<PAGE>
As Filed with the Securities and Exchange Commission on June 13, 1995
Registration No. 33-59657
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
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: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Maximum Proposed Maximum Amount of
Securities To Be Amount To Be Offering Price Aggregate Registration
Registered Registered(1) Per Share(2) Offering Price(2) Fee(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A TCI Group Common Stock, -- -- -- --
par value $1.00 per share
- ----------------------------------------------------------------------------------------------------------------
Series B TCI Group Common Stock, -- -- -- --
par value $1.00 per share
- ----------------------------------------------------------------------------------------------------------------
Series A Liberty Media Group Common Stock, -- -- -- --
par value $1.00 per share
- ----------------------------------------------------------------------------------------------------------------
Series B Liberty Media Group Common Stock, -- -- -- --
par value $1.00 per share
- ----------------------------------------------------------------------------------------------------------------
Total -- -- $100 $100
================================================================================================================
</TABLE>
(1) The securities being registered are the Series A Liberty Media Group Common
Stock, par value $1.00 per share, and Series B Liberty Media Group Common
Stock, par value $1.00 per share, to be distributed to holders of shares of
the Registrant's Class A Common Stock, par value $1.00 per share, and Class
B Common Stock, par value $1.00 per share, respectively, outstanding on the
record date for the distribution on a one-for-four basis as described herein
and the Series A TCI Group Common Stock, par value $1.00 per share, and
Series B TCI Group Common Stock, par value $1.00 per share, to be created by
redesignation of such Class A Common Stock and Class B Common Stock,
respectively. In accordance with Rule 457(o) under the Securities Act of
1933, as amended, the number of shares being registered is not included in
this table.
(2) The shares will be distributed to stockholders without consideration.
Accordingly, pursuant to Section 6(b) of the Securities Act of 1933, as
amended, the amount of the registration fee is $100. For purposes solely of
filing this Registration Statement, the Registrant has included a nominal
Proposed Maximum Aggregate Offering Price of $100.
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
====================================================================================================================================
<S> <C> <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; 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 six 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;
Concerning Management; Stockholders' Proposals
Item 19. Information if Proxies, Consents or Authorizations are
not to be Solicited or in an Exchange Offer............ *
___________________
* Omitted because inapplicable or answer is in the negative.
</TABLE>
<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
[date] 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
common stock to be called Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, which are 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. 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
Series A Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock (collectively, the "Liberty Media Group Common Stock") distributed
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, 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.
<PAGE>
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 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 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 as 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,
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS.................................... 1
PROXY STATEMENT/PROSPECTUS.................................................. 1
AVAILABLE INFORMATION....................................................... 7
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 8
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.............................. 10
PROXY STATEMENT/PROSPECTUS SUMMARY.......................................... 18
SPECIAL CONSIDERATIONS...................................................... 34
THE ANNUAL MEETING.......................................................... 46
ELECTION OF DIRECTORS....................................................... 48
THE LIBERTY MEDIA GROUP STOCK PROPOSAL...................................... 51
General................................................................... 51
Background and Reasons for the Liberty Media Group Stock Proposal......... 52
Recommendation of the Board of Directors.................................. 57
Management and Allocation Policies........................................ 57
Description of TCI Group Common Stock and Liberty Media Group Common
Stock.................................................................... 62
No Initial Inter-Group Interest........................................... 83
Dividend Policy........................................................... 86
Stock Transfer Agent and Registrar........................................ 86
Inclusion in Nasdaq National Market....................................... 86
No Dissenters' Rights..................................................... 87
Certain Federal Income Tax Considerations................................. 87
Effects on Convertible Securities......................................... 91
Adjustments Under Stock Incentive Plan and Director Stock Option Plan..... 91
Future Issuances Pursuant to Stock Incentive Plan and Director Stock
Option Plan.............................................................. 91
Issuance of Series F Preferred Stock...................................... 92
DESCRIPTION OF BUSINESS OF LIBERTY MEDIA GROUP.............................. 94
THE INCREASED AUTHORIZATION PROPOSAL........................................ 130
THE DIRECTOR STOCK OPTION PLAN PROPOSAL..................................... 132
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................. 136
CONCERNING MANAGEMENT....................................................... 144
ANTI-TAKEOVER CONSIDERATIONS................................................ 159
DESCRIPTION OF EXISTING COMMON STOCK AND OTHER CAPITAL STOCK................ 162
LEGAL MATTERS............................................................... 169
EXPERTS..................................................................... 169
STOCKHOLDERS' PROPOSALS..................................................... 171
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-278
APPENDIX V - Tele-Communications, Inc. 1994 Nonemployee Director Stock
Option Plan............................................................... V-1
</TABLE>
i
<PAGE>
TELE-COMMUNICATIONS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on [date]
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 [date], for the following
purposes:
1. To elect three directors of the Company to hold office 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
550,000,000 in the number of authorized shares so that the Common Stock would
consist of: (i) 500,000,000 newly authorized shares designated Series A Liberty
Media Group Common Stock, (ii) 50,000,000 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 [record date], the
record date for the Annual Meeting, will be entitled to notice of and to vote at
the Annual Meeting. Holders of the Class A Common Stock, the Class B Common
Stock, the Class B Preferred Stock and the Series C Preferred Stock will be
entitled to vote together as a single class in the election of directors, and
holders of the Class A Common Stock, the Class B Common Stock and the Series C
Preferred Stock 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 the Class A Common
Stock and holders of the Class B Common Stock will each be entitled to vote as a
separate class on the Liberty Media Group Stock Proposal.
<PAGE>
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
[date]
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU INTEND
TO BE PRESENT AT THE ANNUAL MEETING.
<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 13, 1995
TELE-COMMUNICATIONS, INC.
Terrace Tower II, 5619 DTC Parkway
Englewood, Colorado 80111
PROXY STATEMENT/PROSPECTUS
For Annual Meeting of Stockholders to be held [date]
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
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 550,000,000 in the number of authorized shares so that
the Common Stock would consist of:
(a) 500,000,000 newly authorized shares designated Series A Liberty
Media Group Common Stock (the "Series A Liberty Media Group
Common Stock"),
(b) 50,000,000 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 represent the newly
created "Liberty Media Group". The 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 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
of substantially all of Old TCI's interests in Turner Broadcasting System, Inc.
and Discovery Communications, Inc.).
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 and
one-fourth of one share of Series B Liberty Media Group Common Stock on each
outstanding share of Class B Common Stock, in each case to holders of record on
the record date for the Distribution. The record date for the Distribution will
be the date the Company's Restated Certificate of Incorporation (the "Charter")
is amended pursuant to the Liberty Media Group Stock Proposal, which is expected
to occur as promptly as practicable after the Annual Meeting. The Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock so distributed will be intended to reflect 100% of the equity value of the
Company attributable to the Liberty Media Group.
-2-
<PAGE>
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 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 outstanding shares of Liberty Media Group Common Stock are
purchased 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. 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 "SPECIAL CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE LIBERTY MEDIA GROUP STOCK
PROPOSAL.
-3-
<PAGE>
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. Under the terms of the Liberty Media Group
Common Stock as set forth in the Charter as proposed to be amended pursuant to
the Liberty Media Group Stock Proposal (the "Amended Charter"), 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 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.
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.
-4-
<PAGE>
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 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 specified period after
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 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 fair 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 specified 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.
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 for an aggregate number of shares of any one or more wholly-
owned subsidiaries that hold all of the assets and liabilities of the Liberty
Media Group equal to the product of the percentage interest in the Liberty Media
Group represented by outstanding shares of Liberty Media Group Common Stock and
the number of outstanding shares of common stock of each of such subsidiaries.
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.
-5-
<PAGE>
The rights of holders of the TCI Group Common Stock upon liquidation of the
Company will be based on the ratio 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 ratio 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. For this purpose, market capitalization is determined on the
basis of a time-weighted average over a specified period prior to announcement
of the liquidation event.
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".
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.
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].
-6-
<PAGE>
The Company was incorporated in 1994 under the name "TCI/Liberty Holding
Company" for the purpose of combining 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 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 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 issuable in
connection with the Liberty Media Group Stock Proposal. 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 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.
-7-
<PAGE>
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 and May 4, 1995.
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.
-8-
<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].
-9-
<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", "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 TCI Group - the Company's Liberty Media Group is
Company. businesses and assets not engaged in two principal
included in the Liberty lines of business: (i)
Media Group, including production, acquisition
domestic cable and and distribution through
telephony distribution all available formats and
and communications, media of branded
international cable, entertainment,
telephony and programming educational and
and technology/venture informational programming
capital, together with and software including
any subsequently created multimedia products and
Inter-Group Interest in (ii) electronic
the Liberty Media Group. retailing, direct
marketing, advertising
sales relating to
programming services,
infomercials and
transaction processing.
The TCI Group Common The Liberty Media Group
Stock is intended to Common Stock is intended
reflect the separate to reflect the separate
performance of the TCI performance of the
Group. However, holders Liberty Media Group.
of TCI Group Common Stock However, holders of
will continue to be Liberty Media Group
subject to risks Common Stock will be
associated with an subject to risks
investment in the Company associated with an
and all of its investment in the Company
businesses, assets and and all of its
liabilities. There is no businesses, assets and
assurance as to the liabilities. There is no
degree to which the assurance as to the
market value of the TCI degree to which the
Group Common Stock will market value of the
reflect the separate Liberty Media Group
performance of the TCI Common Stock will reflect
Group. the separate performance
of the Liberty Media
Group.
</TABLE>
-10-
<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: The Company has never The Company's current The Company's current
paid cash dividends on policy of paying no cash policy of paying no cash
its Class A Common Stock dividends on Common Stock dividends on Common Stock
or Class B Common Stock, would also apply to the would also apply to the
and the Company's current TCI Group Common Stock. Liberty Media Group
policy is to pay no cash Common Stock.
dividends on 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 the lesser of assets
Company legally available of the Company legally of the Company legally
for dividends. If available therefor and available therefor and the
dividends on the Class A the TCI Group Available Liberty Media Group
Common Stock or Class B Dividend Amount. If Available Dividend Amount.
Common Stock are paid, dividends on the TCI If dividends on the Liberty
they will be concurrently Group Common Stock are Media Group Common Stock
paid on both the Class A paid, equivalent per are paid, equivalent per
Common Stock and the share dividends will be share dividends will be
Class B Common Stock in concurrently paid on both concurrently paid on both
equal per share amounts. the Series A TCI Group the Series A Liberty
Share distributions Common Stock and the Media Group Common Stock
consisting of Class A Series B TCI Group Common and the Series B Liberty
Common Stock or Class B Stock. For this purpose, Media Group Common Stock.
Common Stock may be made equivalent per share For this purpose,
either on the basis of an dividends include, in the equivalent per share
identical distribution to case of distributions of dividends include, in the
the holders of certain securities case of distributions of
outstanding Class A (including stock certain securities
Common Stock and Class B dividends consisting of (including stock
Common Stock or on the any series of Common dividends consisting of
basis of equal per share Stock), either Liberty Media Group
distributions of Class A distributions of Common Stock), either
Common Stock to the identical securities or distributions of
holders of Class A Common distributions of identical securities or
Stock and Class B Common securities having distributions of
Stock to the holders of relative voting rights securities having
Class B Common Stock. and differences in relative voting rights
certain related rights and differences in
not greater than the certain related rights
corresponding differences not greater than the
between the Series A TCI corresponding differences
Group Common Stock and between the Series A
the Series B TCI Group Liberty Media Group
Common Stock. Common Stock and the
Series B Liberty Media
Group Common Stock.
</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>
Dividends (Cont'd): Subject to the foregoing Subject to the foregoing
provisions, dividends may provisions, dividends may
be declared and paid on be declared and paid on
the TCI Group Common the TCI Group Common
Stock and/or the Liberty Stock and/or the Liberty
Media Group Common Stock Media Group Common Stock
in equal or unequal in equal or unequal
amounts, notwithstanding amounts, notwithstanding
the relationship between the relationship between
the TCI Group Available the 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, prior dividends paid on,
or liquidation rights of, or liquidation rights of,
the TCI Group Common Stock the TCI Group Common Stock
or the Liberty Media Group or 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. the Company as a whole.
In making a determination In making a determination
as to the allocation of as to the allocation of
any future dividends any future dividends
among the TCI Group among the TCI Group
Common Stock and the Common Stock and the
Liberty Media Group Liberty Media Group
Common Stock, the Board Common Stock, the Board
of Directors expects to of Directors expects to
follow a policy under follow a policy under
which it will consider, which it will consider,
among other factors, the among other factors, the
relative financial relative financial
condition, results of condition, results of
operations and business operations and business
requirements of the requirements of the
respective Groups. respective Groups.
</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>
Dividend,
Redemption and
Conversion Rights
applicable on
Disposition
of Group Assets: None. None. 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
Related Business
Transaction in which the
Company receives
Qualifying 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>
-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
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. In case the
Company elects to redeem
the Liberty Media Group
Common Stock in part
following the disposition
of substantially all of
the properties and assets
of the Liberty Media
Group, such 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.
Conversion at
Option of Holder: Shares of Class B Common Shares of Series B TCI Shares of Series B
Stock are convertible at Group Common Stock will Liberty Media Group
any time at the option of be convertible at any Common Stock will be
the holder only into the time at the option of the convertible at any time
same number of shares of holder only into the same at the option of the
Class A Common Stock. number of shares of holder only into the same
Series A TCI Group Common number of shares of
Stock. Series A Liberty Media
Group Common Stock.
</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>
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 Common Stock
equal to the ratio of the
Fair 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>
-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>
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 for an
aggregate number of
shares of any one or more
wholly-owned subsidiaries
that hold all of the
assets and liabilities of
the Liberty Media Group
equal to the product of
the percentage interest
in the Liberty Media
Group represented by
outstanding shares of
Liberty Media Group
Common Stock and the
number of outstanding
shares of common stock of
each of such
subsidiaries. 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.
Voting Rights: The Class A Common Stock The Series A TCI Group The Series A Liberty
is entitled to one vote Common Stock will be Media Group Common Stock
per share and the Class B entitled to one vote per will be entitled to one
Common Stock is entitled share and the Series B vote per share and the
to ten votes per share, TCI Group Common Stock Series B Liberty Media
voting as one class with will be entitled to ten Group Common Stock will
any preferred stock votes per share, voting be entitled to ten votes
entitled to vote, except as one class with the per share, voting as one
to the extent separate Liberty Media Group class with the TCI Group
class votes are required Common Stock and any Common Stock and any
by law or the Charter. preferred stock entitled preferred stock entitled
to vote, except to the to vote, except to the
extent separate class extent separate class or
or series votes are series votes are required
required by law or the by law or the Amended
Amended Charter. Charter.
</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>
Liquidation: Holders of shares of Holders of shares of Holders of shares of
Class A Common Stock and Series A TCI Group Common Series A Liberty Media
Class B Common Stock are Stock and Series B TCI Group Common Stock and
entitled to share the Group Common Stock will Series B Liberty Media
funds of the Company be entitled to share (on Group Common Stock will
remaining for an equal per share basis) be entitled to share (on
distribution to its a portion of the funds of an equal per share basis)
common stockholders. the Company remaining for a portion of the funds of
distribution to its the Company remaining for
common stockholders based distribution to its
on the ratio of the common stockholders based
aggregate Market on the ratio of the
Capitalization of the aggregate Market
TCI Group Common Stock Capitalization of the
to the aggregate Market Liberty Media
Capitalization of the Group Common Stock
TCI Group Common Stock to the aggregate Market
and the Liberty Capitalization of the
Media Group Common Stock. TCI Group Common Stock
Market Capitalization is and the Liberty
determined on the basis Media Group Common Stock.
of a time-weighted Market Capitalization is
average over a period of determined on the basis
20 trading days prior to of a time-weighted
announcement of the average over a period of
liquidation event. 20 trading days prior to
announcement of the
liquidation event.
Inclusion in Nasdaq
National Market: Nasdaq National Market Nasdaq National Market Nasdaq National Market
under the symbols under the symbols under the symbols
"TCOMA" and "TCOMB". "TCOMA" and "TCOMB". "LBTYA" and "LBTYB".
</TABLE>
-17-
<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", "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, Class A and Class B shares 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 shares. LMC
common shareholders received 0.975 of a share of Common Stock for each of their
common shares.
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 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, including
Turner Broadcasting System, Inc.
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<PAGE>
("TBS"); Discovery Communications, Inc. ("Discovery"); Home Shopping Network
Inc. ("HSN"); QVC, Inc. ("QVC"); Encore Media Corporation ("Encore"); BET
Holdings, Inc.; International Family Entertainment, Inc.; E! Entertainment
Television; and five national and 15 regional sports networks. The Liberty Media
Group also owns Netlink USA ("Netlink"), a provider of programming packages to
home satellite dish owners. Liberty Media Group provided service to
approximately 451,000 Netlink subscribers at March 31, 1995. 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, certain programming assets held by TCIC (primarily
its interests in TBS, Discovery and Netlink) were transferred to Liberty, and
LMC, which then held only 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 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. Additionally, the TCI Group had approximately 150,000 Primestar
Partners subscribers at March 31, 1995.
Subsidiaries of TCIC, together with 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 for the Los Angeles - San Diego market. The TCI Group also owns a 35.3%
interest in a partnership with 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
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<PAGE>
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.
The TCI Group also has an investment in Primestar Partners, a direct
broadcast satellite service.
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 filed a
registration statement on May 4, 1995 with the Commission pursuant to which it
proposes 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. 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 Time Warner Entertainment Company, L.P. to develop and market the
first video game channel, called "The Sega Channel." TCI Technology has also
made investments in TSX Corporation, a producer of communications equipment,
Interactive Network, Inc., a developer of interactive television programming
systems, and Acclaim Entertainment, Inc. ("Acclaim"). TCI
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Technology has formed a joint venture with Acclaim 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 [date], starting at [time],
local time. Holders of record of shares of Class A Common Stock, Class B Common
Stock, the Company's 6% Cumulative Redeemable Exchangeable Junior Preferred
Stock, par value $.01 per share (the "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 [date] (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. 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 one hundred
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.
<TABLE>
<CAPTION>
Record Holders
Entitled to Vote Vote Required
---------------- -------------
<S> <C> <C>
Election of Directors: Class A Common Stock Plurality of the votes of the shares
Class B Common Stock of Class A Common Stock,
Class B Preferred Stock Class B Common Stock, Class B
Series C Preferred Stock Preferred Stock and Series C
Preferred Stock represented and
entitled to vote at the Annual
Meeting, voting as a single class.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Record Holders
Entitled to Vote Vote Required
---------------- -------------
<S> <C> <C>
Liberty Media Group Stock
Proposal: Class A Common Stock 66 2/3% of the combined voting
Class B Common Stock power of the shares of Class A
Series C Preferred Stock 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 voting
Class B Common Stock power of the shares of Class A
Series C Preferred Stock 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 voting
Class B Common Stock power of the shares of Class A
Series C Preferred Stock 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.
</TABLE>
The directors and officers of the Company as of the Record Date owned
[6,169,538] 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 [25,697,083] 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 Annual Meeting in the same proportions as votes
represented by all other shares are cast
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<PAGE>
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 [42.79]% of the
combined voting power of the Class A Common Stock, Class B Common Stock, Class B
Preferred Stock and Series C Preferred Stock, [42.81]% of the voting power of
the Class A Common Stock, Class B Common Stock and Series C Preferred Stock,
[1.08]% of the number of the outstanding shares of Class A Common Stock,
[71.27]% of the number of the outstanding shares of Class B Common Stock and
[10.63]% 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). 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. 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 550,000,000 in the number of authorized shares
so that the Common Stock would consist of: (i) 500,000,000 newly authorized
shares designated Series A Liberty Media Group Common Stock, (ii) 50,000,000
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 issued in the Distribution would be intended
initially to reflect 100% of the equity value of the Company attributable to the
Liberty Media Group.
Fractional shares of Liberty Media Group Common Stock will not be issued in
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 the
cash value of such fractional share within
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<PAGE>
60 trading days of the Distribution, based upon the average of the last reported
sales prices 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".
Special Considerations
SEE "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 "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.
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 detailed description of the TCI
Group Common Stock and the Liberty Media Group Common Stock, see "The Liberty
Media Group Common Stock Proposal-Description of TCI Group Common Stock and
Liberty Media Group Common Stock".
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<PAGE>
No Initial Inter-Group Interest
After issuance of the Liberty Media Group Common Stock pursuant to the
Distribution, shares representing 100% of the equity value of the Company
attributable to the Liberty Media Group will be outstanding 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 are purchased 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 measured on a basis
comparable to outstanding shares of Liberty Media Group Common Stock by the
"Number of Shares Issuable with respect to the Inter-Group Interest", which is
the number of shares of Series A Liberty Media Group Common Stock that could be
sold or otherwise issued by the Company for the account of the TCI Group in
respect of its Inter-Group Interest. In general, if an Inter-Group Interest is
created or increased 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 the amount of funds or value of the
assets transferred divided by the then current Market Value of a share of Series
A Liberty Media Group Common Stock. 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. Repurchases of shares of Liberty Media Group Common Stock
with funds attributed to the TCI Group would increase the Number of Shares
Issuable with Respect to the Inter-Group Interest on a share for share basis.
Likewise, 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. Shares of Series B Liberty Media Group
Common Stock may not be 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. 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".
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<PAGE>
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.
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
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<PAGE>
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). 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 (iii) provide for the potential conversion or
redemption of the Liberty Media Group Common 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 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 takeover or 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
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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
Directors 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".
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.
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Price Range Of Class A Common Stock, Class B Common Stock and Class B Preferred
Stock
The Class A Common Stock, the Class B Common Stock and the Class B
Preferred Stock are traded on the Nasdaq National Market under the symbols
"TCOMA", "TCOMB" and "TCOMP", respectively. The following table sets forth the
high and low sales prices of the Class A Common Stock, the Class B Common Stock
and the Class B Preferred Stock as reported by the Nasdaq National Market for
the periods indicated. The prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
Class A Class B Class B
Common Common Preferred
Stock Stock Stock
----- ----- -----
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <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 71 62
Fourth Quarter 25 20 1/4 25 1/2 21 1/2 64 1/8 54
Year ending December 31, 1995
First Quarter 23 3/4 19 7/8 25 20 3/4 65 1/2 56
Second Quarter (through
May 17, 1995) 21 1/2 17 1/4 21 3/4 18 1/4 66 62 1/2
</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 and the
Class B Common 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 date of this Proxy Statement/Prospectus, there were approximately
_______, _______ and _______ holders of record of the Class A Common Stock, the
Class B Common Stock and the Class B Preferred Stock, respectively (excluding
shares held by subsidiaries of the Company).
-29-
<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.
The table also sets forth selected unaudited pro forma balance sheet data for
the Company as of December 31, 1994, giving pro forma effect to the Company's
acquisition of TeleCable Corporation ("TeleCable") by means of a merger (the
"TeleCable Merger"), 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") and the merger of
QVC Programming, Inc., a corporation jointly owned by Comcast and Liberty, with
QVC (the "QVC Merger") as if such transactions had occurred as of December 31,
1994, 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 TeleCable Merger, the Cablevision Acquisition and the
QVC Merger 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, the Cablevision Acquisition and the QVC
Merger 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 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 common shareholders
and earnings per share for 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 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.
-30-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
Pro
Forma
1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue.................................... $ 6,131 $ 4,936 $ 4,153 $ 3,574 $ 3,214 $ 2,940
Operating, selling, general and
administrative expenses............... (4,095) (3,138) (2,295) (1,937) (1,784) (1,678)
Depreciation and amortization.............. (1,173) (1,018) (911) (764) (756) (716)
Operating income........................... 877 788 916 864 674 546
Earnings (loss) from:
Continuing operations................. 105 55 (7) 7 (78) (191)
Discontinued operations............... -- -- -- (15) (19) (63)
------- ------- ------- ------- ------- -------
105 55 (7) (8) (97) (254)
Dividend requirement on
redeemable preferred stocks........... (31) (8) (2) (15) -- --
------- ------- ------- ------- ------- -------
Net earnings (loss) attributable to
common stockholders................... $ 74 $ 47 $ (9) $ (23) $ (97) $ (254)
======= ======= ======= ======= ======= =======
Net loss attributable to TCI Series A
and Series B common shareholders...... $ (30)
Net earnings attributable to Liberty Media
Group Series A and Series B
common shareholders................... $ 104
Primary earnings (loss) attributable
to common stockholders per
common and common equivalent
share:
Continuing operations........... $ .11 $ .09 $ (.02) $ (.01) $ (.22) $ (.54)
Discontinued operations......... -- -- -- (.04) (.05) (.18)
------- ------- ------- ------- ------- -------
$ .11 $ .09 $ (.02) $ (.05) $ (.27) $ (.72)
======= ======= ======= ======= ======= =======
TCI Group Series A and
Series B Common Stock................. $ (.05)
=======
Liberty Media Group Series A and
Series B Common Stock................. $ .64
=======
Primary weighted average common
shares outstanding
TCI Series A and Series B
Common Stock.................... 600 541 433 424 360 355
TCI Group Series A and Series B
Common Stock.................... 600
Liberty Media Group Series A and
Series B Common Stock........... 163
Other Data:
Operating income before
depreciation, amortization and
non-cash operating expenses/(1)/...... $ 2,036 $ 1,798 $ 1,858 $ 1,637 $ 1,430 $ 1,262
Consolidated basic cable and
satellite subscribers................. 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.
-31-
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
Pro
Forma
1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net.................. $ 6,498 $ 5,876 $ 4,935 $ 4,562 $ 4,081 $ 4,156
Franchise costs, net......................... 11,738 9,444 9,197 9,300 8,104 7,348
Net assets of discontinued operations........ -- -- -- -- 242 54
Total assets................................. 22,284 19,528 16,520 16,310 15,166 14,106
Total debt................................... 11,755 11,162 9,900 10,285 9,455 8,922
Stockholders' equity......................... 3,844 2,971 2,112 1,726 1,570 748
Shares outstanding (net of treasury shares):
Class A Common Stock.................... 535 491 403 382 370 310
Class B Common Stock.................... 85 85 47 48 49 48
</TABLE>
Liberty Media Group
The following table sets forth selected historical combined financial data
for the Liberty Media Group for each of the five fiscal years in the period
ended December 31, 1994. The table also sets forth selected unaudited pro forma
combined balance sheet data for the Liberty Media Group as of December 31, 1994,
giving pro forma combined effect to the QVC Merger as if such transaction had
occurred as of December 31, 1994, and selected unaudited pro forma combined
statement of operations data for the Company for the year ended December 31,
1994, giving pro forma effect to the QVC Merger as if the same 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 QVC Merger been effective at or prior to such
assumed dates, or of the future results of operations of Liberty Media Group.
Additionally, such pro forma statement of operations data reflects earnings
attributable to the Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock common shareholders and earnings per share for
the Series A Liberty Media Group Common Stock and Series B 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 the Company and its affiliate, Liberty Media Corporation.
-32-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
Pro Forma
1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue, including amounts from
TCI Group............................... $ 1,498 $ 1,498 $ 1,207 $ 209 $ 126 $ 78
Cost of goods sold, operating, selling,
general and administrative expenses,
including amounts to TCI Group.......... (1,462) (1,462) (1,131) (189) (127) (89)
Depreciation and amortization................ (50) (50) (40) (14) (14) (17)
Operating loss............................... (5) (5) (4) (11) (17) (28)
Interest expense, including amounts to
TCI Group............................... (15) (15) (14) (14) (9) (11)
Dividend and interest income, primarily
from affiliates......................... 20 20 23 12 25 28
Share of earnings of affiliates,
net..................................... (19) (20) 24 24 9 1
Net earnings................................. 104 105 25 15 31 1
Earnings attributable to the Liberty Media
Group Series A and Series B common
shareholders............................ 104
Primary earnings attributable to Liberty
Media Group Series A and Series B
common stock per common and common
equivalent share........................ .64
Other Data:
Operating income (loss) before
depreciation, amortization and
non-cash operating expenses/(2)/........ 36 36 76 20 (1) (11)
<CAPTION>
December 31,
----------------------------------------------------------------------------
Pro Forma
1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Investment in affiliates, accounted for
under the equity method................ $ 197 $ 197 $ 229 $ 214 $ 208 $ 203
Investment in Turner Broadcasting
System, Inc............................. 654 654 487 487 487 406
Other investments, at cost................... 230 439 235 76 63 61
Total assets................................. 2,272 2,481 1,732 999 962 791
Total debt................................... 330 330 400 289 280 50
Combined equity.............................. 1,266 1,386 892 628 643 682
</TABLE>
- ------------------------
/(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.
-33-
<PAGE>
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 legally available funds of the
Company 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 the Liberty Media 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
-34-
<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. 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 the 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.
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
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 described 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
-35-
<PAGE>
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.
Optional Conversion of Liberty Media Group Common Stock into TCI Group Common
Stock
The Board of Directors may, in its sole discretion, 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 Fair 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 Fair Value of the 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
Fair 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
-36-
<PAGE>
that used in the determination of the Fair 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 separately reflect 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, in its sole discretion, 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 Related Business
Transaction in which the Company receives Qualifying 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 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 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".
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
-37-
<PAGE>
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, in its sole discretion, 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 International or the Liberty
Media Group, or jointly between the two. See "The Liberty Media Group Stock
Proposal--Management and Allocation Policies".
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, in its sole discretion, 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 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. Dividends on the TCI
Group Common Stock and the Liberty Media Group Common Stock are limited to funds
of the Company legally available for such purpose, which are determined on the
basis of the entire Company, and 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
-38-
<PAGE>
Directors may, in its sole discretion, 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, in its sole discretion, 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 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
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". 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
-39-
<PAGE>
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". 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 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
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 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 from and loans to the TCI
Group 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 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 from or loan to the TCI Group 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, taking into account relevant
circumstances, including the use of proceeds by the recipient Group, the capital
expenditure plans of and the investment
-40-
<PAGE>
opportunities available to each Group, the business prospects of each Group and
the availability, cost and time associated with alternative financing sources.
Generally, it is expected that entities included in the Liberty Media Group will
seek their own long-term debt financing.
Borrowings from or loans to the TCI 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.
In making such determinations, either in specific instances or by setting
generally applicable policies from time to time, the Board of Directors expects
to take into account considerations it deems relevant, including 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.
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 then current Market Value of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock, as applicable, 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". 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
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by such stockholder prior to the Distribution. See "Proxy Statement/Prospectus
Summary-Price Range of Class A Common Stock, Class B Common Stock and Class B
Preferred 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 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-Optional Conversion of Liberty Media Group Common Stock into TCI
Group Common Stock".
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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 Related Business Transaction in
which the Company receives Qualifying Securities of an entity primarily engaged
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 Market Value of a share of Series
A Liberty Media Group Common Stock to the average Market Value of a share of
Series A TCI Group Common Stock over a specified period. "Net Proceeds" means
the proceeds of such Disposition after payment of 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 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 Issuances of Liberty Media Group Common Stock upon Conversion of
Outstanding Securities
After the Distribution, 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 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 had such conversion or exchange occurred
prior to 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
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Class A Common Stock prior to the Distribution. A sufficient number of shares of
Series A Liberty Media Group Common Stock will be reserved for issuance upon
conversion or exchange of such existing securities or exercise of such Liberty
Media Group options. These reserved shares will not constitute an Inter-Group
Interest in the Liberty Media Group and will only be issued upon the conversion
or exchange of such securities or exercise of such Liberty Media Group options.
The issuance of shares of Series A Liberty Media Group Common Stock upon such
conversion, exchange or exercise 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 options to purchase Series A Liberty Media Group
Common Stock, the proceeds received upon the exercise of such option will be
attributed to the Liberty Media Group. 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). After the Distribution, such
preferred stock, debt securities and options will be convertible into or
exchangeable or exercisable for [17,130,200] shares of Series A Liberty Media
Group Common Stock.
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
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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 authorization of the Company's Board of Directors to issue
additional shares of preferred stock 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 [date], 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 [date] 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 [571,489,713] shares of Class A Common Stock outstanding and
entitled to vote at the Annual Meeting held by ____________ stockholders of
record, [84,864,800] shares of Class B Common Stock outstanding and entitled to
vote held by _________ stockholders of record, [1,620,026] shares of Class B
Preferred Stock outstanding and entitled to vote held by _____ stockholders of
record and [70,559] shares of Series C Preferred Stock outstanding and entitled
to vote held by _______ stockholders of record.
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 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
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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 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
[6,169,538] 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 [25,697,083] 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 [42.79]% of the total voting
power of the Class A Common Stock, Class B Common Stock, Class B Preferred Stock
and Series C Preferred Stock, [42.81]% of the total voting power of the Class A
Common Stock, Class B Common Stock and Series C Preferred Stock, [1.08]% 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 [10.63]%
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).
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
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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 or personal interviews. 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 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 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.
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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, present in person or represented by proxy at the Annual Meeting
and entitled to vote thereon, 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.
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.
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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.
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.
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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 550,000,000 in the number of authorized
shares so that the Common Stock would consist of: (i) 500,000,000 newly
authorized shares designated Series A Liberty Media Group Common Stock, (ii)
50,000,000 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 approval of the Liberty Media Group Stock Proposal by
stockholders, 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 date the Company files the
Certificate of Amendment with the Secretary of State of the State of Delaware,
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 issued in the Distribution would be intended to reflect 100%
of the equity value of the Company attributable to the 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.
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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 resolutions
declaring the Distribution are adopted. Fractional shares of Liberty Media
Group Common Stock will not be issued in the Distribution. If more than one
share of Common Stock is held by the same holder of record, the Company will
aggregate the number of shares of Liberty Media Group Common Stock issuable to
such holder pursuant to the Distribution (including any fractions of shares).
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 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 such 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, (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 outstanding 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 outstanding shares of Class A Common Stock,
voting as a separate class, and a majority of the outstanding shares of Class B
Common Stock, voting as a separate class, 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
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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 the Company of a significant portion of such interests,
as well as materially limit the Company'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 the Company
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) the Company's interests (consisting 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 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. As a result, management of Old TCI began to consider the
possibility of re-combining the two
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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.
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 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 its cable television programming-related assets
was transferred to a new subsidiary of the Company, together with stock of
TCIC's subsidiaries that owned the programming-related assets of TCIC (which
consisted primarily of the Company's interests in TBS, Discovery and Netlink).
After these transfers, the assets held in LMC consisted solely 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.
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
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markets, in part because the market focused primarily upon the Company's
dominant cable television business and did not give full value to the Company's
diverse assets, such as its programming, international and technology
businesses. The Board noted that companies which operated in several lines of
business were often valued based upon the business considered "dominant." 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. The Board
believed that separate equity securities would enable investors to gain a better
understanding of each Group, and the separate reporting of their results would
create a framework for increased and more focused equity research coverage by
the investment community.
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.
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.
Because the tracking stock could track the performance of a single line of
business, it would also provide the Company with flexibility in future
financings, which could be targeted to investors interested primarily in
securities of companies in that line of 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 class 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
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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, 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 "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, 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, 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 "Special
Considerations-No Assurance as to Market Price" and "--Potential Divergence of
Interests". The Board determined, however, that the positive aspects of the
Liberty Media Group Stock Proposal outweighed any potentially adverse
aspect.
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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
reflect the 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. 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 "Special
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
Liberty Media Group to the extent that the debt is incurred or the
preferred stock is issued for the benefit of Liberty Media
Group.
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(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 be reflected
entirely 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 be reflected entirely 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
the TCI Group will be attributed an amount equal to the product of
the aggregate amount of such dividend or other distribution and a
fraction the numerator of which is the Inter-Group Interest Fraction,
if any, 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 be reflected entirely in the combined financial
statements 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 be reflected entirely in the
combined financial statements of the TCI Group.
(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 from and loans to the TCI Group 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 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 from
or loan to the TCI Group 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, taking into account relevant
circumstances, including the use of proceeds by the recipient Group,
the capital expenditure plans of and
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the investment opportunities available to each Group, the business
prospects of each Group and the availability, cost and time
associated with alternative financing sources. Generally, it is
expected that entities included in the Liberty Media Group will seek
their own long-term debt financing.
(iv) Borrowings from or loans to the TCI 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. In making such
determinations, either in specific instances or by setting generally
applicable policies from time to time, the Board of Directors expects
to take into account considerations it deems relevant, including 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.
(v) In the event of a transfer of funds 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 equal to the amount of such transfer divided
by the Market Value of a share of Liberty Media Group Common Stock,
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 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 equal to the amount of such transfer divided by the Market
Value of a share of Liberty Media Group Common Stock and the
Inter-Group Interest Fraction would be decreased and the Outstanding
Interest Fraction would be increased accordingly.
(vi) The combined financial statements 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 financial information 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 statements of
combined cash flows of 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 from
or loans to the TCI Group have been included as a component of the
Liberty Media Group's combined equity. Until the Distribution, the
net borrowings from or loans to the TCI Group will continue to be
characterized as a component of the Liberty Media Group's combined
equity.
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(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, such costs were
expected to aggregate 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. 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 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) 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 would 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
would 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 would 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 the Company for its
gross share of the Company'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 the Company's consolidated, combined or unitary tax
benefit carryovers. Similarly, the Company 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 the Company 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 would be inventoried
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and tracked for the entities comprising each Group. The Company would
retain the right to file all returns, make all elections and control
all audits and contests.
(ix) The Board of Directors of the Company has informed
International that it currently intends, 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 (a) existing programming services that
are owned or managed by the Liberty Media Group (including The
International Channel, Prime Sports Network and Encore), (b)
programming services acquired, developed, managed and/or operated by
subsidiaries or affiliates of the Company that are not controlled by
the Company or (c) the distribution outside of the United States of a
programming service that is or was initially created for distribution
within the United States. If the board of directors of International
determines not to pursue an International Programming Opportunity
presented to it by the Company, the Board of Directors of the Company
may determine to pursue such International Programming Opportunity
through the Liberty Media Group, or subject to the approval of the
board of directors of International, through a joint venture between
International and the Liberty Media Group. In addition, to the extent
that the Company or any of its controlled affiliates owns rights to
worldwide or regional sporting events, the Company (through the
Liberty Media Group) or such affiliates will be entitled to utilize
those rights to provide "backdrop" service to programming channels
outside of the United States. The Board of Directors does not intend
to make available to International any International Programming
Opportunity to the extent the Company or any of its controlled
affiliates is legally or contractually prohibited from doing so.
Any arrangement for making International Programming Opportunities
available to International will also be terminable at such time as
the Company ceases to own at least a majority in voting power of the
outstanding shares 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
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Stock, would be made by the Board of Directors as set forth under "Special
Considerations-Fiduciary Duties of the Board of Directors".
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 550,000,000 in the number of authorized
shares so that the Common Stock would consist of: (i) 500,000,000 newly
authorized shares designated Series A Liberty Media Group Common Stock, (ii)
50,000,000 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 be entitled to one vote for each share of such stock held, and
holders of Series B TCI Group Common Stock will 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 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 the amendment, alteration or repeal of any provision of the Amended
Charter or the addition or insertion of other provisions therein, 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, 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, the sale, lease or exchange of all or substantially all of
the property and assets of the Company or the dissolution of the Company. Any
action to remove directors would be required to be for cause and be approved by
the holders of a majority of the shares then 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
separately as a class 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 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
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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 contain similar provisions.
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) the greater of (x) the fair value (as determined by
the Board of Directors) of the net assets of the TCI Group and (y)
$_____________ (the stockholders' equity of the Company attributable
to the TCI Group as of March 31, 1995),
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increased or decreased, as appropriate, to reflect, after such date,
(A) Company Earnings (Loss) Attributable to the TCI Group, (B) any
dividends or other distributions (including by reclassification or
exchange) declared or paid with respect to, or repurchases or
issuances of, any shares of Series A TCI Group Common Stock or Series
B TCI Group Common Stock or preferred stock attributed to the TCI
Group, (C) assets or properties of the TCI Group that are included in
the TCI Group as a result of any dividend or other distribution with
respect to any shares of Liberty Media Group Common Stock and (D) any
other adjustments to stockholders' equity of the Company made in
accordance with generally accepted accounting principles and
attributed to the TCI Group, over (ii) the sum of the aggregate par
value of all outstanding shares of preferred stock attributed to the
TCI Group and the aggregate par value of all outstanding shares of
Series A TCI Group Common Stock and Series B TCI Group Common Stock;
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 the dividend is declared and/or the preceding
fiscal year.
"Company Earnings (Loss) Attributable to the TCI Group", for any period, means
the net earnings or loss of the TCI Group for such period (or for fiscal periods
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 period as if the first day of the fiscal quarter in which such
date falls had been the first day of such period) 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 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) the greater of (x) the fair value (as determined by
the Board of Directors) of the net assets of the Liberty Media Group
and (y) $______________ (the stockholders' equity of the Company
attributable to the Liberty Media Group as of March 31, 1995)
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increased or decreased, as appropriate, to reflect, after such date,
(A) Company Earnings (Loss) Attributable to the Liberty Media Group,
(B) any dividends or other distributions (including by
reclassification or exchange) declared or paid with respect to, or
repurchases or issuances of, any shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock or
preferred stock attributed to the Liberty Media Group, (C) assets or
properties of the Liberty Media Group that are no longer included in
the Liberty Media Group as a result of any dividend or other
distribution with respect to any shares of Liberty Media Group Common
Stock and (D) any other adjustments to stockholders' equity of the
Company made in accordance with generally accepted accounting
principles and attributed to the Liberty Media Group, over (ii) the
sum of the aggregate par value of all outstanding shares of preferred
stock attributed to the Liberty Media Group and the aggregate par
value of all outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock; 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 the dividend is declared and/or the
preceding fiscal year.
The "Company Earnings (Loss) Attributable to the Liberty Media Group", for any
period, means the net earnings or loss of the Liberty Media Group for such
period (or for fiscal periods 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 period as if the first day
of the fiscal quarter in which such date falls had been the first day of such
period) 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 classes, 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.
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 all or less than all series of
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".
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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 paid), 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 in the Liberty Media Group and the effects of dividends on shares of
Liberty Media Group Common Stock.
Share Distributions
Distributions on Common Stock. If at any time a distribution paid in TCI
Group Common Stock, Liberty Media Group Common Stock or any other securities 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 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 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 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 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 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; or consisting of shares
of Series B Liberty Media Group Common Stock (or Convertible
Securities convertible into or exercisable for shares of Series B
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; or consisting of shares of Series A Liberty Media Group
Common Stock (or Convertible Securities convertible into or
exercisable for 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 (or
like Convertible Securities convertible into or exercisable for
shares of Series B Liberty Media Group Common Stock) to holders of
Series B TCI Group Common Stock; provided in each case covered by
this subparagraph (ii) that the sum of (1) the aggregate number
of shares of Series A Liberty Media Group
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Common Stock to be so issued (or the number of such shares which
would be issuable upon conversion or exercise of any Convertible
Securities to be so issued) and (2) the number of such shares of
such series that are subject to issuance upon conversion or exercise
of any Convertible Securities then outstanding that are attributed
to the TCI Group 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
of the Company other than TCI Group Common Stock or Liberty Media
Group Common Stock (or Convertible Securities convertible into or
exercisable 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) 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 Series B TCI
Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B
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TCI Group Common Stock without reclassifying, subdividing or combining the
Series A TCI Group Common Stock, on an equal per share basis.
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 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 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 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 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 Company other than Liberty Media Group Common Stock (or
Convertible Securities convertible into or exercisable for shares of
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 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) 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,
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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.
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 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 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) the numerator of which is the
Fair Value of one share of Liberty Media Group Common Stock (determined as
described in the two immediately following paragraphs) and the denominator of
which is the average Market Value of one share of Series A TCI Group Common
Stock for the 20-Trading Day period ending on the Initiation Date (as defined in
the following paragraph).
For purposes of determining the Optional Conversion Ratio, the "Fair Value"
of one share of Liberty Media Group Common Stock means an amount determined as
described in this paragraph. In the event that the Company determines to
establish such Fair Value, on the date as of which
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such Fair Value is to be determined (the "Initiation Date"), two investment
banking firms of recognized national standing will be designated to determine
the Fair Value, 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 Trading Days after the Initiation Date, the First
Appraiser and the Second Appraiser will each determine its initial view as to
the private market value (as described in the following paragraph) of the
Liberty Media Group as of the Initiation Date and will consult with one another
with respect thereto. By the 30th Trading Day after the Initiation 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
Fair Value will be the average of those two amounts divided by the sum of the
aggregate number of shares of Liberty Media Group Common Stock outstanding and
deemed to be outstanding as of the Initiation Date by such investment banking
firms (or the average thereof if such aggregate number of shares differ) and the
Number of Shares Issuable with Respect to the Inter-Group Interest. Otherwise,
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 50th Trading Day after the Initiation Date, determine such private
market value (the "Mutually Appraised Amount"), and the Fair Value will be (i)
the average of (a) the Mutually Appraised Amount and (b) the Lower Appraised
Amount or the Higher Appraised Amount, whichever is closer to the Mutually
Appraised Amount, provided that the Mutually Appraised Amount is between the
Lower Appraised Amount and the Higher 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, in either case divided by the sum of the aggregate number of
shares of Liberty Media Group Common Stock outstanding or deemed to be
outstanding as of the Initiation Date by the two investment banking firms whose
determinations of such private market value are averaged to determine the Fair
Value (or the average thereof if such aggregate number of shares differ) and the
Number of Shares Issuable with Respect to the Inter-Group Interest. 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 100th Trading Day following the Initiation Date. If the Company determines
not to undertake such conversion, the Company may at any time thereafter
undertake to reestablish the Fair Value as of a subsequent date.
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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 Initiation 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 would have existed if the Liberty Media Group were a publicly traded
non-controlled entity.
Any such conversion would dilute the interests of holders of TCI Group
Common Stock and would preclude holders of Liberty Media Group Common Stock
converted from retaining their interest in a security reflecting separately the
business of the Liberty Media Group. See "Special Considerations--Potential
Conversion of Liberty Media Group Common Stock".
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 (w) 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 which is followed by a liquidation, dissolution or winding up of
the Company, (x) 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, (y) to any person, entity or group which the Company,
directly or indirectly, after giving effect to the Disposition, controls or (z)
in connection with 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 in securities or other
property 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 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 in an aggregate amount
equal to the product of the Outstanding Interest Fraction and the
Net Proceeds of such Disposition, such amount to be allocated to
shares of Series A Liberty Media Group Common Stock and Series B
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Liberty Media Group Common Stock in the ratio of the number of
shares of each such series outstanding; or
(B) if such Disposition involves substantially all (but not
all) of the properties and assets of the Liberty Media Group, apply
an amount of cash and/or securities or other property equal to the
product of the Outstanding Interest Fraction 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 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, (1) the number of shares of Series A Liberty
Media Group Common Stock to be redeemed to equal the lesser of the
whole number nearest the amount so allocated to the redemption of
such series divided by the average Market Value of such series
during the ten-Trading Day period beginning on the 16th Trading Day
following the consummation of such Disposition and the number of
shares of such series outstanding and (2) the number of shares of
Series B Liberty Media Group Common Stock to be redeemed to equal
the lesser of the whole number nearest the amount so allocated to
the redemption of such series divided by the average Market Value of
such series during the same ten-Trading Day period and the number of
shares of such series outstanding; 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 B Liberty Media Group Common Stock to the Market Value of one
share of Series B TCI Group Common Stock during the ten-Trading Day
period referred to in clause (ii) 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
(including, without limitation, by merger, consolidation or sale) in a
transaction in which the Company receives primarily Qualifying Securities (as
defined below) in consideration for the disposition of such properties and
assets. The term "Qualifying Securities" means equity securities (including,
without limitation, capital
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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 all or substantially all of the business 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 transaction, 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 "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 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 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.
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 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
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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 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 or redemption made as a result of a Disposition
referred to above, the TCI Group will be credited, and the Liberty Media Group
will be charged, with an amount equal to the product of (i) the aggregate amount
paid in respect of such dividend or redemption 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 or redemption date on which all outstanding
shares of Liberty Media Group Common Stock were converted or redeemed, any share
of Liberty Media Group Common Stock that is issued on conversion or exercise of
any Convertible Securities will, immediately upon issuance pursuant to such
conversion or exercise 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:
(i) in the event that the shares of Liberty Media Group Common Stock
were converted into TCI Group Common Stock on such conversion date pursuant
to the provisions described under "-Conversion at the Option of the
Company" or "-Mandatory Dividend, Redemption or Conversion 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 or exercise 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 or
exercise 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 or exercised immediately prior thereto; or
(ii) in the event that the shares of Liberty Media Group Common Stock
were redeemed in whole pursuant to the provisions described under "-
Mandatory Dividend, Redemption or Conversion of Liberty Media Group Common
Stock" or redeemed for common stock of the Liberty Media Group Subsidiaries
pursuant to the provisions
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described under "-Redemption in Exchange for Stock of Subsidiaries", be
redeemed, to the extent of assets of the Company legally available
therefor, for $.01 per share in cash.
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.
Redemption in Exchange for Stock of Subsidiaries. Any time at which all of
the assets and liabilities of 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 and provided that the
Liberty Media Group Available Dividend Amount would have been sufficient to pay
a dividend in lieu thereof, 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 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. 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 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 common stock of each Liberty
Media Group Subsidiary issued in redemption 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 by reason of the existence of any Inter-
Group Interest 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
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Stock and Series B Liberty Media 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 or
exercisable and the conversion or exercise price thereof and (iv) the
Outstanding Interest Fraction. 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 such
paragraph referred to above, 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 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, (iii) the kind and aggregate amount of shares of capital stock, cash
and/or other securities or property to be distributed in respect of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, (iv) 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 or exercisable and the conversion or exercise
prices thereof and (v) 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 or exercise them prior to the record date referred to in clause (i) of
this sentence.
If the Company determines to undertake a redemption described in clause
(ii)(A) of such paragraph referred to above, 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 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, (ii)
the redemption date, (iii) 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 outstanding shares of Liberty Media Group Common Stock, (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 such capital stock, cash and/or other securities or property, (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 such Convertible Securities are then convertible or exercisable and
the
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conversion or exercise 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 participate in such redemption
only if such holders appropriately convert or exercise 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 thereafter convert or exercise such Convertible Securities. 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 described in clause
(ii) (B) of such paragraph referred to above, 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 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 subject
to redemption, (ii) the anticipated redemption date, (iii) 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 outstanding shares of
Liberty Media Group Common Stock, (iv) 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 or exercisable and the
conversion or exercise prices thereof and (v) 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 or exercise 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 and, if applicable, the provision
described in the last paragraph under "-Mandatory Dividend, Redemption or
Conversion of Liberty Media Group Common Stock" if such holders thereafter
convert or exercise such Convertible Securities. Promptly following the date
referred to in clause (i) of the preceding sentence, but not less than 35
Trading Days nor more than 45 Trading Days prior to the redemption date, 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, (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
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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.
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 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, (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 for delivery of certificates for shares of TCI Group
Common Stock, (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 or exercisable and the conversion or exercise process
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 or
exercise 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 thereafter convert or exercise such Convertible
Securities. 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 Subsidiaries", 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 for shares of either such
series (unless provision for such notice is otherwise made
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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) the aggregate number of
shares of common stock of each Liberty Media Group Subsidiary to be paid as a
redemption price in respect of outstanding shares of Liberty Media Group Common
Stock, (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 Subsidiary,
(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 or exercisable and the conversion or exercise 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 Subsidiary upon
redemption only if such holders appropriately convert or exercise 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 thereafter convert or exercise such Convertible Securities. 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 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. 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. If more than one share of Liberty Media Group
Common Stock is held at the relevant time by the same holder, the Company may
aggregate the number of shares of any class of capital stock that is issuable or
the amount of securities that is deliverable to such holder upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities). 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
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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 such shares described above,
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 fractional 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.
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
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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 fraction of the funds of the Company remaining for
distribution to its common stockholders equal to the quotient of (A) the sum of
(1) four times the average ratio of X/Z for the five-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, (2) three times the average ratio of X/Z for the next preceding
five-Trading Day period, (3) two times the average ratio of X/Z for the next
preceding five-Trading Day period and (4) the average ratio of X/Z for the next
preceding five-Trading Day period, divided by (B) ten, 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 fraction of the funds of the Company remaining
for distribution to its common stockholders equal to the quotient of (A) the sum
of (1) four times the average ratio of Y/Z for the five-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, (2) three times the average ratio of Y/Z for the next preceding
five-Trading Day period, (3) two times the average ratio of Y/Z for the next
preceding five-Trading Day period and (4) the average ratio of Y/Z for the next
preceding five-Trading Day period, divided by (B) ten, 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 Series B Liberty Media Group Common Stock.
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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.
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
After issuance of the Liberty Media Group Common Stock pursuant to the
Distribution, shares representing 100% of the equity value of the Company
attributable to the Liberty Media Group will be outstanding 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 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 are purchased with funds attributed
to the TCI Group. The terms of the Liberty Media Group Common 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 sold or otherwise issued by the Company for the account of the TCI
Group in respect of its Inter-Group Interest. Shares of Series B Liberty Media
Group Common Stock may not be issued for the account of the TCI Group in respect
of the 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
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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 full definitions of "Number of Shares Issuable with
Respect to the Inter-Group Interest", "Outstanding Interest Fraction" and
"Inter-Group Interest Fraction" are set forth in Appendix III-A.
Any Inter-Group Interest in the Liberty Media Group would not be
represented by shares of Liberty Media Group Common Stock. Accordingly, the
Company will not have any voting rights with respect to any Inter-Group
Interest, and the outcome of any class vote of the Liberty Media Group Common
Stock would be determined by the holders of the outstanding shares of Liberty
Media Group Common Stock.
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 the
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. Such
determination will be made by the Board of Directors, in its sole discretion,
after consideration of such factors as it deems relevant, including, without
limitation, 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
and cost of 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 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 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
for the account of the TCI Group unless an Inter-Group Interest is again
subsequently created. If the net proceeds of any sale 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
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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.
If the Company repurchases shares of Liberty Media Group Common Stock for
consideration that is attributed to the TCI Group, the Number of Shares Issuable
with Respect to the Inter-Group Interest and the Inter-Group Interest Fraction
would increase, and the Outstanding Interest Fraction would decrease
accordingly. If the repurchase 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 repurchases 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 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, costs 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 equal to the
fair value (as determined by the Board of Directors) of such cash or other
property divided 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 Inter-Group Interest, in which case the Number of
Shares Issuable with Respect to the Inter-Group Interest would be decreased by
the number equal to the fair value (as determined by the Board of Directors) of
such cash or other property divided 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 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.
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The TCI Group will be credited, and the Liberty Media Group will be
charged, 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.
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 and the Combined
Financial Information of the Liberty Media 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 Company anticipates that the Bank of New York will act as transfer
agent and registrar for the Liberty Media Group Common Stock upon issuance
thereof.
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
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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.
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. 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
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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 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 has announced from time to time
that it is 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. It is possible, therefore, 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
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property. However, as indicated above, counsel is of the opinion that the
Liberty Media Group 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 may, depending upon the transaction in which the Liberty Media Group
Common Stock is issued, become convertible into a combination of TCI Group
Common Stock and Liberty Media Group Common Stock, or 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 of
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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, 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 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
Pursuant to applicable provisions of the Company's 1994 Stock Incentive
Plan, the Compensation Committee of the Board of Directors 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 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.
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 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 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.
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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.
In determining whether awards 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
regarding 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.
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.
Stock. Options on, and stock appreciation rights respecting, Liberty Media Group
Common Stock will be attributed to the Liberty Media 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 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 to all holders of the Company's Class A Common Stock and Class B
Common Stock and securities convertible into Class A Common Stock and Class B
Common Stock, unless action were taken, shares of Liberty Media Group Common
Stock would be issued and 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 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 TCI Treasury Shares that are not cancelled for
shares of a new series of Series Preferred Stock designated Convertible
Redeemable Participating Preferred Stock, Series F (the "Series F Preferred
Stock"), which would not be entitled to receive Liberty Media Group Common Stock
in the Distribution.
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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, 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, into 1,000 shares of Class A Common
Stock, subject to anti-dilution adjustments. 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 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 additional shares of Class A Common Stock rather than the number of
shares of 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.
The holders of the Series F Preferred Stock are entitled to participate, on
an as-converted basis, with the holders of the Class A Common Stock, with
respect to any cash dividends or distributions declared and paid on the Class A
Common Stock. Dividends or distributions on the Class A Common Stock which are
not paid in cash would result in the adjustment of the applicable conversion
rate as described above.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series F Preferred Stock will be entitled to receive from the assets of the
Company available for distribution to stockholders an amount, in cash or
property or a combination thereof, per share of Series F Preferred Stock, equal
to the sum of (x) $.01 and (y) the amount to be distributed per share of 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
Class A 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.
-93-
<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, 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
- ------------------------------------------------------------------------------------------
NATIONAL SPORTS
NETWORKS
<S> <C> <C> <C>
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%(1)(2)
Communications, Ltd. ("ARC")
Prime Deportiva 220,000 Liberty Sports, Inc. 100%
- ------------------------------------------------------------------------------------------
</TABLE>
-94-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- ----------------------------------------------------------------------------------------------
REGIONAL SPORTS
NETWORKS
<S> <C> <C> <C>
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%(1)
Prime Sports-Midwest 603,000 ARC 68%(1)
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%
Prime International 138,000 ARC 68%
Prime Deportiva 65,000 Liberty Sports, Inc. 100%
- ----------------------------------------------------------------------------------------------
</TABLE>
-95-
<PAGE>
GENERAL ENTERTAINMENT AND INFORMATION SERVICES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- --------------------------------------------------------------------------------------------------
MOVIE SERVICES
<S> <C> <C> <C>
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 303,000
Network
STARZ! 1,924,000 QE+Ltd. 90%
Request TV 26,211,000(5) Reiss Media Enterprises, 40%(2)
Inc.
Viewer's Choice 29,067,000(5) PPVN Holding Company 10%
EDUCATION/INFORMATION
Court TV 16,935,000 Courtroom Television 33%(2)(6)
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 (7)
Discovery Latin 3,573,000
America
What on Earth 100,000(5) Ingenius 50%
X*Change 29,500,000(5)
International Channel 6,264,000 Encore ICCP, Inc. 45%(2)
GENERAL ENTERTAINMENT
America One 14,758,000(8) 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)
Digital Music Express 32,281,000(5) DMX, Inc. 8.6%(2)
("DMX") (NASDAQ-TUNE) 3,409,063 Common
- --------------------------------------------------------------------------------------------------
</TABLE>
-96-
<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 UK 3,243,000 (NYSE-FAM) 220,000 Preferred(9)
$23,000,000 Conv.
notes(10)
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; TBS/B) 29,281,771 B Common
TNT 62,000,000 5,939,551 C Preferred (11)
Turner Classic Movies 4,000,000
TBS SuperStation 63,500,000
CNN International 63,700
TNT Latin America 3,700
Cartoon Latin America 4,200
TNT and Cartoon
Network Europe 25,600
TNT and Cartoon
Network Asia 900
tv! Network 6,773,000 TV Network Corporation 100%
- --------------------------------------------------------------------------------------------------
</TABLE>
ELECTRONIC RETAILING SERVICES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PROGRAMMING SUBSCRIBERS SUBSIDIARY/AFFILIATE OWNERSHIP
SERVICES AT INTEREST
3/31/95
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Shopping Club 63,700,000(12) Home Shopping Network 41.5%(13)
(HSN 1, HSN 2, HSN (NYSE-HSN) 17,566,702 Common
Spree) 20,000,000 B Common
QVC Network 50,737,000 QVC, Inc. 42.6%
Q2 11,215,000
QVC-The Shopping
Channel (UK) 3,300,000
QVC Mexico 6,600,000
- --------------------------------------------------------------------------------------------------
</TABLE>
-97-
<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 Island 7.5%
Productions LP
News/Documentary N/A MacNeil/Lehrer Productions 66%
Production
Distribution of 410,000 Netlink USA 100%
programming to HSD 20,000 Netlink International
UHF/LPTV broadcast 28,000,000(14) Silver King 23%(15)
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
Services N/A Vision Group, Inc. 100%
- --------------------------------------------------------------------------------------------------
</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 value for the entity
and other owners then elect either to buy the interest of the initiating
owner or to sell their interests to the initiating owner. In the case of
agreements with multiple parties, the parties electing to purchase the
initiating party's interest must also purchase the interest of any other
party that has elected to sell.
(3) Population in broadcast areas of affiliate.
(4) Distributor of Sports Programming to HSD and DBS markets.
(5) Number of subscribers to whom service is available.
(6) 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.
(7) Included with Discovery Europe.
(8) Number of television households in broadcast areas of stations carrying
America One.
(9) $22,000,000 face amount, convertible into 3,300,000 shares of Class B
common stock at $6.67 per share.
(10) $23,000,000 face amount, convertible into 2,070,000 shares of Class B
common stock at $11.11 per share.
(11) Convertible into 6 shares of Class B common stock for each share of
preferred.
(12) Includes broadcast households and cable subscribers.
(13) The Liberty Media Group has 80% voting power.
(14) Number of television households in areas of Silver King's broadcast
stations.
(15) 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. See description of Silver King
Communications, Inc. in "-Other Assets" below.
-98-
<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 Cable
and Rainbow Program Enterprises. 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 Prime Network and NewSport
distribution networks.
"Prime Sports Showcase" is produced and distributed by Liberty Sports, Inc.
("Liberty Sports"). 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", the national Spanish
language sports service, is also available on a full time, 24-hour basis, having
been launched on March 1, 1995. Prime Deportiva is also distributed
internationally in Latin America and South America. Prime Deportiva is
generally offered as an expanded basic service or for distribution on another
acceptable tier. Women's Sports 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. Prime Sports Showcase will also feature other sports programming
as part of the service. At launch Prime Sports Showcase was
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<PAGE>
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.
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:
-100-
<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 TX, OK 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, KY, St. Louis Cardinals
OH, KS, MO St. Louis Blues
Prime Sports-Upper Midwest 1990 IA, MN, ND, Minnesota
SD, WI Timberwolves
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
Prime Sports Network) University
Denver Grizzlies
University of New
Mexico
</TABLE>
-101-
<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, TN Atlanta Hawks
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>
-102-
<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 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.
Of the total 35.7 million cable subscribers served at March 31, 1995, by the
Liberty Sports Networks, approximately 25% were subscribers of cable television
systems that receive such programming pursuant to affiliation agreements with
SSI, and approximately 10% were subscribers of cable television systems owned
by other companies that have equity interests in the Liberty Sports 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
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<PAGE>
advertisement. Approximately 25% of the consolidated revenue derived from the
Liberty Media Group's sports programming businesses for the year ended December
31, 1994, 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 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.
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<PAGE>
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.
In January 1995, Liberty Sports launched "Premier Sports Network," a sports
programming service for distribution in Australia and New Zealand, in
partnership with Australia Sports Pty, Ltd. ("Australis"). Liberty Sports
produces and manages the service. Premier Sports Network is currently delivered
as part of a multi-channel pay television package distributed by Australis to
approximately 4,500 subscribers.
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. SSI has entered into an
affiliation agreement with EMC and currently accounts for approximately 72% of
its total subscribers. 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 1.9 million
elected to receive STARZ!.
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 instances,
billing and collection services. For providing these services, they are paid a
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<PAGE>
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 the Liberty Media Group 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. X*Change is currently available to approximately 30
million households.
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.
"International Channel" is a basic cable service providing multi-lingual
programming. As of March 31, 1995, International Channel was being carried by
173 cable systems, which account for a total of 6.3 million subscribers. The
service is generally carried as a basic service. 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
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language. These services are scheduled to launch during the fourth quarter of
1995 utilizing proprietary compression technology.
General Entertainment
TBS is a diversified information and entertainment company, which produces,
finances and distributes entertainment and news programming worldwide, and has
operations in motion pictures, animation and television production, 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); three international entertainment networks (TBS Latin America, Cartoon
Network Latin America, and TNT & Cartoon Network Europe); three news networks
(Cable News Network, Headline News and Cable News Network International); a
motion picture and television production company (Castle Rock Entertainment);
and an independent producer and distributor of motion pictures (New Line Cinema
Corporation). 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).
International Family Entertainment, Inc.'s ("IFE") principal business is
"The Family Channel," an advertiser-supported basic cable network carried by
cable television systems reaching 95% of all US cable television households. 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. As of March
31, 1995, The Family Channel was being provided to approximately 60 million
subscribers. 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; Great American
Entertainment Company, a producer of live musical variety shows; and the Ice
Capades, a touring ice show.
"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. As of March 31, 1995, BET Cable Network
was being provided to approximately 41.3 million subscribers. "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.
"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.
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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. DMX, Inc. plans to expand
the marketing of its DBS service to residential customers. 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.
As of March 31, 1995, "tv! Network" had approximately seven million subscribers,
all of which received the service pursuant to an affiliation agreement with SSI.
"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 that are located within the 900 or 976 telephone
service range. 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. The Box 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 described above in which the
Liberty Media Group has interests (the "Programming Companies") directly compete
with other programming services for distribution and, when distribution is
obtained, the programming offered by the Programming Companies competes, in
varying degrees, for
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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, 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 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.
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Many of the Programming Companies' competitors are owned by large publicly
held companies which have greater financial resources than the Liberty Media
Group and the Programming 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 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 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 transponder leases provide the right to use
the transponders to provide compressed services. Use of compressed service may
result in greater transponder capacity.
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Federal 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 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 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
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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.
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.
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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.
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.
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 predominatly used for the transmission of sales presentations or
program-length commercials operate in the public interest and are entitled to
"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
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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
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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 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
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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. 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 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 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
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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
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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.
Electronic Retailing Services
The Liberty Media Group currently provides electronic retailing services
through a subsidiary, HSN and through an equity affiliate, QVC.
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HSN
As of March 31, 1995, the Liberty Media Group owned 41.5% of the common
stock of HSN, which represents 80.4% voting control (as a result of multiple
voting rights associated with 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.
HSC produces three separate retail sales programming networks, HSN 1, HSN 2 and
HSN Spree. HSN 1 is carried by cable television throughout the country and is
the original HSC programming network. HSN 2 is carried by broadcast television
stations pursuant to affiliation agreements with HSC. HSN 2 is also carried by
cable television systems which primarily retransmit the broadcast television
signals of one of the independent broadcast television stations carrying HSN 2.
HSN Spree programming is available in one hour segments twenty-four hours per
day which allows broadcast and cable affiliates to distribute HSN Spree in
available daytime, evening or overnight time slots that would not otherwise
produce revenue. HSN has announced that during the second and third quarters of
1995 HSN 1 and 2 will be combined into one network and HSN Spree will be
expanded. As of March 31, 1995, HSC programming could be received by
approximately 63.7 million homes, including broadcast television households and
cable television subscribers.
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
calendar 1994, jewelry, hardgoods, softgoods, cosmetics and other categories
accounted for approximately 41%, 34%, 14%, 10% and 1% respectively, of HSC's
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 thirty 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.
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.
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HSN has lease agreements securing full time use of three transponders on
three domestic communications satellites, Satcom C-3, Satcom C-4 and Galaxy VII.
The two Satcom transponders are located on a domestic communications satellite
owned by GE American Communications, Inc. ("GE") and the Galaxy VII transponder
is located on a domestic communications satellite owned by Hughes Communications
Galaxy, Inc. ("Hughes"). Each of the lease agreements which relate to Satcom C-4
used by HSN 1, Satcom C-3 used by HSN 2 and Galaxy VII used by HSN Spree grant
HSN "protected" rights. The Galaxy VII transponder may, however, be preempted by
Hughes in order to satisfy Hughes' obligations to provide the transponder to
another lessee on the satellite in the event that the other lessee cannot be
restored to service through the use of spare or reserve transponders (the
"Special Termination Right").
The terms of the Satcom C-3 and Satcom C-4 contracts are for the life of the
satellites, which are projected by GE to be through 2004. Galaxy VII was
launched in October 1993. The term of the Galaxy VII lease is through December
31, 2006, subject to earlier implementation of the Special Termination Right.
HSN's access to three transponders pursuant to long-term agreements would enable
HSC to continue transmission of its two primary programming services, HSN 1 and
HSN 2, should any one of the satellites fail. 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 "HSN1", "HSN 2", "HSN Spree" or any combination
of the programming. HSC's standard affiliation 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 area
(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
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transmit HSN 2. See "--Federal 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.
Affiliation agreements were entered into during the year with SSI.
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"). On December 28, 1992, HSN
distributed 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 have realized additional commissions
during the year, and those stations, and possibly others, are expected to
continue to 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 21 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 2 or HSN 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 December 31, 1994, HSC had entered into either full or part-time
affiliation agreements with 35 broadcast television stations to carry HSN 2
(including broadcast television stations owned by SKC), 71 television stations
to carry HSN Spree and 54 LPTV stations to carry HSN 2 or HSN Spree.
Distribution, Data Processing and Telecommunications. HSN's fulfillment
subsidiaries ship merchandise purchased by customers from warehouses located in
St. Petersburg, Florida; Salem, Virginia; Waterloo, Iowa; and Reno, Nevada.
Substantially all inventory resides at
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HSN's four 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.
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 "Federal 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 "--Federal Regulations--Programming Companies"
above. The going forward rules provide that cable operators can 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
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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 and
competes most intensely with 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. In addition, HSN believes that due to a number
of factors, including the development by cable operators of alternative sources
of cable operator owned programming, the 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. Some of HSN's competitors
are larger and more diversified than HSN, or are affiliated with cable operators
which have a substantial number of subscribers. 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
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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
The Liberty Media Group owns a 42.6% interest in QVC. The remaining 57.4%
of QVC is owned by Comcast, which manages the day-to-day operations of QVC. The
Liberty Media Group and Comcast have pledged their shares of QVC as security for
QVC's borrowings under a credit facility.
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. As of March 31, 1995, QVC's programs were
being transmitted by cable television systems on a full-time basis to
approximately 42.6 million subscribers and on a part-time basis to approximately
3.1 million subscribers. 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 5% of 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".
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
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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 "--Federal 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 31% of the U.S. cable subscribers to whom the WTBS service
from Southern was made available at December 31, 1994, are served either on a
non-contract basis or pursuant to affiliation agreements which expire in the
next five years. Approximately 24% of the U.S. cable subscribers to whom WTBS
was made available December 31, 1994 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. Approximately 962,000
homes in Canada were receiving the service as of March 31, 1995. Canadian
agreements expire between 1995 and 1997. Southern provides the WTBS signal to
the Canadian HSD market 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, in which TCIC has an interest, and DirecTV. Primestar
and DirecTV are medium-power and high power, respectively, DBS distributors.
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.
Federal 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 "--Federal Regulation--Programming Companies".
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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 receive 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.
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
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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. 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.
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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 distribute 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.
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 "--Federal Regulation-Southern". 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 December 31, 1994, the Stations reached
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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
December 31, 1994, SKC also owned 21 LPTV stations that broadcast HSC retail
sales programming, held options to purchase 5 additional LPTV stations and held
construction permits for 2 additional LPTV stations.
On February 11, 1993, the Liberty Media Group entered into an Option
Agreement with RMS Limited Partnership ("RMS") pursuant to which the Liberty
Media Group had the right to purchase at $1.00 per share 2,000,000 shares of the
Class B Common Stock of SKC. On September 23, 1994, the Liberty Media Group 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 increases
the exercise price by $0.25 each year with the final exercise price from
February 12, 1998 to February 11, 1999 being $2.25. The current Option exercise
price is $1.50. Upon exercise of the Option, the Liberty Media Group would
control SKC by virtue of the voting power of the SKC Class B Stock.
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 transfer. Under present FCC
rules it is unlikely that the Liberty Media Group will be able to obtain the
consent of the FCC with respect to the exercise of its options because of the
Company's ownership of certain cable television assets. However, FCC rules and
regulations do permit certain types of noncontrolling direct and indirect
interests in SKC to be held by the Liberty Media Group. If the Liberty Media
Group is unable to obtain consent to exercise the option, the Liberty Media
Group may assign the option to a third party.
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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, as well as home video and audio product. ATP's
video library was originally developed for the Americana Television Network,
which ceased operations in December 1994, and 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 December 31, 1994, consolidated entities included in the Liberty Media
Group had approximately 6,237 employees. Of these employees, 15 were located in
its corporate headquarters, 4,951 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.
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, building 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 Nevada and Virginia. HSN also leases retail, office and/or
warehouse space in California, Colorado and
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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.
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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).
As of the date of this Proxy Statement/Prospectus, there were [571,489,713]
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
[38,519,064]. 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 convertible securities held by
subsidiaries of the Company referred to above and (iii) provide for the
potential conversion or redemption of the Liberty Media Group Common 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 Common
Stock now trades, currently requires stockholder approval to 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
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<PAGE>
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 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 authorization
and issuance of shares of a series of Series Preferred Stock will create a new
series of stock with rights superior to the Class A Common Stock and Class B
Common Stock of the Company outstanding as of the date of this Proxy
Statement/Prospectus.
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 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 takeover or make a
takeover proposal with respect to, the Company.
The affirmative vote of 66 2/3% 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.
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<PAGE>
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 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.
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, Options 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 Options 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 50,000 shares of Series A TCI Group Common Stock and 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 exercise price of all
Options 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. If the
Director Stock Option Plan is approved, outstanding options that were previously
granted subject to such approval will be adjusted so that each holder of such an
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 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 strike price of the Options
covering Series A TCI Group Common Stock will be 75% of the pre-adjustment
strike price.
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<PAGE>
Options granted under the Director Stock Option Plan will vest and become
exercisable in equal instalments 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 Class A Common Stock that have been
held by the optionee for more than six months or any combination thereof, at the
election of the optionee. Shares of Class A Common Stock 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)
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 (d)
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.
The Director Stock Option Plan provides that 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 capital reorganization
or reclassification or other transaction involving an increase or reduction in
the number of outstanding shares of Class A Common Stock, the Board of Directors
may adjust proportionally (i) the number of shares of Class A Common Stock
reserved under the
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<PAGE>
Options; and (ii) the exercise price of such Options. In the event of any
consolidation or merger of the Company with another corporation or entity 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 will make such adjustments or other provisions as it may deem
equitable, including adjustments to avoid fractional shares, to give proper
effect to such event. In the event of a merger, consolidation, acquisitions 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, or to make provision for the acceleration of the
exercisability of, or lapse of restrictions with respect to, the termination of
unexercised Options in connection with such transaction.
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 terminate or amend the Director Stock Option Plan
at any time. However, without further stockholder approval, no amendment to the
Director Stock Option Plan shall increase the number of shares subject to the
Director Stock Option Plan (except as authorized by the adjustment provisions
described above), change the class of persons eligible to receive Options under
the Director Stock Option Plan, or otherwise materially increase the benefits
accruing to participants under the Director Stock Option Plan. In addition, the
Plan may not be amended without further stockholder approval to the extent such
approval is otherwise required under applicable law. Termination or amendment of
the Director Stock Option Plan may not adversely affect the rights of any holder
of an Option without his or her consent.
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.
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
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<PAGE>
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 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 in voting power and a majority in 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.
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<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Beneficial Ownership of More than Five Percent of Voting Securities
The following table sets forth, as of May 1, 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 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 1,169,983 (5) * 18.08%
Class B and a Director 25,697,083 (6)(7)(8) 30.28%
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 Terrace Boieldieu
92042 Paris La Defense France
</TABLE>
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<PAGE>
<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 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.
(1) Based on 571,489,713 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 1, 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 "Concerning
Management--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 "Concerning
Management--Executive Compensation--Summary Compensation Table" below for
additional information.
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<PAGE>
(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. 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 15.89% 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 1, 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
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<PAGE>
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 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
Beneficial of Beneficial Percent Voting
Title of Class Owner Ownership of Class Power
- -------------- ------------ ----------------- -------- -------
<S> <C> <C> <C> <C>
Class A Donne F. Fisher 543,934 (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 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name of Amount and Nature
Beneficial of Beneficial Percent Voting
Title of Class Owner Ownership of Class Power
- -------------- ------------ ----------------- -------- -------
<S> <C> <C> <C> <C>
Class A Fred A. Vierra 762,551 (6) * *
Class B -- --
Class B Pref. 200 *
Class A Brendan R. Clouston 1,208,969 (8) * *
Class B 230 *
Class B Pref. -- --
Class A J.C. Sparkman 247,359 (7) * *
Class B -- --
Class B Pref. -- --
Class A All directors and 36,967,784 (1)(2)(3)(4) 6.14% 46.14%
executive officers (5)(6)(7)(8)
as a group (9)(10)(11)
Class B (19 persons) 63,601,807 (1)(11) 74.94%
Class B Pref. 438,884 27.09%
</TABLE>
- ------------------------------
* Less than one percent.
(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 "Concerning Management-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.
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<PAGE>
(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 August of 1990, to purchase an aggregate of 9,714 shares of Class A
Common Stock at an adjusted price of $10.30 per share, all of which options
are fully exercisable; (b) 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 "Concerning
Management-Executive Compensation-Summary Compensation Table"); (c) 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 "Concerning Management-Executive
Compensation-Summary Compensation Table"); and (d) 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
"Concerning Management-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 "Concerning Management-
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 "Concerning Management-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 "Concerning Management-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 "Concerning Management-
Executive Compensation-Option/SAR Grants Table").
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(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 (11 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 3,325,000 shares of Class A Common Stock at a
purchase price of $16.75 per share. Options to acquire 1,390,000 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. Vierra holds an option
to acquire 9,714 shares of Class A Common Stock as described in note 6
above and 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 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
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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.
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CONCERNING MANAGEMENT
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 1, 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.
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 of
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Positions
- -------------------------- ---------------------------------------------------
<S> <C>
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>
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
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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 $100,000 for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payout
-------------------------------- ------------------------- --------
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All Other
sation Award(s) SARs Payouts Compensation
Position Year Salary ($) 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)
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.
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<PAGE>
(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 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)
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<PAGE>
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 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 $14,999, respectively, to the ESPP for Dr. Malone.
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<PAGE>
Option/SAR Grants Table
The following table shows all individual grants of stock options and stock
appreciation rights ("SARs") granted to each of the named executive officers of
the Company during the year ended December 31, 1994:
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs Market
SARs Granted Exercise or Price on Grant Date
Granted to Employees Base Price Grant Date Expiration Present Value
Name (#)(1) in Fiscal Year(1) ($/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>
- --------------------------
(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
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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:
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired at December at December
on Value 31, 1994 (#) 31, 1994 ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) 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
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<PAGE>
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
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
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<PAGE>
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
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
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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 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 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 "CONCERNING MANAGEMENT--Executive Compensation--
Employment Contracts and Termination of Employment and Change of Control
Arrangements."
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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 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.
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.
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
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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.
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.
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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 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 Tele-
Communications, Inc. 1994 Stock 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 LCM's Class E, 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock ("LCM 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
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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 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.
Encore QE Programming Corp. ("QEPC"), a wholly-owned subsidiary of EMC, a 90%
owned subsidiary of Liberty, entered into a limited partnership agreement with
TCI Starz, Inc. ("TCIS"), a wholly-owned subsidiary of TCIC prior to the
Business Line Restructuring, for the purpose of developing, operating and
distributing STARZ!, a first-run movie premium programming service launched in
1994. QEPC is the general partner and TCIS is the limited partner. Losses are
allocated 1% to QEPC and 99% to TCIS. Profits are allocated 1% to QEPC and 99%
to TCIS until certain defined criteria are met. Subsequently, profits are
allocated 20% to QEPC and 80% to TCIS. TCIS has the option, exercisable at any
time and without payment of additional consideration, to convert its limited
partner interest to an 80% general partner interest with QEPC's partnership
interest simultaneously converting to a 20% limited partnership interest. In
addition, during specific periods commencing April 1999 and April 2001,
respectively, QEPC may require TCIS to purchase, or TCIS may require QEPC to
sell, the partnership interest of QEPC in the partnership for a formula-based
price. EMC is paid a management fee equal to 20% of "managed costs" as defined,
in order to manage the service. From January 1, 1994 through the Old TCI/LMC
Combination, EMC earned approximately $2,145,000 in management fees. EMC has
agreed to provide the limited partnership with certain programming under a
programming agreement whereby the partnership will pay its pro rata share of the
total costs incurred by EMC for such programming. In the Business Line
Restructuring, TCIC became an indirect wholly-owned subsidiary of Liberty.
During 1994, Peachtree Cable TV, Inc. ("Peachtree"), a Nevada corporation
wholly owned by certain employees of TCIC, including Messrs. Thomson, Schotters,
Marshall and
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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.
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.
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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 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.
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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 (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 F Preferred Stock
have voting rights, but outstanding shares are not entitled to vote because they
are held by subsidiaries of the Company.) Stockholders of the Company do not
have cumulative voting rights.
The Charter authorizes the issue of 10,000,000 shares of Series Preferred
Stock, of which 8,520,000 remain available for issuance. 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 [503,441,864] remain available for issuance. If the Liberty Media Group
Stock Proposal and the Increased Authorization Proposal are approved by
stockholders and following the Distribution, there would be 1,900,000,000 shares
of TCI Group Common Stock, 550,000,000 shares of Liberty Media Group Common
Stock and 50,000,000 shares of Series Preferred Stock authorized, of which
[1,153,441,864] shares of TCI Group Common Stock, [385,911,372] 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 [1,153,441,864]
shares of common stock and [48,683,039] shares of Series Preferred Stock would
be available for issuance. The issue and sale of shares common stock and/or
Series Preferred Stock could
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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.
The Charter and the Company's Bylaws provide that a annual 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.
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,
nor can the Company predict the effect of the proposed provisions for voting
rights of 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" and "Special Considerations--No Assurance as to
Market Price".
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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.
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
550,000,000 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
[571,489,713] 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 the 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
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without a corresponding stock dividend on, or stock split, reverse stock split
or other reclassification of, the other class of Common Stock.
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 available therefor. Dividends accrue cumulatively
(but without
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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.
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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 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 then liquidation value of the
Series C Preferred Stock. Subject to the rights of any other class or series of
the Company's preferred stock ranking pari passu with the Series C Preferred
Stock, the Series C Preferred Stock is required to be redeemed by the Company at
any time after such seventh anniversary at the option of the holder, in whole or
in part (provided that the aggregate liquidation value of the shares to be
redeemed is in excess of $1 million), in each case at a redemption price, per
share, equal to the then liquidation value.
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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 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 is (a) 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. 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 10% per annum. To the extent any cash dividends are not paid
on any dividend payment date, the amount of such dividends will be 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.
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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.
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 then 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 such 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 has 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 then liquidation value. If the
Company fails to effect any redemption of Series D Preferred Stock, 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.
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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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 thereof and for no other
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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.
EXPERTS
The firm of KPMG Peat Marwick LLP ("KPMG") serves as the Company's independent
certified public accountants. A partner of KPMG will be present at the Annual
Meeting with
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the opportunity to make a statement if KPMG so desires and will be available to
respond to appropriate questions.
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.
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 sheets 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, have been
incorporated by reference herein in reliance upon the report of KPMG
Finsterbusch Pickenhayn Sibille, independent certified public accountants,
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,
as amended, of Tele-Communications, Inc. dated February 3, 1995, 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
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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.
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.
-171-
<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.............................................................. 111
1992 Cable Act.............................................................. 53
Acclaim..................................................................... 20
Amended Charter............................................................. 4
Annual Meeting.............................................................. 1
ARC......................................................................... 94
Assumed Options and SARs.................................................... 147
ATP......................................................................... 128
Australis................................................................... 105
Business Line Restructuring................................................. 18
Cablevision................................................................. 30
Cablevision Acquisition..................................................... 30
CCT......................................................................... 156
Certificate of Amendment.................................................... 51
Change of Control........................................................... 133
Charter..................................................................... 2
Class A Common Stock........................................................ 2
Class A Preferred Stock..................................................... 62
Class A shares.............................................................. 137
Class B Common Stock........................................................ 2
Class B Preferred Stock..................................................... 21
Class B shares.............................................................. 137
Code........................................................................ 87
Comcast..................................................................... 19
Commission.................................................................. 7
Communications Act.......................................................... 115
Common Stock................................................................ 1
Company..................................................................... 1
Company Earnings (Loss) Attributable to the Liberty Media Group............. 66
Company Earnings (Loss) Attributable to the TCI Group....................... 65
Convertible Securities...................................... Appendix III - A-21
Copyright Act............................................................... 123
Cox......................................................................... 19
CRT......................................................................... 123
DBS......................................................................... 94
DGCL........................................................................ 4
Director Stock Option Plan.................................................. 2
Director Stock Option Plan Proposal......................................... 2
Discount Rate............................................................... 158
Discovery................................................................... 19
Disposition................................................................. 72
Distribution................................................................ 2
DMX......................................................................... 96
E!.......................................................................... 107
EMC......................................................................... 105
Effective Date.............................................................. 132
Encore...................................................................... 19
ESPP........................................................................ 136
Exchange Act................................................................ 7
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
Fair Value.................................................................. 70
FCC......................................................................... 19
First Appraiser............................................................. 71
GE.......................................................................... 118
Group....................................................................... 3
Groups...................................................................... 3
Higher Appraised Amount..................................................... 71
HSC......................................................................... 117
HSDs........................................................................ 94
HSN......................................................................... 19
Hughes...................................................................... 118
IFE......................................................................... 107
Incentive Plan.............................................................. 147
Increased Authorization Proposal............................................ 1
Initiation Date............................................................. 71
Inter-Group Interest Fraction............................................... 25
Inter-Group Interest........................................................ 3
International............................................................... 18
International Programming Opportunity....................................... 61
Junior Exchange Notes....................................................... 164
Junior Stock................................................................ 168
Kearns...................................................................... 137
KPMG........................................................................ 169
Liberty..................................................................... 7
Liberty Class E Preferred Stock............................................. 156
Liberty Media Group......................................................... 2
Liberty Media Group Available Dividend Amount............................... 65
Liberty Media Group Common Stock............................................ 1
Liberty Media Group Stock Proposal.......................................... 1
Liberty Media Group Subsidiaries............................................ 76
Liberty Sports Networks..................................................... 100
Liberty Sports.............................................................. 99
LMC......................................................................... 7
Lower Appraised Amount...................................................... 71
LPTV........................................................................ 119
Market Capitalization....................................... Appendix III - A-24
Market Value................................................ Appendix III - A-24
Merger Agreement............................................................ 147
MLP......................................................................... 128
MMDS........................................................................ 111
MSTV........................................................................ 108
MTM......................................................................... 107
Mutually Appraised Amount................................................... 71
Mutually Designated Appraiser............................................... 71
Netlink..................................................................... 19
Net Proceeds................................................................ 43
Nonemployee Director........................................................ 132
Number of Shares Issuable with Respect to the Inter-Group Interest.......... 25
Old TCI..................................................................... 7
Old TCI/LMC Combination..................................................... 7
Optional Conversion Ratio................................................... 70
Options..................................................................... 132
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
Outstanding Interest Fraction............................................... 25
Parity Stock................................................................ 168
PCS......................................................................... 19
Peachtree................................................................... 157
Programming Companies....................................................... 108
PSC......................................................................... 99
PSR......................................................................... 100
QEPC........................................................................ 157
Qualifying Securities....................................................... 73
QVC......................................................................... 19
QVC Merger.................................................................. 30
Record Date................................................................. 21
Registration Statement...................................................... 7
Related Business Transaction................................................ 73
Restricted Voting Shares.................................................... 22
RMS......................................................................... 127
Royal....................................................................... 122
SARs........................................................................ 147
Second Appraiser............................................................ 71
Securities Act.............................................................. 7
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.................................................... 21
Series D Preferred Stock.................................................... 62
Series E Preferred Stock.................................................... 62
Series F Preferred Stock.................................................... 92
Series Preferred Stock...................................................... 2
Service..................................................................... 87
share distribution.......................................................... 67
SHV Act..................................................................... 123
SKC......................................................................... 119
Southern.................................................................... 122
Special Securities.......................................................... 166
Special Termination Right................................................... 118
SportSouth.................................................................. 154
Sprint...................................................................... 19
SSI......................................................................... 100
Stated Liquidation Value.................................................... 164
Stations.................................................................... 126
TBS......................................................................... 19
TCG......................................................................... 20
TCI Cable Investments....................................................... 7
TCI Group................................................................... 3
TCI Group Available Dividend Amount......................................... 64
TCI Group Common Stock...................................................... 2
TCI Technology.............................................................. 18
TCI Treasury Shares......................................................... 92
TCIC........................................................................ 7
TCIS........................................................................ 157
TeleCable................................................................... 30
TeleCable Merger............................................................ 30
Telephony Joint Venture..................................................... 19
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Page on which
term is defined
in the Proxy
Term Statement/Prospectus
- ---- --------------------
<S> <C>
TIN......................................................................... 90
Trading Day................................................. Appendix III - A-28
UACI........................................................................ 142
UAE......................................................................... 144
VJN......................................................................... 108
Voting Securities........................................................... 63
Voting Stock................................................................ 160
VRU System.................................................................. 120
WTBS........................................................................ 122
</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 550 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 390 million
authorized and unissued shares of Liberty Media Group Common Stock
remaining (550 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 470 million authorized and unissued shares of
Liberty Media Group Common Stock (550 million minus 80 million issued
and outstanding).
Repurchase with TCI Group Funds
Assume all such shares 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 repurchased 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 repurchased 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 470 million authorized and unissued shares of
Liberty Media Group Common Stock (550 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 390 million authorized and unissued shares of
Liberty Media Group Common Stock (550 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 390 million authorized and unissued shares of
Liberty Media Group Common Stock (550 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 310 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (550 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 equity of the Liberty Media Group.
. The Company would have 310 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (550 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 310 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (550 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 330 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (550 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 one billion eight hundred twelve million three
hundred seventy-five thousand ninety-six (1,812,375,096) shares, of which one
billion eight hundred million (1,800,000,000) 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) One billion eight hundred million (1,800,000,000) 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) 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 eight hundred million (1,800,000,000) 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"), five hundred million
(500,000,000) 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 fifty million (50,000,000) 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
foregoing 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 Series A Liberty Media Group Common Stock, the
holders of Series B Liberty Media Group Common Stock and the holders of
Preferred Stock, 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 Series A TCI
Group Common Stock, of Series B TCI Group Common Stock 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
III-A-2
<PAGE>
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 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 Series
A TCI Group Common Stock, the holders of Series B TCI Group Common Stock and the
holders of Preferred Stock, 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 Series A
Liberty Media Group Common Stock or of Series B Liberty Media Group Common Stock
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 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 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
III-A-3
<PAGE>
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
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
III-A-4
<PAGE>
Media Group Common Stock shall be convertible into a number 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 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) the numerator of which is the Fair Value of one share of Series
A Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
(determined pursuant to clause (iii) of this paragraph 2(c)) and the denominator
of which is the average Market Value of one share of Series A TCI Group Common
Stock for the 20-Trading Day period ending on the Initiation Date (as defined in
clause (iii) of this paragraph 2(c)).
(iii) For purposes of clause (ii) of this paragraph 2(c), the "Fair
Value" of one share of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock means an amount determined in accordance with
this clause (iii). In the event that the Corporation determines to establish a
Fair Value, on the date as of which such Fair Value is to be determined (the
"Initiation Date"), two investment banking firms of recognized national standing
shall be designated to determine the Fair Value, 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 Trading
Days after the Initiation Date, the First Appraiser and the Second Appraiser
shall each determine its initial view as to the private market value (determined
in accordance with clause (iv) of this paragraph 2(c)) of the Liberty Media
Group as of the Initiation Date and shall consult with one another with respect
thereto. By the 30th Trading Day after the Initiation 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 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 Fair Value shall be
the average of those two amounts divided by the sum of the aggregate number of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock outstanding and deemed to be outstanding as of the Initiation
Date by such investment banking firms (or the average thereof if such aggregate
number of shares differ) and the Number of Shares Issuable with Respect to the
Inter-Group Interest. Otherwise, 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 50th Trading Day after the Initiation Date, determine
such private market value (the "Mutually Appraised Amount"), and the Fair Value
shall be (A) the average of (I) the Mutually Appraised Amount and (II) the Lower
Appraised Amount or the
III-A-5
<PAGE>
Higher Appraised Amount, whichever is closer to the Mutually Appraised Amount,
provided that the Mutually Appraised Amount is between the Lower Appraised
Amount and the Higher 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, in either case divided by the sum of the aggregate number of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding or deemed to be outstanding as of the Initiation Date
by the investment banking firms whose determinations of such private market
value are averaged to determine the Fair Value (or the average thereof if such
aggregate number of shares differ) and the Number of Shares Issuable with
Respect to the Inter-Group Interest. 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 pursuant to clause (i) of this paragraph 2(c), such
conversion shall occur on a conversion date on or prior to the 100th Trading Day
following the Initiation Date. If the Corporation determines not to undertake
such conversion, the Corporation may at any time thereafter undertake to
reestablish the Fair Value as of a subsequent date.
(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 Initiation 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 would have existed if the Liberty Media
Group were a publicly traded non-controlled entity.
(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.
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
III-A-6
<PAGE>
Common Stock a dividend per share at least 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
at least 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 at least 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 at least 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 all or less
than all series of 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 the Series B TCI Group Common Stock or the Series A Liberty Media Group
Common Stock and the 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. If at any time a distribution paid in 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 any other
securities 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 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 for shares of Series B TCI Group
Common Stock) to holders of Series A TCI Group Common Stock and Series B TCI
III-A-7
<PAGE>
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 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 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 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; or consisting of shares of Series B Liberty Media Group
Common Stock (or Convertible Securities convertible into or exercisable for
shares of Series B 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; or consisting of shares of Series A Liberty Media Group Common Stock (or
Convertible Securities convertible into or exercisable for 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 (or like Convertible Securities convertible into or exercisable for shares
of Series B Liberty Media Group Common Stock) to holders of Series B TCI Group
Common Stock; provided in each case covered by this subparagraph (ii) 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 or exercise of any Convertible Securities to be so issued) and (2)
the number of such shares of such series that are subject to issuance upon
conversion or exercise of any Convertible Securities then outstanding that are
attributed to the TCI Group 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 of the Corporation 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 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) 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.
III-A-8
<PAGE>
The Corporation shall not reclassify, subdivide or combine the Series
A TCI Group Common Stock without reclassifying, subdividing or combining 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 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 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 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
Convertible Securities convertible into or exercisable 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 Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock (or Convertible Securities
convertible into or exercisable for shares of 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 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) 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.
III-A-9
<PAGE>
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 Subsidiaries. At any time at
which all of the assets and liabilities of the Liberty Media Group (and no other
assets or liabilities) 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, 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, 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 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 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 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 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
common stock of each Liberty Media Group Subsidiary issued in redemption 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 by reason of the existence of any Number of Shares
III-A-10
<PAGE>
Issuable with Respect to the Inter-Group Interest 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 or entities (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
which is followed by a 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 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
aggregate amount equal to the product of the Outstanding Interest Fraction 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 in an aggregate amount equal to the product of
the Outstanding Interest Fraction and the Net Proceeds of such Disposition,
such 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; or
(B) if such Disposition involves substantially all (but not all)
of the properties and assets of the Liberty Media Group, apply an amount of
cash and/or securities or other property equal to the product of the
Outstanding Interest Fraction 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 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
III-A-11
<PAGE>
of each such series outstanding, (1) the number of shares of Series A
Liberty Media Group Common Stock to be redeemed to equal the lesser of the
whole number nearest the amount so allocated to the redemption of such
series divided by the average Market Value of such series during the ten-
Trading Day period beginning on the 16th Trading Day following the
consummation of such Disposition and the number of shares of such series
outstanding and (2) the number of shares of Series B Liberty Media Group
Common Stock to be redeemed to equal the lesser of the whole number nearest
the amount so allocated to the redemption of such series divided by the
average Market Value of such series during the same ten-Trading Day period
and the number of shares of such series outstanding, and the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock shall be redeemable at the option of the Corporation on such terms;
such redemption to be effected in accordance with the applicable provisions of
paragraph 5(d) of this Section E; or
(iii) convert (1) 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 (2) 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 B Liberty Media Group Common Stock to the
Market Value of one share of Series B 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 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.
III-A-12
<PAGE>
(c) Other Redemptions. After any Conversion Date or Redemption Date
on which all outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock were converted or redeemed, any share
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock that is issued on conversion or exercise of any Convertible
Securities shall, immediately upon issuance pursuant to such conversion or
exercise 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:
(i) in the event that the shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock were converted
into Series A TCI Group Common Stock or Series B TCI Group Common Stock on
such Conversion Date pursuant to paragraph 2(c) or 5(b)(iii) of this
Section E, 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 or exercise 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 or exercise 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 or exercised immediately prior thereto;
or
(ii) in the event that the shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock were redeemed in
whole pursuant to paragraph 5(b)(ii)(A) of this Section E or redeemed for
common stock of the Liberty Media Group Subsidiary pursuant to paragraph
5(a) of this Section E, be redeemed, to the extent of assets of the
Corporation legally available therefor, for $.01 per share in cash.
The provisions of clauses (i) and (ii) 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 or exercisable and the conversion or exercise price thereof and (D)
the Outstanding
III-A-13
<PAGE>
Interest Fraction. 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.
(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 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, (C) the kind and aggregate amount of shares of capital stock,
cash and/or other securities or property to be distributed in respect of
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, (D) 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 or exercisable and the conversion or exercise
prices thereof and (E) 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 or exercise them prior to the record date referred to in clause (A) of
this sentence.
(iii) If the Corporation determines to undertake a redemption
pursuant to clause (ii) (A) of subparagraph 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 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 outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock shall be redeemed, (B) the
Redemption Date, (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 outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, (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 waives such requirement), are to be surrendered for
delivery of certificates for shares of such capital stock, cash and/or other
securities or property, (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 such Convertible Securities
are then convertible or exercisable
III-A-14
<PAGE>
and the conversion or exercise 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 participate in such redemption
only if such holders appropriately convert or exercise 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 thereafter convert
or exercise such Convertible Securities. 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 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 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
subject to redemption, (B) the anticipated Redemption Date, (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 outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock, (D) 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 or exercisable and the conversion or exercise prices
thereof and (E) 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 or exercise 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 and, if applicable, paragraph 5(c) of this Section E, if such holders
thereafter convert or exercise such Convertible Securities. Promptly following
the date referred to in clause (A) of the preceding sentence, but not less than
35 Trading Days nor more than 45 Trading Days prior to the redemption date, 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, (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
III-A-15
<PAGE>
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.
(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 subparagraph
(c) of this paragraph 5), the Corporation shall cause to be given to each holder
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock and to each holder of Convertible Securities convertible into or
exercisable 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 B Liberty Media Group Common Stock
shall be converted, (B) the Conversion Date, (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 for
delivery of certificates for shares of Series A TCI Group Common Stock or Series
B TCI Group Common Stock, as applicable, (E) the number of outstanding 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 or exercisable and the conversion or exercise process 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 or exercise
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 holder
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
thereafter convert or exercise such Convertible Securities. 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 for
III-A-16
<PAGE>
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) the aggregate number of shares of common stock of each
Liberty Media Group Subsidiary to be paid as a redemption price in respect of
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, (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 or exercisable and the conversion or exercise 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 common stock of the Liberty Media Group Subsidiaries upon redemption
only if such holders appropriately convert or exercise such Convertible
Securities on or prior to the Redemption Date referred to in Class (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 thereafter convert or
exercise such Convertible Securities. 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) If less than all of the outstanding shares of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock are to be
redeemed pursuant to clause (ii) of subparagraph 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, from among the holders of outstanding shares of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock, as
applicable, at the close of business on the record date referred to in clause
(A) of the first sentence of subparagraph 5(d)(iv) of this Section E. 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 or 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 or Series B Liberty Media
Group Common Stock or of Convertible Securities, or the validity of any
conversion or redemption.
III-A-17
<PAGE>
(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. If more than one share of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock shall be held at the relevant
time by the same holder, the Corporation may aggregate the number of shares of
any class of capital stock that shall be issuable or the amount of securities
that shall be deliverable to such holder upon any such conversion, redemption,
dividend or other distribution (including any fractions of shares or
securities). 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 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 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
III-A-18
<PAGE>
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.
(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
III-A-19
<PAGE>
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.
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 fraction of the funds of the
Corporation remaining for distribution to its common stockholders equal to the
quotient of (A) the sum of (1) four times the average ratio of X/Z for the five-
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, (2) three times the average ratio of X/Z for
the next preceding five-Trading Day period, (3) two times the average ratio of
X/Z for the next preceding five-Trading Day period and (4) the average ratio of
X/Z for the next preceding five-Trading Day period, divided by (B) ten, 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 fraction of the funds of the Corporation remaining for
distribution to its common stockholders equal to the quotient of (A) the sum of
(1) four times the average ratio of Y/Z for the five-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, (2) three times the average ratio of Y/Z for the next preceding
five-Trading Day period, (3) two times the average ratio of Y/Z for the next
preceding five-Trading Day period and (4) the average ratio of Y/Z for the next
preceding five-Trading Day period, divided by (B) ten, 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 such 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.
III-A-20
<PAGE>
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 of the
fair market value of any properties, assets or securities and shall file such
statement with the Secretary of the Corporation.
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:
"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 or evidence the right to purchase any shares of any series
of Common Stock, whether upon conversion, exercise, pursuant to antidilution
provisions of such securities or otherwise.
"Corporation Earnings (Loss) Attributable to the Liberty Media Group", for
any period, shall mean the net earnings or loss of the Liberty Media Group for
such period (or for fiscal periods 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 period as if the first day of the
fiscal quarter in which such date falls had been the first day of such period)
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 substantially consistent basis,
including without limitation, corporate administrative costs, net interest and
income taxes.
"Corporation Earnings (Loss) Attributable to the TCI Group", for any
period, shall mean the net earnings or loss of the TCI Group for such period (or
for fiscal periods 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 period as if the first day of the fiscal quarter in which such
date falls had been the first day of such period) 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 TCI
Group on a substantially consistent basis, including without limitation,
corporate administrative costs, net interest and income taxes.
III-A-21
<PAGE>
"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 (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 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;
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
III-A-22
<PAGE>
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) the greater of (x) the fair value (as determined
by the Board of Directors) of the net assets of the Liberty Media Group and (y)
$________ (the stockholders' equity of the Corporation attributable to the
Liberty Media Group as of March 31, 1995), increased or decreased, as
appropriate, to reflect, after such date, (A) Corporation Earnings (Loss)
Attributable to the Liberty Media Group, (B) any dividends or other
distributions (including by reclassification or exchange) declared or paid with
respect to, or repurchases or issuances of, any shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock or Preferred
Stock attributed to the Liberty Media Group, (C) assets or properties of the
Liberty Media Group that are no longer included in the Liberty Media Group as a
result of 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 pursuant to the first proviso to the definition of Liberty Media Group,
and (D) any other adjustments to stockholders' equity of the Corporation made in
accordance with generally accepted accounting principles and attributed to the
Liberty Media Group, over (ii) the sum of the aggregate par value of all
outstanding shares of Preferred Stock attributed to the Liberty Media Group and
the aggregate par value of all outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock, 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 the dividend is declared and/or the
preceding fiscal year.
III-A-23
<PAGE>
"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.
"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 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 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
III-A-24
<PAGE>
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 initial issuance of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, 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, 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 such initial issuance, the proceeds of which are
attributed to the TCI Group, (iii) the 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 such initial issuance 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 outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock repurchased by the Corporation, 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
III-A-25
<PAGE>
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
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 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.
"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
(including, without limitation, by merger, consolidation or sale) in a
transaction in which the Corporation receives primarily Qualifying Securities in
consideration for the disposition of such properties and assets. For the
purposes of this definition, "Qualifying Securities" shall mean 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 all or substantially all of the business 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
transaction, as determined in good faith by the Board of Directors.
III-A-26
<PAGE>
"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 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
III-A-27
<PAGE>
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 conversion or exercise, 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 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.
"TCI Group Available Dividend Amount", as of any date, shall mean either:
(a) the excess of (i) the greater of (x) the fair market value (as
determined by the Board of Directors) of the net assets of the TCI Group and (y)
$_______ (the stockholders' equity of the Corporation attributable to the TCI
Group as of March 31, 1995) increased or decreased, as appropriate, to reflect,
after such date, (A) Corporation Earnings (Loss) Attributable to the TCI Group,
(B) any dividends or other distributions (including by reclassification or
exchange) declared or paid with respect to, or repurchases or issuances of, any
shares of Series A TCI Group Common Stock or Series B TCI Group Common Stock or
Preferred Stock attributed to the TCI Group, (C) assets or properties of the TCI
Group that are included in the TCI Group as a result of 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 pursuant to paragraph (c) of
the definition of the TCI Group and (D) any other adjustments to stockholders'
equity of the Corporation made in accordance with generally accepted accounting
principles and attributed to the TCI Group, over (ii) the sum of the aggregate
par value of all outstanding shares of Preferred Stock attributed to the TCI
Group and the aggregate par value of all outstanding shares of Series A TCI
Group Common Stock and Series B TCI Group Common Stock, 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 the dividend is declared 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-28
<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 a majority of the 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-29
<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
ANNUAL AND SPECIAL MEETINGS
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-30
<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 Certiticate), 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-31
<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-32
<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 five hundred two million three
hundred seventy-five thousand ninety-six (2,502,375,096) shares, of which two
billion four hundred fifty million (2,450,000,000) 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 four hundred fifty million (2,450,000,000) 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"), five hundred million
(500,000,000) 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 fifty million (50,000,000) 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 designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, as shall be stated and expressed in a resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors. 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, December 31, 1994 (unaudited)... IV - 3
Condensed Pro Forma Combined Balance Sheet, December 31, 1994 (unaudited).......... IV - 4
Condensed Pro Forma Combined Statement of Operations, Year
ended December 31, 1994 (unaudited).............................................. IV - 5
Notes to Condensed Pro Forma Combined Financial Statements,
December 31, 1994 (unaudited).................................................... IV - 6 to IV - 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Three months ended March 31, 1995 and 1994............................. IV - 9 to IV - 22
Consolidated Financial Statements
Consolidated Balance Sheets, March 31, 1995 and 1994 (unaudited)................... IV - 23 to IV - 24
Consolidated Statements of Operations, Three months ended
March 31, 1995 and 1994 (unaudited).............................................. IV - 25
Consolidated Statements of Stockholders' Equity, Three months
ended March 31, 1995 (unaudited)................................................. IV - 26
Consolidated Statements of Cash Flows, Three months ended
March 31, 1995 and 1994 (unaudited).............................................. IV - 27
Notes to Consolidated Financial Statements, March 31, 1995 (unaudited)............. IV - 28 to IV - 41
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1994, 1993 and 1992........................... IV - 42 to IV - 61
Consolidated Financial Statements
Independent Auditors' Report....................................................... IV - 62
Consolidated Balance Sheets, December 31, 1994 and 1993............................ IV - 63 to IV - 64
Consolidated Statements of Operations, Years ended December 31,
1994, 1993 and 1992.............................................................. IV - 65
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1994, 1993 and 1992................................................. IV - 66 to IV - 67
Consolidated Statements of Cash Flows, Years ended December 31,
1994, 1993 and 1992.............................................................. IV - 68 to IV - 69
Notes to Consolidated Financial Statements, December 31, 1994,
1993 and 1992....................................................................IV - 70 to IV - 113
LIBERTY MEDIA GROUP
Management's Discussion and Analysis of Financial Condition and
Results of Operations,
Three months ended March 31, 1995 and 1994.......................................IV - 114 to IV - 124
Combined Financial Statements
Combined Balance Sheets,
March 31, 1995 and December 31, 1994 (unaudited).................................IV - 125 to IV - 126
Combined Statements of Operations,
Three months ended March 31, 1995 and 1994 (unaudited)........................... IV - 127
Combined Statement of Equity,
Three months ended March 31, 1995 (unaudited).................................... IV - 128
Combined Statements of Cash Flows,
Three months ended March 31, 1995 and 1994 (unaudited)........................... IV - 129
Notes to Combined Financial Statements,
Three months ended March 31, 1995 and 1994 (unaudited)...........................IV - 130 - to IV - 142
</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................IV - 143 to IV - 154
Combined Financial Statements
Independent Auditors' Report....................................................... IV - 155
Combined Balance Sheets, December 31, 1994 and 1993................................IV - 156 to IV - 157
Combined Statements of Operations, Years ended December 31, 1994,
1993 and 1992.................................................................... IV - 158
Combined Statements of Equity, Years ended December 31, 1994,
1993 and 1992.................................................................... IV - 159
Combined Statements of Cash Flows, Years ended December 31, 1994,
1993 and 1992.................................................................... IV - 160
Notes to Combined Financial Statements, December 31, 1994,
1993 and 1992....................................................................IV - 161 to IV - 183
TCI GROUP
Managements's Discussion and Analysis of Financial Condition and
Results of Operations,
March 31, 1995 and December 31, 1994............................................IV -184 to IV - 196
Combined Financial Statements
Combined Balance Sheets,
March 31, 1995 and December 31, 1994(unaudited).................................IV - 197 to IV - 198
Combined Statements of Operations,
Three months ended March 31, 1995 and 1994 (unaudited)........................... IV - 199
Combined Statement of Equity,
Three months ended March 31, 1995 (unaudited).................................... IV - 200
Combined Statements of Cash Flows,
Three months ended March 31, 1995 and 1994 (unaudited)........................... IV - 201
Notes to Combined Financial Statements,
March 31, 1995 (unaudited).......................................................IV - 202 to IV - 217
Managements's Discussion and Analysis of Financial Condition and
Results of Operations.
Years ended December 31, 1994, 1993 and 1992.....................................IV - 218 to IV - 231
Combined Financial Statements
Independent Auditors' Report....................................................... IV - 232
Combined Balance Sheets,
December 31, 1994 and 1993.......................................................IV - 233 to IV - 234
Combined Statements of Operations,
Years ended December 31, 1994, 1993 and 1992..................................... IV - 235
Combined Statements of Equity,
Years ended December 31, 1994, 1993 and 1992.....................................IV - 236 to IV - 238
Combined Statements of Cash Flows,
Years ended December 31, 1994, 1993 and 1992.....................................IV - 239 to IV - 240
Notes to Combined Financial Statements,
December 31, 1994, 1993 and 1992.................................................IV - 241 to IV - 277
LIBERTY MEDIA CORPORATION
Consolidated Financial Statements
Independent Auditors' Report....................................................... IV - 278
Consolidated Balance Sheets, December 31, 1993 and 1992............................IV - 279 to IV - 280
Consolidated Statements of Operations, Years ended December 31,
1993 and 1992, nine months ended December 31, 1991
and three months ended March 31, 1991............................................ IV - 281
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..........................IV - 282 to IV - 283
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..........................IV - 284 to IV - 285
Notes to Consolidated Financial Statements, December 31, 1993,
1992 and 1991....................................................................IV - 286 to IV - 329
</TABLE>
IV-2
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Statements
December 31, 1994
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
TCI, dated as of December 31, 1994, assumes that (i) the TeleCable Merger, (ii)
the Cablevision Acquisition and (iii) the QVC Merger had occurred as of such
date. See notes (2), (3) and (4).
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, the Old TCI/Liberty Combination
(see note 1) and the QVC Merger 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, the Old TCI/Liberty Combination and the QVC Merger 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>
December 31, 1994
---------------------------------------------------------------
QVC
TCI TeleCable Cablevision Pro forma Merger TCI
Historical Historical (2) Historical (3) adjustments (2)(3) Pro forma (4) Pro forma
---------- -------------- -------------- ------------------ ------------- ---------
Assets amounts millions
- ------
<S> <C> <C> <C> <C> <C> <C>
Cash, receivables and other current
assets $ 496 19 10 -- -- 525
Investment in affiliates and Turner
Broadcasting System, Inc., and related
receivables 2,156 18 -- -- 7 (12) 1,956
(216)(13)
Property and equipment, net of
accumulated depreciation 5,876 258 30 334 (5) -- 6,498
Franchise costs, intangibles and other
assets, net of amortization 11,000 21 -- 1,319 (5) -- 13,296
956 (6)
------ --- -- ------ ------ ------
$19,528 316 40 2,609 (209) 22,284
======= === === ======== ===== ======
Liabilities and Stockholders' Equity
- ------------------------------------
Payables and accruals $ 1,193 31 32 -- -- 1,256
Debt 11,162 274 46 87 (7) 7 (12) 11,755
179 (8)
Deferred income taxes 3,613 46 6 956 (6) (89)(13) 4,532
Other liabilities 160 5 -- -- -- 165
------- --- --- -------- ----- ------
Total liabilities 16,128 356 84 1,222 (82) 17,708
------- --- --- -------- ----- ------
Minority interests 429 3 -- -- -- 432
Series D Preferred Stock -- -- -- 300 (10) -- 300
Stockholders' equity;
Preferred Stock -- -- -- -- -- --
Combined deficit -- -- (44) 44 (11) -- --
Class A common stock 577 -- -- 42 (10) -- 619
Class B common stock 89 7 -- (7) (9) -- 89
Additional paid-in capital 2,959 (262) -- 958 (10) -- 3,917
262 (9)
Cumulative foreign currency
translation adjustment (4) -- -- -- -- (4)
Unrealized holding gains for
available-for-sale securities 253 3 -- (3) (9) (127)(13) 126
Retained earnings (deficit) (293) 209 -- (209) (9) -- (293)
Treasury stock (610) -- -- -- -- (610)
------- ---- --- -------- ----- ------
2,971 (43) (44) 1,087 (127) 3,844
------- ---- --- -------- ----- ------
$19,528 316 40 2,609 (209) 22,284
======= ==== === ======== ===== ======
</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>
Year ended December 31, 1994
--------------------------------------------------------------------------------------------
QVC
TCI Liberty TeleCable Cablevision Pro forma Merger TCI
Historical Historical (1) Historical (2) Historical (3) adjustments(1)(2)(3) Pro forma (4) Pro forma
---------- -------------- -------------- -------------- -------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 4,936 790 302 139 (36) (14) -- 6,131
Operating, cost of sales,
selling, general and
administrative expenses and
compensation relating to
stock appreciation rights (3,130) (726) (171) (90) 36 (14) -- (4,081)
Depreciation and amortization (1,018) (32) (46) (6) (71) (15) -- (1,173)
------ ------ ------ ------ ------ ------ -----
Operating income (loss) 788 32 85 43 (71) -- 877
Interest expense (785) (22) (23) -- 12 (16) -- (845)
(6) (17)
(15) (18)
(6) (19)
Interest and dividend income 36 15 1 -- (12) (16) -- 40
Share of earnings of Liberty 125 -- -- -- (125) (20) -- --
Share of earnings (losses)
of affiliates, net (120) 23 -- -- -- 26 (24) (98)
(27) (25)
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 171 220 59 42 (223) (1) 268
Income tax expense (116) (95) (23) (15) 86 (21) -- (163)
------ ------ ------ ------ ------ ------ -----
Net earnings (loss) 55 125 36 27 (137) (1) 105
Dividend requirement on
redeemable preferred stocks (8) (14) -- -- (17) (22) -- (31)
8 (23)
------ ------ ------ ------ ------ ------ -----
Net earnings (loss)
attributable to common
shareholders $ 47 111 36 27 (146) (1) 74
======= ====== ====== ====== ====== ====== =====
Primary earnings per common
and common equivalent share $.09 $ .11 (26)
======= =====
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-5
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
December 31, 1994
(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 acquisition of controlling
interests in Cablevision for an aggregate purchase price of $286 million,
including a previously paid deposit of $20 million. The purchase price was
paid with cash consideration of approximately $199 million (including the
initial $20 million) and the Company's issuance of approximately $87
million in secured negotiable promissory notes payable.
(4) Pursuant to an Agreement and Plan of Merger dated as of August 4, 1994, as
amended (the "QVC Merger Agreement"), 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. 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. Upon consummation of
the aforementioned QVC transactions, the Company was deemed to exercise
significant influence over QVC and, as such, will account for its
investment in QVC under the equity method.
(5) Represents an allocation of the purchase prices of TeleCable and
Cablevision to their 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.
(6) Represents the estimated incremental deferred income tax liability
associated with the TeleCable and Cablevision purchase price allocations,
as described in note (5) above. The adjustment assumes a combined federal
and state income tax rate of 41%.
IV-6
<PAGE>
(7) Represents the issuance of the Notes in the acquisition of Cablevision (see
note 3).
(8) Represents borrowings by the Company to pay the remaining cash
consideration in the Cablevision acquisition.
(9) Represents the elimination of TeleCable's historical stockholders'
deficit.
(10) Represents the issuance by TCI to TeleCable shareholders of TCI Class A
common stock (approximately 42 million shares) and 1 million shares of
Series D Preferred Stock with an aggregate liquidation value of $300
million. See note (2) above.
(11) Represents the elimination of Cablevision's historical stockholders'
deficit.
(12) Represents the Company's cash contribution in the QVC Merger.
(13) Represents the elimination of the unrealized gain attributable to QVC.
(14) 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.
(15) 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.
(16) Represents the elimination of interest on intercompany indebtedness between
TCIC and Liberty. See note (1) above.
(17) Represents assumed interest expense incurred by the Company on the Notes,
calculated at an assumed rate of 7% per annum.
(18) Represents assumed interest expense incurred by the Company 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 initial $20 million payment toward 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.
(19) 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 December 31, 1994 for such indebtedness (14.4%
per annum).
(20) Represents the elimination of TCIC's share of Liberty's historical
earnings.
(21) Reflects the estimated income tax effect of the pro forma adjustments.
(22) Represents the dividend requirements on TCI's Series D Preferred Stock
(issued in connection with the TeleCable Merger--see note 2).
(23) Represents the elimination of the preferred stock dividend requirements on
Liberty preferred stock held by TCIC converted into preferred stock of
TCI.
(24) Reflects the incremental increase in TCI's share of QVC's historical
earnings resulting from the consummation of the QVC Merger.
IV-7
<PAGE>
(25) Represents the adjustments to TCI's share of the pro forma loss of the
Purchaser after giving effect to the consummation of the QVC Merger. Such
adjustment reflects the estimated incremental interest, depreciation and
amortization expense, net of income taxes, incurred by the Purchaser
following the consummation of the QVC Merger.
(26) 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.
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
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<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.
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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.
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<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"),
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<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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
IV-58
<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.
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.
IV-59
<PAGE>
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.
IV-60
<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'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.
IV-61
<PAGE>
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 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 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")
QE+ LTD
Southern Satellite Systems, Inc. ("Southern")
Netlink USA ("Netlink")(owned by TCIC prior to the Mergers)
Netlink International, Inc. (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")
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)
International Cablecasting Technologies, 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)
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
Sports Channel 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)
Premier Sports Network (launched in 1995)
Silver King Communications, Inc.
Asian Television and Communications LLC
TCI also has other business units which may transact business with the
Liberty Media Group. These businesses represent (i) TCI's Domestic Cable and
Communications unit, (ii) TCI's International Cable and Programming unit and
(iii) TCI's Technology/Venture Capital unit. 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 results of operations or financial condition of the Liberty Media Group or
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 the assets 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.
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.
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 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 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.
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 a rate to be established
by the Board of Directors. In making such determinations, the Board of
Directors expects to take into account considerations it deems relevant,
including 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 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 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 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 subsidiaries of 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 $387 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 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.
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 globally 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% $ 121,042 100% $ 77,457
Operating, selling, general &
administrative 116% 140,362 112% 86,811
Depreciation and amortization 5% 6,122 4% 3,244
----- --------- ----- ---------
Operating loss (21%) $ (25,442) (16%) $ (12,598)
===== ========= ===== =========
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 56%, or $43.6 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. STARZ! (launched
in February 1994), tv! (launched in May 1994) and Encore's six new thematic
multiplex services (three launched in July 1994 and three launched in September
1994) accounted for a combined increase in revenue of $13.8 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 62%, or $53.6 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 $36 million of the increase. 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 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 $25.4 million in the 1995 first quarter compared with a loss of $12.6
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 revenue
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 combining HSN 1 and HSN 2 into one network, the expansion of its HSN
Spree network, 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
-----------------------------------------
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 with 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
-----------------------------------------
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.
Subsidiaries of 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.
Other Income and Expense
- ------------------------
Interest expense was $6.1 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 a subsidiary of
Liberty Media Group. 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 103,754 95,081
Inventories, net 112,316 119,814
Prepaid expenses 15,298 14,581
Prepaid program rights 41,975 24,018
Committed film inventory 55,045 46,503
Investments in affiliates, accounted
for under the equity method, and
related receivables (note 3) 272,827 269,292
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 158,983 152,487
Computer and broadcast equipment 61,170 60,525
---------- ---------
242,131 234,946
Less accumulated depreciation 44,050 38,547
---------- ---------
198,081 196,399
---------- ---------
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 15,669 13,277
---------- ---------
$2,353,923 2,272,985
========== =========
</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 $ 137,092 111,239
Accrued liabilities 66,741 112,278
Film licenses payable 67,636 54,026
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) 364,704 330,461
Deferred tax liability 171,284 150,601
Other liabilities 9,264 4,320
---------- ---------
Total liabilities 925,905 894,366
---------- ---------
Minority interests 116,100 115,165
Combined equity (note 8):
Combined equity 1,153,201 1,133,002
Unrealized gains on
available-for-sale
securities, net of taxes 158,717 130,452
---------- ---------
1,311,918 1,263,454
---------- ---------
Commitments and contingencies (note 9)
$2,353,923 2,272,985
========== =========
</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) 25,519 13,404
From others 95,523 64,053
-------- -------
364,739 351,672
-------- -------
Cost of sales, operating costs and
expenses:
Cost of sales 160,007 175,615
Operating 128,220 89,384
Selling, general and administrative 100,580 79,864
Charges by TCI (note 8) 6,689 1,903
Adjustment to compensation relating
to stock appreciation rights (note 8) (2,096) (10,302)
Depreciation 6,343 5,478
Amortization 9,706 4,567
-------- -------
409,449 346,509
-------- -------
Operating earnings (loss) (44,710) 5,163
Other income (expense):
Interest expense (5,316) (2,927)
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) (1,843) 7,324
Minority interest in losses
(earnings) of consolidated
subsidiaries 5,941 (4,179)
Loss on disposition of assets -- (2,233)
Other, net 753 168
-------- -------
904 3,840
-------- -------
Earnings (loss) before income
taxes (43,806) 9,003
Income tax benefit (expense) 20,279 (5,755)
-------- -------
Net earnings (loss) $(23,527) 3,248
======== =======
</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* $1,133,002 130,452 1,263,454
Net loss (23,527) -- (23,527)
Sale of programming to TCI (25,519) -- (25,519)
Cost allocations from TCI 6,689 -- 6,689
Interest expense allocation from TCI 743 -- 743
Intergroup tax allocation (20,496) -- (20,496)
Net cash transfers from TCI 70,809 -- 70,809
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 $1,153,201 158,717 1,311,918
========== ======= =========
</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) $ (23,527) 3,248
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 16,049 10,045
Adjustment to compensation relating
to stock appreciation rights (2,096) (10,302)
Share of losses (earnings) of
affiliates, net 1,843 (7,324)
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 (8,562) (2,312)
Change in inventories (1,044) (8,236)
Change in prepaid expenses (18,661) (12,620)
Change in payables, accruals, due
to TCI from HSN and deferred
revenue 8,716 20,608
--------- --------
Net cash provided (used) by
operating activities (55,606) 4,546
--------- --------
Cash flows from investing activities:
Cash paid for acquisitions (33,739) --
Capital expended for property and
equipment (8,208) (5,652)
Additional investments in and loans to
affiliates and others (13,000) (7,436)
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 1,639 3,361
--------- --------
Net cash used in investing
activities (58,199) (1,873)
--------- --------
Cash flows from financing activities:
Borrowings of debt 175,300 250,000
Repayments of debt (127,010) (249,463)
Change in cash transfers from TCI 26,009 2,437
Contributions by minority shareholders -- 3,946
of subsidiaries
Distributions to minority shareholders (593) (400)
of subsidiaries --------- --------
Net cash provided by financing
activities 73,706 6,520
--------- --------
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 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
QE+ LTD
Southern Satellite Systems, Inc.
Netlink USA (owned by TCIC prior to the Mergers)
Netlink International, Inc. (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")
(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)
International Cablecasting Technologies, 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)
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)
Premier Sports Network (launched in 1995)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
TCI also has other business units which may transact business with the
Liberty Media Group. These businesses represent (i) TCI's Domestic Cable
and Communications unit, (ii) TCI's International Cable and Programming
unit and (iii) TCI's Technology/Venture Capital unit. 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 results of operations or financial condition of the Liberty
Media Group or 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 the assets 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.
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.
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 $4,415,000 and $1,850,000 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 $ 405,084 441,202
Operating expenses (330,931) (358,989)
Depreciation and amortization (30,834) (25,495)
--------- --------
Operating income 43,319 56,718
Interest expense (14,633) (2,549)
Other, net (32,727) (28,761)
--------- --------
Net earnings (loss) $ (4,041) 25,408
========= ========
</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 21,044 28,695
-------- -------
$272,827 269,292
======== =======
</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
Other (5,076) (2,053)
------- ------
$(1,843) 7,324
======= ======
</TABLE>
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 8,329 8,667
-------- -------
$364,704 330,461
======== =======
</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 of TBS.
(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.
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 corporation)
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.
(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.
Subsidiaries of 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 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.
(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 a rate to be
established by the Board of Directors. In making such determinations, the
Board of Directors expects to take into account considerations it deems
relevant, including 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 $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, required aggregate payments under
the Film License 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 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 currently anticipated to be 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")
QE+LTD
Southern Satellite Systems, Inc.
Netlink USA (owned by TCIC prior to the Mergers)
Netlink International, Inc. (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 Ticket Networks, L.P. ("Prime Ticket") (acquired in 1994)
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)
International Cablecasting Technologies, 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)
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)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
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% $ 372,346 100% $263,960 100% $208,988
Operating, selling, general and
administrative 103% 383,786 85% 224,647 92% 192,863
Depreciation and amortization 5% 17,238 6% 16,112 7% 14,088
--- ---------- ---- -------- ---- --------
Operating income (loss) 8% ($28,678) 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 41%, or $108.4 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 were revenue from STARZ!, a first run premium movie service launched in
February 1994, and 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 71%, or $159.1 million, from 1993 to 1994. New business activities
(Prime Sports-West, STARZ!, and tv! Network) accounted for $89.5 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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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 a loss of $28.7 million in 1994, income of $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, STARZ! ($36.6 million), Prime
Sports-West ($8.0 million) and tv! Network ($6.7 million). STARZ! and tv!
Network were both launched during 1994. The loss at Prime Sports-West (formerly
Prime Ticket) 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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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.
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 $8,717,000, $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.
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Other Income and Expenses
- -------------------------
Interest expense was $14.8 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 Ticket Network, acquired in August 1994, and an
increase in interest expense at Affiliated Regional Communications, Ltd.,
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 Communication
Capital Corporation ("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 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 TCI or Liberty Media Group could obtain comparable
financing from an unrelated financing source.
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.
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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
- ------------
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 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 Ticket 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 Ticket. 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
results of operations or financial condition of the Liberty Media Group or 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 the assets 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.
Loans from TCI would bear interest at a rate to be established from
time to time by, or pursuant to procedures established by, the Board of
Directors. It is intended that the rate would be set so as to approximate the
rate at which TCI or Liberty Media Group could obtain comparable financing from
an unrelated financing source. The availability of loans from TCI to Liberty
Media Group is dependent on TCI working capital requirements and other factors.
There can be no assurances that such financing will be available in the future.
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 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 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 subsidiaries of 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 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
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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 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.
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 14,581 12,431
Prepaid program rights 24,018 1,422
Committed film inventory 46,503 11,448
Investments in affiliates, accounted for under
the equity method, and related receivables
(note 4) 197,192 229,292
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 152,487 130,207
Computer and broadcast equipment 60,525 61,825
---------- ---------
234,946 212,406
Less accumulated depreciation 38,547 28,710
---------- ---------
196,399 183,696
---------- ---------
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 13,277 7,066
---------- ---------
$2,480,822 1,735,118
========== =========
(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 112,278 98,607
Film licenses payable 54,026 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) 330,461 399,680
Deferred tax liability (note 10) 235,814 --
Other liabilities 4,320 1,522
---------- ---------
Total liabilities 979,579 726,904
---------- ---------
Minority interests in equity of consolidated 115,165 112,319
subsidiaries
Combined equity (note 11):
Combined equity 1,128,407 895,895
Unrealized gains on available-for-sale
securities, net of taxes 257,671 --
---------- ---------
1,386,078 895,895
---------- ---------
$2,480,822 1,735,118
========== =========
</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) 75,212 47,448 45,970
From others 297,134 216,512 163,018
---------- --------- -------
1,498,263 1,206,900 208,988
---------- --------- -------
Cost of sales, operating costs and expenses:
Cost of sales 730,505 611,526 --
Operating 362,592 246,299 137,371
Selling, general and administrative
(note 11) 353,988 266,860 43,888
Charges by TCI (note 11) 15,355 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 22,806 19,384 2,933
Amortization 26,762 20,808 11,168
---------- --------- -------
1,503,434 1,210,898 219,885
---------- --------- -------
Operating loss (5,171) (3,998) (10,897)
Other income (expense):
Interest expense (12,429) (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) 19,984 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 (886) (1,586) (1,277)
---------- --------- -------
194,084 52,193 34,360
---------- --------- -------
Earnings before income taxes 188,913 48,195 23,463
Income tax expense (note 10) (83,604) (21,330) (8,959)
---------- --------- -------
Net earnings $ 105,309 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
Net cash transfers from TCI 256,946 -- 256,946
---------- ---------- ---------
Balance at December 31, 1993 895,895 -- 895,895
Unrealized holding gains
for available-for-sale
securities as of January 1,
1994 (note 5) -- 335,177 335,177
Net earnings 105,309 -- 105,309
Sale of programming to TCI (75,212) -- (75,212)
Cost allocations from TCI 15,355 -- 15,355
Interest expense allocation
from TCI 2,348 -- 2,348
Intergroup tax allocation 62,353 -- 62,353
Acquisition of Prime Ticket
(note 7) 220,000 -- 220,000
Net cash transfers to TCI (97,641) -- (97,641)
Change in unrealized holding
gains for available-for-sale
securities (note 5) -- (77,506) (77,506)
---------- ---------- ---------
Balance at December 31, 1994 $1,128,407 257,671 1,386,078
========== ========== =========
</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 $ 105,309 26,865 14,504
Adjustments to reconcile net
earnings to net cash provided (used)
by operating activities:
Depreciation and amortization 49,568 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 (19,984) (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 (42,861) (8,672) 80
Change in prepaid expenses (23,200) (10,678) 1,296
Change in payables,
accruals, due to TCI and
deferred revenue 76,407 55,285 23,592
--------- ---------- --------
Net cash provided
(used) by operating
activities (25,035) 39,208 44,838
--------- ---------- --------
Cash flows from investing activities:
Cash paid for acquisitions -- (160,440) (32,930)
Capital expended for property and
equipment (34,775) (18,627) (2,116)
Additional investments in and loans
to affiliates and others (24,846) (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 (1,369) (3,569) (3,751)
--------- ---------- --------
Net cash provided
(used) by investing
activities 206,610 (162,146) (37,364)
--------- ---------- --------
Cash flows from financing activities:
Borrowings of debt 283,859 1,140,400 344,066
Repayments of debt (388,579) (1,197,181) (337,628)
Change in borrowings from or loans
to TCI (102,308) 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 (201,156) 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 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")
QE+ LTD
Southern Satellite Systems, Inc.
Netlink USA (owned by TCIC prior to the Mergers)
Netlink International, Inc. (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 Ticket Networks, L.P. ("Prime Ticket") (acquired in 1994)
(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)
International Cablecasting Technologies, 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)
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)
Premier Sports Network (launched in 1995)
Silver King Communications, Inc. ("SKC")
Asian Television and Communications LLC
TCI also has other business units which may transact business with the
Liberty Media Group. These businesses represent (i) TCI's Domestic Cable
and Communications unit, (ii) TCI's International Cable and Programming
unit and (iii) TCI's Technology/Venture Capital unit. 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 results of operations or financial condition of the Liberty
Media Group or 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.
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 $10,741,000 $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 $ 56,433 136,144
Feature film inventory 115,638 112,183
Cable distribution rights -- 99,579
Due from Liberty Media Group 11,253 --
Excess cost, other intangibles and other assets 281,923 1,042,387
----------- ----------
Total assets $ 465,247 1,390,293
=========== ==========
Debt $ 168,520 203,813
Due to Liberty Media Group 1,712 4,254
Feature film rights payable 15,909 104,096
Other liabilities 121,001 458,614
Owners' equity 158,105 619,516
----------- ----------
Total liabilities and equity $ 465,247 1,390,293
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1993 1992
----- ---- ----
amounts in thousands
<S> <C> <C> <C>
Combined Operations
- -------------------
Revenue $ 583,813 1,799,780 1,518,508
Operating expenses (442,157) (1,515,697) (1,272,238)
Depreciation and amortization (73,676) (50,157) (80,941)
--------- ----------- ----------
Operating income 67,980 233,926 165,329
Interest expense (10,071) (12,582) (26,005)
Other, net (28,597) (118,281) (53,098)
--------- ----------- ----------
Net earnings $ 29,312 103,063 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 28,695 26,382
-------- -------
$197,192 229,292
======== =======
</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) -- --
Other (5,859) (4,626) (5,568)
------- ------ ------
$19,984 24,045 24,355
======= ====== ======
</TABLE>
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 Ticket 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 Ticket. 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 Ticket 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 8,667 6,367
-------- -------
$330,461 399,680
======== =======
</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 Communications Capital Corp.
---------------------------------------
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 Ticket Networks, L.P. ("Prime Ticket")
-------------------------------------------------------
Prime Ticket 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 Ticket 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 Ticket 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 - $30,760,000; 1996 - $1,959,000; 1997
- $278,898,000; 1998 -$1,892,000 and 1999 - $9,302,000.
(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 $(14,313) (4,297) (18,610)
Federal intergroup tax expense
allocation (48,040) (16,954) (64,994)
Intergroup alternative minimum
tax allocation -- -- --
-------- ------- -------
$(62,353) (21,251) (83,604)
======== ======= =======
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 $(66,120) (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 (11,999) (2,774) (892)
Sale of wholly-owned subsidiary 920 -- --
Other, net 783 1,119 (856)
-------- ------- ------
$(83,604) (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.
(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
$8,717,000, $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 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 $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 $405 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 $36,733,000, $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 $28,538
1996 27,647
1997 28,031
1998 22,520
1999 20,811
</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"
(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, and (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"). The businesses of TCI not
attributed to the Liberty Media Group, together with any Inter-Group 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-184
<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 results of operations or financial condition of the TCI Group or 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.
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 Group
to the Liberty Media Group.
IV-185
<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-186
<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. In making such determinations, the Board of Directors expects to take
into account considerations it deems relevant, including 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.
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-187
<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-188
<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-189
<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)($495 million and $475 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 211% and 267% 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-190
<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 ($225 million and $308 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-191
<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 $1,247 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-192
<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-193
<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-194
<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.
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-195
<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 $21 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 $29 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-196
<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) 1,211 1,018
Property and equipment, at cost:
Land 69 69
Distribution systems 8,652 7,705
Support equipment and buildings 1,005 933
------- ------
9,726 8,707
Less accumulated depreciation 3,220 3,027
------- ------
6,506 5,680
------- ------
Franchise costs 13,150 11,152
Less accumulated amortization 1,779 1,708
------- ------
11,371 9,444
------- ------
Other assets, at cost, net of amortization 826 721
------- ------
$20,164 17,109
======= ======
</TABLE>
* Restated - see note 8.
(continued)
IV-197
<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 688 770
Debt (note 5) 11,006 10,831
Deferred income taxes 4,226 3,377
Other liabilities (note 8) 159 142
------- ------
Total liabilities 16,253 15,210
------- ------
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
Inter-Group Interest in Liberty Media Group (1,312) (1,264)
------- ------
Combined equity 3,351 1,585
------- ------
Commitments and contingencies (note 9)
$20,164 17,109
======= ======
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
IV-198
<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 338 264
Programming charges from Liberty Media Group
(note 8) 26 13
Selling, general and administrative 333 290
Charges to Liberty Media Group (note 8) (7) (2)
Adjustment to compensation relating to
stock appreciation rights (1) (19)
Depreciation 195 165
Amortization 76 73
------ -----
960 784
------ -----
Operating income 225 256
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 (20) 67
Income tax benefit (expense) (1) (38)
------ -----
Net earnings (loss) before earnings (loss)
of Liberty Media Group (21) 29
Earnings (loss) of Liberty Media Group (24) 3
------ -----
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-199
<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 Inter-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 (1,264) 1,585
Net earnings (loss) (45) -- -- -- 24 (21)
Purchase of programming from
Liberty Media Group -- -- -- -- 26 26
Cost allocations to Liberty
Media Group -- -- -- -- (7) (7)
Interest income from Liberty
Media Group -- -- -- -- (1) (1)
Intergroup tax allocation -- -- -- -- 21 21
Net cash transfers to Liberty
Media Group -- -- -- -- (71) (71)
Change in unrealizedgains
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 (1,312) 3,351
====== ======= ======= ======= ====== =====
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
IV-200
<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* $ (21) 29
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 (44) 37
------ -----
Net cash provided by operating activities 225 308
------ -----
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 investment in Liberty Media Group (26) (2)
Repayment of loans by affiliates and others 5 21
Other investing activities (34) (49)
------ -----
Net cash used in investing activities (578) (365)
------ -----
Cash flows from financing activities:
Borrowings of debt 889 1,046
Repayments of debt (932) (939)
Preferred stock dividends of subsidiaries -- (2)
Preferred stock dividends (12) --
Issuance of common stock 430 --
------ -----
Net cash provided by financing activities 375 105
------ -----
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-201
<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,
and (b) any interest in the Liberty Media Group other than the interest
represented by any outstanding shares of Liberty Media Group Stock (an
"Inter-Group Interest"). 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 Inter-Group
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-202
<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 results of operations or financial condition of the TCI Group or
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.
Subsequent to the adoption of 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 Group to the
Liberty Media Group.
(continued)
IV-203
<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-204
<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-205
<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-206
<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-207
<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-208
<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-209
<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-210
<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-211
<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-212
<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.
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
$3,994,000, and $1,557,000, 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 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 under the
equity method during that period.
(continued)
IV-213
<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. In making such determinations, the Board of Directors expects to
take into account considerations it deems relevant, including 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-214
<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-215
<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-216
<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 has guaranteed the payment of certain fees for Liberty Media
Group's license to exhibit certain films that are released theatrically by
various motion picture studios through December 31, 2002 (the "Film License
Obligations"). As of March 31, 1995, TCI Group's guarantee of Liberty Media
Group's obligations under certain of the license agreements aggregated
approximately $151 million. The aggregate guarantee by TCI Group of Liberty
Media Group's 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 aggregate guarantee 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-217
<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, and (b) any interest in the Liberty
Media Group other than the interest represented by any outstanding shares of
Liberty Media Group Stock (an "Inter-Group Interest"). The businesses of TCI
not attributed to the Liberty Media Group, together with any Inter-Group
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-218
<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 results of operations or financial condition of the TCI Group or 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.
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 Group
to the Liberty Media Group.
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).
IV-219
<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 57 2,443 55 2,251 53 1,881
Depreciation and amortization 23 1,001 22 920 22 766
--- ------ --- ------ --- ------
Operating income 20% $ 825 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-220
<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 9% 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
$8,717,000, $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-221
<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-222
<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-223
<PAGE>
Net Earnings (Loss)
-------------------
TCI Group's net loss (before earnings of Liberty Media Group and preferred
stock dividends) of $50 million for the year ended December 31, 1994 represented
a decrease in earnings of $16 million as compared to TCI Group's net loss
(before earnings of Liberty Media Group preferred stock dividends) of $34
million for the corresponding period of 1993. Such decrease is principally the
result 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, net 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%.
TCI Group's loss (before earnings of Liberty Media Group and preferred
stock dividends) of $34 million for the year ended December 31, 1993 represented
a decrease in earnings of $27 million as compared to TCI Group's loss 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, 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-224
<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 $304 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. Such amount was adjusted
by $182 million recorded in the Merger. The amount of net unrealized gain was
reduced by $233 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-225
<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-226
<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)($1,821 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 232%, 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-227
<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 ($1,045 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-228
<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 $1,247 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-229
<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.
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.
IV-230
<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. In making such determinations, the Board of Directors expects to
take into account considerations it deems relevant, including 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-231
<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-232
<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) 1,018 568
Property and equipment, at cost:
Land 69 74
Distribution systems 7,705 6,716
Support equipment and buildings 933 813
------- ------
8,707 7,603
Less accumulated depreciation 3,027 2,596
------- ------
5,680 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 721 509
amortization ------- ------
$17,109 15,646
======= ======
</TABLE>
(continued)
IV-233
<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 770 666
Debt (note 5) 10,831 9,760
Deferred income taxes (note 9) 3,377 3,317
Other liabilities (note 10) 142 70
------- ------
Total liabilities 15,210 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 --
Inter-Group Interest in Liberty Media
Group (note 1) (1,386) (896)
------- ------
Combined equity 1,585 1,398
------- ------
Commitments and contingencies (note 11)
$17,109 15,646
======= ======
</TABLE>
See accompanying notes to combined financial statements.
IV-234
<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 1,180 1,341 969
Programming charges from Liberty
Media Group (note 10) 75 47 46
Selling, general and administrative 1,208 838 865
Charges to Liberty Media Group
(note 10) (15) (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
------ ----- -----
3,444 3,171 2,647
------ ----- -----
Operating income 825 919 872
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 77 125 33
Income tax expense (note 9) (76) (157) (34)
------ ----- -----
Earnings (loss) from continuing
operations 1 (32) (1)
Loss from discontinued operations,
net of income taxes (note 12) -- -- (15)
------ ----- -----
Earnings (loss) before earnings of
Liberty Media Group 1 (32) (16)
Earnings of Liberty Media Group 105 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-235
<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 Inter-
holding unrealized Group
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-236
<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 Inter-
holding unrealized Group
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 -- -- -- -- -- (6) (6)
Interest income from Liberty
Media Group -- -- -- -- -- (2) (2)
Intergroup tax allocation -- -- -- -- -- (24) (24)
Net cash transfers to Liberty
Media Group -- -- -- -- -- (133) (133)
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) -- -- (896) 1,398
--------- ----------- ---------- ------------ ---------- ---- -----
</TABLE>
(continued)
IV-237
<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 Inter-
holding unrealized Group
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) -- -- (896) 1,398
Unrealized holding gains (losses)
for available-for-sale
securities as of January 1, 1994 -- -- -- 21 335 (335) 21
Net earnings (loss) 106 -- -- -- -- (105) 1
Purchase of programming from
Liberty Media Group -- -- -- -- 75 75
Cost allocations to Liberty
Media Group -- -- -- -- -- (15) (15)
Interest income from Liberty
Media Group -- -- -- -- -- (2) (2)
Intergroup tax allocation -- -- -- -- -- (62) (62)
Net cash transfers from Liberty
Media Group -- -- -- -- -- 97 97
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 -- -- -- -- -- (52) (52)
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 (1,386) 1,585
====== =========== ========== ============ ========== ====== =====
</TABLE>
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 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* $ 1 (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 75 120 59
------ ----- ----
Net cash provided by
operating activities 1,046 1,263 961
------ ----- ----
</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 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 (1,247) (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 (433) (295) (262)
Change in investment in Liberty Media Group 102 (119) 19
Repayment of loans by affiliates and others 33 62 30
Return of capital from affiliates 21 81 1
Other investing activities (60) (105) (154)
------- ------ ------
Net cash used in investing activities (2,084) (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-240
<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,
and (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"). 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 Inter-Group
Interest is referred to as the "Company" or "TCI Group".
(continued)
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)
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 results of operations or financial condition of the TCI Group or
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-242
<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.
Subsequent to the adoption of 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 Group to the
Liberty Media Group.
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-243
<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-244
<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-245
<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-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
(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-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
<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-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
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-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
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-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
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-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
(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-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
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-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
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-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
(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-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
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-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
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-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
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-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
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-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
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-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
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-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
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-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
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-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
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-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
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-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
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 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 Group is responsible to the
Liberty Media Group (or its constituent corporation) 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-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
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 $(64) (4) (67)
State and local (13) 4 (9)
---- ---- ----
$(77) -- (76)
==== ==== ====
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-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
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 $ (27) (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 (11) (22) (10)
Valuation allowance on
foreign corporation (10) -- --
Other (3) 4 (4)
----- ---- ----
$ (76) (157) (34)
===== ==== ====
</TABLE>
(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 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-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
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-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
(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.
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 $8,717,000, $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-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
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. In making such determinations, the Board of Directors expects
to take into account considerations it deems relevant, including 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-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
(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-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
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-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
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 has guaranteed the payment of certain fees for Liberty Media
Group's 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, TCI Group's guarantee of Liberty
Media Group's obligations under certain of the license agreements
aggregated approximately $162 million. The aggregate guarantee by TCI
Group of Liberty Media Group's 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 aggregate guarantee 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-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
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-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
(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-277
<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-278
<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-279
<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-280
<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-281
<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-282
<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-283
<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-284
<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-285
<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-286
<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-287
<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-288
<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-289
<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-290
<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-291
<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-292
<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-293
<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-294
<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-295
<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-296
<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-297
<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-298
<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-299
<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-300
<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-301
<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-302
<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-303
<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-304
<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-305
<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-306
<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-307
<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-308
<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-309
<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-310
<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-311
<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-312
<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-313
<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-314
<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-315
<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-316
<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-317
<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-318
<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-319
<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-320
<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-321
<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-322
<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-323
<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-324
<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-325
<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-326
<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-327
<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-328
<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-329
<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 "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 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.
V-1
<PAGE>
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 Common Stock
shall be reserved for issuance upon the exercise of Options granted pursuant to
this Plan. 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. 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 such share of Common Stock on the date the Option is granted, such percentage
rounded down to the nearest quarter dollar.
(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, as
applicable, 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 is listed on an exchange, on the principal
exchange on which the Common Stock, as applicable, 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.
V-2
<PAGE>
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.
(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 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.
V-3
<PAGE>
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 Common Stock or declaration of a dividend payable in shares of Common
Stock or capital reorganization or reclassification or other transaction
involving an increase or reduction in the number of outstanding shares of Common
Stock, the Board of Directors may adjust proportionally (i) the number of shares
of Common Stock reserved under these Options; and (ii) the exercise price of
such Options. In the event of any consolidation or merger of the Company with
another corporation or entity or the adoption by the Company of a plan of
exchange affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends or dividends
payable in Common Stock), the Board of Directors shall make such adjustments or
other provisions as it may deem equitable, including adjustments to avoid
fractional shares, to give proper effect to such event. 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, or to
make provision for the acceleration of the exercisability of, or lapse of
restrictions with respect to, the termination of unexercised options in
connection with such transaction.
(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: (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 Securities Exchange Act of 1934, as amended (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 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; (c) 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 (d) during any period of two consecutive years, individuals who
at the beginning
V-4
<PAGE>
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.
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-5
<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 12, 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 12, 1995
- ------------------------- Director
(Bob Magness)
* Chief Executive Officer, June 12, 1995
- ------------------------- President and Director
(John C. Malone) (Principal Executive Officer)
* Executive Vice President, June 12, 1995
- ------------------------- Treasurer and Director
(Donne F. Fisher) (Principal Financial and
Accounting Officer)
* Director June 12, 1995
- -------------------------
(Jerome H. Kern)
* Director June 12, 1995
- -------------------------
(John W. Gallivan)
* Director June 12, 1995
- -------------------------
(Kim Magness)
* Director June 12, 1995
- -------------------------
(Robert A. Naify)
* Director June 12, 1995
- -------------------------
(Tony Coelho)
Director June 12, 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 8, 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 8, 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 8, 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 8, 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 8, 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 8, 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 8, 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
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 8, 1995
