% 675
September 2000 5.1% 75
--------
$2,605
========
</TABLE>
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCI Group
does not anticipate that it will incur any material credit losses because
it does not anticipate nonperformance by the counterparties.
In order to diminish its exposure to extreme increases in variable interest
rates, TCI Group has entered into various interest rate hedge agreements on
notional amounts of $325 million which fix the maximum variable interest
rates at 11%. Such agreements expire during the third and fourth quarters
of 1995.
The fair value of the interest rate exchange agreements is the estimated
amount that TCI Group would pay or receive to terminate the agreements at
March 31, 1995, taking into consideration current interest rates and the
current creditworthiness of the counterparties. TCI Group would be required
to pay $121 million at March 31, 1995 to terminate the agreements.
The fair value of the debt attributable to the TCI Group is estimated based
on the quoted market prices for the same or similar issues or on the
current rates offered to the TCI Group for debt of the same remaining
maturities. The fair value of debt, which has a carrying value of $11,006
million, was $11,069 million at March 31, 1995.
Certain subsidiaries attributed to the TCI Group are required to maintain
unused availability under bank credit facilities to the extent of
outstanding commercial paper.
(continued)
IV-215
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Redeemable Preferred Stock
--------------------------
Convertible Preferred Stock, Series D. TCI issued 1,000,000 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series D", par value $.01 per share, as partial consideration for
the merger between TCIC and TeleCable (see note 4).
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series D Preferred
stock at the rate of 5-1/2% per annum of the liquidation value ($300 per
share). Dividends are cumulative, and in the event that dividends are not
paid in full on two consecutive dividend payment dates or in the event that
TCI fails to effect any required redemption of Series D Preferred Stock,
accrue at the rate of 10% per annum of the liquidation value. The Series D
Preferred Stock ranks on parity with the Class A Preferred Stock, the
Series C Preferred Stock and the Series E Preferred Stock.
Each share of Series D Preferred Stock is convertible into 10 shares of TCI
Class A common stock, subject to adjustment upon certain events specified
in the certificate of designation establishing Series D Preferred Stock. To
the extent any cash dividends are not paid on any dividend payment date,
the amount of such dividends will be deemed converted into shares of TCI
Class A common stock at a conversion rate equal to 95% of the then current
market price of TCI Class A common stock, and upon issuance of TCI Class A
common stock to holders of Series D Preferred Stock in respect of such
deemed conversion, such dividend will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a
price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for
cash at the option of TCI after the fifth anniversary of the issue date at
such redemption price or after the third anniversary of the issue date if
the market value per share of TCI Class A common stock shall have exceeded
$37.50 for periods specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series
D Preferred Stock into TCI Class A common stock at a conversion rate of 95%
of the then current market value of TCI Class A common stock, provided that
such option may not be exercised unless the failure to redeem continues for
more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the shareholders of
TCI.
(continued)
IV-216
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) 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.
Subsequent to the distribution of the Liberty Group Stock, the rights of
holders of the TCI Group common stock upon liquidation of TCI will be based
on the ratio of the aggregate market capitalization, as defined, of the TCI
Group common stock to the aggregate market capitalization, as defined, of
the TCI Group common stock and the Liberty Group Stock.
Stock Options
-------------
TCI has adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan
(the "Plan"). The Plan provides for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be
made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof. Pursuant to the TCI/Liberty
Merger Agreement and certain assumption agreements, stock options and/or
stock appreciation rights granted (or assumed) by Old TCI and stock options
and/or stock appreciation rights granted by Liberty were assumed by TCI and
new options and/or stock appreciation rights were substituted under the
Plan. The following descriptions represent the terms of the assumed options
and/or stock appreciation rights.
Stock options to acquire 162,228 shares of TCI Class A common stock at
adjusted purchase prices ranging from $8.83 to $18.63 per share were
outstanding at March 31, 1995. During the three months ended March 31,
1995, no options were exercised and no options were canceled. Options to
acquire 19,428 shares of TCI Class A common stock expire August 14, 1995.
Options to acquire 142,800 shares of TCI Class A common stock expire
December 15, 1998.
Stock options in tandem with stock appreciation rights to purchase
3,963,000 shares of Class A common stock at a purchase price of $16.75 per
share were outstanding at March 31, 1995. Such options become exercisable
and vest evenly over five years, first became exercisable beginning
November 11, 1993 and expire on November 11, 2002.
Stock options in tandem with stock appreciation rights to purchase
1,940,000 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at March 31, 1995. Such options become
exercisable and vest evenly over four years, first became exercisable
beginning October 12, 1994 and expire on October 12, 2003.
(continued)
IV-217
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 were outstanding at March 31, 1995. On November 12, 1993, 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.
On November 17, 1994, stock options in tandem with stock appreciation
rights to purchase 2,885,000 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 $22.00 per share. Such options become exercisable and
vest evenly over five years, first become exercisable beginning November
17, 1995 and expire on November 17, 2004.
TCI's Board of Directors has approved, subject to stockholder approval of
the Director Stock Option Plan, the grant effective as of November 16,
1994, to each person that as of that date was a member of the Board of
Directors and was not an employee of TCI or any of its subsidiaries, of
options to purchase 50,000 shares of Class A common stock. Such options
have an exercise price of $22.00 per share and will vest and become
exercisable over a five-year period, commencing on November 16, 1995 and
will expire on November 16, 2004.
Estimated compensation relating to stock appreciation rights has been
recorded through March 31, 1995, but is 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, 1995, there were 68,520,802 shares of TCI Class A common stock
reserved for issuance under exercise privileges related to options and
convertible debt securities. In addition, one share of Class A common stock
is reserved for each share of Class B common stock.
(continued)
IV-218
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Transactions with Liberty Media Group and Other Related Parties
---------------------------------------------------------------
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for
that year. The utilization-based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone
basis. The accompanying combined statements of operations do not reflect
the allocation of corporate general and administrative costs through the
date of the Mergers in the aforementioned manner because the majority of
the entities attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty Media Corporation for the majority of the periods
presented herein. During the three months ended March 31, 1995, Liberty
Media was allocated $767,000 in corporate general and administrative costs
by TCI Group.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of
time TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend
on Liberty Media Group matters. TCI management evaluated several
alternative allocation methods including assets, revenue, operating income,
and employees. Management did not believe that any of these methods would
reflect an appropriate allocation of corporate expenses given the diverse
nature of TCI's operating subsidiaries, the relative maturity of certain of
the operating subsidiaries, and the way in which corporate resources are
utilized.
Liberty Media Group has a 49.9% partnership interest in QE+Ltd Limited
Partnership ("QE+"), which distributes STARZ!, a first-run movie premium
programming service launched in 1994. Entities attributed to the TCI Group
hold the remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that the TCI Group will be
required to make special capital contributions to QE+ through 2005, up to a
maximum amount of $350 million, $90 million of which is required in 1995.
QE+ is obligated to pay TCI Group a preferred return of 10% per annum on
its special capital contributions of up to $200 million beginning five
years from the date of the contribution or January 1, 1996, whichever is
later. Any TCI Group special capital contributions in excess of $200
million will be entitled to a preferred return of 10% per annum from the
date of the contribution. QE+ is required to apply 75% of its available
cash flow, as defined, to repay the TCI Group special capital contributions
and any preferred return payable thereon. To the extent such special
capital contributions are insufficient to fund the cash requirements of
QE+, the TCI Group and the Liberty Media Group will each be obligated to
fund such cash requirements in proportion to their respective ownership
percentages.
The TCI Group has also entered into a long-term affiliation agreement with
QE+ in respect of the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for 1995 are
anticipated to aggregate approximately $30 million to $40 million. The
affiliation agreement also provides that QE+ will not grant materially more
favorable terms and conditions to other cable system operators unless such
more favorable terms and conditions are made available to the TCI Group.
The affiliation agreement also requires the TCI Group to make payments to
QE+ with respect to a guaranteed minimum number of subscribers totaling
approximately $339 million for the years 1996, 1997, and 1998.
In connection with the launch of the STARZ! service, the TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may be
due pursuant to motion picture output, distribution, and license
agreements. As of March 31, 1995, the maximum amount of such obligations or
guarantees was approximately $151 million. The future obligations of the
TCI Group with respect to these agreements is not currently determinable
because such amount is dependent on 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.
Liberty Starz! also has the right to acquire an additional 10.1% general
partnership interest in QE+ based on a formula designed to approximate the
fair value of the interest. Such right is exercisable for a period of ten
years beginning January 1, 1999 after QE+ has had positive cash flow for
two consecutive calendar quarters. The right is exercisable only after all
special capital contributions from the TCI Group have been repaid,
including the preferred return thereon.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. Payment
of such fees is subordinated to the repayment of the TCI Group special
capital contributions and the preferred return thereon. In addition,
effective July 1, 1995, Liberty Media Group will earn a "Content Fee" for
certain services provided to QE+ equal to 4% of the gross revenue of QE+,
estimated to be approximately $1.2 million for the six months ended
December 31, 1995. The Content Fee agreement expires on June 30, 2001,
subject to renewal on an annual basis thereafter. Payment of the Content
Fee will be subordinated to the repayment of the contributions made by the
TCI Group and the preferred return thereon.
Subsidiaries of Liberty Media Group lease office space and satellite
transponder facilities from TCI Group. Charges by TCI Group for such
arrangements for the three months ended March 31, 1994 and 1993, aggregated
$3,210,000, and $1,293,000, respectively. From January 1, 1993 through the
Mergers, no employees of Liberty Media Corporation's subsidiaries remained
on the TCI payroll.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN paid a commission to TCI Group for merchandise sales to customers who
are subscribers of TCI Group's cable systems. Aggregate commissions and
charges to TCI Group were approximately $1,928,000 and $346,000 for the
three months ended March 31, 1995 and 1994, respectively.
During the first quarter of 1995, the Liberty Media Group acquired an
additional interest in an investment previously accounted for under the
cost method. Upon consummation of such transaction, the Liberty Media Group
is deemed to exercise significant influence over such entity and, as such,
adopted the equity method of accounting. As a result, TCI Group restated
its Interest in the Liberty Media Group, its unrealized gain on available-
for-sale securities and accumulated deficit by $122 million, $127 million
and $5 million, respectively, at December 31, 1994. The restatement did not
affect the earnings from the Liberty Media Group for the three months ended
March 31, 1994 as this investment was accounted for under the equity method
during that period.
(continued)
IV-219
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the Mergers, TCI Group manages certain treasury activities
for Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are remitted to TCI Group and
certain cash disbursements of Liberty Media Group are funded by TCI Group
on a daily basis. Prior to the implementation of the Liberty Group Stock
Proposal, but subsequent to the Mergers, the net amounts of such cash
activities are included in investment in Liberty Media Group in the
accompanying combined financial statements. Prior to the Mergers, Liberty
Media Corporation separately managed the treasury activities of its
subsidiaries. Subsequent to the implementation of the Liberty Group Stock
Proposal, such cash activities will be included in borrowings from and
loans to TCI Group or, if determined by the Board of Directors, as an
equity contribution to be reflected as an Inter-Group Interest to the
Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI
Group not incurred by entities attributed to the Liberty Media Group or
preferred stock and the proceeds thereof should be specifically attributed
to and reflected on the combined financial statements of Liberty Media
Group to the extent that the debt is incurred or the preferred stock is
issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of Class A common stock
and Class B common stock will be attributed entirely to TCI Group, all
financial impacts of issuances of additional shares of Liberty Group Stock
the proceeds of which are attributed to the Liberty Media Group will be
reflected entirely in the combined financial statements of the Liberty
Media Group. Financial impacts of dividends or other distributions on, and
purchases of, Class A common stock and Class B common stock will be
attributed entirely to TCI Group, and financial impacts of dividends or
other distributions on Liberty Group Stock will be attributed entirely to
the Liberty Media Group. Financial impacts of repurchases of Liberty Group
Stock the consideration for which is charged to the Liberty Group will be
reflected entirely in the combined financial statements of the Liberty
Media Group, the financial impacts of repurchases of Liberty Group Stock
the consideration for which is charged to TCI Group will be attributed
entirely to TCI Group.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI Group would bear interest at such rates and
have repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost
and time associated with alternative financing sources.
(continued)
IV-220
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Commitments and Contingencies
-----------------------------
During 1994, the TCI Group, Comcast, Cox Communications, Inc. ("Cox") and
Sprint Corporation ("Sprint") formed a partnership ("WirelessCo") to engage
in the business of providing wireless communications services on a
nationwide basis. Through WirelessCo, the partners have been participating
in auctions ("PCS Auctions") of broadband personal communications services
("PCS") licenses being conducted by the Federal Communications Commission
("FCC"). In the first round auction, which concluded during the first
quarter of 1995, WirelessCo was the winning bidder for PSC licenses for 29
markets, including New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses is approximately
$2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and has agreed to make capital
contributions to APC equal to 49/51 of the cost of APC's PCS license.
Additional capital contributions may be required in the event APC is unable
to finance the full cost of its PCS license. WirelessCo may also be
required to finance the build-out expenditures for APC's PCS system. Cox,
which holds a pioneer preference PCS license for the Los Angeles-San Diego
market, and WirelessCo have also agreed on the general terms and conditions
upon which Cox (with a 60% interest) and WirelessCo (with a 40% interest)
would form a partnership to hold and develop a PCS system using the Los
Angeles-San Diego license. APC and the Cox partnership would affiliate
their PCS systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under the
"Sprint" brand. TCI Group owns a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and TCI Group also formed a
separate partnership ("PhillieCo"), in which TCI Group owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction for a
PCS license for the Philadelphia market at a license cost of $85 million.
To the extent permitted by law, the PCS system to be constructed by
PhillieCo would also be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above,
will be substantial.
(continued)
IV-221
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the end of the first quarter of 1995, TCI Group, Comcast, Cox and Sprint
formed two new partnerships, of which the principal partnership is MajorCo,
L.P. ("MajorCo"), to which they contributed their respective interests in
WirelessCo and through which they formed another partnership, NewTelco,
L.P. ("NewTelco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis.
NewTelco will serve its customers primarily through the cable television
facilities of cable television operators that affiliate with NewTelco in
exchange for agreed-upon compensation. The modification of existing
regulations and laws governing the local telephony market will be necessary
in order for NewTelco to provide its proposed services on a competitive
basis in most states. Subject to agreement upon a schedule for upgrading
its cable television facilities in selected markets and certain other
matters, TCI Group has agreed to affiliate certain of its cable systems
with NewTelco. The capital required for the upgrade of TCI Group's cable
facilities for the provision of telephony services is expected to be
substantial.
TCI Group, Cox and Comcast, together with Continental Cablevision, Inc.
("Continental"), own TCG, which is one of the largest competitive access
providers in the United States in terms of route miles. TCI Group, Cox and
Comcast have entered into an agreement with MajorCo and NewTelco to
contribute their interests in TCG and its affiliated entities to NewTelco.
TCI Group currently owns an approximate 29.9% interest in TCG. The closing
of this contribution is subject to the satisfaction of certain conditions,
including the receipt of necessary regulatory and other consents and
approvals. In addition, TCI Group, Comcast and Cox intend to negotiate with
Continental, which owns a 20% interest in TCG, regarding their acquisition
of Continental's TCG interest. If such agreement cannot be reached, they
will need to obtain Continental's consent to certain aspects of their
agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
At March 31, 1995, TCI Group was liable for a $720 million letter of credit
which guarantees contributions to WirelessCo. TCI Group pledged 56,656,584
shares of TCI Class A common stock held by subsidiaries of TCI Group as
collateral for the letter of credit. During the first quarter of 1995, an
initial borrowing aggregating $95 million was made pursuant to the letter
of credit. Subsequent to March 31, 1995, 19,638,508 shares of TCI Class A
common stock held by subsidiaries of TCI Group were pledged as additional
collateral for the letter of credit.
(continued)
IV-222
<PAGE>
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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. As a result of such
actions, TCI Group's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are evaluated against competitive benchmark rates as
published by the FCC, and equipment and installation charges are based on
actual costs. Any rates for Regulated Services that exceeded the benchmarks
were reduced as required by the 1993 rate regulations. The rate regulations
do not apply to the relatively few systems which are subject to "effective
competition" or to services offered on an individual service basis, such as
premium movie and pay-per-view services.
TCI Group believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, TCI Group's rates for regulated services are subject to review by
the FCC, if a complaint has been filed, or the appropriate franchise
authority, if such authority has been certified. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark and
refund the excess portion of rates received. Any refunds of the excess
portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated Service
rates would be retroactive to the later of September 1, 1993 or one year
prior to the certification date of the applicable franchise authority. The
amount of refunds, if any, which could be payable by TCI Group in the event
that systems' rates are successfully challenged by franchising authorities
is not considered to be material.
TCI Group has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $250 million
at March 31, 1995. Although there can be no assurance, management of TCI
Group believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such obligations, that
they will not be material to TCI Group.
TCI Group is obligated to pay fees for the license to exhibit certain films
that are released theatrically by various motion picture studios through
December 31, 2002 (the "Film License Obligations"). As of December 31,
1994, these agreements require minimum amount of the payments aggregating
approximately $207 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, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant.
TCI Group has also committed to provide additional debt or equity funding
to certain of its affiliates. At March 31, 1995, such commitments
aggregated $174 million.
TCI Group 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 combined financial statements.
IV-223
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations.
-----------
"TCI Group"
-----------
General
-------
The Board of Directors of Tele-Communications, Inc. ("TCI") have adopted a
proposal (the "Liberty Group Stock Proposal") which, if approved by
stockholders, would authorize the Board to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of TCI's
business which produces and distributes cable television programming services
("Liberty Media Group"). While the Liberty Group Stock constitutes common stock
of TCI, the Liberty Group Stock Proposal would not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. TCI intends to distribute
one hundred percent of the equity value attributable to the Liberty Media Group.
Additionally, the Liberty Group Stock Proposal, if approved by stockholders,
would redesignate the previously authorized Class A and Class B common stock
into Series A TCI Group and Series B TCI Group common stock.
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate performance
of the TCI Group, which is generally comprised of (a) the subsidiaries and
assets not attributed to the Liberty Media Group, including (i) TCI's Cable and
Communications unit, (ii) TCI's International Cable and Programming unit and
(iii) TCI's Technology/Venture Capital unit, (b) any interest in the Liberty
Media Group other than the interest represented by any outstanding shares of
Liberty Group Stock (an "Inter-Group Interest") and (c) any interest in the
Liberty Media Group represented by outstanding shares of Liberty Group Stock.
The businesses of TCI not attributed to the Liberty Media Group, together with
any Interest is referred to as the "TCI Group".
On January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies (the
"Mergers"). The transaction was consummated on August 4, 1994. Due to the
significant economic interest held by TCIC through its ownership of Liberty
preferred stock and Liberty common stock and other related party considerations,
TCIC accounted for its investment in Liberty under the equity method prior to
the consummation of the Mergers. Accordingly, TCIC had recognized 100% of
Liberty's earnings or losses before deducting preferred stock dividends. The
Mergers were accounted for using predecessor cost due to related party
considerations. Accordingly, the accompanying combined financial statements of
TCI Group reflect the combination of the historical financial information of the
assets of TCI and Liberty which have not been attributed to Liberty Media Group.
For periods prior to the Mergers, the combined financial statements of TCI Group
and Liberty Media Group comprise all the accounts included in the corresponding
consolidated financial statements of TCI and subsidiaries and Liberty and
subsidiaries. For periods subsequent to the Mergers, the combined financial
statements of TCI Group and Liberty Media Group comprise all the accounts
included in the corresponding consolidated financial statements of TCI and
subsidiaries.
IV-224
<PAGE>
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI contemplated by
the Liberty Group Stock Proposal would not affect the ownership or the
respective legal title to assets or responsibility for liabilities of TCI or any
of its subsidiaries. TCI and its subsidiaries would each continue to be
responsible for their respective liabilities. Holders of TCI Group common stock
would be holders of common stock of TCI and would continue to be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities. The Liberty Group Stock Proposal would not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the TCI Group and
the market price of shares of the TCI Group common stock. In addition, net
losses of any portion of TCI, dividends or distributions on, or repurchases of,
any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce the funds of TCI legally available for dividends on
all series of common stock. Accordingly, TCI Group financial information should
be read in conjunction with the TCI and Liberty consolidated financial
information.
Under the terms of the Liberty Group Stock Proposal, dividends on the TCI
Group common stock would be payable at the sole discretion of the Board out of
the lesser of assets of TCI legally available for dividends and the available
dividend amount with respect to the TCI Group, as defined. Determinations to
pay dividends on TCI Group common stock would be based primarily upon the
financial condition, results of operations and business requirements of TCI
Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common stock
will, as a result of the operation of antidilution provisions, be adjusted so
that there will be delivered upon their conversion or exchange (in addition to
the same number of shares of redesignated Series A TCI Group Common Stock as
were theretofore issuable thereunder) the number of shares of Series A Liberty
Group Stock that would have been issuable in the Distribution with respect to
the TCI Class A common stock issuable upon conversion or exchange had such
conversion or exchange occurred prior to the record date for the Distribution.
Options to purchase TCI Class A common stock outstanding at the time of the
Distribution will be adjusted by issuing to the holders of such options separate
options to purchase that number of shares of Series A Liberty Group Stock which
the holder would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date for the
Distribution and reallocating a portion of the aggregate exercise price of the
previously outstanding options to the newly issued options to purchase Series A
Liberty Group Stock. Such convertible or exchangeable preferred stock and debt
securities and options outstanding on the record date for the Distribution are
referred to as "Pre-Distribution Convertible Securities." The issuance of shares
of Series A Liberty Group Stock upon such conversion, exchange or exercise of
Pre-Distribution Convertible Securities will not result in any transfer of funds
or other assets from the TCI Group to the Liberty Media Group or a reduction in
any Inter-Group Interest that then may exist, in consideration of such issuance.
In the case of the exercise of Pre-Distribution Convertible Securities
consisting of options to purchase Series A Liberty Group Stock, the proceeds
received upon the exercise of such options will be attributed to Liberty Media
Group. If Pre-Distribution Convertible Securities remain outstanding at the time
of any disposition of all or substantially all of the properties and assets of
Liberty Media Group and TCI elects to distribute to holders of Liberty Group
Stock their proportionate interest in the net proceeds of the disposition, the
proportionate interest of the holders of Liberty Group Common Stock will be
determined on a basis that allocates to the TCI Group a portion of such net
proceeds, in addition to the portion attributable to any Inter-Group Interest,
sufficient to provide for the payment of the portion of the consideration
payable by TCI on any post-Distribution conversion, exercise or exchange of Pre-
Distribution Convertible Securities that becomes so payable in substitution for
shares of Liberty Group Stock that would have been issuable upon such
conversion, exercise or exchange if it had occurred prior to the record date for
the disposition. Likewise, if Pre-Distribution Convertible Securities remain
outstanding at the time of any redemption for all the outstanding shares of
Liberty Group Stock in exchange for stock of any one or more wholly-owned
subsidiaries of TCI which hold all of the assets and liabilities of the Liberty
Media Group, the portion of the shares of such subsidiaries deliverable in
redemption of the outstanding shares of Liberty Group Stock will be determined
on a basis that allocates to the TCI Group a portion of the shares of such
subsidiaries, in addition to the number of shares so allocated in respect to any
Inter-Group Interest, sufficient to provide for the payment of the portion of
the consideration payable by TCI upon any post-redemption conversion, exercise
or exchange of Pre-Distribution Convertible Securities that becomes so payable
in substitution for shares of Liberty Group Stock that would have been issuable
upon such conversion, exercise or exchange if it had occurred prior to such
redemption.
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. As consideration for
such transfer of assets by TCIC and Liberty, TCI issued 317,112 shares of TCI
Class A common stock and 246,402 shares of Redeemable Convertible Preferred
Stock, Series E ("Series E Preferred Stock") (see note 7).
(continued)
IV-225
<PAGE>
Summary of Operations
---------------------
TCI Group operates principally in the cable and communications industry.
The Technology/Venture Capital and the International Cable and Programming
portions of TCI Group's business have been included with cable and
communications services due to their immateriality. The tables below set forth
for the periods presented, the percentage relationship that certain items bear
to revenue. This summary provides trend data relating to the normal recurring
operations of TCI Group. Other items of significance are discussed separately
under separate captions below. Amounts set forth below reflect TCI Group's
motion picture theatre exhibition industry segment as discontinued operations.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1994 1993 1992
--------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
amounts in millions, except for percentages
Revenue 100% $4,269 100% $4,090 100% $3,519
Operating costs and expenses
before depreciation
and amortization 58 2,480 55 2,251 53 1,881
Depreciation and amortization 23 1,001 22 920 22 766
--- ------ --- ------ --- ------
Operating income 19% $ 788 23% $ 919 25% $ 872
=== ====== === ====== === ======
</TABLE>
Revenue increased by approximately 4% from 1993 to 1994. Such increase was
the result of growth in subscriber levels within TCI Group's cable television
systems (5%), the effect of certain other acquisitions (2%) and certain new
services (1%), net of a decrease in revenue (4%) due to rate reductions required
by rate regulation implemented pursuant to the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In the second
half of 1994, TCI Group experienced an additional decrease, in excess of that
which was incurred in 1993, in the price charged for those services that are
subject to rate regulation under the 1992 Cable Act. Revenue increased by
approximately 16% from 1992 to 1993. Such increase was the result of an
acquisition in late 1992 (10%), growth in subscriber levels within TCI Group's
cable television systems (4%) and increases in prices charged for cable services
(3%), net of a decrease in revenue (1%) due to rate reductions required by rate
regulation implemented pursuant to the 1992 Cable Act. See related discussion
below.
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and 1994,
the Federal Communications Commission ("FCC") adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, TCI Group's basic and tier service
rates and its equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the FCC.
TCI Group estimates that the FCC's 1993 and 1994 rate regulations will
result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such rate regulation. The estimated annualized reduction in
revenue assumes that the FCC will not require further reductions beyond the
current regulations and is prior to any possible mitigating factors (none of
which is assured) such as (i) the provision of alternate service offerings (ii)
the implementation of rate adjustments to non-regulated services and (iii) the
utilization of cost-of-service methodologies, as described below.
IV-226
<PAGE>
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a cost-of-
service showing. Under this methodology, cable operators may be allowed to
recover through the rates they charge for Regulated Services, their normal
operating expenses plus an interim rate of return of 11.25% on the rate base, as
defined, which rate may be subject to change in the future.
The FCC rate regulations govern changes in the rates which cable operators
may charge when adding or deleting a service from a regulated tier of service.
The FCC substantially revised its rules for adding and deleting services in
November 1994 and has provided an alternative methodology for adding services to
cable programming service tiers which includes a flat fee increase per added
channel and an aggregate limit on such increases with an additional license fee
reserve. The FCC's rate regulations also permit cable operators to "pass
through" increases in programming costs and certain other external costs which
exceed the rate of inflation. However, a cable operator may pass through
increases in the cost of programming services affiliated with such cable
operator to the extent such costs exceed the rate of inflation only if the price
charged by the programmer to the affiliated cable operator reflects prevailing
prices offered in the marketplace by the programmer to unaffiliated third
parties or the fair market value of the programming.
Based on the foregoing, TCI Group believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse effect on its
results of operations.
Operating costs and expenses before depreciation and amortization have
increased by 10% for the year ended December 31, 1994 compared to the
corresponding period of 1993. TCI Group cannot determine whether and to what
extent increases in the cost of programming will affect its future operating
costs. However, such programming costs have increased at a greater percentage
than increases in revenue of Regulated Services. In 1993, TCI Group incurred
certain one-time direct charges relating to the implementation of the FCC rate
regulations. Due to a program to upgrade and install optical fiber in its cable
systems, TCI Group's capital expenditures and depreciation expense have
increased. TCI Group recorded an adjustment of $5 million in 1994 to reduce its
liability for compensation relating to stock appreciation rights resulting from
a decline in the market price of TCI's Class A common stock. TCI made several
separate grants (in 1992 and 1993) of stock options issued in tandem with stock
appreciation rights. TCI Group recorded compensation relating to such stock
appreciation rights of $31 million and $1 million in 1993 and 1992,
respectively. During 1992, TCI Group streamlined its operating structure
through the consolidation of three of its regional operating divisions into two
divisions. In connection with the consolidation of these divisional offices,
TCI Group incurred restructuring charges of approximately $8 million which are
reflected in the accompanying combined financial statements for the year ended
December 31, 1992.
Liberty Media Corporation and TCI were parties to a service agreement
pursuant to which TCI agreed to provide certain administrative services to
Liberty Media Corporation. In addition, the employees of certain of Liberty's
subsidiaries remained on the TCI payroll until December 31, 1992. Liberty Media
Corporation reimbursed TCI for their salaries and related employment expenses.
Subsidiaries of Liberty Media Group also lease office space and satellite
transponder facilities from TCI Group. Charges by TCI Group for such
arrangements for the years ended December 31, 1994, 1993 and 1992, aggregated
$7,542,000, $4,455,000 and $7,586,000, respectively. From January 1, 1993
through the Mergers, no employees of Liberty Media Corporation's subsidiaries
remained on the TCI payroll.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators (including
TCI Group) and others. Charges to TCI Group are based upon customary rates
charged to others.
IV-227
<PAGE>
HSN paid a commission to TCI Group for merchandise sales to customers who
are subscribers of TCI Group's cable systems. Aggregate commissions and charges
to TCI Group were approximately $6,638,000 and $1,200,000 in 1994 and 1993,
respectively.
Effective April 1, 1993, based upon changes in FCC regulations, TCI Group
revised its estimate of the useful lives of certain distribution equipment to
correspond to TCI Group's anticipated remaining period of ownership of such
equipment. The revision resulted in a decrease in net earnings of approximately
$12 million for the year ended December 31, 1993.
Other Income and Expense
------------------------
TCI Group's weighted average interest rate on borrowings was 7.6%, 7.3% and
7.3% during 1994, 1993 and 1992, respectively. At December 31, 1994, after
considering the net effect of various interest rate hedge and exchange
agreements (see note 5 to the combined financial statements) with notional
amounts aggregating $1,730 million, TCI Group had $4,784 million (or 44%) of
fixed-rate debt with a weighted average interest rate of 8.9% and $6,047 million
(or 56%) of variable-rate debt with interest rates approximating the prime rate
(8.5% at December 31, 1994).
TCI Group is a shareholder of TeleWest Communications plc (formerly TCI/US
WEST Cable Communications Group or "TeleWest UK") ("TeleWest Communications"), a
company that is currently operating and constructing cable television and
telephone systems in the United Kingdom ("UK"). TeleWest Communications, which
is accounted for under the equity method, had a carrying value at December 31,
1994 of $454 million and comprised $43 million, $28 million and $26 million of
TCI Group's share of its affiliates' losses in 1994, 1993 and 1992,
respectively. In February 1994, TCI Group acquired a consolidated investment in
Flextech p.l.c. ("Flextech"). Flextech accounted for net losses of $24 million
(before deducting the minority interests' 40% share of such losses) in 1994. In
addition, TCI Group has other less significant equity method investments in
video distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $135
million at December 31, 1994 and accounted for $50 million of TCI Group's share
of its affiliates' losses in 1994.
In November of 1994, TCI Group and US West, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000 ordinary shares
and 76,500,000 convertible preference shares of TeleWest Communications (the
"TeleWest Exchange"). Following the completion of the TeleWest Exchange,
TeleWest Communications conducted an initial public offering in November of 1994
in which it sold 243,740,000 ordinary shares for aggregate net proceeds of
(Pounds)401 million (the "TeleWest IPO"). Upon completion of the TeleWest
Exchange and the TeleWest IPO, TCI Group and US WEST, Inc. each became the
owners of 36% of the ordinary shares and 38% of the total outstanding ordinary
and convertible preference shares of TeleWest Communications. As a result of
the TeleWest IPO and the associated dilution of TCI Group's ownership interest
of TeleWest Communications, TCI Group has recognized a nonrecurring gain
amounting to $161 million (before deducting the related tax expense of $75
million). There is no assurance that TCI Group will realize similar
nonrecurring gains in future periods.
IV-228
<PAGE>
TeleWest Communications, which is currently constructing broadband cable
television and telephony networks in the UK, has incurred net losses since its
inception. At December 31, 1994, TeleWest Communications had completed
approximately 37% of its network construction and, within five years it is
expected that approximately 97% of TeleWest Communications' network construction
will be complete. Although there is no assurance, TCI Group believes (i) that
the continued expansion of TeleWest Communications' networks ultimately will
provide TeleWest Communications with a revenue base that will exceed its
expenses and (ii) that TeleWest Communications' present and future sources of
liquidity (including the net proceeds from the TeleWest IPO and certain bank
credit facilities) will be sufficient to meet TeleWest Communications' liquidity
requirements for the foreseeable future. TCI Group has no present intention to
make significant loans to or investments in TeleWest Communications.
In connection with its investments in the above-described foreign entities,
TCI Group, through its International Cable and Programming unit, is exposed to
the risk that unfavorable and potentially volatile fluctuations in exchange
rates with respect to the UK currency and other foreign currencies will cause
TCI Group to experience unrealized foreign currency translation losses. To a
much lesser extent, TCI Group is exposed to the risk that unfavorable and
potentially volatile foreign currency fluctuations will cause TCI Group to
experience unrealized losses with respect to transactions denominated in
currencies other than the respective functional currencies of TCI Group and its
various foreign affiliates. Because TCI Group views its foreign assets as long-
term investments, TCI Group generally does not hedge its exposure to short-term
movements in foreign amounts of future foreign cash inflows and outflows
associated with TCI Group's foreign investments. Although, TCI Group
continually evaluates the advantages and disadvantages of hedging its exposure
to currency risk on a long-term basis, TCI Group historically has not entered
into any significant long-term hedge agreements.
TCI Group sold certain investments and other assets for an aggregate net
pre-tax gain of $42 million and $1 million in 1993 and 1992, respectively.
During 1994, 1993 and 1992, TCI Group recorded losses of $9 million, $15
million and $67 million, respectively, from early extinguishments of debt.
Included in the 1992 amount was $52 million from the extinguishment of the SCI
Holdings, Inc. ("SCI") indebtedness (see note 4 to the combined financial
statements). There may be additional losses associated with early
extinguishments of debt in the future.
Interest and dividend income was $23 million, $20 million and $87 million
in 1994, 1993 and 1992, respectively. Included in the 1992 amounts was $30
million earned on the preferred stock investment that was repurchased by a
subsidiary of SCI in 1992 (see note 4 to the consolidated financial statements).
In connection with such repurchase, TCI Group received a premium amounting to
$14 million which has been reflected in premium received on redemption of
preferred stock investment in the accompanying combined statements of
operations.
Income Taxes
------------
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%.
TCI Group has reflected the tax rate change in its combined statements of
operations. Such tax rate change resulted in an increase of $76 million to TCI
Group's income tax expense and deferred income tax liability in the third
quarter of 1993.
IV-229
<PAGE>
Net Earnings (Loss)
-------------------
TCI Group's net loss (before earnings of Liberty Media Group and preferred
stock dividends) of $21 million for the year ended December 31, 1994 represented
an increase in earnings of $11 million as compared to TCI Group's net loss
(before earnings of Liberty Media Group preferred stock dividends) of $32
million for the corresponding period of 1993. Such increase is principally the
result of the recognition of a nonrecurring gain resulting from the TeleWest IPO
and the associated dilution of TCI Group's ownership in TeleWest Communications,
and the reduction in income tax expense (principally resulting from the required
recognition in the third quarter of 1993 of the cumulative effect of the change
in the Federal income tax rate from 34% to 35%, net of the effect of the
aforementioned reduction in rates charged for Regulated Services, increase in
TCI Group's share of losses of affiliates, and the decrease in gain on
disposition of assets.
TCI Group's loss (before earnings of Liberty Media Group and preferred
stock dividends) of $32 million for the year ended December 31, 1993 represented
a decrease of $31 million as compared to TCI Group's loss from continuing
operations of $1 million for the corresponding period of 1992. Such decline was
due primarily to an increase in income tax expense arising from the
aforementioned tax rate change enacted in the third quarter of 1993, the effect
of the aforementioned reduction in rates charged for Regulated Services, an
increase in compensation relating to stock appreciation rights and the reduction
of interest and dividend income resulting from the disposition at the end of
1992 of a preferred stock investment, net of an increase in gain on disposition
of assets, a reduction in loss from early extinguishment of debt and a reduction
in minority interest in earnings of consolidated subsidiaries attributable to
the repurchase of certain preferred stock of a consolidated subsidiary.
On May 12, 1992, TCI Group sold its motion picture theatre business and
certain theatre-related real estate assets (see note 12 to the accompanying
combined financial statements). Accordingly, the operations of the Company's
motion picture theatre exhibition industry segment have been reclassified and
reflected as "discontinued operations" in the accompanying combined financial
statements.
Inflation has not had a significant impact on TCI Group's results of
operations during the three-year period ended December 31, 1994.
Recent Accounting Pronouncements
--------------------------------
In November of 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("Statement No. 112"). As TCI Group's
present accounting policies generally are in conformity with the provisions of
Statement No. 112, TCI Group does not believe that Statement No. 112 will have a
material effect on TCI Group. Statement No. 112 is effective for years
beginning after December 31, 1994.
In May 1993, the FASB 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 Statement No. 115, debt securities that TCI Group has both the
positive intent and ability to hold to maturity are carried at amortized cost.
Debt securities that TCI Group 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 are carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried net
of taxes as a separate component of stockholders' equity. Unrealized holding
gains and losses on securities classified as trading are reported in earnings.
IV-230
<PAGE>
TCI Group applied Statement No. 115 beginning in the first quarter of 1994.
Application of Statement No. 115 resulted in a net increase of $356 million to
stockholders' equity on January 1, 1994, representing the recognition of
unrealized appreciation, net of taxes, for TCI Group's investments in marketable
equity securities determined to be available-for-sale. The amount of net
unrealized gain was reduced by $103 million through December 31, 1994. The
majority of the aggregate unrealized gain is comprised from investments in
Turner Broadcasting System, Inc. ("TBS") common stock ($100 million) and QVC,
Inc. ("QVC") common stock ($127 million) which are included in Liberty Media
Group. TCI Group holds no material debt securities.
The FASB has recently issued other accounting pronouncements which are not
yet effective. TCI Group does not expect that these pronouncements will have a
material effect on TCI Group's combined financial statements.
Liquidity and Capital Resources
-------------------------------
During 1994, the TCI Group, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Sprint Corporation ("Sprint") formed a
partnership ("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, the partners
have been participating in auctions ("PCS Auctions") of broadband personal
communications services ("PCS") licenses being conducted by the FCC. In the
first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets, including New
York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth, Boston-
Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The aggregate
license cost for these licenses is approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and has agreed to make capital contributions to
APC equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the build-
out expenditures for APC's PCS system. Cox, which holds a pioneer preference
PCS license for the Los Angeles-San Diego market, and WirelessCo have also
agreed on the general terms and conditions upon which Cox (with a 60% interest)
and WirelessCo (with a 40% interest) would form a partnership to hold and
develop a PCS system using the Los Angeles-San Diego license. APC and the Cox
partnership would affiliate their PCS systems with WirelessCo and be part of
WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand. TCI Group owns a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and TCI Group also formed a
separate partnership ("PhillieCo"), in which TCI Group owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial. TCI Group anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
IV-231
<PAGE>
At the end of the first quarter of 1995, the TCI Group, Comcast, Cox and
Sprint formed two new partnerships, of which the principal partnership is
MajorCo, L.P. ("MajorCo"), to which they contributed their respective interests
in WirelessCo and through which they formed another partnership, NewTelco, L.P.
("NewTelco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis.
NewTelco will serve its customers primarily through the cable television
facilities of cable television operators that affiliate with NewTelco in
exchange for agreed-upon compensation. The modification of existing regulations
and laws governing the local telephony market will be necessary in order for
NewTelco to provide its proposed services on a competitive basis in most states.
Subject to agreement upon a schedule for upgrading its cable television
facilities in selected markets and certain other matters, TCI Group has agreed
to affiliate certain of its cable systems with NewTelco. The capital required
for the upgrade of TCI Group's cable facilities for the provision of telephony
services is expected to be substantial.
TCI Group, Cox and Comcast, together with Continental Cablevision, Inc.
("Continental"), own Teleport Communications Group, Inc. and TCG Partners
(collectively, "TCG"), which is one of the largest competitive access providers
in the United States in terms of route miles. TCI Group, Cox and Comcast have
entered into an agreement with MajorCo and NewTelco to contribute their
interests in TCG and its affiliated entities to NewTelco. TCI Group currently
owns an approximate 29.9% interest in TCG. The closing of this contribution is
subject to the satisfaction of certain conditions, including the receipt of
necessary regulatory and other consents and approvals. In addition, TCI Group,
Comcast and Cox intend to negotiate with Continental, which owns a 20% interest
in TCG, regarding their acquisition of Continental's TCG interest. If such
agreement cannot be reached, they will need to obtain Continental's consent to
certain aspects of their agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to $4.4
billion in the aggregate over a three- to five-year period, which amount
includes the approximately $500 million already contributed by the partners to
WirelessCo. The partners intend for MajorCo and its subsidiary partnerships to
be the exclusive vehicles through which they engage in the wireless and wireline
telephony service businesses, subject to certain exceptions.
At December 31, 1994, TCI Group was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. TCI Group pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of TCI Group
as collateral for the letter of credit. There were no borrowings pursuant to
such letter of credit at December 31, 1994.
As of January 26, 1995, the TCI Group and TeleCable Corporation
("TeleCable") consummated a transaction whereby TeleCable was merged into TCIC
(the "TeleCable Merger"). The aggregate $1.6 billion purchase price was
satisfied by TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of approximately 42
million shares of TCI Class A common stock and 1 million shares of TCI
Convertible Preferred stock, Series D (the "Series D Preferred Stock") with an
aggregate initial liquidation value of $300 million. The Series D Preferred
Stock, which accrues dividends at a rate of 5.5% per annum, is convertible into
10 million shares of TCI Class A common stock. The Series D Preferred Stock is
redeemable for cash at the option of TCI after five years and at the option of
either TCI or the holder after ten years. The amount of net liabilities assumed
by TCIC and the number of shares of TCI Class A common stock issued to
TeleCable's shareholders are subject to post-closing adjustments.
IV-232
<PAGE>
Pursuant to an underwritten public offering, TCI sold 19,550,000 shares of
TCI Class A common stock in February of 1995. TCI Group received net proceeds
of approximately $401 million. Such proceeds were immediately used to reduce
outstanding indebtedness under credit facilities.
TCI's ability to pay dividends on any classes or series of preferred stock
is dependent upon the ability of TCI's subsidiaries to distribute amounts to TCI
in the form of dividends, loans or advances or in the form of repayment of loans
and advances from TCI Group. The subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay the dividends
on any class or series of preferred stock of TCI or to make any funds available
therefor, whether by dividends, loans or their payments. The payment of
dividends, loans or advances to TCI by its subsidiaries may be subject to
statutory or regulatory restrictions, is contingent upon the cash flows
generated by those subsidiaries and is subject to various business
considerations. Further, certain of TCI Group's subsidiaries are subject to
loan agreements that prohibit or limit the transfer of funds by such
subsidiaries to TCI in the form of dividends, loans, or advances and require
that such subsidiaries' indebtedness to TCI be subordinate to the indebtedness
under such loan agreements. The amount of net assets of subsidiaries subject to
such restrictions exceeds TCI Group's consolidated net assets. TCI Group's
subsidiaries currently have the ability to transfer funds to TCI in amounts
exceeding TCI's dividend requirement on any class or series of preferred stock.
Net cash provided by operating activities of subsidiaries which are not
restricted from making transfers to the parent company have been and are
expected to continue to be sufficient to enable the parent company to meet its
cash obligations.
The TCI Group had approximately $1.7 billion in unused lines of credit at
December 31, 1994 excluding amounts related to lines of credit which provide
availability to support commercial paper. Although subsidiaries attributed to
the TCI Group were in compliance with the restrictive covenants contained in
their credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with such
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined).
TCI Group believes that the aforementioned FCC 1993 and 1994 rate regulations
will not materially impact the availability under its subsidiaries' lines of
credit or its ability to repay indebtedness as it matures. See note 5 to the
accompanying combined financial statements for additional information regarding
the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash operating
credits or charges)($1,784 million, $1,870 million and $1,647 million in 1994,
1993 and 1992, respectively) to interest expense ($784 million, $733 million and
$710 million in 1994, 1993 and 1992, respectively), is determined by reference
to the consolidated statements of operations. TCI Group's interest coverage
ratio was 228%, 255% and 232% for 1994, 1993 and 1992, respectively. Management
of TCI Group believes that the foregoing interest coverage ratio is adequate in
light of the consistency and nonseasonal nature of its cable television
operations and the relative predictability of TCI Group's interest expense,
almost half of which results from fixed rate indebtedness. Operating Cash Flow
is a measure of value and borrowing capacity within the cable television
industry and is not intended to be a substitute for cash flows provided by
operating activities, a measure of performance prepared in accordance with
generally accepted accounting principles, and should not be relied upon as such.
Operating Cash Flow, as defined, does not take into consideration substantial
costs of doing business, such as interest expense, and should not be considered
in isolation to other measures of performance.
IV-233
<PAGE>
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying combined statements of cash flows. Net cash
provided by operating activities ($1,051 million, $1,263 million and $961
million in 1994, 1993 and 1992, respectively) reflects net cash from the
operations of TCI Group available for TCI Group's liquidity needs after taking
into consideration the aforementioned additional substantial costs of doing
business not reflected in Operating Cash Flow. Amounts expended by TCI Group
for its investing activities exceed net cash provided by operating activities.
However, management believes that net cash provided by operating activities, the
ability of TCI Group to obtain additional financing (including the subsidiaries
available lines of credit and access to public debt markets), issuances and
sales of TCI Group's equity or equity of its subsidiaries, proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, TCI Group pays (i) fixed interest rates ranging from 7.2%
to 9.9% on notional amounts of $550 million at December 31, 1994 and (ii)
variable interest rates on notional amounts of $2,605 million at December 31,
1994. During the years ended December 31, 1994, 1993 and 1992, TCI Group's net
payments pursuant to its fixed rate exchange agreements were $26 million, $38
million and $46 million, respectively. During the years ended December 31,
1994, 1993 and 1992, TCI Group's net receipts pursuant to its variable rate
exchange agreements were $36 million, $31 million and $7 million, respectively.
TCI Group's interest rate hedge agreements fix the maximum variable interest
rates on notional amounts of $325 million at 11%. TCI Group is exposed to
credit losses for the periodic settlements of amounts due under the interest
rate exchange agreements in the event of nonperformance by the other parties to
the agreements. However, TCI Group does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance by the
counterparties.
Approximately thirty-five percent of the franchises held by TCI Group,
involving approximately 3.8 million basic subscribers, expire within five years.
There can be no assurance that the franchises for TCI Group's systems will be
renewed as they expire although TCI Group believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for
franchise renewal. However, in the event they are renewed, TCI Group cannot
predict the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with the renewals. To date they have
not varied significantly from the original terms.
TCI Group competes with operators who provide, via alternative methods of
distribution, the same or similar video programming as that offered by TCI
Group's cable systems. Technologies competitive with cable television have been
encouraged by Congress and the FCC. One such technology is direct broadcast
satellite ("DBS"). DBS services are offered directly to subscribers owning home
satellite dishes that vary in size depending upon the power of the satellite;
two DBS operators recently began offering nationwide video services that can be
received by a satellite that measures approximately eighteen inches in diameter.
DBS operators can acquire the right to distribute over satellite all of the
significant cable television programming currently available on TCI Group's
cable systems. As the cost of equipment needed to receive these transmissions
declines, TCI Group expects that it will experience increased and substantial
competition from DBS operators.
IV-234
<PAGE>
The 1984 Cable Act and FCC rules prohibit telephone companies from offering
video programming directly to subscribers in their telephone service areas
(except in limited circumstances in rural areas). However, a number of Federal
Court decisions have held that the cross-entry prohibition in the 1984 Cable Act
is unconstitutional as a violation of the telephone company's First Amendment
right to free expression. In addition, certain proposals are also pending
before the FCC and Congress which would eliminate or relax these restrictions on
telephone companies. As the current cross-entry restrictions are removed or
relaxed, TCI Group will face increased competition from telephone companies
which, in most cases, have greater financial resources than TCI Group. All
major telephone companies have announced plans to acquire cable television
systems or provide video services to the home through fiber optic technology.
The FCC authorized the provision of so-called "video-dialtone" services by
which independent video programmers may deliver services to the home over
telephone-provided circuits, thereby by-passing the local cable system or other
video provider. Under the FCC decision, such services would require no local
franchise agreement or payment to the city or local governmental authority.
Although telephone companies providing "video-dialtone" were originally allowed
only a limited financial interest in programming services and their role was
limited largely to that of a traditional "common carrier," the FCC recently has
proposed relaxation of these restrictions and has authorized some telephone
companies to offer programming services directly to subscribers. Telephone
companies have filed numerous applications with the FCC for authorization to
construct video-dialtone systems to provide such services. This alternative
means of distributing video services to the consumer's home represents a direct
competitive threat to TCI Group.
TCI Group is upgrading and installing optical fiber in its cable systems at
a rate such that in two years the TCI Group anticipates that it will be serving
the majority of its customers with state-of-the-art fiber optic cable systems.
TCI Group made capital expenditures of $1,249 million in 1994 and TCI Group
expects to expend similar amounts in 1995 to provide for the continued
rebuilding of its cable systems. However, such proposed expenditures are
subject to reevaluation based upon changes in TCI Group's liquidity, including
those resulting from rate regulation.
TCI Group believes that it has complied, in all material respects, with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, TCI Group's rates for Regulated Services are subject to adjustment upon
review, as described above. If, as a result of the review process, a system
cannot substantiate its rates, it could be required to retroactively reduce its
rates to the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Generally, any refunds of the excess
portion of all other Regulated Services rates would be retroactive to the later
of September 1, 1993, or one year prior to the implementation of the rate
reduction. The amount of refunds, if any, which could be payable by TCI Group
in the event that any system's rates were to be successfully challenged, is not
considered to be material.
TCI Group believes that the FCC's comprehensive system of rate regulation,
including regulation of the changes in rates when programming services are added
or deleted from service tiers, also may have an adverse effect on the
programming services in which TCI Group has an ownership interest by limiting
the carriage of such services and/or the ability and willingness of cable
operators to pay the rights fees for such carriage.
IV-235
<PAGE>
On September 23, 1993, the FCC also adopted regulations establishing a 30%
limit on the number of homes passed nationwide that a cable operator may reach
through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. Under the FCC regulations, if the ownership limits are determined to be
constitutional, they may limit TCI Group's future ability to acquire interests
in additional cable systems.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. TCI Group is uncertain how the courts and/or the FCC ultimately
will rule or whether such rulings will materially change any existing rules or
statutory requirements.
TCI Group's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group) and through
net cash provided by their own operating activities.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of time
TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend on Liberty
Media Group matters. TCI management evaluated several alternative allocation
methods including assets, revenue, operating income, and employees. Management
did not believe that any of these methods would reflect an appropriate
allocation of corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating subsidiaries,
and the way in which corporate resources are utilized.
Under the Liberty Group Stock Proposal, prior to any distributions of
Liberty Media Group Stock, TCI Group would have a 100% Inter-Group Interest in
Liberty Media Group. Following the initial distribution of Liberty Media Group
Stock, it is currently anticipated that TCI Group would have no Inter-Group
Interest in Liberty Media Group. For periods in which an Inter-Group interest
exists, TCI Group would account for its Inter-Group Interest in a manner similar
to the equity method of accounting. For periods after the distribution and
before the creation of an Inter-Group Interest, TCI Group would not reflect any
interest in Liberty Media Group. An Inter-Group Interest would be created only
if a subsequent transfer of cash or other property from the TCI Group to the
Liberty Media Group is specifically designated by the Board of Directors as
being made to create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to the TCI Group. However,
Liberty Media Group is under the sole control of TCI. Management of TCI
believes that generally accepted accounting principles require that Liberty
Media Group be consolidated with the TCI Group. If Liberty Media Group were
consolidated with TCI Group, the combined financial position, combined results
of operations, and combined cash flows of TCI Group would equal the consolidated
financial position, consolidated results of operations and consolidated cash
flows of TCI and subsidiaries, which financial statements are included
separately herein. Management of TCI has elected to present the accompanying
combined financial statements in a manner that does not comply with generally
accepted accounting principles.
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for that
year. The utilization-based charges will be set at levels that management
believes to be reasonable and that would approximate the costs Liberty Media
Group would incur for comparable services on a stand alone basis. The
accompanying combined statements of operations through the date of the Mergers
do not reflect the allocation of corporate general and administrative costs in
the aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty Media
Corporation for the majority of the periods presented herein. During such
periods, Liberty Media Corporation was not allocated corporate general and
administrative costs.
TCI Group is obligated to pay fees for the license to exhibit certain films
that are released theatrically by various motion picture studios through
December 31, 2002 (the "Film License Obligations"). As of December 31, 1994,
these agreements require minimum payments aggregating approximately $227
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,
TCI Group's required aggregate payments under the Film Licensing Obligations
could prove to be significant.
IV-236
<PAGE>
Subsequent to the Mergers, TCI Group manages certain treasury activities
for Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are remitted to TCI Group and
certain cash disbursements of Liberty Media Group are funded by TCI Group on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal,
but subsequent to the Mergers, the net amounts of such cash activities are
included in investment in Liberty Media Group in the accompanying combined
financial statements. Prior to the Mergers, Liberty Media Corporation
separately managed the treasury activities of its subsidiaries. Subsequent to
the implementation of the Liberty Group Stock Proposal, such cash activities
will be included in borrowings from and loans to TCI Group or, if determined by
the Board of Directors, as an equity contribution to be reflected as an Inter-
Group Interest in the Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI
Group not incurred by entities attributed to the Liberty Media Group or
preferred stock and the proceeds thereof should be specifically attributed to
and reflected on the combined financial statements of Liberty Media Group to the
extent that the debt is incurred or the preferred stock is issued for the
benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of Series A TCI Group common
stock and Series B TCI Group common stock will be attributed entirely to TCI
Group, all financial impacts of issuances of additional shares of Liberty Group
Stock the proceeds of which are attributed to the Liberty Media Group will be
reflected entirely in the combined financial statements of the Liberty Media
Group. Financial impacts of dividends or other distributions on, and purchases
of, Class A common stock and Class B common stock will be attributed entirely to
TCI Group, and financial impacts of dividends or other distributions on Liberty
Group Stock will be attributed entirely to the Liberty Media Group. Financial
impacts of repurchases of Liberty Group Stock the consideration for which is
charged to the Liberty Group will be reflected entirely in the combined
financial statements of the Liberty Media Group, the financial impacts of
repurchases of Liberty Group Stock the consideration for which is charged to TCI
Group will be attributed entirely to TCI Group.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI Group would bear interest at such rates and have
repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans and investment opportunities available to
each Group and the availability, cost and time associated with alternative
financing sources.
IV-237
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1994
and 1993 and for each of the years in the three-year period ended December 31,
1994.
We have also audited the accompanying combined balance sheets of TCI Group (a
combination of certain assets of Tele-Communications, Inc. and its affiliate,
Liberty Media Corporation, as defined in note 1) as of December 31, 1994 and
1993, and the related combined statements of operations, equity, and cash flows
for each of the years in the three-year period ended December 31, 1994. These
combined financial statements are the responsibility of the companies'
managements. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of TCI Group are presented for purposes of
additional analysis of the consolidated financial statements of Tele-
Communications, Inc. and subsidiaries. As more fully described in note 1, the
combined financial statements of TCI Group are intended to reflect the
performance of the remaining businesses of Tele-Communications, Inc. and its
affiliate, Liberty Media Corporation, which have not been attributed to the
Liberty Media Group. Liberty Media Group includes the businesses of Tele-
Communications, Inc. and Liberty Media Corporation which produce and distribute
cable television programming services. The combined financial statements of
TCI Group should be read in conjunction with the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries and Liberty Media
Corporation and subsidiaries.
As more fully described in Note 2 to the combined financial statements, TCI
Group has accounted for its interest in the Liberty Media Group in a manner
similar to the equity method of accounting that, in our opinion, should be
consolidated with TCI Group to conform to generally accepted accounting
principles for the period subsequent to the mergers of TCI Communications, Inc.
and Liberty Media Corporation on August 4, 1994. The Liberty Media Group is
under the sole control of Tele-Communications, Inc. If TCI Group's interest in
the Liberty Media Group were consolidated with the TCI Group subsequent to the
mergers, the combined financial position, combined results of operations, and
combined cash flows of the TCI Group would equal the consolidated financial
position, consolidated results of operations, and consolidated cash flows of
Tele-Communications, Inc. and subsidiaries, which financial statements are
included separately herein.
In our opinion, except for the effects of not consolidating TCI Group's interest
in Liberty Media Group as discussed in the preceding paragraph, the combined
financial statements referred to in the second paragraph above present fairly,
in all material respects, the financial position of TCI Group as of December 31,
1994 and 1993, and the results of their operations and cash flows for each of
the years in the three-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in note 2 to the combined financial statements, TCI Group adopted
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
IV-238
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- -------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 11 9
Trade and other receivables, net 206 216
Due from Home Shopping Network, Inc.
(note 10) 29 3
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 1,019 568
Property and equipment, at cost:
Land 69 74
Distribution systems 7,705 6,716
Support equipment and buildings 935 813
------- ------
8,709 7,603
Less accumulated depreciation 3,027 2,596
------- ------
5,682 5,007
------- ------
Franchise costs 11,152 10,762
Less accumulated amortization 1,708 1,428
------- ------
9,444 9,334
------- ------
Other assets, at cost, net of 759 511
amortization ------- ------
$17,150 15,648
======= ======
</TABLE>
(continued)
IV-239
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Balance Sheets, continued
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- --------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 90 123
Accrued expenses 798 666
Debt (note 5) 10,831 9,760
Deferred income taxes (note 9) 3,377 3,317
Other liabilities (note 10) 142 70
------- ------
Total liabilities 15,238 13,936
------- ------
Minority interests in equity
of consolidated subsidiaries 314 294
Redeemable preferred stocks (note 6) -- 18
Combined equity (note 7):
Combined equity, including preferred
stocks 2,722 2,338
Cumulative foreign currency translation
adjustment, net of taxes (4) (29)
Note receivable from related party -- (15)
TCI Group unrealized holding losses for
available-for-sale securities, net of
taxes (5) --
Liberty Media Group unrealized holding
gains for available-for-sale securities,
net of taxes 258 --
Interest in Liberty Media
Group (note 1) (1,373) (894)
------- ------
Combined equity 1,598 1,400
------- ------
Commitments and contingencies (note 11)
$17,150 15,648
======= ======
</TABLE>
See accompanying notes to combined financial statements.
IV-240
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Operations
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- ------- -------
<S> <C> <C> <C>
amounts in millions,
except per share amounts
Revenue $4,269 4,090 3,519
Operating costs and expenses:
Operating 1,232 1,341 969
Programming charges from Liberty
Media Group (note 10) 60 47 46
Selling, general and administrative 1,207 838 865
Charges to Liberty Media Group
(note 10) (14) (6) (8)
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating
to stock appreciation rights (5) -- --
Restructuring charge -- -- 8
Depreciation 694 628 513
Amortization 307 292 253
------ ----- -----
3,481 3,171 2,647
------ ----- -----
Operating income 788 919 872
Other income (expense):
Interest expense (784) (733) (710)
Interest and dividend income 21 18 85
Interest income from Liberty Media
Group (note 10) 2 2 2
Share of losses of other affiliates,
net (note 4) (117) (66) (111)
Gain on sale of stock by equity
investee (note 4) 161 -- --
Gain (loss) on disposition of assets (13) 42 1
Premium received on redemption of
preferred stock investment (note 4) -- -- 22
Loss on early extinguishment of debt (9) (15) (67)
Minority interests in losses
(earnings) of consolidated
subsidiaries, net 6 (5) (41)
Other, net (15) (37) (20)
------ ----- -----
(748) (794) (839)
------ ----- -----
Earnings from continuing operations
before income taxes 40 125 33
Income tax expense (note 9) (61) (157) (34)
------ ----- -----
Earnings (loss) from continuing
operations (21) (32) (1)
Loss from discontinued operations,
net of income taxes (note 12) -- -- (15)
------ ----- -----
Earnings (loss) before earnings of
Liberty Media Group (21) (32) (16)
Earnings of Liberty Media Group 127 27 14
------ ----- -----
Net earnings (loss) 106 (5) (2)
Dividend requirements on preferred stocks (14) (12) (23)
------ ----- -----
Net earnings (loss) attributable
to common stockholders $ 92 (17) (25)
====== ===== =====
</TABLE>
See accompanying notes to combined financial statements.
IV-241
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
TCI Liberty
Group Media
unrealized Group
holding unrealized
Combined Cumulative Note gains holding Interest
equity, foreign receivable (losses) for gains for in
including currency from available- available- Liberty
preferred translation related for-sale for-sale Media Combined
stocks adjustment party securities securities Group equity
---------- ------------ ----------- ------------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
amounts in millions
Balance at January 1, 1992 $ 1,702 -- (14) -- -- 643 1,045
Net loss (2) -- -- -- -- (14) (16)
Purchase of programming from
Liberty Media Group -- -- -- -- -- 46 46
Cost allocations to Liberty
Media Group -- -- -- -- -- (8) (8)
Interest income from Liberty
Media Group -- -- -- -- -- (2) (2)
Net cash transfers to Liberty
Media Group -- -- -- -- -- (7) (7)
Foreign currency translation
adjustment -- (19) -- -- -- -- (19)
Payment of TCI preferred stock
dividends (15) -- -- -- -- -- (15)
Issuance of TCI Class A
common stock for
acquisitions and investments 98 -- -- -- -- -- 98
Conversion of public debentures
into TCI Class A common stock 112 -- -- -- -- -- 112
Issuance of TCI Class A common
stock upon exercise of
stock options 14 -- -- -- -- -- 14
Acquisition and retirement of
TCI and Liberty common stock (83) -- -- -- -- -- (83)
Accrued interest on note receivable
from related party -- -- (1) -- -- -- (1)
--------- ----------- ---------- ------------ ---------- ----- -----
Balance at December 31, 1992 1,826 (19) (15) -- -- (628) 1,164
--------- ----------- ---------- ------------ ---------- ----- -----
</TABLE>
(continued)
IV-242
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Equity, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
TCI Liberty
Group Media
unrealized Group
holding unrealized
Combined Cumulative Note gains holding Interest
equity, foreign receivable (losses) for gains for in
including currency from available- available- Liberty
preferred translation related for-sale for-sale Media Combined
stocks adjustment party securities securities Group* equity
---------- ------------ ----------- ------------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
amounts in millions
Balance at December 31, 1992 $1,826 (19) (15) -- -- (628) 1,164
Net loss (5) -- -- -- -- (27) (32)
Purchase of programming from
Liberty Media Group -- -- -- -- -- 47 47
Cost allocations to Liberty
Media Group -- -- -- -- -- (5) (5)
Interest income from Liberty
Media Group -- -- -- -- -- (2) (2)
Intergroup tax allocation -- -- -- -- -- (24) (24)
Net cash transfers to Liberty
Media Group -- -- -- -- -- (132) (132)
Foreign currency translation
adjustment -- (10) -- -- -- -- (10)
Payment of TCI and Liberty
preferred stock dividends (11) -- -- -- -- -- (11)
Issuance of Liberty Class A
common stock for acquisition
by Liberty Media Group 123 -- -- -- -- (123) --
Issuance of TCI Class A common
stock upon conversion of notes 403 -- -- -- -- -- 403
Issuance of TCI Class A common
stock upon exercise of
stock options 7 -- -- -- -- -- 7
Acquisition and retirement
of TCI common stock (5) -- -- -- -- -- (5)
--------- ----------- ---------- ------------ ---------- ---- -----
Balance at December 31, 1993 2,338 (29) (15) -- -- (894) 1,400
--------- ----------- ---------- ------------ ---------- ---- -----
</TABLE>
(continued)
IV-243
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Equity, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
TCI Liberty
Group Media
unrealized Group
holding unrealized
Combined Cumulative Note gains holding Interest
equity, foreign receivable (losses) for gains for in
including currency from available- available- Liberty
preferred translation related for-sale for-sale Media Combined
stocks adjustment party securities securities Group * equity
---------- ------------ ----------- ------------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
amounts in millions
Balance at December 31, 1993 $2,338 (29) (15) -- -- (894) 1,400
Unrealized holding gains (losses)
for available-for-sale
securities as of January 1, 1994 -- -- -- 21 335 (335) 21
Net earnings (loss) 106 -- -- -- -- (127) (21)
Purchase of programming from
Liberty Media Group -- -- -- -- 60 60
Cost allocations to Liberty
Media Group -- -- -- -- -- (14) (14)
Interest income from Liberty
Media Group -- -- -- -- -- (2) (2)
Intergroup tax allocation -- -- -- -- -- (77) (77)
Net cash transfers from Liberty
Media Group -- -- -- -- -- 150 150
Change in unrealized holding
gains for available-for-sale
securities -- -- -- (26) (77) 77 (26)
Foreign currency translation
adjustment -- 25 -- -- -- -- 25
Payment of TCI and Liberty
preferred stock dividends (14) -- -- -- -- -- (14)
Issuance of TCI common stock
for investments 130 -- -- -- -- -- 130
Fees incurred
in Mergers (13) -- -- -- -- -- (13)
Issuance of TCI preferred stock
for acquisition by Liberty
Media Group 168 -- -- -- -- (168) --
Acquisition by Liberty Media Group -- -- -- -- -- (43) (43)
Conversion of redeemable
preferred stock 18 -- -- -- -- -- 18
Conversion of TCI Class A common
stock upon conversion of notes 3 -- -- -- -- -- 3
Issuance of TCI Class A common
stock upon exercise of
stock options 3 -- -- -- -- -- 3
Acquisition and retirement of
TCI common stock (2) -- -- -- -- -- (2)
Repayment of note receivable
from related party with
TCI common stock (15) -- 15 -- -- -- --
------ ----------- ---------- ------------ ---------- ------ -----
Balance at December 31, 1994 $2,722 (4) -- (5) 258 (1,373) 1,598
====== =========== ========== ============ ========== ====== =====
</TABLE>
IV-244
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -----
<S> <C> <C> <C>
amounts in millions
(see note 3)
Cash flows from operating activities:
Earnings (loss) before earnings of
Liberty Media Group* $ (21) (32) (16)
Adjustments to reconcile loss
before earnings of Liberty Media Group
to net cash provided by operating
activities:
Depreciation and amortization 1,001 920 766
Compensation relating to stock
appreciation rights -- 31 1
Payment for stock appreciation -- -- (80)
rights
Adjustment to compensation relating
to stock appreciation rights (5) -- --
Share of losses of other affiliates 117 66 111
Gain on sale of stock by equity
investee (161) -- --
Deferred income tax expense -- 128 21
Minority interests in earnings
(losses) (6) 5 41
Amortization of debt discount 1 27 27
Loss on early extinguishment of debt 9 15 67
Loss (gain) on disposition of assets 13 (42) (1)
Premium received on preferred stock
investment redemption -- -- (22)
Payment of premium received on
preferred stock investment
redemption -- 22 --
Noncash interest and dividend income (8) (7) (48)
Noncash interest expense 5 -- --
Discontinued operations -- -- 15
Restructuring charge -- -- 8
Payment on restructuring charge -- (8) --
Other noncash charges -- 30 18
Changes in operating assets
and liabilities, net of the
effect of acquisitions:
Change in receivables 4 (12) (6)
Change in accruals and
payables 102 120 59
------ ----- ----
Net cash provided by
operating activities 1,051 1,263 961
------ ----- ----
</TABLE>
(continued)
IV-245
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Combined Statements of Cash Flows, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
amounts in millions
(see note 3)
Cash flows from investing activities:
Cash paid for acquisitions (541) (262) (1,280)
Capital expended for property and equipment (1,249) (954) (527)
Cash proceeds from disposition of assets 41 146 102
Payment received on preferred
stock investment redemption -- 287 --
Cash proceeds from disposition of discontinued
operations -- -- 220
Discontinued operations -- -- 9
Additional investments in and
loans to affiliates and others (434) (295) (262)
Change in interest in Liberty Media Group 137 (119) 19
Repayment of loans by affiliates and others 33 62 30
Return of capital from affiliates 21 81 1
Other investing activities (97) (105) (154)
------- ------ ------
Net cash used in investing activities (2,089) (1,159) (1,842)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt 4,411 5,409 5,096
Repayments of debt (3,362) (5,441) (4,119)
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends (4) (2) (15)
Repurchases of preferred stock -- (92) (5)
Issuances of common stock 1 6 7
Repurchases of common stock -- (4) (76)
------- ------ ------
Net cash provided (used) by financing
activities 1,040 (130) 882
------- ------ ------
Net increase (decrease) in cash 2 (26) 1
Cash at beginning of year 9 35 34
------- ------ ------
Cash at end of year $ 11 9 35
======= ====== ======
</TABLE>
* Liberty Media Group's earnings or losses do not provide or use funds.
See accompanying notes to combined financial statements.
IV-246
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
December 31, 1994, 1993 and 1992
(1) Liberty Group Stock Proposal
----------------------------
The Board of Directors of Tele-Communications, Inc. ("TCI") have adopted a
proposal (the "Liberty Group Stock Proposal") which, if approved by
stockholders, would authorize the Board to issue a new class of stock
("Liberty Group Stock") which is intended to reflect the separate
performance of TCI's business which produces and distributes cable
television programming services ("Liberty Media Group"). While the Liberty
Group Stock constitutes common stock of TCI, the Liberty Group Stock
Proposal would not result in any transfer of assets or liabilities of TCI
or any of its subsidiaries or affect the rights of holders of TCI's or any
of its subsidiaries' debt. TCI intends to distribute one hundred percent
of the equity value attributable to the Liberty Media Group. Additionally,
the Liberty Group Stock Proposal, if approved by stockholders, would
redesignate the previously authorized Class A and Class B common stock into
Series A TCI Group and Series B TCI Group common stock.
Upon the initial distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of (a) the
subsidiaries and assets not attributed to the Liberty Media Group,
including (i) TCI's Cable and Communication unit, (ii) TCI's International
Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit,
(b) any interest in the Liberty Media Group other than the interest
represented by any outstanding shares of Liberty Group Stock (an "Inter-
Group Interest") and (c) any interest in the Liberty Media Group
represented by outstanding shares of Liberty Group Stock. Liberty Media
Group includes the businesses of Tele-Communications, Inc. and Liberty
Media Corporation which produce and distribute cable television programming
services. The businesses of TCI not attributed to the Liberty Media Group,
together with any Interest is referred to as "TCI Group".
(continued)
IV-247
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
On January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies
(the "Mergers"). The transaction was consummated on August 4, 1994. Due
to the significant economic interest held by TCIC through its ownership of
Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method prior to the consummation of the Mergers. Accordingly, TCIC
had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The Mergers were accounted for using
predecessor cost due to related party considerations. Accordingly, the
accompanying combined financial statements of TCI Group reflect the
combination of the historical financial information of the assets of TCI
and Liberty which have not been attributed to Liberty Media Group. For
periods prior to the Mergers, the combined financial statements of TCI
Group and Liberty Media Group comprise all the accounts included in the
consolidated financial statements of TCI and subsidiaries and the separate
consolidated financial statements of Liberty and subsidiaries. For periods
subsequent to the Mergers, the combined financial statements of TCI Group
and Liberty Media Group comprise all the accounts included in the
corresponding consolidated financial statements of TCI and subsidiaries.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI
contemplated by the Liberty Group Stock Proposal would not affect the
ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
would each continue to be responsible for their respective liabilities.
Holders of TCI Group common stock would be holders of common stock of TCI
and would continue to be subject to risks associated with an investment in
TCI and all of its businesses, assets and liabilities. The Liberty Group
Stock Proposal would not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of the TCI
Group and the market price of shares of the TCI Group common stock. In
addition, net losses of any portion of TCI, dividends or distributions on,
or repurchases of, any series of common stock, and dividends on, or certain
repurchases of preferred stock would reduce the funds of TCI legally
available for dividends on all series of common stock. Accordingly, TCI
Group financial information should be read in conjunction with the TCI and
Liberty consolidated financial information.
(continued)
IV-248
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Under the terms of the Liberty Group Stock Proposal, dividends on the TCI
Group common stock would be payable at the sole discretion of the Board out
of the lesser of assets of TCI legally available for dividends and the
available dividend amount with respect to the TCI Group, as defined.
Determinations to pay dividends on TCI Group common stock would be based
primarily upon the financial condition, results of operations and business
requirements of TCI Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that are convertible into or exchangeable for shares of TCI Class A common
stock will, as a result of the operation of antidilution provisions, be
adjusted so that there will be delivered upon their conversion or exchange
(in addition to the same number of shares of redesignated Series A TCI
Group Common Stock as were theretofore issuable thereunder) the number of
shares of Series A Liberty Group Stock that would have been issuable in the
Distribution with respect to the TCI Class A common stock issuable upon
conversion or exchange had such conversion or exchange occurred prior to
the record date for the Distribution. Options to purchase TCI Class A
common stock outstanding at the time of the Distribution will be adjusted
by issuing to the holders of such options separate options to purchase that
number of shares of Series A Liberty Group Stock which the holder would
have been entitled to receive had the holder exercised such option to
purchase TCI Class A common stock prior to the record date for the
Distribution and reallocating a portion of the aggregate exercise price of
the previously outstanding options to the newly issued options to purchase
Series A Liberty Group Stock. Such convertible or exchangeable preferred
stock and debt securities and options outstanding on the record date for
the Distribution are referred to as "Pre-Distribution Convertible
Securities." The issuance of shares of Series A Liberty Group Stock upon
such conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets from
the TCI Group to the Liberty Media Group or a reduction in any Inter-Group
Interest that then may exist, in consideration of such issuance. In the
case of the exercise of Pre-Distribution Convertible Securities consisting
of options to purchase Series A Liberty Group Stock, the proceeds received
upon the exercise of such options will be attributed to Liberty Media
Group. If Pre-Distribution Convertible Securities remain outstanding at the
time of any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders of
Liberty Group Stock their proportionate interest in the net proceeds of the
disposition, the proportionate interest of the holders of Liberty Group
Common Stock will be determined on a basis that allocates to the TCI Group
a portion of such net proceeds, in addition to the portion attributable to
any Inter-Group interest, sufficient to provide for the payment of the
portion of the consideration payable by TCI on any Post-Distribution
conversion, exercise or exchange of Pre-Distribution Convertible Securities
that becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or exchange if
it had occurred prior to the record date for the disposition. Likewise, if
Pre-Distribution Convertible Securities remain outstanding at the time of
any redemption for all the outstanding shares of Liberty Group Stock in
exchange for stock of any one or more wholly-owned subsidiaries of TCI
which hold all of the assets and liabilities of the Liberty Media Group,
the portion of the shares of such subsidiaries deliverable in redemption of
the outstanding shares of Liberty Group Stock will be determined on a basis
that allocates to the TCI Group a portion of the shares of such
subsidiaries, in addition to the number of shares so allocated in respect
to any Inter-Group Interest, sufficient to provide for the payment of the
portion of the consideration payable by TCI upon any post-redemption
conversion, exercise or exchange of Pre-Distribution Convertible Securities
that becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or exchange if
it had occurred prior to such redemption.
Subsequent to the distribution of the Liberty Group Stock, the rights of
holders of the TCI Group common stock upon liquidation of TCI will be based
on the ratio of the aggregate market capitalization, as defined, of the TCI
Group common stock to the aggregate market capitalization, as defined, of
the TCI Group common stock and the Liberty Group Stock.
Under the Liberty Group Stock Proposal, prior to any distributions of
Liberty Media Group Stock, TCI Group would have a 100% Inter-Group Interest
in Liberty Media Group. Following the initial distribution of Liberty
Media Group Stock, it is currently anticipated that TCI Group would have no
Inter-Group Interest in Liberty Media Group. For periods in which an
Inter-Group interest exists, TCI Group would account for its Inter-Group
Interest in a manner similar to the equity method of accounting. For
periods after the distribution and before the creation of an Inter-Group
Interest, TCI Group would not reflect any interest in Liberty Media Group.
An Inter-Group Interest would be created only if a subsequent transfer of
cash or other property from the TCI Group to the Liberty Media Group is
specifically designated by the Board of Directors as being made to create
an Inter-Group Interest or if outstanding shares of Liberty Group Stock are
purchased with funds attributable to the TCI Group. However, Liberty Media
Group is under the sole control of TCI. Management of TCI believes that
generally accepted accounting principles require that Liberty Media Group
be consolidated with the TCI Group subsequent to the Mergers. If TCI
Group's interest in the Liberty Media Group were consolidated with TCI
Group subsequent to the Mergers, the combined financial position, combined
results of operations, and combined cash flows of TCI Group would equal the
consolidated financial position, consolidated results of operations and
consolidated cash flows of TCI and subsidiaries, which financial statements
are included separately herein. Management of TCI has elected to present
the accompanying combined financial statements in a manner that does not
comply with generally accepted accounting principles.
(continued)
IV-249
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. As consideration
for such transfer of assets by TCIC and Liberty, TCI issued 317,112 shares
of TCI Class A common stock and 246,402 shares of Redeemable Convertible
Preferred Stock, Series E ("Series E Preferred Stock") (see note 7).
(2) Summary of Significant Accounting Policies
------------------------------------------
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1994 and 1993 was not material.
Investments
-----------
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 Statement No. 115, debt
securities that TCI Group has both the positive intent and ability to hold
to maturity are carried at amortized cost. Debt securities that TCI Group
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 net of taxes as a
separate component of combined equity. Unrealized holding gains and losses
on securities classified as trading are reported in earnings. TCI Group
applied Statement No. 115 in the first quarter of 1994. Application of
Statement No. 115 resulted in a net increase of $356 million to combined
equity on January 1, 1994, representing TCI Group's investment in
marketable securities determined to be available-for-sale. Such amount was
adjusted by $103 million through December 31, 1994. Marketable equity
securities held by TCI Group were reported at the lower of cost or market
prior to the adoption of Statement No. 115, and any declines in the value
which were other than temporary were reflected as a reduction in TCI
Group's carrying value of such investment.
(continued)
IV-250
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Other investments in which the ownership interest is less than 20% but do
not fall within the guidelines of Statement No. 115 are generally carried
at cost. For those investments in affiliates in which TCI Group's voting
interest is 20% to 50%, the equity method of accounting is generally used.
Under this method, the investment, originally recorded at cost, is adjusted
to recognize TCI Group's share of the net earnings or losses of the
affiliates as they occur rather than as dividends or other distributions
are received, limited to the extent of TCI Group's investment in, advances
to and guarantees for the investee. TCI Group's share of net earnings or
losses of affiliates includes the amortization of purchase adjustments.
Changes in TCI Group's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as gains or losses in TCI Group's combined statement of
operations.
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 1994, 1993 and 1992, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for
support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or
other dispositions of property, the original cost and cost of removal of
such property are charged to accumulated depreciation, and salvage, if any,
is credited thereto. Gains or losses are only recognized in connection
with the sales of properties in their entirety. However, recognition of
gains on sales of properties to affiliates accounted for under the equity
method is deferred in proportion to TCI Group's ownership interest in such
affiliates.
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 TCI Group in obtaining franchises are being amortized on
a straight-line basis over the life of the franchise, generally 10 to 20
years.
(continued)
IV-251
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Interest Rate Derivatives
-------------------------
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from TCI Group's financial
liabilities are recognized as interest expense. Gains and losses on early
terminations of derivatives are included in the carrying amount of the
related debt and amortized as yield adjustments over the remaining terms of
the debt. TCI Group does not use such instruments for trading purposes.
Minority Interests
------------------
Recognition of minority interests' share of losses of combined subsidiaries
is limited to the amount of such minority interests' allocable portion of
the common equity of those combined subsidiaries. Further, the minority
interests' share of losses is not recognized if the minority holders of
common equity of combined subsidiaries have the right to cause TCI Group to
repurchase such holders' common equity.
Included in minority interests in equity of combined subsidiaries is $50
million in each of 1994 and 1993 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 combined statements of operations.
Foreign Currency Translation
----------------------------
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement of
operations items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
combined equity.
(continued)
IV-252
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(3) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $756 million, $643 million and $682 million for
the years ended December 31, 1994, 1993 and 1992, respectively. Also,
during these periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
------- ----- ------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 694 318 1,263
Liabilities assumed, net of current assets (10) (8) 13
Deferred tax liability recorded
in acquisitions (34) (7) 7
Minority interests in equity of
acquired entities (35) (8) --
Common stock and preferred stock
issued in acquisitions (298) -- (3)
Contribution to combined equity of Liberty
Media Group from TCI Group for
acquisition 211 -- --
Fees incurred in the Mergers 13 -- --
Noncash contribution for acquisition -- (33) --
----- ---- -----
Cash paid for acquisitions $ 541 262 1,280
===== ==== =====
Common stock issued upon conversion
of redeemable preferred stock $ 18 -- --
===== ==== =====
Effect of foreign currency translation
adjustment on book value of foreign
consolidated subsidiaries and equity
method investments $ 25 10 19
===== ==== =====
</TABLE>
(continued)
IV-253
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------
1994 1993 1992
------ ----- ----
amounts in millions
<S> <C> <C> <C>
Unrealized gains, net of deferred income
taxes, on available-for-sale securities
as of January 1, 1994 $ 356 -- --
====== ===== ====
Increase in unrealized losses, net of deferred
income taxes, on available-for-sale
securities exclusive of unrealized gains
recorded in the Mergers $ 103 -- --
====== ===== ====
Common stock issued upon conversion
of notes (with accrued interest
through conversion) $ 3 403 112
====== ===== ====
Repayment of note receivable from related
party with shares of TCI Class A
common stock $ 15 -- --
====== ===== ====
Noncash exchange of equity investment
for consolidated subsidiary and
equity investment $ 22 --
====== ===== ====
Common stock surrendered in lieu of cash
upon exercise of stock options $ 2 1 7
====== ===== ====
Value of TCI Class A common stock issued
as part of purchase price of equity investment $ -- -- 95
====== ===== ====
Note received upon disposition of assets $ -- -- 15
====== ===== ====
</TABLE>
(4) Investments in Affiliates
-------------------------
TCI Group has various investments accounted for under the equity method.
Some of the more significant investments held by TCI Group at December 31,
1994 are TeleWest Communications plc ("TeleWest Communications") (carrying
value of $454 million) and Teleport Communications Group, Inc. and TCG
Partners (collectively, "TCG") (carrying value of $126 million).
(continued)
IV-254
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
TCI Group is a shareholder of TeleWest Communications plc (formerly TCI/US
WEST Cable Communications Group or "TeleWest UK") ("TeleWest
Communications"), a company that is currently operating and constructing
cable television and telephone systems in the United Kingdom ("UK").
TeleWest Communications, which is accounted for under the equity method,
had a carrying value at December 31, 1994 of $454 million and comprised $43
million, $28 million and $26 million of TCI Group's share of its
affiliates' losses in 1994, 1993 and 1992, respectively. In February 1994,
TCI Group acquired a consolidated investment in Flextech p.l.c.
("Flextech"). Flextech accounted for net losses of $24 million (before
deducting the minority interests' 40% share of such losses) in 1994. In
addition, TCI Group has other less significant equity method investments in
video distribution businesses located in the UK, other parts of Europe,
Asia, Latin America and certain other foreign countries. In the aggregate,
such other equity method investments had a carrying value of $135 million
at December 31, 1994 and accounted for $50 million of TCI Group's share of
its affiliates' losses in 1994.
On November 22, 1994, TCI Group and US West, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000 ordinary
shares and 76,500,000 convertible preference shares of TeleWest
Communications (the "TeleWest Exchange"). Following the completion of the
TeleWest Exchange, TeleWest Communications conducted an initial public
offering on November 23, 1994 in which it sold 243,740,000 ordinary shares
for aggregate net proceeds of (Pounds)401 million (the "TeleWest IPO").
Upon completion of the TeleWest Exchange and the TeleWest IPO, TCI Group
and US West, Inc. each became the owners of 36% of the ordinary shares and
38% of the total outstanding ordinary and convertible preference shares of
TeleWest Communications. As a result of the TeleWest IPO and the
associated dilution of TCI Group's ownership interest of TeleWest
Communications, Inc., TCI Group has recognized a nonrecurring gain
amounting to $161 million (before deducting the related tax expense of $57
million).
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 TCI Group. Prior to the Split-Off, TCI Group
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 Storer, was effected
by the distribution of approximately 50% of the net assets of SCI to three
holding companies formed by TCI Group (the "Holding Companies").
(continued)
IV-255
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Prior to the Split-Off, TCI Group 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.
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) the TCI Group 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 extinguish all of its
debt. TCI Group'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, TCI Group received a premium, amounting to $14 million, on
the repurchase of the Storer preferred stock. Such amount is reflected in
premium received on redemption of preferred stock investment in the
accompanying combined 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, TCI Group owned a majority of the
common stock of the Holding Companies and Comcast owned 100% of the common
stock of Storer. As such, TCI Group, which previously accounted for its
investment in SCI using the equity method, now consolidates its investment
in the Holding Companies. The assets of the Holding Companies were
recorded at predecessor cost.
In connection with TCI Group's 1988 acquisition of an equity interest in
SCI, a subsidiary of TCI Group 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 for
the period ended December 2, 1992. TCI Group's share of losses of SCI,
prior to the Split-Off for the period ended December 2, 1992 amounted to
$51 million, as adjusted for the effect of interest and dividends accounted
for by Storer as capital transactions due to their related party nature.
(continued)
IV-256
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited financial information for affiliates is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1993
----------- --------
Combined Financial Position amounts in millions
- ---------------------------
<S> <C> <C>
Property and equipment, net $2,186 1,573
Franchise costs, net 1,231 944
Other assets, net 1,219 748
------ -----
Total assets $4,636 3,265
====== =====
Debt $2,410 2,022
Due to (from) TCI Group (3) 78
Other liabilities 560 385
Owners' equity 1,669 780
------ -----
Total liabilities and equity $4,636 3,265
====== =====
<CAPTION>
Years ended December 31,
---------------------------
1994 1993 1992
---- ---- ----
Combined Operations amounts in millions
- -------------------
<S> <C> <C> <C>
Revenue $ 1,431 1,044 1,540
Operating expenses (1,232) (727) (897)
Depreciation and amortization (324) (276) (424)
------- ------ -----
Operating income (loss) (125) 41 219
Interest expense (159) (123) (390)
Other, net 111 99 (254)
------- ------ -----
Net loss $ (173) 17 (425)
======= ====== =====
</TABLE>
Certain of TCI Group's affiliates are general partnerships and any subsidiary of
TCI Group that is a general partner in a general partnership is, as such, liable
as a matter of partnership law for all debts (other than non-recourse debts) of
that partnership in the event liabilities of that partnership were to exceed its
assets.
(continued)
IV-257
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(5) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at -------------------
December 31, 1994 1994 1993
------------------ ---- ----
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Senior notes 8.5% $ 5,387 5,052
Bank credit facilities 7.2% 3,774 3,173
Commercial paper 6.6% 445 44
Notes payable 10.2% 1,024 1,350
Convertible notes (a) 9.5% 45 47
Other debt -- 156 94
------- -----
$10,831 9,760
======= =====
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $186 million and $197 million at December 31, 1994 and 1993,
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 TCI Class A common stock. During the
year ended December 31, 1994, certain of these notes were converted
into 2,350,000 shares of TCI Class A common stock. At December 31,
1994, the notes were convertible, at the option of the holders, into
an aggregate of 38,710,990 shares of TCI Class A common stock.
On October 28, 1993, TCIC called for redemption of its remaining Liquid
Yield Option(TM) Notes. In connection with such call for redemption, Notes
aggregating $405 million were converted into 18,694,377 shares of TCI 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.
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 TCI 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)
IV-258
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
The bank credit facilities and various other debt instruments of TCI
Group's subsidiaries generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash
flow and financial ratios (primarily the ratios of cash flow to total debt
and cash flow to debt service, as defined), and include certain limitations
on indebtedness, investments, guarantees, dispositions, stock repurchases
and/or dividend payments.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed
Rate Agreements") ranging from 7.2% to 9.9% on notional amounts of $550
million at December 31, 1994 and (ii) variable interest rates (the
"Variable Rate Agreements") on notional amounts of $2,605 million at
December 31, 1994. During the years ended December 31, 1994, 1993 and
1992, TCI Group's net payments pursuant to the Fixed Rate Agreements were
$26 million, $38 million and $47 million, respectively; and TCI Group's net
receipts pursuant to the Variable Rate Agreements were $36 million, $31
million and $7 million, respectively. After giving effect to TCI Group's
interest rate exchange agreements, approximately 44% of TCI Group's
indebtedness bears interest at fixed rates.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
---------- ------------- -------- ---------- --------------- --------
<S> <C> <C> <C> <C> <C>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
July 1996 8.2% 10 July 1996 8.2% 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
---- April 1999 7.4% 100
September 1999 7.2%-7.4% 300
$550 February 2000 5.8%-6.6% 650
==== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,605
======
</TABLE>
(continued)
IV-259
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCI Group
does not anticipate that it will incur any material credit losses because
it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that TCI Group would pay or receive to terminate the agreements at
December 31, 1994, taking into consideration current interest rates and
assuming the current creditworthiness of the counterparties. TCI Group
would pay an estimated $195 million at December 31, 1994 to terminate the
agreements.
In order to diminish its exposure to extreme increases in variable interest
rates, TCI Group has entered into various interest rate hedge agreements on
notional amounts of $325 million which fix the maximum variable interest
rates at 11%. Such agreements expire during the third and fourth quarters
of 1995.
The fair value of TCI Group's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to
TCI Group for debt of the same remaining maturities. The fair value of
debt, which has a carrying value of $10,831 million, was $10,734 million at
December 31, 1994.
TCI Group and certain of its subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, TCI Group 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.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1995 $1,175*
1996 888
1997 560
1998 811
1999 814
</TABLE>
* Includes $445 million of commercial paper.
(continued)
IV-260
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(6) Redeemable Preferred Stocks
---------------------------
4-1/2% Convertible Preferred Stock. The 4-1/2% Convertible Preferred Stock
was stated at its redemption value of $3,000 per share, and each share was
convertible into 204 shares of TCI Class A common stock. In February of
1994, all of the shares of such convertible preferred stock were tendered
to TCIC for conversion and, on March 3, 1994, 1,265,004 shares of TCI Class
A common stock were issued to the holders of such preferred stock.
Convertible Preferred Stock, Series D. Subsequent to December 31, 1994,
TCI issued 1,000,000 shares of a series of TCI Series Preferred Stock (see
note 8) designated "Convertible Preferred Stock, Series D" (the "Series D
Preferred Stock"), par value $.01 per share, as partial consideration for
the merger between TCIC and TeleCable Corporation ("TeleCable") (see note
14).
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of unrestricted funds
legally available therefore, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series D Preferred
stock at the rate of 5-1/2% per annum of the liquidation value
($300 per share). Dividends are cumulative, and in the event that
dividends are not paid in full on two consecutive dividend payment dates or
in the event that TCI fails to effect any required redemption of Series D
Preferred Stock, accrue at the rate of 10% per annum of the liquidation
value. The Series D Preferred Stock ranks on parity with the Class A
Preferred Stock, the Series C Preferred Stock and the Series E Preferred
Stock.
Each share of Series D Preferred Stock is convertible into 10 shares of TCI
Class A common stock, subject to adjustment upon certain events specified
in the certificate of designation establishing Series D Preferred Stock.
To the extent any cash dividends are not paid on any dividend payment date,
the amount of such dividends will be deemed converted into shares of TCI
Class A common stock at a conversion rate equal to 95% of the then current
market price of TCI Class A common stock, and upon issuance of TCI Class A
common stock to holders of Series D Preferred Stock in respect of such
deemed conversion, such dividend will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a
price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for
cash at the option of TCI after the fifth anniversary of the issue date at
such redemption price or after the third anniversary of the issue date if
the market value per share of TCI Class A common stock shall have exceeded
$37.50 for periods specified in the certificate of designation.
(continued)
IV-261
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series
D Preferred Stock into TCI Class A common stock at a conversion rate of 95%
of the then current market value of TCI Class A common stock, provided that
such option may not be exercised unless the failure to redeem continues for
more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the shareholders of
TCI.
(7) Combined Equity
---------------
Employee Benefit Plans
----------------------
TCI has an Employee Stock Purchase Plan ("ESPP") to provide employees an
opportunity for ownership in TCI 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. TCI, by annual
resolution of the Board of Directors, contributes up to 100% of the amount
contributed by employees. Certain of TCI's subsidiaries have their own
employee benefit plans. Contributions to all plans aggregated $19 million,
$16 million and $13 million for 1994, 1993 and 1992, respectively.
Preferred Stock
---------------
Class A Preferred Stock. TCI is authorized to issue 700,000 shares of
Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI
hold all of the issued and outstanding shares of such stock, amounting to
592,797 shares. Such preferred stock is eliminated in consolidation. The
holders of the Class A Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, out of unrestricted funds legally
available therefor, cumulative dividends, in preference to dividends on any
stock that ranks junior to the Class A Preferred Stock (currently the Class
A common stock, the Class B common stock and the Class B Preferred Stock),
that accrue on each share of the Class A Preferred Stock at the rate of 9-
3/8% per annum of the Stated Liquidation Value of such share ($322.84 per
share). Dividends are fully cumulative and are payable in cash. The Class
A Preferred Stock ranks on a parity basis with the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock as to
dividend rights, rights of redemption or rights on liquidation. The Class
A Preferred Stock is subject to mandatory redemption by TCI on the twelfth
anniversary of the issue date. The Class A Preferred Stock may be redeemed
at the option of TCI. The holders of the Class A Preferred Stock have the
right to vote at any annual or special meeting of stockholders for the
purpose of electing directors. Each share of Class A Preferred Stock shall
have one vote for such purpose.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. TCI
is authorized to issue 1,675,096 shares of Class B Preferred Stock. All
such shares are issued and outstanding. Subsidiaries of TCIC hold 55,070
of such issued and outstanding shares.
(continued)
IV-262
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Dividends accrue cumulatively (but without compounding) at an annual rate
of 6% of the stated liquidation value of $100 per share (the "Stated
Liquidation Value"), whether or not such dividends are declared or funds
are legally available for payment of dividends. Accrued dividends will be
payable annually on March 1 of each year (or the next succeeding business
day if March 1 does not fall on a business day), commencing March 1, 1995,
and, in the sole discretion of the TCI Board, may be declared and paid in
cash, in shares of TCI Class A common stock or in any combination of the
foregoing. Accrued dividends not paid as provided above on any dividend
payment date will accumulate and such accumulated unpaid dividends may be
declared and paid in cash, shares of TCI Class A common stock or any
combination thereof at any time (subject to the rights of any senior stock
and, if applicable, to the concurrent satisfaction of any dividend
arrearages on any class or series of TCI preferred stock ranking on a
parity with the Class B Preferred Stock with respect to dividend rights)
with reference to any regular dividend payment date, to holders of record
of Class B Preferred Stock as of a special record date fixed by the TCI
Board (which date may not be more than 45 days nor less than 10 days prior
to the date fixed for the payment of such accumulated unpaid dividends).
The Class B Preferred Stock ranks junior to the Class A Preferred Stock
with respect to the declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of TCI Class A common stock, the number of
such shares to be issued and delivered will be determined by dividing the
amount of the dividend to be paid in shares of TCI Class A common stock by
the Average Market Price of the TCI Class A common stock. For this
purpose, "Average Market Price" means the average of the daily last
reported sale prices (or, if no sale price is reported on any day, the
average of the high and low bid prices on such day) of a share of TCI Class
A common stock for the period of 20 consecutive trading days ending on the
tenth trading day prior to the regular record date or special record date,
as the case may be, for the applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to the
Class B Preferred Stock with respect to liquidating distributions, to
receive from the assets of TCI available for distribution to stockholders
an amount in cash or property or a combination thereof, per share, equal to
the Stated Liquidation Value thereof, plus all accumulated and accrued but
unpaid dividends thereon to and including the redemption date. TCI does
not have any mandatory obligation to redeem the Class B Preferred Stock as
of any fixed date, at the option of the holders or otherwise.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock, the Class B Preferred Stock will be exchangeable at
the option of TCI in whole but not in part at any time for junior
subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior
Exchange Notes will be issued pursuant to an indenture (the "Indenture"),
to be executed by TCI and a qualified trustee to be chosen by TCI.
(continued)
IV-263
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal
amount of which will be equal to the aggregate Stated Liquidation Value of
the shares of Class B Preferred Stock so exchanged by such holder, plus all
accumulated and accrued but unpaid dividends thereon to and including the
exchange date. The Junior Exchange Notes will be issuable only in
principal amounts of $100 or any integral multiple thereof and a cash
adjustment will be paid to the holder for any excess principal that would
otherwise be issuable. The Junior Exchange Notes will mature on the
fifteenth anniversary of the date of issuance and will be subject to
earlier redemption at the option of TCI, in whole or in part, for a
redemption price equal to the principal amount thereof plus accrued but
unpaid interest. Interest will accrue, and be payable annually, on the
principal amount of the Junior Exchange Notes at a rate per annum to be
determined prior to issuance by adding a spread of 215 basis points to the
"Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will
accrue on overdue principal at the same rate, but will not accrue on
overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of
TCI and will be subordinated in right of payment to all Senior Debt (as
defined in the Indenture). Accordingly, holders of Class B Preferred Stock
who receive Junior Exchange Notes in exchange therefor may have difficulty
selling such Notes.
(continued)
IV-264
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
For so long as any dividends are in arrears on the Class B Preferred Stock
or any class or series of TCI preferred stock ranking pari passu with the
Class B Preferred Stock which is entitled to payment of cumulative
dividends prior to the redemption, exchange, purchase or other acquisition
of the Class B Preferred Stock, and until all dividends accrued up to the
immediately preceding dividend payment date on the Class B Preferred Stock
and such parity stock shall have been paid or declared and set apart so as
to be available for payment in full thereof and for no other purpose,
neither TCI nor any subsidiary thereof may redeem, exchange, purchase or
otherwise acquire any shares of Class B Preferred Stock, any such parity
stock or any class or series of its capital stock ranking junior to the
Class B Preferred Stock (including the TCI common stock), or set aside any
money or assets for such purpose, unless all of the outstanding shares of
Class B Preferred Stock and such parity stock are redeemed. If TCI fails
to redeem or exchange shares of Class B Preferred Stock on a date fixed for
redemption or exchange, and until such shares are redeemed or exchanged in
full, TCI may not redeem or exchange any parity stock or junior stock,
declare or pay any dividend on or make any distribution with respect to any
junior stock or set aside money or assets for such purpose and neither TCI
nor any subsidiary thereof may purchase or otherwise acquire any Class B
Preferred Stock, parity stock or junior stock or set aside money or assets
for any such purpose. The failure of TCI to pay any dividends on any class
or series of parity stock or to redeem or exchange on any date fixed for
redemption or exchange any shares of Class B Preferred Stock shall not
prevent TCI from (i) paying any dividends on junior stock solely in shares
of junior stock or the redemption purchase or other acquisition of junior
stock solely in exchange for (together with cash adjustment for fractional
shares, if any) or (but only in the case of a failure to pay dividends on
any parity stock) through the application of the proceeds from the sale of,
shares of junior stock; or (ii) the payment of dividends on any parity
stock solely in shares of parity stock and/or junior stock or the
redemption, exchange, purchase or other acquisition of Class B Preferred
Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of
failure to pay dividends on any parity stock) through the application of
the proceeds from the sale of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of directors,
will have one vote per share for such purpose and will vote as a single
class with the TCI common stock, the Class A Preferred Stock and any other
class or series of TCI preferred stock entitled to vote in any general
election of directors. The Class B Preferred Stock will have no other
voting rights except as required by the Delaware General Corporation Law
("DGCL").
(continued)
IV-265
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Series Preferred Stock. The TCI Series Preferred Stock is issuable, from
time to time, in one or more series, with such designations, preferences
and relative participating, option or other special rights, qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of such series adopted by
the TCI Board.
All shares of any one series of the TCI Series Preferred Stock are required
to be alike for every particular and all shares are required to rank
equally and be identical in all respects, except insofar as they may vary
with respect to matters which the TCI Board is expressly authorized by the
TCI Charter to determine in the resolution or resolutions providing for the
issue of any series of the TCI Series Preferred Stock.
Convertible Preferred Stock, Series C. TCI has issued 70,559 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series C," par value $.01 per share, as partial consideration for an
acquisition by TCI .
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 100 shares of TCI Class A common stock, subject to anti-
dilution adjustments. The dividend, liquidation and redemption features of
the Series C Preferred Stock will be determined by reference to the
liquidation value of the TCI Series C Preferred Stock, which as of any date
of determination is equal, on a per share basis, to the sum of (i) $2,375,
plus (ii) all dividends accrued on such share through the dividend payment
date on or immediately preceding such date of determination to the extent
not paid on or before such date, plus (iii), for purposes of determining
liquidation and redemption payments, all unpaid dividends accrued on the
sum of clauses (i) and (ii) above, to such date of determination.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock ranking pari passu with the Series C Preferred Stock,
the holders of Series C Preferred Stock are entitled to receive and,
subject to any prohibition or restriction contained in any instrument
evidencing indebtedness of TCI, TCI is obligated to pay preferential
cumulative cash dividends out of funds legally available therefor.
Dividends accrue cumulatively at an annual rate of 5-1/2% of the
liquidation value per share, whether or not such dividends are declared or
funds are legally or contractually available for payment of dividends,
except that if TCI fails to redeem shares of Series C Preferred Stock
required to be redeemed on a redemption date, dividends will thereafter
accrue cumulatively at an annual rate of 15% of the liquidation value per
share. Accrued dividends are payable quarterly on January 1, April 1, July
1 and October 1 of each year, commencing on the first dividend payment date
after the issuance of the Series C Preferred Stock. Dividends not paid on
any dividend payment date will be added to the liquidation value on such
date and remain a part thereof until such dividends and all dividends
accrued thereon are paid in full. Dividends accrue on unpaid dividends at
the rate of 5-1/2% per annum, unless such dividends remain unpaid for two
consecutive quarters in which event such rate will increase to 15% per
annum. The Series C Preferred Stock ranks prior to the TCI common stock
and Class B Preferred Stock and pari passu with the Class A Preferred Stock
with respect to the declaration and payment of dividends.
(continued)
IV-266
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets of TCI
available for distribution to stockholders an amount in cash, per share,
equal to the liquidation value. The Series C Preferred Stock will rank
prior to the TCI common stock and Class B Preferred Stock and pari passu
with the Class A Preferred Stock as to any such distributions.
The Series C Preferred Stock is subject to optional redemption at any time
after the seventh anniversary of its issuance, in whole or in part, by TCI
at a redemption price, per share, equal to the then liquidation value of
the Series C Preferred Stock.
For so long as any dividends are in arrears on the Series C Preferred Stock
or any class or series of TCI preferred stock ranking pari passu (including
the Class A Preferred Stock) with the Series C Preferred Stock and until
all dividends accrued up to the immediately preceding dividend payment date
on the Series C Preferred Stock and such parity stock shall have been paid
or declared and set apart so as to be available for payment in full thereof
and for no other purpose, TCI may not redeem or otherwise acquire any
shares of Series C Preferred Stock, any such parity stock or any class or
series of its preferred stock ranking junior (including the TCI common
stock and Series C Preferred Stock) unless all then outstanding shares of
Series C Preferred Stock and such parity stock are redeemed. If TCI fails
to redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, and until all such shares are redeemed in full, TCI may
not redeem any such parity stock or junior stock, or otherwise acquire any
shares of such stock or Series C Preferred Stock. Nothing contained in the
two immediately preceding sentences shall prevent TCI from acquiring (i)
shares of Series C Preferred Stock and any such parity stock pursuant to a
purchase or exchange offer made to holders of all outstanding shares of
Series C Preferred Stock and such parity stock, if (a) as to holders of all
outstanding shares of Series C Preferred Stock, the terms of the purchase
or exchange offer for all such shares are identical, (b) as to holders for
all outstanding shares of a particular series or class of parity stock, the
terms of the purchase or exchange offer for all such shares are identical
and (c) as among holders of all outstanding shares of Series C Preferred
Stock and parity stock, the terms of each purchase or exchange offer are
substantially identical relative to the respective liquidation prices of
the shares of Series C Preferred Stock and each series or class of such
parity stock, or (ii) shares of Series C Preferred Stock, parity stock or
junior stock in exchange for, or through the application of the proceeds of
the sale of, shares of junior stock.
(continued)
IV-267
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
The Series C Preferred Stock is subject to restrictions on transfer
although it has certain customary registration rights with respect to the
underlying shares of TCI Class A common stock. The Series C Preferred
Stock may vote on all matters submitted to a vote of the holders of the TCI
common stock, has one vote for each share of TCI Class A common stock into
which the shares of Series C Preferred Stock are converted for such
purpose, and may vote as a single class with the TCI common stock. The
Series C Preferred Stock has no other voting rights except as required by
the DGCL and except that the consent of the holders of record of shares
representing at least two-thirds of the liquidation value of the
outstanding shares of the Series C Preferred Stock is necessary to (i)
amend the designation, rights, preferences and limitations of the Series C
Preferred Stock as set forth in the TCI Charter and (ii) to create or
designate any class or series of TCI preferred stock that would rank prior
to the Series C Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. In connection with the
Reorganization, the Board of Directors created and authorized the issuance
of the Redeemable Convertible Preferred Stock, Series E, par value $.01 per
share. TCI is authorized to issue 400,000 shares. Subsidiaries of TCI hold
all of the issued and outstanding shares of such stock, amounting to
246,402 shares. All such preferred stock eliminates in consolidation.
The holders of the Series E Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series E Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series E Preferred
Stock at the rate of 5.0% per annum of the Stated Liquidation Value
($22,303 per share). Dividends are fully cumulative and are payable in
cash. The Series E Preferred Stock ranks on parity with the Class A
Preferred Stock, the Series C Preferred Stock and the Series D Preferred
Stock as to dividend rights, rights of redemption or rights on liquidation.
The Series E Preferred Stock may be redeemed at the option of TCI. TCI may
elect to pay the redemption price by issuing to the holder thereof a number
of shares of Class A common stock equal to the aggregate redemption price
of such shares divided by the Average Quoted Price (as defined) of a share
of Class A common stock.
Unless previously called for redemption, shares of Series E Preferred Stock
shall be convertible, at the option of the holder thereof, into shares of
Class A common stock at any time subsequent to a duly approved amendment to
TCI's Restated Certificate of Incorporation increasing the number of Class
A shares to a number that would permit conversion of all shares of Series E
Preferred Stock then outstanding into Class A common stock. The Series E
Preferred Stock may be converted into Class A common stock at the initial
conversion rate of 1,000 shares of Class A common stock for one share of
the Series E Preferred Stock.
(continued)
IV-268
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
The holders of the Series E Preferred Stock have the right to vote at any
annual or special meeting of stockholders for the purpose of electing
directors. Each share of Series E Preferred Stock shall have one vote for
such purpose.
Stock Options
-------------
TCI has adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan
(the "Plan"). The Plan provides for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be
made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof. Pursuant to the
TCI/Liberty Merger Agreement and certain assumption agreements, stock
options and/or stock appreciation rights granted (or assumed) by Old TCI
and stock options and/or stock appreciation rights granted by Liberty were
assumed by TCI and new options and/or stock appreciation rights were
substituted under the Plan. The following descriptions represent the terms
of the assumed options and/or stock appreciation rights and additional
awards under the Plan.
TCI assumed certain options which were exercisable through November 9,
1994. During the years ended December 31, 1994, 1993 and 1992, options to
acquire 203,508, 96,242 and 321,406 shares, respectively, were exercised at
prices ranging from $10.00 to $17.25 per share and options for 3,500,
25,000 and 12,000 shares, respectively, were canceled.
TCI assumed certain stock options which are currently exercisable,
representing the right, as of December 31, 1994, to acquire 162,228 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, 1994, options to
acquire 5,100 shares were exercised and no options were canceled. Options
to acquire 19,428 shares of TCI Class A common stock expire August 14,
1995. Options to acquire 142,800 shares of TCI Class A common stock expire
December 15, 1998.
Stock options in tandem with stock appreciation rights to purchase
3,963,000 shares of Class A common stock at a purchase price of $16.75 per
share were outstanding at December 31, 1994. 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, 1994, stock appreciation rights covering 7,000
shares of Class A common stock were exercised and the tandem stock options
were canceled. During the year ended December 31, 1993, stock options
covering 50,000 shares of Class A common stock were canceled upon
termination of employment of the option holder.
Stock options in tandem with stock appreciation rights to purchase
1,940,000 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at December 31, 1994. Such options become
exercisable and vest evenly over four years, first became exercisable
beginning October 12, 1994 and expire on October 12, 2003. During the year
ended December 31, 1994, stock options covering 1,875 shares of Class A
common stock were exercised and stock options covering 13,125 shares of
Class A common stock were canceled upon termination of employment of the
option holder.
(continued)
IV-269
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
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 were outstanding at December 31, 1994. On November 12, 1993,
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.
On November 17, 1994, stock options in tandem with stock appreciation
rights to purchase 2,885,000 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 $22.00 per share. Such options become exercisable and
vest evenly over five years, first become exercisable beginning November
17, 1995 and expire on November 17, 2004.
TCI's Board of Directors has approved, subject to stockholder approval of
the Director Stock Option Plan, the grant effective as of November 16,
1994, to each person that as of that date was a member of the Board of
Directors and was not an employee of TCI or any of its subsidiaries, of
options to purchase 50,000 shares of Class A common stock. Such options
have an exercise price of $22.00 per share and will vest and become
exercisable over a five-year period, commencing on November 16, 1995 and
will expire on November 16, 2004.
Estimated compensation relating to stock appreciation rights has been
recorded through December 31, 1994, but is subject to future adjustment
based upon market value, and ultimately, on the final determination of
market value when the rights are exercised.
An officer of TCIC received payments of $512,500 and $569,000 from TCIC
(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. Another officer receied payment of $2,276,000 from
TCIC 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.
Other
-----
In connection with the exercise of a stock option by an officer/director of
Liberty, a note was given to Liberty as partial payment of the exercise
price. This note bore interest at 7.54% per annum. At the date of the
Merger, TCI Group recorded the net assumed note receivable, amounting to
approximately $15 million, from such officer as a reduction of
stockholders' equity. On October 27, 1994, such officer tendered to TCI
Group 634,917 shares of TCI Class B common stock in full payment of
principal and interest amounting to $15 million. Such Class B common stock
is reflected as treasury stock in the accompanying consolidated balance
sheet.
(continued)
IV-270
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
The shares issued by Liberty upon exercise of the aforementioned Liberty
option, together with all subsequent dividends and distributions thereon
(collectively totaling 16,000,000 shares of Liberty Class B common stock
and 200,000 shares of Liberty Class E Preferred Stock, the "Option Units"),
were subject to repurchase by Liberty under certain circumstances. Such
shares were exchanged for 15,600,000 shares of TCI Class A common stock and
200,000 shares of Class B Preferred Stock in the Merger. TCI Group's
repurchase right terminates as to 20% of the Option Units per year,
commencing March 28, 1992, and will terminate as to all of the Option Units
on March 28, 1996 or in the event of death, disability or under certain
other circumstances.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1994, there were 58,534,218 shares of TCI Class A common
stock reserved for issuance under exercise privileges related to options,
convertible debt securities and convertible preferred stock described in
this note 7 and in note 5. Additionally, subsequent to December 31, 1994,
TCI issued the Series D Preferred Stock (see note 6) which is convertible
into 10,000,000 shares of TCI Class A common stock. In addition, one share
of Class A common stock is reserved for each share of outstanding Class B
common stock.
(8) Transactions with Officers and Directors
----------------------------------------
On December 10, 1992, pursuant to a restricted stock award agreement, an
officer, who is also a director, of TCI 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 TCI Group).
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 TCI for $2,138,000.
(9) Income Taxes
------------
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which TCI owns less
than 80% each file a separate income tax return. TCI and such subsidiaries
calculate their respective tax liabilities on a separate return basis which
are combined in the accompanying consolidated financial statements.
(continued)
IV-271
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Federal income taxes and certain state and local taxes will be paid on a
consolidated basis by TCI. However, pursuant to a tax sharing agreement,
federal income taxes will be calculated, with certain adjustments, on a
separate return basis for each corporation in each Group (applying
provisions of the Internal Revenue Code of 1986, as amended, and related
regulations as if such corporation filed a separate return for federal
income tax purposes). In addition, pursuant to such agreement, state and
local income taxes will be calculated on a separate return basis for each
Group (applying provisions of state and local tax law and related
regulations as if the Group were a separate unitary or combined group for
tax purposes). Based upon these separate calculations, an allocation of tax
liabilities will be made such that the Liberty Media Group (or each
separate corporation within the Liberty Media Group, as the case may be) is
responsible to TCI Group for its gross share of TCI's consolidated,
combined or unitary tax liabilities, such gross share being determined
without regard to (a) tax benefits that are attributable to the TCI group
or (b) certain tax benefits that are attributable to the Liberty Media
Group (or its constituent corporations) but that are taken into account in
determining TCI's consolidated, combined or unitary tax benefit carryovers.
Similarly, TCI Group is responsible to the Liberty Media Group (or its
constituent corporations) for tax benefits attributable to the Liberty
Media Group (or its constituent corporations) and actually used by TCI in
determining its consolidated, combined or unitary tax liability. Tax
attributes, including but not limited to net operating losses, investment
tax credits, alternative minimum tax net operating losses, alternative
minimum tax credits, deferred intercompany gains and tax basis in assets
will be inventoried and tracked for the entities comprising each Group. TCI
will retain the right to file all returns, make all elections and control
all audits and contests.
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("Statement No. 109") requires the use of 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.
(continued)
IV-272
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Income tax benefit (expense) attributable to income or loss from continuing
operations for the years ended December 31, 1994, 1993 and 1992 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- --------- ------
<S> <C> <C> <C>
amounts in millions
Year ended December 31, 1994:
Federal $(50) (4) (54)
State and local (11) 4 (7)
---- ---- ----
$(61) -- (61)
==== ==== ====
Year ended December 31, 1993:
Federal $(13) (110) (123)
State and local (16) (18) (34)
---- ---- ----
$(29) (128) (157)
==== ==== ====
Year ended December 31, 1992:
Federal $ (2) (18) (20)
State and local (11) (3) (14)
---- ---- ----
$(13) (21) (34)
==== ==== ====
</TABLE>
The significant components of deferred income tax expense for the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
------- ------ -----
<S> <C> <C> <C>
amounts in millions
Deferred tax expense
(exclusive of effects of other
components listed below) $ -- (52) (21)
Adjustment to deferred tax assets
and liabilities for enacted change
in tax rates -- (76) --
------ ---- ----
$ -- (128) (21)
====== ==== ====
</TABLE>
(continued)
IV-273
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Income tax expense attributable to income from continuing operations
differs from the amounts computed by applying the Federal income tax rate
of 35% in 1994 and 1993 and 34% in 1992 as a result of the following:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1994 1993 1992
-------- ----- -----
<S> <C> <C> <C>
amounts in millions
Computed "expected" tax
expense $ (14) (44) (11)
Adjustment to deferred tax assets
and liabilities for enacted change
in Federal income tax rate -- (76) --
Dividends excluded for income
tax purposes -- 3 13
Amortization not deductible for
tax purposes (12) (13) (8)
Minority interest in earnings of
consolidated subsidiaries (3) (1) (14)
Recognition of losses of
consolidated partnership (10) (8) --
State and local income taxes,
net of Federal income
tax benefit (9) (22) (10)
Valuation allowance on
foreign corporation (10) -- --
Other (3) 4 (4)
----- ---- ----
$ (61) (157) (34)
===== ==== ====
</TABLE>
(continued)
IV-274
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1993
----------- --------
<S> <C> <C>
amounts in millions
Deferred tax assets:
Net operating loss carryforwards $ 478 583
Less - valuation allowance (100) (92)
Investment tax credit carryforwards 122 144
Less - valuation allowance (36) (36)
Alternative minimum tax credit
carryforwards 88 22
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 294 292
Future deductible amounts principally
due to non-deductible accruals 35 31
Other 4 9
------ -----
Net deferred tax assets 885 953
------ -----
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,185 1,190
Franchise costs, principally due to
differences in amortization 2,600 2,784
Investment in affiliates, due
principally to undistributed
earnings of affiliates 290 289
Intangible assets, principally due to
differences in amortization 104 1
Other 83 6
------ -----
Total gross deferred tax liabilities 4,262 4,270
------ -----
Net deferred tax liability $3,377 3,317
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994 and
1993 was $136 million and $128 million, respectively. Such balance
increased by $8 million from December 31, 1993 resulting from a valuation
allowance established against net operating loss carryforwards of foreign
corporations. Subsequently recognized tax benefits relating to $126
million of the valuation allowance for deferred tax assets as of December
31, 1994 will be recorded as reductions of franchise costs.
(continued)
IV-275
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1994, TCI Group had net operating loss carryforwards for
income tax purposes aggregating approximately $899 million of which, if not
utilized to reduce taxable income in future periods, $8 million expires
through 2002, $149 million in 2003, $120 million in 2004, $352 million in
2005, $259 million in 2006, $8 million in 2008 and $3 million in 2009.
Certain subsidiaries of TCI Group had additional net operating loss
carryforwards for income tax purposes aggregating approximately $247
million and these net operating losses are subject to certain rules
limiting their usage.
At December 31, 1994, TCI Group had remaining available investment tax
credits of approximately $67 million which, if not utilized to offset
future Federal income taxes payable, expire at various dates through 2005.
Certain subsidiaries of TCI Group had additional investment tax credit
carryforwards aggregating approximately $55 million and these investment
tax credit carryforwards are subject to certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the
Internal Revenue Service ("IRS") for the years 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 combined
financial position of TCI Group. TCI Group 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 TCI Group prevailed in
the appeal. The IRS elected not to further appeal the decision to the
Supreme Court. TCI Group has entered into a closing agreement with the IRS
which settles these matters for all open tax years. A subsidiary of TCI
Group has filed a petition in United States Tax Court protesting the
disallowance of certain Transitional Investment Tax Credits and such issue
should be litigated by early 1996.
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%. TCI Group has reflected the tax rate change in its combined
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.
(continued)
IV-276
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(10) Transactions with Liberty Media Group and Other Related Parties
---------------------------------------------------------------
Upon implementation of the Liberty Group Stock Proposal, certain corporate
general and administrative costs would be charged to Liberty Media Group at
rates set at the beginning of each year based on projected utilization for
that year. The utilization-based charges will be set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone
basis. The accompanying combined statements of operations do not reflect
the allocation of corporate general and administrative costs in the
aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty Media
Corporation for the majority of the periods presented herein. During such
periods, Liberty Media Corporation was not allocated corporate general and
administrative costs.
Prior to the Liberty Group Stock Proposal, TCI did not have formalized
intercompany allocation methodologies. In connection with the Liberty Group
Stock Proposal, management of TCI has determined that TCI general corporate
expenses should be allocated to Liberty Media Group based on the amount of
time TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend
on Liberty Media Group matters. TCI management evaluated several
alternative allocation methods including assets, revenue, operating income,
and employees. Management did not believe that any of these methods would
reflect an appropriate allocation of corporate expenses given the diverse
nature of TCI's operating subsidiaries, the relative maturity of certain of
the operating subsidiaries, and the way in which corporate resources are
utilized.
Liberty Media Group has a 49.9% partnership interest in QE+Ltd Limited
Partnership ("QE+"), which distributes STARZ!, a first-run movie premium
programming service launched in 1994. Entities attributed to the TCI group
hold the remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that the TCI Group will be
required to make special capital contributions to QE+ through 2005, up to a
maximum amount of $350 million, $90 million of which is required in 1995.
QE+ is obligated to pay TCI Group a preferred return of 10% per annum on
its special capital contributions of up to $200 million beginning five
years from the date of the contribution. Any TCI Group special capital
contributions in excess of $200 million will be entitled to a preferred
return of 10% per annum from the date of the contribution. QE+ is required
to apply 75% of its available cash flow, as defined, to repay the TCI Group
special capital contributions and any preferred return payable thereon. To
the extent such special capital contributions are insufficient to fund the
cash requirements of QE+, the TCI Group and the Liberty Media Group will
each be obligated to fund such cash requirement in proportion to their
respective ownership percentages.
The TCI Group has also entered into a long-term affiliation agreement with
QE+ in respect of the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for 1995 are
anticipated to aggregate approximately $30 million to $40 million. The
affiliation agreement also provides that QE+ will not grant materially more
favorable terms and conditions to other cable system operators unless such
more favorable terms and conditions are made available to the TCI Group.
The affiliation agreement also requires the TCI Group to make payments to
QE+ with respect to a guaranteed minimum number of subscribers totaling
approximately $339 million for the years 1996, 1997, and 1998.
In connection with the launch of the STARZ! service, the TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may be
due pursuant to motion picture output, distribution, and license
agreements. As of December 31, 1994, the maximum amount of such
obligations or guarantees was approximately $162 million. The future
obligations of the TCI Group with respect to these agreements is not
currently determinable because such amount is dependent on 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.
Liberty Starz! also has the right to acquire an additional 10.1% general
partnership interest in QE+ based on a formula designed to approximate the
fair value of the interest. Such right is exercisable for a period of ten
years beginning January 1, 1999 after QE+ has had positive cash flow for
two consecutive calendar quarters. The right is exercisable only after all
special capital contributions from the TCI Group have been repaid,
including the preferred return thereon.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. Payment
of such fees is subordinated to the repayment of the TCI Group special
capital contributions and the preferred return thereon. In addition,
effective July 1, 1995, Liberty Media Group will earn a "Content Fee" for
certain services provided to QE+ equal to 4% of the gross revenue of QE+,
estimated to be approximately $1.2 million for the six months ended
December 31, 1995. The Content Fee agreement expires on June 30, 2001,
subject to renewal on an annual basis thereafter. Payment of the Content
Fee will be subordinated to the repayment of the contributions made by the
TCI Group and the preferred return thereon.
Liberty Media Corporation and TCI were parties to a service agreement
pursuant to which TCI agreed to provide certain administrative services to
Liberty Media Corporation. In addition, the employees of certain of
Liberty's subsidiaries remained on the TCI payroll until December 31, 1992.
Liberty Media Corporation reimbursed TCI for their salaries and related
employment expenses. Subsidiaries of Liberty Media Group also lease office
space and satellite transponder facilities from TCI Group. Charges by TCI
Group for such arrangements for the years ended December 31, 1994, 1993 and
1992, aggregated $7,542,000, $4,455,000 and $7,586,000, respectively. From
January 1, 1993 through the Mergers, no employees of Liberty Media
Corporation's subsidiaries remained on the TCI payroll.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN paid a commission to TCI Group for merchandise sales to customers who
are subscribers of TCI Group's cable systems. Aggregate commissions and
charges to TCI Group were approximately $6,638,000 and $1,200,000 in 1994
and 1993, respectively.
(continued)
IV-277
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the Mergers, TCI Group manages certain treasury activities
for Liberty Media Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group are remitted to TCI Group and
certain cash disbursements of Liberty Media Group are funded by TCI Group
on a daily basis. Prior to the implementation of the Liberty Group Stock
Proposal, but subsequent to the Mergers, the net amounts of such cash
activities are included in investment in Liberty Media Group in the
accompanying combined financial statements. Prior to the Mergers, Liberty
Media Corporation separately managed the treasury activities of its
subsidiaries. Subsequent to the implementation of the Liberty Group Stock
Proposal, such cash activities will be included in borrowings from and
loans to TCI Group or, if determined by the Board of Directors, as an
equity contribution to be reflected as an Inter-Group Interest in the
Liberty Media Group.
The Board of Directors could determine from time to time that debt of TCI
Group not incurred by entities attributed to the Liberty Media Group or
preferred stock and the proceeds thereof should be specifically attributed
to and reflected on the combined financial statements of Liberty Media
Group to the extent that the debt is incurred or the preferred stock is
issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of Series A TCI Group
common stock and Series B TCI Group common stock will be attributed
entirely to TCI Group, all financial impacts of issuances of additional
shares of Liberty Group Stock the proceeds of which are attributed to the
Liberty Media Group will be reflected entirely in the combined financial
statements of the Liberty Media Group. Financial impacts of dividends or
other distributions on, and purchases of, Series A TCI Group common stock
and Series B TCI Group common stock will be attributed entirely to TCI
Group, and financial impacts of dividends or other distributions on Liberty
Group Stock will be attributed entirely to the Liberty Media Group.
Financial impacts of repurchases of Liberty Group Stock the consideration
for which is charged to the Liberty Group will be reflected entirely in the
combined financial statements of the Liberty Media Group, the financial
impacts of repurchases of Liberty Group Stock the consideration for which
is charged to TCI Group will be attributed entirely to TCI Group.
Subsequent to the implementation of the Liberty Group Stock Proposal,
borrowings from or loans to TCI Group would bear interest at such rates and
have repayment schedules and other terms as are established by the Board of
Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost
and time associated with alternative financing sources.
(continued)
IV-278
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(11) Commitments and Contingencies
-----------------------------
During 1994, TCI Group, Comcast, Cox Communications, Inc. ("Cox") and
Sprint Corporation ("Sprint") formed a partnership ("WirelessCo") to engage
in the business of providing wireless communications services on a
nationwide basis. Through WirelessCo, the partners have been participating
in auctions ("PCS Auctions") of broadband personal communications services
("PCS") licenses being conducted by the Federal Communications Commission
("FCC"). In the first round auction, which concluded during the first
quarter of 1995, WirelessCo was the winning bidder for PSC licenses for 29
markets, including New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses is approximately
$2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and has agreed to make capital
contributions to APC equal to 49/51 of the cost of APC's PCS license.
Additional capital contributions may be required in the event APC is unable
to finance the full cost of its PCS license. WirelessCo may also be
required to finance the build-out expenditures for APC's PCS system. Cox,
which holds a pioneer preference PCS license for the Los Angeles-San Diego
market, and WirelessCo have also agreed on the general terms and conditions
upon which Cox (with a 60% interest) and WirelessCo (with a 40% interest)
would form a partnership to hold and develop a PCS system using the Los
Angeles-San Diego license. APC and the Cox partnership would affiliate
their PCS systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under the
"Sprint" brand. TCI Group owns a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and TCI Group also formed a
separate partnership ("PhillieCo"), in which TCI Group owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction for
a PCS license for the Philadelphia market at a license cost of $85 million.
To the extent permitted by law, the PCS system to be constructed by
PhillieCo would also be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above,
will be substantial.
(continued)
IV-279
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
At the end of the first quarter of 1995, TCI Group, Comcast, Cox and Sprint
formed two new partnerships, of which the principal partnership is MajorCo,
L.P. ("MajorCo"), to which they contributed their respective interests in
WirelessCo and through which they formed another partnership, NewTelco,
L.P. ("NewTelco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis.
NewTelco will serve its customers primarily through the cable television
facilities of cable television operators that affiliate with NewTelco in
exchange for agreed-upon compensation. The modification of existing
regulations and laws governing the local telephony market will be necessary
in order for NewTelco to provide its proposed services on a competitive
basis in most states. Subject to agreement upon a schedule for upgrading
its cable television facilities in selected markets and certain other
matters, TCI Group has agreed to affiliate certain of its cable systems
with NewTelco. The capital required for the upgrade of TCI Group's cable
facilities for the provision of telephony services is expected to be
substantial.
TCI Group, Cox and Comcast, together with Continental Cablevision, Inc.
("Continental"), own TCG, which is one of the largest competitive access
providers in the United States in terms of route miles. TCI Group, Cox and
Comcast have entered into an agreement with MajorCo and NewTelco to
contribute their interests in TCG and its affiliated entities to NewTelco.
TCI Group currently owns an approximate 29.9% interest in TCG. The closing
of this contribution is subject to the satisfaction of certain conditions,
including the receipt of necessary regulatory and other consents and
approvals. In addition, TCI Group, Comcast and Cox intend to negotiate
with Continental, which owns a 20% interest in TCG, regarding their
acquisition of Continental's TCG interest. If such agreement cannot be
reached, they will need to obtain Continental's consent to certain aspects
of their agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
At December 31, 1994, TCI Group was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. TCI Group pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of TCI
Group as collateral for the letter of credit. There were no borrowings
pursuant to such letter of credit at December 31, 1994.
(continued)
IV-280
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable
Act and imposed a moratorium on certain rate increases. As a result of
such actions, TCI Group's basic and tier service rates and its equipment
and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are evaluated against competitive benchmark rates as
published by the FCC, and equipment and installation charges are based on
actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate regulations.
The rate regulations do not apply to the relatively few systems which are
subject to "effective competition" or to services offered on an individual
service basis, such as premium movie and pay-per-view services.
TCI Group believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, TCI Group's rates for Regulated Services are subject to review by
the FCC, if a complaint has been filed, or the appropriate franchise
authority, if such authority has been certified. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark and
refund the excess portion of rates received. Any refunds of the excess
portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to the later of September 1, 1993 or one
year prior to the certification date of the applicable franchise authority.
The amount of refunds, if any, which could be payable by TCI Group in the
event that systems' rates are successfully challenged by franchising
authorities is not considered to be material.
TCI Group is obligated to pay fees for the license to exhibit certain films
that are released theatrically by various motion picture studios through
December 31, 2002 (the "Film License Obligations"). As of December 31,
1994, these agreements require minimum payments aggregating approximately
$227 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, TCI Group's required aggregate
payments under the Film Licensing Obligations could prove to be
significant.
TCI Group 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 $41 million,
$53 million and $49 million in 1994, 1993 and 1992, respectively.
(continued)
IV-281
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
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>
1995 $ 19
1996 15
1997 13
1998 11
1999 10
</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 1995.
TCI Group 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.
(12) Discontinued Operations
-----------------------
TCI Group 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, TCI Group 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 are reported separately in the combined
statements of operations under the caption "Loss from discontinued
operations" and include:
<TABLE>
<CAPTION>
1992
----
amounts in millions
<S> <C>
Revenue $ 211
Loss before income taxes $ (16)
Income tax benefit $ 1
Net loss $ (15)
</TABLE>
(continued)
IV-282
<PAGE>
"TCI GROUP"
(a combination of certain assets of Tele-Communications, Inc.
and its affiliate, Liberty Media Corporation, as defined in note 1)
Notes to Combined Financial Statements
(13) Subsequent Events
-----------------
Comcast had the right, through December 31, 1994, to require TCI Group to
purchase or cause to be purchased from Comcast all shares of Heritage
Communications, Inc. ("Heritage") directly or indirectly owned by Comcast
for either cash or assets or, at TCI Group's election shares of TCI common
stock. On October 24, 1994, TCI Group and Comcast entered into a purchase
agreement whereby TCI Group would repurchase the entire 19.9% minority
interest in Heritage owned by Comcast for an aggregate consideration of
approximately $290 million, the majority of which is payable in shares of
TCI Class A common stock. Such acquisition was consummated subsequent to
December 31, 1994.
As of January 26, 1995, TCI Group and TeleCable consummated a transaction,
whereby TeleCable was merged into TCI Group. The aggregate $1.6 billion
purchase price was satisfied by TCIC's assumption of approximately $300
million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of approximately 42 million shares of TCI Class A common stock
and 1 million shares of Series D Preferred Stock with an aggregate initial
liquidation value of $300 million (see note 7).
IV-283
<PAGE>
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."
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1994
IV-284
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1993 1992*
---- -----
<S> <C> <C>
amount in thousands
Assets
- ------
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 expense 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
========== =======
*Restated -- see notes 6, 9 and 13.
</TABLE>
IV-285
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1993 1992*
---- -----
amount in thousands
Liabilities and Stockholders' Equity
- ------------------------------------
<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 Convertive 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.
IV-286
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Liberty Companies
---------- -----------
Nine
Year ended Year Months Three Months
December ended ended ended March
31, December 31, December 31, 31,
1993 1992* 1991* 1991*
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
amounts in thousands, except per share data
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.
IV-287
<PAGE>
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 E 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 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)
Acquisitions 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>
IV-288
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, continued
<TABLE>
<CAPTION>
Note
receivable Total
Preferred Stock Common Stock Additional Retained from stock-
--------------- ------------ paid-in earnings related holders'
Class C Class E Class A Class B capital* (deficit)* party equity*
------- ------- ------- ------- -------- ---------- ----- -------
amounts in thousands
Liberty (continued)
-------------------
<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 classes of
preferred stock -- -- -- -- (19,247) (22,384) -- (41,631)
Dividends, including
accretion, on classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- 28,850 -- -- 28,850
Stock split effect in the form
of a dividend (note 2) -- -- 29,514 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 classes of
preferred stock -- -- -- -- (27,177) (4,795) -- (31,972)
Dividends, including
accretion on classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- 19,229 -- -- 19,229
Cash dividends on Class E
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.
IV-289
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liberty Predecessor
------- 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 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 -- 520 1,483 455
discount
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)
IV-290
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
- --------------------------------------------------------------------------------
<TABLE>
<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 values of assets
sold to an
affiliate over net book value -- -- 23,333 --
Purchases of 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.
IV-291
<PAGE>
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").
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.
IV-292
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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.
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.
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
IV-293
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- -------------------------------------------------------------------------------
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, 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.
IV-294
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- -------------------------------------------------------------------------------
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.
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.
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,
IV-295
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- -------------------------------------------------------------------------------
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.
IV-296
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 --
========= ======== ======== =========
</TABLE>
IV-297
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
<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>
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>
(6) Investments in Affiliates
Summarized unaudited financial information for affiliated 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 cost, 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>
IV-298
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Liberty Companies
------- ---------
Nine Three
months 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>
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 earnings
(loss) $ 121,184 55,156 4,879 (4,262)
=========== ========== ======== ========
</TABLE>
IV-299
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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).
IV-300
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
The following table reflects the Company's share of earnings (losses) of each of
the aforementioned affiliates:
<TABLE>
<CAPTION>
Predecessor
Liberty Companies
------- ---------
Nine Three
months 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>
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
IV-301
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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.
IV-302
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
(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 46,457 46,459
investment
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>
IV-303
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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). 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.
(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.
IV-304
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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
IV-305
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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, 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.
IV-306
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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>
<CAPTION>
<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.
IV-307
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(11) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ------------
December 31, 1993 1993 1992
------------------ ---- ----
<S> <C> <C> <C>
amounts in thousands
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 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.
IV-308
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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
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
IV-309
<PAGE>
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.
(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%.
IV-310
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 "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 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
IV-311
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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.
IV-312
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 $13,933 42,331 613
reported
Effect of restatements:
Mile Hi and Mile Hi Note 2,329 1,851 367
(note 9)
Lefest 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 $ (0.22) 0.15
previously reported
Effect of restatements:
Mile Hi and Mile Hi Note 0.02 0.02
(note 9)
Lenfest and TKR (note 6) 0.05 (0.03)
State No. 109 (0.01) (0.01)
------- ------
As restated $ (0.16) 0.13
======= ======
</TABLE>
IV-313
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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) (15,191) 650
-------- ------- ------- ----
$(11,522) (10,443) (16,961) 753
======== ======= ======= ====
</TABLE>
IV-314
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
Income tax benefit (expense) differs from the amounts computed by the Federal
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>
IV-315
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
The significant components of deferred tax benefit (expense) are as follows:
<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>
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>
IV-316
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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
--------- ---------
<S> <C> <C>
amounts in thousands
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 uncollectible 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, primarily due to differences in
amortization 6,170 --
Investments in affiliates, due principally to
undistributed earnings of affiliates 88,671 109,491
-------- --------
104,115 110,749
-------- --------
Net deferred tax liabilities $ 1,653 14,974
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1992 was
$1,138,000.
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.
IV-317
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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
IV-318
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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
IV-319
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
exchange, unless in either case the Company defaults in the payment of the
redemption price or the making of the exchange.
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.
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 accredit
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
IV-320
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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 Mandatory
Class B Class B Redemption
Class A Series 1 Series 2 Class C Class 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>
(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
IV-321
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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.
IV-322
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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 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
IV-323
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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.
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.
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.
IV-324
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(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 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
IV-325
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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.
IV-326
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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.
IV-327
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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
IV-328
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
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 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>
<CAPTION>
<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.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
thousands):
IV-329
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <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:
IV-330
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Home
Corporate Shopping Cable Programming Total
--------- -------- ----- ----------- -----
amounts in thousands
Liberty:
- -------
Year ended December 31, 1993:
- ----------------------------
<S> <C> <C> <C> <C> <C>
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>
IV-331
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Home
Corporate Shopping Cable Programming Total
--------- -------- ----- ----------- -----
amounts in thousands
Nine months ended
December 31, 1991:
- -----------------
<S> <C> <C> <C> <C> <C>
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 -- 1,551 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 $ -- -- 563 3,430 3,993
amortization ======== ====== ======= ======= =======
Capital expenditures,
including $ -- -- 196 649 845
acquisitions ======== ====== ======= ======= =======
Identifiable assets $ 1,607 44,801 286,864 202,349 535,621
======== ====== ======= ======= =======
</TABLE>
IV-332
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
(20) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in thousands,
except per share data
1993:
- ----
<S> <C> <C> <C> <C>
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>
IV-333
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
<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)
======== ======== ======== ========
</TABLE>
IV-334
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in thousands,
except per share data
1992 continued:
---------------
<S> <C> <C> <C> <C>
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>
IV-335
<PAGE>
APPENDIX V
1994 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
of
TELE-COMMUNICATIONS, INC.
1. Purpose of the Plan. This Nonemployee Director Stock Option Plan
(the "Plan") is intended as an incentive to retain and attract persons of
training, experience and ability to serve as independent directors on the Board
of Directors of Tele-Communications, Inc., a Delaware corporation (the
"Company"), to encourage the sense of proprietorship of such persons and to
stimulate the active interest of such persons in the development and financial
success of the Company. It is further intended that the options granted
pursuant to this Plan (the "Options") will be nonqualified options within the
meaning of Section 83 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Stockholder Approval. This Plan shall be effective as of the date
(the "Effective Date") it was approved by the Board of Directors of the Company,
November 16, 1994. All Options granted pursuant to this Plan are subject to,
and may not be exercised before, the approval of this Plan by the affirmative
vote of the holders of a majority in voting power of the shares of capital
stock of the Company that are present, or represented, and entitled to vote
thereon at a meeting of the Company's stockholders. If the stockholders of the
Company should fail so to approve this Plan on or prior to such date, this Plan
shall terminate and cease to be of any further force or effect and all grants of
options hereunder shall be null and void.
3. Designation of Participants; Automatic Grant of Options. Each
director of the Company who is not an employee of the Company or any Subsidiary
(as hereinafter defined) of the Company (any such director being hereinafter
referred to as a "Nonemployee Director") shall be granted Options as described
hereunder. Each Nonemployee Director who is a director as of the Effective Date
(as hereinafter defined) shall automatically be granted Options to purchase
50,000 shares of Class A Common Stock, $1.00 par value per share of the Company
(the "Class A Common Stock") at the Effective Date. Thereafter, each individual
who becomes a Nonemployee Director shall automatically be granted Options to
purchase 50,000 shares of Class A Common Stock (subject to adjustment as
provided in Paragraph 10) on the date such person first becomes a Nonemployee
Director. Notwithstanding the foregoing, in the case of any grant of Options
made on a date subsequent to the Effective Date, such grant shall only be made
if the number of shares subject to future grant under this Plan is sufficient to
make all automatic grants required to be made pursuant to this Plan on such date
of grant. As used herein, the term "Subsidiary" of the Company shall mean any
corporation of which the Company directly or indirectly owns shares representing
more than 50% of the voting power of all classes or series of capital stock of
such corporation which have the right to vote generally on matters submitted to
a vote of the stockholders of such corporation. If the Liberty Media Group
Stock Proposal,
V-1
<PAGE>
as approved by the Board of Directors, is approved by the requisite vote of the
stockholders of the Company, the automatic grants provided for in this Paragraph
3 shall be adjusted so that each individual who becomes a Nonemployee Director
after such approval shall automatically be granted (instead of an Option to
purchase Class A Common Stock as aforesaid) (a) an Option to purchase 50,000
shares of Series A TCI Group Common Stock, par value $1.00 per share of the
Company ("Series A TCI Group Common Stock"), and (b) an Option to purchase
12,500 shares of Series A Liberty Media Group Common Stock of the Company
("Series A Liberty Media Group Common Stock). The Class A Common Stock, Series
A TCI Group Common Stock and Series A Liberty Media Group Common Stock are
sometimes collectively referred to herein as "Common Stock".
4. Option Agreement. Each Option granted hereunder shall be embodied
in a written option agreement ("Option Agreement"), which shall be subject to
the terms and conditions set forth above and shall be signed by the Optionee and
by the Chief Executive Officer, the Chief Operating Officer, or any Vice
President of the Company for and on behalf of the Company.
5. Common Stock Reserved for the Plan. Subject to adjustment as
provided in Paragraph 10 hereof, a total of 1,000,000 shares of Class A Common
Stock shall be reserved for issuance upon the exercise of Options granted
pursuant to this Plan. If the Liberty Media Group Stock Proposal is approved
by the requisite vote of the stockholders of the Company, the shares subject to
issuance upon the exercise of Options granted pursuant to this Plan shall be
adjusted to consist of (subject to further adjustment as provided in Paragraph
10), 1,000,000 shares of Series A TCI Group Common Stock and 250,000 shares of
Series A Liberty Media Group Common Stock. The Board of Directors and the
appropriate officers of the Company shall from time to time take whatever
actions are necessary to execute, acknowledge, file and deliver any documents
required to be filed with or delivered to any governmental authority or any
stock exchange or transaction reporting system on which shares of Common Stock
are listed or quoted in order to make shares of Common Stock available for
issuance to an Optionee (as hereinafter defined) pursuant to this Plan. Shares
of Common Stock subject to Options that are forfeited or terminated or expire
unexercised in such a manner that all or some of the shares subject thereto are
not issued to an Optionee shall immediately become available for the granting of
Options. As used herein, the term "Optionee" shall mean any Nonemployee
Director to whom Options are granted hereunder.
6. Option Price.
(a) The purchase price of each share of Common Stock that is subject
to an Option granted pursuant to this Plan shall be 95% of the Fair Market Value
of a share of Common Stock of the applicable class or series on the date the
Option is granted, such percentage rounded down to the nearest quarter dollar.
V-2
<PAGE>
(b) The Fair Market Value of a share of Common Stock on a particular
date means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Common Stock of the
applicable class or series on such day (or, if such day is not a trading day, on
the next preceding trading day) as reported on the Nasdaq Stock Market or, if
not reported on the Nasdaq Stock Market, as quoted by the National Quotation
Bureau Incorporated, or if the Common Stock of the applicable class or series is
listed on an exchange, on the principal exchange on which the Common Stock of
the applicable class or series is listed.
7. Option Period. Each Option granted pursuant to this Plan shall
terminate and be of no force and effect with respect to any shares of Common
Stock not purchased by the Optionee upon the earliest to occur of the following:
(a) the expiration of ten years following the date upon which the Option is
granted; (b) the expiration of one year following the date upon which the
Optionee ceases to be a Director for any reason other than voluntary termination
of Director status; or (c) the expiration of three months following the date on
which the Optionee voluntarily ceases his status as a Director.
8. Exercise of Options.
(a) Options granted pursuant to this Plan shall be exercisable, on a
cumulative basis, as follows: (i) with respect to 20% of the total number of
shares of Common Stock initially subject to any Option, such Option shall be
exercisable on the first anniversary of the date of grant; and (ii) with respect
to the remaining shares of Common Stock subject to any Option, such Option shall
be exercisable with respect to an additional 20% of the total number of shares
initially subject thereto as of the second, third, fourth and fifth
anniversaries of the date of the grant.
(b) An Option may be exercised solely by the Optionee during his
lifetime or after his death by the person or persons entitled thereto under his
will or the laws of descent and distribution.
(c) In the event that an Optionee voluntarily ceases his status as a
Director, an Option granted to such Optionee may be exercised only to the extent
such Option was exercisable at the time he ceased to serve in such capacity.
(d) In the event that an Optionee ceases to serve as a Director for
any reason other than voluntary termination of Director status, at a time when
an Option granted hereunder is still in force and unexpired under the terms of
Paragraph 7 hereof, each such unmatured Option shall be accelerated. Such
acceleration shall be effective as of the date of termination of Director status
and each Option so accelerated shall be exercisable in full for so long as it is
still in force and unexpired under the terms of Paragraph 7 hereof.
V-3
<PAGE>
(e) Upon the occurrence of a Change in Control, as defined in
Paragraph 10(c), all Options previously granted and still in force and unexpired
under the terms of Paragraph 7 hereof shall be accelerated effective as of such
Change in Control.
(f) The purchase price of the shares as to which an Option is
exercised shall be paid in full at the time of the exercise. Such purchase
price shall be payable in cash or by means of tendering theretofore owned Common
Stock of the same class or series for which the Option is exercisable which has
been held by the Optionee for more than six months, valued at Fair Market Value
on the date of exercise, or any combination thereof. No holder of an Option
shall be, or have any of the rights or privileges of, a stockholder of the
Company in respect of any shares subject to any Option unless and until
certificates evidencing such shares shall have been issued by the Company to
such holder.
9. Assignability. No Option shall be assignable or otherwise
transferable except by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder. Any attempted
assignment of an Option in violation of this Paragraph 9 shall be null and void.
10. Adjustments.
(a) The existence of outstanding Options shall not affect in any
manner the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the capital stock of the Company or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock (whether or not such issue is prior to, on a parity with
or junior to the Common Stock) or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding of any kind, whether or not of a character
similar to that of the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of outstanding
shares of Class A Common Stock or declaration of a dividend payable in shares of
Class A Common Stock or other stock split, then (i) the number of shares of
Class A Common Stock issuable pursuant to each Option, (ii) the total number of
shares of Class A Common Stock reserved under the Plan and (iii) the per share
exercise price of the Options shall each be proportionately adjusted to reflect
such transaction. In the event of any other recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company with
another corporation or entity, the adoption by the Company of a plan of exchange
affecting the Class A Common Stock or any distribution to holders of Class A
Common Stock of securities or property (other than normal cash dividends or
dividends payable in Class A Common Stock), the Board of Directors shall make
V-4
<PAGE>
appropriate adjustments to (1) the number of shares of Class A Common Stock
issuable pursuant to each Option and (2) the per share exercise price of the
Options to give effect to such transaction; provided that such adjustments shall
only be such as are necessary to maintain the proportionate interest of the
optionees and preserve, without exceeding, the value of the Options. In the
event of a corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, the Board of Directors shall be
authorized to issue or assume stock options by means of substitution of new
options for previously issued options or an assumption of previously issued
options as a part of such adjustment. If the Liberty Media Group Stock Proposal
is approved by the requisite vote of the stockholders of the Company, references
to Class A Common Stock in this paragraph shall apply to Series A TCI Group
Common Stock and Series A Liberty Media Group Common Stock, as appropriate. If
the Liberty Media Group Stock Proposal is approved by the requisite vote of the
stockholders of the Company, Options theretofore granted will be adjusted so
that each holder of such an Option will receive an additional Option covering
12,500 shares of Series A Liberty Media Group Common Stock and the outstanding
Option will continue in effect as an option covering the 50,000 shares of Series
A TCI Group Common Stock (as redesignated). The aggregate pre-adjustment
exercise price of such outstanding Options will be allocated so that the
aggregate exercise price of the additional Options covering Series A Liberty
Media Group Common Stock will be 25% of the aggregate pre-adjustment exercise
price and the aggregate strike price of the Options covering Series A TCI Group
Common Stock will be 75% of the aggregate pre-adjustment exercise price.
(c) An Option shall become fully exercisable upon a Change in Control
(as hereinafter defined) of the Company. For purposes of this Plan, a "Change
of Control" shall be conclusively deemed to have occurred if (and only if) any
of the following events shall have occurred: (i) there shall have occurred an
event required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such reporting
requirement; (ii) after the Effective Date any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than a person that is a
director of the Company on the Effective Date or any person controlled by such a
director, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
20% or more of the combined voting power of the Company's then outstanding
voting securities; (iii) after the Effective Date any person described in the
foregoing clause (ii) commences a tender offer subject to Section 14(d) of the
Exchange Act for securities of the Company representing a majority of the
combined voting power of the Company's then outstanding voting securities,
provided that to the extent any unmatured Options accelerated under this clause
(iii) are not exercised prior to the termination of such offer, such
acceleration shall be rescinded and annulled and such Options shall revert to
their original vesting schedule; (iv) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or
V-5
<PAGE>
a proxy contest, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; or (v) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board of Directors.
11. Purchase for Investment. Unless the Options and shares of Common
Stock covered by this Plan have been registered under the Securities Act of
1933, as amended, each person exercising an Option under this Plan may be
required by the Company to give a representation in writing in form and
substance satisfactory to the Company to the effect that he is acquiring such
shares for his own account for investment and not with a view to, or for sale in
connection with, the distribution of such shares or any part thereof.
12. Taxes. The Company may make such provisions as it may deem
appropriate for the withholding of any taxes that it determines is required in
connection with any Options granted to any Optionee hereunder.
13. Amendments or Termination. The Board of Directors of the Company
may amend, alter or discontinue this Plan, except that (a) no amendment or
alteration that would impair the rights of any Optionee under any Option that he
has been granted shall be made without his consent, (b) no amendment or
alteration shall be effective prior to approval by the Company's stockholders to
the extent such approval is then required pursuant to Rule 16b-3 (or any
successor provision) under the Exchange Act in order to preserve the
applicability of any exemption provided by such rule to any Option then
outstanding (unless the holder of such Option consents) or to the extent
stockholder approval is otherwise required by applicable legal requirements, and
(c) the Plan shall not be amended more than once every six months to the extent
such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor provision)
under the Exchange Act as then in effect.
14. Government Regulations. This Plan, and the granting and exercise
of Options hereunder, and the obligation of the Company to sell and deliver
shares of Common Stock under such Options, shall be subject to all applicable
laws, rules and regulations, and to such approvals on the part of any
governmental agencies or national securities exchanges or transaction reporting
systems as may be required.
15. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
V-6
<PAGE>
16. Miscellaneous. The granting of any Option shall not impose upon
the Company, the Board of Directors of the Company or any other directors of the
Company any obligation to nominate any Optionee for election as a director and
the right of the stockholders of the Company to remove any person as a director
of the Company shall not be diminished or affected by reason of the fact that an
Option has been granted to such person.
V-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, generally,
that a corporation shall have the power to indemnify any person who was or is a
party or is threatened to be made a party to any suit or proceeding (except
actions by or in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such suit or proceeding if he act in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A corporation may
similarly indemnify such person for expenses actually and reasonably incurred by
him in connection with the defense or settlement of any action or suit by or in
the right of the corporation, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, in the case of claims, issues and matters as to which such
person shall have been adjudged liable to the corporation, provided that a court
shall have determined, upon application, that, despite the adjudication of
liability but in view of all of the facts and circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law provides,
generally, that the certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision may not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of title 8, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision may eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective.
Article V, Section E of the Company's Charter provides as follows:
A. Limitation On Liability.
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director. Any repeal or modification of this paragraph 1 shall be
prospective
II-1
<PAGE>
only and shall not adversely affect any limitation, right or protection of
a director of the Corporation existing at the time of such repeal or
modification.
B. Indemnification.
a. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person who was or is made
or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person
for whom he is the legal representative, is or was a director or officer of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees)
reasonably incurred by such person. Such right of indemnification shall
inure whether or not the claim asserted is based on matters which antedate
the adoption of this Section E. The Corporation shall be required to
indemnify a person in connection with a proceeding (or part thereof)
initiated by such person only if the proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
b. PREPAYMENT OF EXPENSES. The Corporation shall pay the expenses
(including attorneys' fees) incurred in defending any proceeding in advance
of its final disposition, provided, however, that the payment of expenses
incurred by a director or officer in advance of the final disposition of
the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be
ultimately determined that the director or officer is not entitled to be
indemnified under this paragraph or otherwise.
c. CLAIMS. If a claim for indemnification or payment of expenses
under this paragraph is not paid in full within 60 days after a written
claim therefor has been received by the Corporation, the claimant may file
suit to recover the unpaid amount of such claim and, if successful in whole
or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the Corporation shall have the burden of proving
that the claimant was not entitled to the requested indemnification or
payment of expenses under applicable law.
d. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this paragraph shall not be exclusive of any other rights which such person
may or hereafter acquire under any statute, provision of this Certificate,
the Bylaws, agreement, vote of stockholders or disinterested directors or
otherwise.
II-2
<PAGE>
e. OTHER INDEMNIFICATION. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any
amount such person may collect as indemnification from such other
corporation, partnership, joint venture, trust, enterprise or nonprofit
entity.
Article II, Section 2.9 of the Company's By-laws also contains an indemnity
provision, requiring Company to indemnify members of the Board of Directors and
officers of the Company and their respective heirs, personal representatives and
successors in interest for or on account of any action performed on behalf of
the Company, to the fullest extent provided by the laws of the State of Delaware
and the Company's Charter.
The Company has also entered into indemnification agreements with each of
its directors (each director, an "indemnitee"). The indemnification agreements
provide (i) for the prompt indemnification to the fullest extent permitted by
law against any and all expenses, including attorneys' fees and all other costs,
expenses and obligations paid or incurred in connection with investigating,
defending, being a witness or participating in (including on appeal), or in
preparing for ("Expenses"), any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation ("Claim"), related to the fact that
such indemnitee is or was a director, officer, employee, agent or fiduciary of
the Company or is or was serving at the Company's request as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by a director or officer in any such
capacity, and against any and all judgments, fines, penalties and amounts paid
in settlement (including all interest, assessments and other charges paid or
payable in connection therewith) of any Claim, unless the Reviewing Party (one
or more members of the Board of Directors or other person appointed by the Board
of Directors, who is not a party to the particular claim, or independent legal
counsel) determines that such indemnification is not permitted under applicable
law and (ii) for the prompt advancement of Expenses, and for reimbursement to
the Company if the Reviewing Party determines that such indemnitee is not
entitled to such indemnification under applicable law. In addition, the
indemnification agreements provide (i) a mechanism through which an indemnitee
may seek court relief in the event the Reviewing Party determines that the
indemnitee would not be permitted to be indemnified under applicable law (and
therefore is not entitled to indemnification or expense advancement under the
indemnification agreement) and (ii) indemnification against all expenses
(including attorneys' fees), and advancement thereof if requested, incurred by
the indemnitee in seeking to collect an indemnity claim or advancement of
expenses from the Company or incurred in seeking to recover under a directors'
and officers' liability insurance policy, regardless of whether successful or
not. Furthermore, the indemnification agreements provide that after there has
been a "change in control" in the Company (as defined in the indemnification
agreements), other than a change in control approved by a majority of directors
who were directors prior to such change, then, with respect to all
determinations regarding a right to indemnity and the right to advancement of
Expenses, the Company will seek legal advice only from independent legal counsel
selected by the indemnitee and approved by the Company.
II-3
<PAGE>
The indemnification agreements impose upon the Company the burden of
proving that an indemnitee is not entitled to indemnification in any particular
case and negate certain presumptions that may otherwise be drawn against an
indemnitee seeking indemnification in connection with the termination of actions
in certain circumstances. Indemnitees' rights under the indemnification
agreements are not exclusive of any other rights they may have under Delaware
law, the Company's Bylaws or otherwise. Although not requiring the maintenance
of directors' and officers' liability insurance, the indemnification agreements
require that indemnitees be provided with the maximum coverage available for any
Company director or officer if there is such a policy.
The Company may purchase liability insurance policies covering its
directors and officers.
ITEM 21. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company dated
August 4, 1994, as amended on August 4, 1994, August 16, 1994,
October 11, 1994, October 21, 1994 and January 26, 1995.
(Incorporated herein by reference to Exhibit 3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1994
(Commission File No. 0-20421)).
3.2 Proposed Amendments to the Restated Certificate of Incorporation
of the Company to be filed in connection with the Liberty Media
Group Stock Proposal described in the Proxy Statement/Prospectus
included in the Registration Statement (included as Appendix
III-A to the Proxy Statement/Prospectus which is part of this
Registration Statement).
3.3 Bylaws of the Company as adopted August 4, 1994 (Incorporated
herein by reference to Exhibit 3 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 (Commission
File No. 0-20421)).
*5 Opinion of Baker & Botts, L.L.P. regarding legality of
securities.
*8 Tax Opinion of Baker & Botts, L.L.P. regarding certain Federal
income tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of KPMG.
23.7 Consent of KPMG Finsterbusch Pickenhayn Sibille.
23.8 Consent of Price Waterhouse LLP.
23.9 Consent of Baker & Botts, L.L.P. (included in Exhibit 5).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23.10 Consent of Baker & Botts, L.L.P. (included in Exhibit 8).
** 24 Power of Attorney.
* 27 Financial Data Schedule.
** 99 Form of Proxy for Annual Meeting of the Company.
</TABLE>
- ------------------------------
* To be filed by amendment
** Previously filed
(b) Financial Statement Schedules. Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The Registrant hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act, and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF GREENWOOD
VILLAGE, STATE OF COLORADO, ON June 21, 1995.
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
--------------------------------------
Name: Stephen M. Brett
Title: Executive Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Chairman of the Board and June 21, 1995
- ------------------------- Director
(Bob Magness)
* Chief Executive Officer, June 21, 1995
- ------------------------- President and Director
(John C. Malone) (Principal Executive Officer)
* Executive Vice President, June 21, 1995
- ------------------------- Treasurer and Director
(Donne F. Fisher) (Principal Financial and
Accounting Officer)
* Director June 21, 1995
- -------------------------
(Jerome H. Kern)
* Director June 21, 1995
- -------------------------
(John W. Gallivan)
* Director June 21, 1995
- -------------------------
(Kim Magness)
* Director June 21, 1995
- -------------------------
(Robert A. Naify)
* Director June 21, 1995
- -------------------------
(Tony Coelho)
Director June 21, 1995
*
- -------------------------
(R. E. Turner)
*By: /s/ Stephen M. Brett
--------------------
Stephen M. Brett
Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company dated August 4,
1994, as amended on August 4, 1994, August 16, 1994, October 11, 1994,
October 21, 1994 and January 26, 1995. (Incorporated herein by
reference to Exhibit 3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (Commission File No. 0-20421)).
3.2 Proposed Amendments to the Restated Certificate of Incorporation of
the Company to be filed in connection with the Liberty Media Group
Stock Proposal described in the Proxy Statement/Prospectus included in
the Registration Statement (included as Appendix III-A to the Proxy
Statement/Prospectus which is part of this Registration Statement).
3.3 Bylaws of the Company as adopted August 4, 1994 (Incorporated herein
by reference to Exhibit 3 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (Commission File No. 0-20421)).
*5 Opinion of Baker & Botts, L.L.P. regarding legality of securities.
*8 Tax Opinion of Baker & Botts, L.L.P. regarding certain Federal income
tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of KPMG.
23.7 Consent of KPMG Finsterbusch Pickenhayn Sibille.
23.8 Consent of Price Waterhouse LLP.
23.9 Consent of Baker & Botts, L.L.P. (included in Exhibit 5).
23.10 Consent of Baker & Botts, L.L.P. (included in Exhibit 8).
**24 Power of Attorney.
*27 Financial Data Schedule.
**99 Form of Proxy for Annual Meeting of the Company.
</TABLE>
- ---------------------
* To be filed by amendment
** Previously filed
II-8
<PAGE>
Exhibit 23.1
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We consent to the inclusion and incorporation by reference in the registration
statement on Form S-4 of Tele-Communications, Inc. of our reports dated March
27, 1995, relating to the consolidated balance sheets of Tele-Communications,
Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, and all
related schedules, which reports appear in the registration statement and the
December 31, 1994 annual report on Form 10-K of Tele-Communications, Inc., as
amended, and to the reference to our firm under the heading "Experts" in the
registration statement. Our reports refer to the adoption of Statement of
Financial Accounting Standards No. 115, "Accounting for Investments in Certain
Debt and Equity Securities," in 1994.
KPMG Peat Marwick LLP
Denver, Colorado
June 20, 1995
<PAGE>
Exhibit 23.2
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Liberty Media Corporation:
We consent to the inclusion in the registration statement on Form S-4 of Tele-
Communications, Inc. of our report dated March 18, 1994, relating to 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 TCI Communications, Inc.
(formerly Tele-Communications, Inc.)) (Predecessor) for the period from January
1, 1991 to March 31, 1991 (Predecessor Periods), included herein and to the
reference to our firm under the heading "Experts" in the registration statement.
Our report refers to a change in the method of accounting for income taxes in
1993.
KPMG Peat Marwick LLP
Denver, Colorado
June 20, 1995
<PAGE>
Exhibit 23.3
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We consent to the inclusion in the registration statement on Form S-4 of Tele-
Communications, Inc. of our report dated March 27, 1995, relating to the
combined balance sheets of Liberty Media Group (a combination of certain assets
of Tele-Communications, Inc. and its affiliate, Liberty Media Corporation) as of
December 31, 1994 and 1993, and the related combined statements of operations,
equity and cash flows for each of the years in the three-year period ended
December 31, 1994, included herein and to the reference to our firm under the
heading "Experts" in the registration statement. Our report refers to the
adoption of Statement of Financial Accounting Standards No. 115, "Accounting for
Investments in Certain Debt and Equity Securities," in 1994.
KPMG Peat Marwick LLP
Denver, Colorado
June 20, 1995
<PAGE>
Exhibit 23.4
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We consent to the inclusion in the registration statement on Form S-4 of
Tele-Communications, Inc. of our report dated March 27, 1995, relating to the
combined balance sheets of TCI Group (a combination of certain assets of
Tele-Communications, Inc. and its affiliate, Liberty Media Corporation) as of
December 31, 1994 and 1993, and the related combined statements of operations,
equity and cash flows for each of the years in the three-year period ended
December 31, 1994, included herein and to the reference to our firm under the
heading "Experts" in the registration statement. Our report refers to the
adoption of Statement of Financial Accounting Standards No. 115, "Accounting for
Investments in Certain Debt and Equity Securities," in 1994.
KPMG Peat Marwick LLP
Denver, Colorado
June 20, 1995
<PAGE>
Exhibit 23.5
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors
QVC, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-4 of Tele-Communications, Inc. of our report dated March 5, 1994, relating to
the consolidated balance sheets of QVC, Inc. and subsidiaries as of January 31,
1994 and 1993, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended January 31, 1994, which report appears in the Current Report on
Form 8-K as amended, of Tele-Communications, Inc. dated February 3, 1995 and to
the reference to our firm under the heading "Experts" in the registration
statement. Our report refers to a change in the method of accounting for income
taxes.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
June 20, 1995
<PAGE>
Exhibit 23.6
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Shareholders of
TeleWest Communications plc
We consent to incorporation by reference in the registration statement on Form
S-4 of Tele-Communications, Inc. of our report dated 21 March 1995, relating to
the consolidated balance sheet of TeleWest Communications plc and subsidiaries
as of 31 December 1994 and 1993, and the related consolidated statements of
operations and cash flows for each of the years in the three year period ended
31 December 1994, which report appears in the 31 December 1994 annual report on
Form 10-K of Tele-Communications, Inc., as amended, and to the reference to our
firm under the heading "Experts" in the registration statement.
KPMG
London, England
June 20, 1995
<PAGE>
Exhibit 23.7
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors and Shareholders of
Tele-Communications, Inc.
We consent to incorporation by reference in the registration statement of
Tele-Communications, Inc. of our report, dated March 24, 1995, relating to the
combined balance sheets of Cablevision (A Combination of certain cable
television assets of Cablevision S.A., Televisora Belgrano S.A., Construred S.A.
and Univent's S.A., as defined in Note 1) as of December 31, 1994 and 1993, and
the related combined statements of operations and deficit and cash flows for
each of the years in the three-year period ended December 31, 1994, which report
appears in the current report on Form 8-K of Tele-Communications, Inc., dated
April 20, 1995, and to the reference to our firm under the heading "Experts" in
the registration statement.
KPMG Finsterbusch Pickenhayn Sibille
Buenos Aires, Argentina
June 20, 1995
<PAGE>
Exhibit 23.8
------------
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus constituting part of this Registration Statement on
Amendment No. 2 to Form S-4 of Tele-Communications, Inc. of our report dated
February 4, 1994 relating to the financial statements of TeleCable Corporation
which appears on page 12 of the TCI Communications, Inc. and Tele-
Communications, Inc. Current Report on Form 8-K dated August 26, 1994. We also
consent to the reference to us under the heading "Experts" in such Proxy
Statement/Prospectus.
Price Waterhouse LLP
Norfolk, Virginia
June 21, 1995
