<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Tele-Communications, Inc.
--------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed:
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
[DATE]
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders
of Tele-Communications, Inc. (the "Company"), which will be held at [PLACE] on
[DATE] starting at [TIME]. A notice of the special meeting, a proxy card and a
proxy statement containing important information about the matters to be acted
upon at the special meeting are enclosed.
At the special 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 globally branded entertainment, educational and
informational programming and software including multimedia products and (ii)
electronic retailing, direct marketing, advertising sales, infomercials and
transaction processing. Promptly following approval of the Liberty Media Group
Stock Proposal, the Company will distribute to holders of outstanding Class A
Common Stock and Class B Common Stock, respectively, Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock (collectively,
"Liberty Media Group Common Stock") intended to represent 100% of the equity
value of the Company attributable to the Liberty Media Group. The distribution
ratio will be determined by the Board of Directors after approval of the Liberty
Media Group Stock Proposal. The existing Class A Common Stock and Class B Common
Stock (collectively, "Common Stock") will remain outstanding following the
issuance of the Liberty Media Group Common Stock and will represent the
Company's businesses and assets not included in the Liberty Media Group,
including its domestic cable and telephony distribution and communications
business, its international cable, telephony and programming business and its
technology ventures 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 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,
<PAGE>
including strategic partnering transactions, with equity securities specifically
related to each Group.
It is important to note that holders of Common Stock and of 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.
Whether or not you are personally able to attend the special 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 special meeting and vote
personally.
Sincerely yours,
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS............................... i
PROXY STATEMENT......................................................... 1
AVAILABLE INFORMATION................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 4
SUMMARY COMPARISON OF TERMS OF EXISTING COMMON STOCK WITH COMMON
STOCK AND LIBERTY MEDIA GROUP COMMON STOCK UNDER THE LIBERTY MEDIA
GROUP STOCK PROPOSAL................................................... 6
PROXY STATEMENT SUMMARY................................................. 12
SPECIAL CONSIDERATIONS.................................................. 29
THE SPECIAL MEETING..................................................... 38
Time and Place; Purposes.......................................... 38
Voting Rights; Votes Required for Approval........................ 38
Proxies........................................................... 39
THE LIBERTY MEDIA GROUP STOCK PROPOSAL.................................. 39
General........................................................... 39
Background and Reasons for the Liberty Media Group Stock Proposal. 41
Recommendation of the Board of Directors.......................... 41
Management and Allocation Policies................................ 41
Description of Common Stock and Liberty Media Group Common Stock.. 45
No Initial Retained Interest...................................... 60
Dividend Policy................................................... 62
Stock Transfer Agent and Registrar................................ 62
Stock Exchange Listings........................................... 62
Dissenters' Rights................................................ 63
Certain Federal Income Tax Considerations......................... 63
Effects on Convertible Securities................................. 66
Adjustments Under Stock Incentive Plan............................ 66
Anti-Takeover Considerations...................................... 67
Description of Existing Common Stock and Other Capital Stock...... 69
DESCRIPTION OF BUSINESS OF LIBERTY MEDIA GROUP.......................... 76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 107
LEGAL MATTERS........................................................... 113
EXPERTS................................................................. 113
STOCKHOLDERS' PROPOSALS................................................. 114
APPENDIX I - Glossary of Certain Defined Terms ........................ I-1
APPENDIX II - Illustration of Certain Terms............................. II-1
APPENDIX III - Proposed Amendments to the Restated Certificate of
Incorporation......................................................... III-1
APPENDIX IV - Financial Information..................................... IV-1
Index............................................................. IV-1
Tele-Communications, Inc.......................................... IV-3
Liberty Media Corporation......................................... IV-101
Liberty Media Group............................................... IV-151
QVC, Inc.......................................................... IV-192
</TABLE>
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [DATE]
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (including
any adjournment or postponement thereof, the "Special 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 consider and vote upon a proposal to amend the Company's
Restated Certificate of Incorporation to authorize _______________ shares
of a new class of Liberty Media Group Common Stock, par value $1.00 per
share, of which ___________ shares will be designated as Series A Liberty
Media Group Common Stock and ___________ shares will be designated as
Series B Liberty Media Group Common Stock, and to provide for the voting
powers and relative, participating, optional and other special rights and
qualifications, limitations and restrictions of each of the new series.
2. To transact such other business as may properly come before the
Special Meeting.
Holders of record of shares of the Company's Class A Common Stock and Class
B Common Stock and the Company's Convertible Preferred Stock, Series C, at the
close of business on [RECORD DATE], the record date for the Special Meeting, are
entitled to notice of and to vote at the Special Meeting.
To assure that your interests will be represented at the Special 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 Special
Meeting and vote personally.
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 SPECIAL MEETING.
i
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II, 5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD [DATE]
This Proxy Statement 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 special meeting of the stockholders of the Company, or any adjournment or
postponement thereof (the "Special Meeting"), called to consider and vote upon a
proposal (the "Liberty Media Group Stock Proposal") to authorize
_______________ shares of a new class of Liberty Media Group Common Stock, par
value $1.00 per share (the "Liberty Media Group Common Stock"), of which ____
shares will be designated as Series A Liberty Media Group Common Stock (the
"Series A Liberty Media Group Common Stock"), and _____ shares will be
designated as Series B Liberty Media Group Common Stock (the "Series B Liberty
Media Group Common Stock"). The two new series are 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 globally branded entertainment,
educational and informational programming and software including multimedia
products and (ii) electronic retailing, direct marketing, advertising sales,
infomercials and transaction processing.
Subject to the approval by the stockholders of the Liberty Media Group
Stock Proposal, the Board of Directors intends to adopt resolutions on the date
of the Special Meeting or shortly thereafter declaring a distribution (the
"Distribution") of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock on the outstanding shares of Class A
Common Stock, par value $1.00 per share (the "Class A Common Stock"), and Class
B Common Stock, par value $1.00 per share (the "Class B Common Stock", and
collectively with the Class A Common Stock, the "Common Stock"), respectively.
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. The number of
shares of Series A Liberty Media Group Common Stock to be distributed per share
of Class A Common Stock will be the same as the number of shares of Series B
Liberty Media Group Common Stock to be distributed per share of Class B Common
Stock. Such distribution ratio will be determined by the Board of Directors at
the time the resolutions are adopted based on then prevailing market conditions.
After the issuance of Liberty Media Group Common Stock in the
Distribution, it is intended that the existing Class A Common Stock and Class B
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, its
international cable, telephony and programming business and its technology
ventures 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 (the "Retained Interest"). For convenience, the businesses
of the Company not attributed to the Liberty Media Group, together with any
Retained Interest, is sometimes referred to herein as the "TCI Group".
Immediately following the Distribution, there will be no Retained Interest. A
Retained Interest would be created only if cash or other properties are
subsequently transferred from the TCI Group to the Liberty Media Group 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
<PAGE>
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 separately and will provide supplemental financial
information of the TCI Group, 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 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 the Company's or
any of its subsidiaries' debt.
SEE "SPECIAL CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE LIBERTY MEDIA GROUP STOCK PROPOSAL.
The Liberty Media Group Stock Proposal provides that any dividends on
the 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 (as
defined) and only if equal per share dividends are concurrently paid on both the
Class A Common Stock and the Class B 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 (as defined) and only if equal dividends are
concurrently paid on both the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock. Under the terms of the Liberty Media
Group Common Stock as set forth in the Company's Restated Certificate of
Incorporation, as proposed to be amended, the Board of Directors will (subject
to the foregoing provisions) have the authority to declare and pay dividends on
the Common Stock and the Liberty Media Group Common Stock in equal or unequal
amounts, notwithstanding the amount of assets available for dividends on any
class, the respective voting or liquidation rights of any class or series, the
amount of prior dividends declared on any class or series or any other factor.
The Company has never paid cash dividends on its Common Stock, and the Board of
Directors does not anticipate that cash dividends on the Common Stock or the
Liberty Media Group Common Stock will be paid in the foreseeable future. The
decision, if any, to pay any such dividends in the future will depend on the
financial condition, results of operations and business requirements of the
Company as a whole. In making the determination as to the allocation of any
future dividends among the 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 rights of holders of the Class A Common Stock and the Class B
Common Stock upon liquidation of the Company will be based on the ratio of the
aggregate market capitalization of the Class A Common Stock and the Class B
Common Stock to the aggregate market capitalization of the Class A Common Stock,
the Class B Common Stock, the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock, with the Class A Common Stock and the
Class B Common Stock participating equally on a share-for-share basis. The
rights of holders of the Series A Liberty Media Group Common Stock and the
-2-
<PAGE>
Series B Liberty Media Group Common Stock upon liquidation of the Company will
be based on the ratio of the aggregate market capitalization of the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock to the aggregate market capitalization of the Class A Common Stock, the
Class B Common Stock, the Series A Liberty Media Group Common Stock and the
Series B 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.
The Liberty Media Group Common Stock will vote together with the
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 will continue to have one vote per share and ten votes per share,
respectively. Subject to certain conditions, shares of Liberty Media Group
Common Stock may be redeemed or converted at the Company's option or upon the
occurrence of certain events as described under the caption "The Liberty Media
Group Stock Proposal--Description of Common Stock and Liberty Media Group Common
Stock".
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 Company anticipates applying for listing of shares of Liberty
Media Group Common Stock on the Nasdaq National Market prior to the time such
shares are issued. See "The Liberty Media Group Stock Proposal -- Stock
Exchange Listings".
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE LIBERTY MEDIA
GROUP STOCK PROPOSAL AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL.
This Proxy Statement and the accompanying form of proxy are first
being mailed to the stockholders of the Company on or about [DATE].
-3-
<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"), and Liberty Media Corporation ("Liberty"). On August 4, 1994 the
mergers (the "TCI/Liberty Combination") of TCIC and Liberty with separate
wholly-owned subsidiaries of the Company were consummated and each of TCIC and
Liberty became wholly-owned subsidiaries of the Company. In connection with the
TCI/Liberty Combination, the Company changed its name to Tele-Communications,
Inc. and TCIC changed its name to TCI Communications, Inc. UNLESS THE CONTEXT
INDICATES OTHERWISE, AS USED IN THIS PROXY STATEMENT 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates in this Proxy Statement by reference:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A (Amendment 1) (Commission File No. 0-5550), (ii)
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994, as amended by Form 10-Q/A (Amendment 1) (Commission File No. 0-5550),
(iii) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (Commission File No. 0-5550), (iv) the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994, as amended by Form 10-Q/A
(Amendment 1) and Form 10-Q/A (Amendment 2) (Commission File No. 0-20421), (v)
the Company's Current Reports on Form 8-K dated February 15, 1994, February 25,
1994, April 6, 1994 and May 27, 1994, as amended by Form 8-K/A (Amendment 1)
(Commission File No. 0-5550), and (vi) the Company's Current Reports on Form 8-K
dated August 5, 1994, August 18, 1994, August 26, 1994, October 27, 1994,
December 2, 1994, as amended by Form 8-K/A (Amendment 1), January 23, 1995,
February 3, 1995, as amended by Form 8-K/A, February 13, 1995 and February 15,
1995 (Commission File No. 0-20421).
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 and prior
to the Special Meeting shall be deemed to be incorporated by reference into this
Proxy Statement 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
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<PAGE>
Proxy Statement is qualified in its entirety by the information and financial
statements (including notes thereto) appearing in the documents incorporated
herein by reference.
THIS PROXY STATEMENT 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 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].
-5-
<PAGE>
SUMMARY COMPARISON OF TERMS OF EXISTING COMMON STOCK WITH 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 Common Stock under the Company's Restated Certificate
of Incorporation (the "Charter") as currently in effect and the terms of the
Common Stock and the Liberty Media Group Common Stock under the Charter as
proposed to be amended pursuant to the Liberty Media Group Stock Proposal (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, the Appendices hereto and the documents incorporated by
reference or otherwise referred to herein. See "Proxy Statement Summary",
"Special Considerations" and "The Liberty Media Group Stock Proposal --
Description of 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. See
Appendix I -- Glossary of Certain Defined Terms. Stockholders are urged to read
carefully this Proxy Statement and the Appendices hereto in their entirety.
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
COMMON STOCK
------------
<S> <C> <C> <C>
BUSINESSES: All businesses of TCI Group - the Company's Liberty Media Group is
the Company. businesses and assets not engaged in two principal lines
included in the Liberty Media of business: (i) production,
Group, including domestic acquisition and distribution
cable and telephony distribution through all available formats
and communications business, and media of globally branded
international cable, telephony entertainment, educational and
and programming business and informational programming
technology ventures business and software including
and any Retained Interest in the multimedia products and (ii)
Liberty Media Group. electronic retailing, direct
marketing, advertising sales,
infomercials and transaction
processing.
The Common Stock is intended The Liberty Media Group
to reflect the separate Common Stock is intended to
performance of the TCI Group. reflect the separate
However, holders of Common performance of the Liberty
Stock will continue to be Media Group. However,
subject to risks associated with holders of Liberty Media
an investment in the Company Group Common Stock will be
and all of its businesses, assets subject to risks associated with
and liabilities. There is no an investment in the Company
assurance as to the degree to and all of its businesses, assets
which the market value of the and liabilities. There is no
Common Stock will reflect the assurance as to the degree to
separate performance of the which the market value of the
TCI Group. Liberty Media Group Common
Stock will reflect the separate
performance of the Liberty
Media Group.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
COMMON STOCK
------------
<S> <C> <C> <C>
DIVIDENDS: The Company has The Liberty Media Group The Company's current policy
never paid cash Stock Proposal would not alter of paying no cash dividends on
dividends on its the current policy of paying no Common Stock would also
Common Stock, cash dividends on Common apply to the Liberty Media
and the Company's Stock. Group Common Stock.
current policy is
to pay no cash
dividends on
Common Stock.
Dividends are Dividends are payable out of Dividends are payable out of
payable out of the lesser of assets of the the lesser of assets of the
the assets of the Company legally available Company legally available
Company legally therefor and the TCI Group therefor and the Liberty Media
available for Available Dividend Amount. If Group Available Dividend
dividends. If dividends on the Common Amount. If dividends on the
dividends on the Stock are paid, equal dividends Liberty Media Group Common
Common Stock are will be concurrently paid on Stock are paid, equal dividends
paid, they will be both the Class A Common will be concurrently paid on
concurrently paid Stock and the Class B Common both the Series A Liberty
on both the Class Stock. Subject to such Media Group Common Stock
A Common Stock and provisions, dividends may be and the Series B Liberty Media
the Class B declared and paid on the Group Common Stock.
Common Stock in Common Stock and/or the Subject to such provisions,
equal per share Liberty Media Group Common dividends may be declared and
amounts. Stock in equal or unequal paid on the Common Stock
amounts, notwithstanding the and/or the Liberty Media
amount of assets available for Group Common Stock in equal
dividends on any class, the or unequal amounts,
respective voting or liquidation notwithstanding the amount of
rights, the amount of prior assets available for dividends
dividends paid or any other on any class, the respective
factor. voting or liquidation rights, the
amount of prior dividends paid
or any other factor.
Any decision to pay dividends Any decision to pay dividends
in the future would depend on in the future would depend on
the financial condition, results the financial condition, results
of operations and business of operations and business
requirements of the Company requirements of the Company
as a whole. In making a as a whole. In making a
determination as to the determination as to the
allocation of any future allocation of any future
dividends among the Common dividends among the Common
Stock and the Liberty Media Stock and the Liberty Media
Group Common Stock, the Group Common Stock, the
Board of Directors will Board of Directors will
consider, among other factors, consider, among other factors,
the relative financial condition, the relative financial condition,
results of operations and results of operations and
business requirements of the business requirements of the
respective Groups. respective Groups.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
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), 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, 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
Liberty Media Group Common
Stock into shares of Common
Stock equal to ___% of the
ratio over a specified period of
time after consummation of the
transaction of the Market
Value of one share of Liberty
Media Group Common Stock
to one share of Common
Stock.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
COMMON STOCK
------------
<S> <C> <C> <C>
DIVIDEND,
REDEMPTION
AND
CONVERSION
RIGHTS
APPLICABLE
ON
DISPOSITION
OF GROUP
ASSETS
(CONTINUED): The Company could, in the
sole discretion of the Board of
Directors, at any time prior to
the first anniversary of a
dividend on or a partial
redemption of the outstanding
shares of Liberty Media Group
Common Stock following a
sale of all or substantially all
of the properties and assets of
the Liberty Media Group,
convert each remaining
outstanding share of Liberty
Media Group Common Stock
into shares of Common Stock
equal to ___% of the ratio over
a specified period of time of
the Market Value of one share
of Liberty Media Group
Common Stock to one share of
Common Stock.
CONVERSION AT
OPTION OF
HOLDER: Shares of Class B Shares of Class B Common Shares of Series B Liberty
Common Stock are Stock are convertible at any Media Group Common Stock
convertible at any time at the option of the holder are convertible at any time at
time at the option only into the same number of the option of the holder only
of the holder only shares of Class A Common into the same number of shares
into the same Stock. of Series A Liberty Media
number of shares Group Common Stock.
of Class A Common
Stock.
CONVERSION AT
OPTION OF
COMPANY: None. None. The Company could, in the
sole discretion of its Board of
Directors, at any time convert
each outstanding share of
Liberty Media Group Common
Stock into shares of Common
Stock equal to ___% of the
ratio over a specified period of
time of the Market Value of
one share of Liberty Media
Group Common Stock to one
share of Common Stock.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
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 shares
of Liberty Media Group
Common Stock for shares of
any one or more wholly-owned
subsidiaries that hold all of the
assets and liabilities of the
Liberty Media Group.
VOTING RIGHTS: The Class A The Class A Common Stock The Series A Liberty Media
Common Stock is will be entitled to one vote per Group Common Stock will be
entitled to one vote share and the Class B Common entitled to one vote per share
per share and the Stock will be entitled to ten and the Series B Liberty Media
Class B Common votes per share, voting as one Group Common Stock will be
Stock is entitled to class with the Liberty Media entitled to ten votes per share,
ten votes per share, Group Common Stock and any voting as one class with the
voting as one class preferred stock entitled to vote, Common Stock and any
with any preferred except to the extent separate preferred stock entitled to vote,
stock entitled to class votes are required by law except to the extent separate
vote, except to the or the Amended Charter. class or series votes are
extent separate required by law or the
class votes are Amended Charter.
required by law or
the Charter.
LIQUIDATION: Holders of shares Holders of shares of Class A Holders of shares of Series A
of Common Stock Common Stock and Class B Liberty Media Group Common
are entitled to share Common Stock will be entitled Stock and Series B Liberty
the funds of the to share (on an equal per share Media Group Common Stock
Company basis) a portion of the funds of will be entitled to share (on an
remaining for the Company remaining for equal per share basis) a portion
distribution to its distribution to its common of the funds of the Company
common stockholders based on the ratio remaining for distribution to its
stockholders. of the aggregate Market common stockholders based on
Capitalization of the Class A the ratio of the aggregate
Common Stock and Class B Market Capitalization of the
Common Stock to the Series A Liberty Media Group
aggregate Market Capitalization Common Stock and Series B
of the Class A Common Stock, Liberty Media Group Common
the Class B Common Stock, Stock to the aggregate Market
the Series A Liberty Media Capitalization of the Class A
Group Common Stock and the Common Stock, the Class B
Series B Liberty Media Group Common Stock, the Series A
Common Stock. Market Liberty Media Group Common
Capitalization is determined on Stock and the Series B Liberty
the basis of a time-weighted Media Group Common Stock.
average over a specified period. Market Capitalization is
determined on the basis of a
time-weighted average over a
specified period.
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP STOCK PROPOSAL
EXISTING ------------------------------------------------------------------
COMMON STOCK COMMON STOCK LIBERTY MEDIA GROUP
------------- ------------ -------------------
COMMON STOCK
------------
<S> <C> <C> <C>
STOCK EXCHANGE
LISTINGS: Nasdaq National Nasdaq National Market The Company intends to apply
Market under the under the symbols "TCOMA" and for listing of shares of Liberty
symbols "TCOMA" "TCOMB". Media Group Common Stock
and "TCOMB". on the Nasdaq National Market
prior to the time such shares
are issued.
</TABLE>
-11-
<PAGE>
PROXY STATEMENT SUMMARY
The following summary is intended only to highlight certain
information contained elsewhere in this Proxy Statement. 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, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. See "Summary Comparison of Terms", "Special
Considerations" and "The Liberty Media Group Stock Proposal". Unless
otherwise defined herein, capitalized terms used in this summary have the
meaning ascribed to them elsewhere in this Proxy Statement. See Appendix I
- Glossary of Certain Defined Terms. Stockholders are urged to carefully
read this Proxy Statement and the Appendices hereto in their entirety.
THE COMPANY
On August 4, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc. or "Old TCI") and Liberty Media Corporation
consummated a transaction to combine the companies (the "TCI/Liberty
Combination") whereby, in a tax free exchange, Class A and Class B shares
of both companies and preferred stock of Liberty were exchanged 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. and TCI/Liberty Holding Company changed its name
to Tele-Communications, Inc. Old TCI shareholders received one share of
Common Stock for each of their shares. Liberty common shareholders received
0.975 of a share of Common Stock for each of their common shares.
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 is primarily 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
and (ii) electronic retailing, direct marketing, advertising sales,
infomercials and transaction processing. Liberty Media Group has interests
in numerous domestic programming businesses, including Turner Broadcasting
System, Inc.; Discovery Communications, Inc.; Home Shopping Network Inc.;
QVC, Inc.; Encore Media Corporation; BET Holdings, Inc.; International
Family Entertainment; E! Entertainment Television; and five national and 15
regional sports networks. The Liberty Media Group also has an interest in
Netlink USA, one of the larger providers, based on its number of
subscribers, of programming packages to home satellite dish owners.
TCI GROUP
Domestic Cable and Communications. Based on the number of basic
subscribers, the TCI Group is the largest provider of cable television
services in the United States. At December 31, 1994, the TCI Group
operated cable television systems serving approximately 11.7 million basic
subscribers throughout the continental United States and Hawaii (12.5
million after giving pro
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<PAGE>
forma effect to the merger with TeleCable Corporation ("TeleCable")). In
addition, at December 31, 1993, the Company's affiliates accounted for
under the equity method and attributed to the TCI Group provided cable
television services to approximately 4.7 million basic subscribers.
In addition to its cable television systems, the TCI Group has an
investment, along with other cable television operators, in Teleport
Communications Group, Inc. ("TCG"). TCG believes that, based on the number
of route miles served by TCG and its subsidiaries, it is the nation's
largest competitive access provider. The TCI Group intends to expand
further its telephony investments as permitted by applicable federal and
state regulatory authorities. The TCI Group also has an investment in
Primestar Partners, a direct broadcast satellite service.
International Cable and Programming. The TCI Group has significant
investments in cable and telecommunications operations and television
programming in international markets. The TCI Group seeks to invest in
foreign markets with favorable regulatory environments and attractive
growth opportunities. Among its overseas investments, the TCI Group has a
38.7% interest in TeleWest Communications plc ("TeleWest"), a corporation
in which U S WEST Communications, Inc. is also a shareholder. TeleWest
provides cable television and residential and business cable telephony in
the United Kingdom. The TCI Group also has a majority interest in Flextech
plc, which provides television programming in the United Kingdom through
its interests in Bravo, The Children's Channel, UK Gold, UK Living and The
Family Channel UK. Through certain other joint ventures, the TCI Group has
interests in cable television systems and television programming in
Hungary, Norway, Sweden, Israel, Ireland, Malta, France, Chile, Puerto
Rico, the Dominican Republic, New Zealand, Australia, Singapore, and Japan.
Technology/Venture Capital. The TCI Group 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 employing such technologies, and other
services for wireline and wireless switched broadband interactive networks.
The TCI Group has an interest in 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." More recently, the TCI Group
has made an investment in TSX Corporation, a producer of communications
equipment. The Company has announced a proposed investment in Acclaim
Entertainment, Inc. ("Acclaim") and the formation of a joint venture with
Acclaim that will develop, acquire and distribute games and other
interactive entertainment software over various telecommunications
networks. The Company has also created the National Digital Television
Center, a provider of digital compression and authorization services to
programming suppliers and to cable television systems and other video
distribution outlets. In addition to its technology investments, the TCI
Group operates Western Tele-Communications, Inc., a wholesale provider of
long distance video, voice, data, and other telecommunications services.
RECENT DEVELOPMENTS
LIBERTY MEDIA GROUP
Liberty Media Corporation, included as part of Liberty Media Group,
Comcast Corporation ("Comcast"), QVC Programming, Inc. (the "Purchaser"), a
corporation jointly owned by Comcast and Liberty Media Corporation, and
QVC, Inc. ("QVC") are parties to a merger agreement, dated August 4, 1994,
as amended. Pursuant to such merger agreement, the Purchaser commenced an
offer to purchase all outstanding shares of common stock and preferred
stock of QVC, upon the terms and subject to the conditions set forth in the
Purchaser's Offer to Purchase, dated August 11, 1994, as supplemented (the
"QVC Tender Offer"). The QVC Tender Offer expired at midnight, New York
City time, on February 9, 1995, at which time the Purchaser
-13-
<PAGE>
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 (the "QVC Merger"), with QVC
continuing as the surviving corporation. Liberty Media Corporation owns
approximately 43% of the post-merger QVC.
TCI GROUP
On January 20, 1995, Viacom International, Inc., Tele-Vue Systems,
Inc. ("Tele-Vue") (a wholly-owned subsidiary of Viacom, Inc.), Intermedia
Partners IV, L.P. ("IP-IV"), and RCS Pacific, L.P. ("RCS") entered into an
asset purchase agreement, pursuant to which RCS will acquire from Tele-Vue
cable television systems serving, at December 31, 1994, approximately one
million basic subscribers. The purchase price for such systems is
approximately $1,983,000,000, subject to closing and other adjustments.
The TCI Group will have a 25% limited partnership interest in IP-IV, and
IP-IV, in turn, will hold a 79% limited partnership interest in RCS. The
TCI Group has agreed to loan $600 million to IP-IV, which will loan such
funds to RCS. RCS may then use such funds to pay part of the purchase
price to Tele-Vue or, at the Company's option, purchase from the Company
shares of Class A Common Stock having an equivalent market value. If RCS
purchases such Class A Common Stock, RCS would tender to Tele-Vue, as part
of the purchase price, RCS's short-term note in the principal amount of
$600 million, which note would be secured by the Class A Common Stock
purchased by RCS. The TCI Group would then guarantee to RCS that it would
receive proceeds from the sale of such Class A Common Stock that would pay
RCS's obligations under its secured note in full. The foregoing purchase
and sale of the Tele-Vue cable television systems is subject to a number of
conditions, including receipt of various franchise and other governmental
approvals and receipt of "minority tax certificates" from the Federal
Communications Commission (the "FCC"). There can be no assurance that such
transaction will be consummated on terms acceptable to the Company.
On January 26, 1995, the Company acquired TeleCable by means of a
merger (the "Tele-Cable Merger"). At September 30, 1994, TeleCable served
approximately 750,000 basic subscribers in 15 states. In this transaction,
TCIC assumed approximately $300 million of TeleCable's net liabilities and
the former stockholders of TeleCable were issued approximately 42 million
shares of Class A Common Stock and one million shares of a new series of
Preferred Stock, designated "Convertible Preferred Stock, Series D."
Subsidiaries of the Company, Comcast, Cox Cable Communications, Inc.
("Cox"), and Sprint Corporation ("Sprint") have formed a partnership
("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. At the date of this Proxy
Statement, through WirelessCo, the partners are bidding for broadband
personal communications services ("PCS") licenses in auctions (the "PCS
Auctions") being conducted by the FCC. The PCS Auctions commenced in
December 1994, and WirelessCo applied for eligibility to bid for licenses
in 39 of the 51 Major Trading Areas ("MTAs") for which PCS licenses are
being auctioned. WirelessCo may also invest in, affiliate with, or acquire
licenses from successful bidders in the PCS Auctions. The TCI Group has a
30% interest in WirelessCo. Subsidiaries of Cox, Sprint, and the Company
have also formed a separate partnership, in which the Company owns a 35.3%
interest, to bid for PCS licenses for the Philadelphia MTA. The Company
cannot predict the cost of obtaining licenses in the PCS Auctions or the
likelihood that WirelessCo and the Philadelphia partnership will be
successful bidders for any of the PCS licenses for which they have applied
to bid. If the respective bidding strategies of WirelessCo and the
Philadelphia partnership are successful, however, the capital required to
fund the license costs and the construction of the PCS systems will be
substantial and the TCI Group's share thereof would represent a material
increase in its capital requirements.
-14-
<PAGE>
The Company, Comcast, Cox (collectively, the "Cable Partners"), and
Sprint have also agree upon the basis upon which they would negotiate a
definitive agreement for the formation of a partnership ("NewTelco") to
engage in the business of providing local wireline communications services
to residences and businesses on a nationwide basis, using cable television
facilities of the Cable Partners and other cable television operators that
agree to affiliate with NewTelco. The parties intend that the Cable
Partners would contribute their interests in TCG and its affiliated
entities and other competitive access businesses to NewTelco. The Company
currently owns an approximately 29.9% interest in TCG and would own a 30%
interest in NewTelco. The modification or repeal of existing regulatory
and legislative barriers to competition in the local telephony market will
be necessary in order for NewTelco to provide its proposed services in most
states. Formation of NewTelco is subject to certain conditions including
the negotiation of a definitive partnership agreement and contribution
agreement. The contributions of TCG and other competitive access
businesses to NewTelco will be subject, among other things, to the receipt
of necessary regulatory and other consents and approvals.
THE SPECIAL MEETING
The Special Meeting will be held at [PLACE], on [DATE], starting at
[TIME], local time. At the Special Meeting, the stockholders of the
Company will be asked to consider and vote upon the Liberty Media Group
Stock Proposal.
Holders of record of shares of Class A Common Stock and Class B Common
Stock and the Company's Convertible Preferred Stock, Series C (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 Special Meeting. Each share
of Class A Common Stock is entitled to one vote, each share of Class B
Common Stock is entitled to ten votes and each share of Series C Preferred
Stock is entitled to one hundred votes, on each proposal properly presented
at the Special Meeting. 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 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 directors and
officers of the Company as of the Record Date owned [6,168,943] outstanding
shares of the Class A Common Stock and [63,601,807] outstanding shares of
the Class B Common 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, of which [6,240,000] shares (the "Restricted Voting
Shares") are subject to a repurchase right by the Company and certain
voting restrictions contained in Dr. Malone's employment agreement with the
Company and, in accordance therewith, will be voted at the Special Meeting
in the same proportions as votes represented by all other shares of Common
Stock are cast with respect to the Liberty Media Group Stock Proposal. 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 Liberty Media Group Stock Proposal. Such shares represent
approximately [40.55]% 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 and [67.39]%
of the total number of the outstanding shares of Class B Common Stock
(exclusive of the Restricted Voting Shares). See "The Special Meeting".
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<PAGE>
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 which, if approved, would
constitute adoption of the amendments to the Company's Charter set forth in
Appendix III hereto. The amendments would authorize ________ shares of a
new class of Liberty Media Group Common Stock, of which _____________
shares would be designated as Series A Liberty Media Group Common Stock and
____________ shares would be designated as Series B Liberty Media Group
Common Stock.
Subject to the approval by the stockholders of the Liberty Media Group
Stock Proposal, the Board of Directors intends to adopt resolutions on the
date of the Special Meeting or shortly thereafter 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. The number of shares of Series A
Liberty Media Group Common Stock to be distributed per share of Class A
Common Stock will be the same as the number of shares of Series B Liberty
Media Group Common Stock to be distributed per share of Class B Common
Stock. Such distribution ratio will be determined by the Board of
Directors at the time the resolutions are adopted based on then prevailing
market conditions.
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 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 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
Stockholders of One Company; Financial Effects on One Business Could
Affect Other Businesses. Notwithstanding the attribution of assets and
liabilities, stockholders' 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 supplemental financial information 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 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 both Groups or the market price of the
Common Stock or the Liberty Media Group Common Stock. In addition, any net
losses of either Group, dividends or distributions on, or repurchases of,
the 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 payment of dividends on both the Common Stock and
the Liberty Media Group Common Stock. The combined financial statements of
the Liberty Media Group and the supplemental financial information of the
TCI Group should be read in conjunction with
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<PAGE>
the consolidated financial statements of the Company, and for periods prior
to August 4, 1994, the consolidated financial statements of Liberty Media
Corporation.
Limited Additional Stockholder Rights. Under the Liberty Media Group
Stock Proposal, holders of Common Stock and Liberty Media Group Common
Stock would have only the rights of holders of common stock and would not
be provided any rights specifically related to their separate class or
series, other than (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 Common Stock and Liberty Media Group Common
Stock--Conversion and Redemption" and (ii) certain limited class voting
rights provided under the Delaware General Corporation Law (the "DGCL").
Similarly, separate meetings for the holders of Common Stock and Liberty
Media Group Common Stock will not be held. See "--Limited Separate
Stockholder Voting Rights; Effects on Voting Power".
Limited Separate Stockholder Voting Rights; Effects on Voting Power.
Under the Liberty Media Group Stock Proposal, subject to certain limited
exceptions, holders of 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. Holders of Common
Stock or Liberty Media Group Common Stock would not have any right to vote
on matters as a separate class or series (except pursuant to certain
limited class voting rights provided under the DGCL). Similarly, separate
meetings for the holders of Common Stock or Liberty Media Group Common
Stock would not be held. Certain matters on which holders of Common Stock
and of Liberty Media Group Common Stock could be so entitled to vote as
part of one class could involve a divergence or the appearance of a
divergence of the interests of such holders. When a vote is taken on any
matter as to which all stock is voting together as one class, any class of
Common Stock or series of Liberty Media Group Common Stock, either alone or
together with other classes or series, that is entitled to more than the
number of votes required to approve such matter would be in a position to
control the outcome of the vote on such matter. Immediately following the
Distribution, the Class A Common Stock and Class B Common Stock would
represent a majority of the voting power of all classes and series entitled
to vote in the election of directors. See "Special Considerations -
Limited Separate Stockholder Voting Rights"; "Effects on Voting Power" and
"The Liberty Media Group Stock Proposal--Description of Common Stock and
Liberty Media Group Common Stock--Voting Rights".
Potential Divergence of Interests. The existence of the Common Stock
and the Liberty Media Group Common Stock may give rise to occasions when
the interests of the holders of Common Stock and the holders of Liberty
Media Group Common Stock, may diverge or appear to diverge. 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 Common Stock at a premium, (ii) approve the disposition of all or
substantially all of the assets of the Liberty Media Group, (iii) allocate
consideration to be received by holders of common stock in connection with
a merger or consolidation involving the Company among holders of different
classes and 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 a Retained Interest, allocate the proceeds of issuances of Liberty
Media Group Common Stock either to the TCI Group in respect of the Retained
Interest or to the equity of the Liberty Media Group, (vi) pay or omit
dividends on 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. See "Special Considerations--Potential Divergence of
Interests".
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<PAGE>
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
Common Stock and Liberty Media Group Common Stock. The existence of the
Common Stock and the Liberty Media Group Common Stock may give rise to
occasions when the interests of the holders of 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 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 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. See "Special
Considerations - Fiduciary Duties of the Board of Directors".
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 in
the supplemental financial information of the TCI Group, except debt
incurred by entities attributed to 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 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 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, funds may be transferred to the
Liberty Media Group from the TCI Group. Conversely, to the extent cash
provided by the Liberty Media Group exceeds cash needs of the Liberty Media
Group, funds may be transferred to the TCI Group by the Liberty Media
Group. The TCI Group will 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 included in 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 an increase in any
Retained Interest or, in the case of a transfer from the Liberty Media
Group to the TCI Group, reflected as a reduction in any Retained 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, in the case of a
transfer from the TCI Group to the Liberty Media Group, an increase in any
Retained Interest or, in the case of a transfer from the Liberty Media
Group to the TCI Group, a reduction in any Retained Interest. The Board of
Directors expects to make such determinations, either in specific instances
or by setting generally applicable policies from time
-18-
<PAGE>
to time, taking into account relevant circumstances, including the use of
proceeds by the recipient Group, the capital expenditure plans of and 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 certain corporations
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 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 the TCI Group could obtain
comparable financing from an unrelated financing source.
Although any increase in the Retained Interest resulting from an
equity contribution by the TCI Group to the Liberty Media Group or any
decrease in the Retained 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 Liberty Media Group Common Stock, 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 and the holders of outstanding shares of
Liberty Media Group Common Stock would not have an opportunity to
participate in a similar transaction.
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 in the sole discretion of the Board of
Directors 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 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 Common Stock and, accordingly,
there can be no assurance that the combined market values of the 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 Common Stock
held by such stockholder prior to the Distribution. Furthermore, there can
be no assurance as to the extent to which investors would assign values to
the 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 Common Stock and the Liberty Media Group
Common Stock. There is no assurance that the Liberty Media Group Common
Stock will be included in any stock market index in which the Common Stock
is now included, or that the 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 Common Stock and,
consequently, the market price thereof. See "Special Considerations - No
Assurance as to Market Price".
Potential Conversions of Liberty Media Group Common Stock. The
Liberty Media Group Stock Proposal will permit the conversion, solely at
the Company's option, at a premium, of all
-19-
<PAGE>
of the outstanding shares of the Liberty Media Group Common Stock into
Common Stock upon the terms described under "The Liberty Media Group Stock
Proposal--Description of Common Stock and Liberty Media Group Common Stock
-- Conversion and Redemption". The Company cannot predict the impact on
the market prices of the Common Stock or the Liberty Media Group Common
Stock on its ability to effect any such conversion or the effect, if any,
that the issuance of shares of Common Stock in exchange for all of the then
outstanding shares of Liberty Media Group Common Stock would have on the
market price of the Common Stock or the Liberty Media Group Common Stock
prevailing at such time. In addition, any such conversion would dilute the
interests of the holders of Common Stock.
Potential Effects of Possible Disposition of Assets of the Liberty
Media Group. 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 (as such terms are defined under the caption "The Liberty Media
Group Common Stock Proposal-Description of Common Stock and Liberty Media
Group Common Stock-Conversion and Redemption") of an entity primarily
engaged in a similar or complementary business, the Company would be
required 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 or (ii) convert each outstanding share of Liberty Group
Common Stock into a number of shares of Common Stock, as described under
"The Liberty Media Group Stock Proposal -Description of Common Stock and
Liberty Media Group Common Stock-Conversion and Redemption". "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 distribution to holders of Liberty Media Group Common
Stock, 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 separate independent company in connection with
such an 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 Conversions of
Liberty Media Group Common Stock" and "-- No Assurance as to Market Price"
above and "Description of 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 generally, 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 had such conversion
or exchange occurred prior to the Distribution. In addition, 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 purchase had the holder
exercised such option to purchase Class A Common Stock prior to the
Distribution. The terms established for the Distribution are such that a
sufficient number of shares of Series A Liberty Media Group Common Stock
will be reserved for issuance upon conversion or exchange of such preferred
stock and debt securities or exercise of such Liberty Media Group options.
These reserved shares will not constitute a Retained Interest in the
Liberty Media Group and will only be issued upon the conversion or
-20-
<PAGE>
exchange of such preferred stock or debt 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 Retained 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, the
Company has outstanding preferred stock and debt securities convertible
into or exchangeable for [55,766,890] shares of Class A Common Stock and
options to purchase [12,767,328] shares of Class A 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. In contrast, 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 Common Stock and
the Liberty Media Group Common Stock. See "The Liberty Media Group Stock
Proposal--Terms of Common Stock and Liberty Media Group Common Stock--
Voting Rights".
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 authorization of the Liberty Media Group Common Stock would
enhance stockholder value over the long term by permitting separate market
valuations of the Common Stock and the Liberty Media Group Common Stock,
which would 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 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 -- 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 COMMON STOCK AND LIBERTY MEDIA GROUP COMMON STOCK
Voting Rights. Under the Liberty Media Group Stock Proposal, holders
of Class A Common Stock will continue to be entitled to one vote for each
share of such stock held, and holders of Class B Common Stock will continue
to be entitled to ten votes for each share of such stock held, on all
matters presented to such stockholders. Holders of Series A Liberty Media
-21-
<PAGE>
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 shares of Common Stock, Liberty Media Group
Common Stock and preferred stock, if any, will vote as one class for all
purposes. See "The Liberty Media Group Stock Proposal--Description of
Common Stock and Liberty Media Group Common Stock--Voting Rights".
Dividends. Following the Distribution, dividends on the Common Stock
may be declared and paid only out of the lesser of (i) assets of the
Company legally available therefor and (ii) 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 Common Stock under
the DGCL if the TCI Group were a separate Delaware corporation. Dividends
on the Liberty Media Group Common Stock may be declared and paid only out
of the lesser of (i) assets of the Company legally available therefor and
(ii) 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. Whenever a cash
dividend is paid to the holders of Class A Common Stock, the Company also
will pay to the holders of Class B Common Stock a cash dividend per share
at least equal to the dividend per share paid to the holders of Class A
Common Stock, and whenever a cash dividend is paid to the holders of Class
B Common Stock, the Company will also pay to the holders of Class A Common
Stock a cash dividend per share at least equal to the dividend per share
paid to the holders of Class B Common Stock. Whenever a cash dividend is
paid to the holders of Series A Liberty Media Group Common Stock, the
Company also will pay to the holders of Series B Liberty Media Group Common
Stock a cash 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 cash dividend is paid to the holders of Series B Liberty Media
Group Common Stock, the Company will also pay to the holders of Series A
Liberty Media Group Common Stock a cash dividend per share at least equal
to the dividend per share paid to the holders of Series B Liberty Media
Group Common Stock. Special provisions apply to distributions made in
shares of Class A Common Stock, Class B Common Stock, Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock.
Subject to such provisions, dividends may be declared and paid on the
Common Stock and the Liberty Media Group Common Stock in equal or unequal
amounts, notwithstanding the amount of assets available for dividends on
any class, the respective voting or liquidation rights of any class or
series, the amount of prior dividends declared on any class or series or
any other factor. See "The Liberty Media Group Stock Proposal--Description
of Common Stock and Liberty Media Group Common Stock--Dividends" and "--
Dividend Policy".
Conversion and Redemption. The terms of the Liberty Media Group
Common Stock provide that the Board of Directors may, at any time, (i)
convert each outstanding share of Series A Liberty Media Group Common Stock
into a number of shares of Class A Common Stock equal to ___% of a time-
weighted average ratio of the respective Market Values of one share of
Series A Liberty Media Group Common Stock to one share of Class A Common
Stock and (ii) convert each outstanding share of Series B Liberty Media
Group Common Stock into a number of shares of Class B Common Stock equal to
___% of a time-weighted average ratio of the respective Market Values of
one share of the Series B Liberty Media Group Common Stock to one share of
Class B Common Stock.
Each share of Class B Common Stock will continue to be convertible, at
the option of the holder thereof, into one share of Class A 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
-22-
<PAGE>
the Series A Liberty Media Group Common Stock. Shares of Class A Common
Stock are not convertible into shares of Class B 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.
At any time when all of the assets and liabilities of the Liberty
Media Group (and no other assets or liabilities) are held directly or
indirectly by any one or more wholly-owned subsidiaries of the Company, all
outstanding shares of the Liberty Media Group Common Stock could be
redeemed (without premium), in the sole discretion of the Board of
Directors, in exchange for shares of common stock of such subsidiaries.
Should the Company 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, the
Company would be required, subject to certain exceptions and conditions,
to, at its option:
(i) distribute to the 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 Liberty Media Group Common
Stock for shares of Common Stock equal to ___% of an average daily
ratio of the Market Value of one share of Liberty Media Group Common
Stock to one share of Common Stock calculated during a specified ten-
Trading Day period following the consummation of such disposition.
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 of the properties
and assets of the Liberty Media Group. See "The Liberty Media Group Stock
Proposal--Description of Common Stock and Liberty Media Group Common
Stock--Conversion and Redemption".
The Company could, in the sole discretion of the Board of Directors,
at any time prior to the first anniversary of a dividend on or a partial
redemption of the outstanding shares of Liberty Media Group Common Stock
following a sale of all or substantially all of the properties and assets
of the Liberty Media Group, convert each remaining outstanding share of
Liberty Media Group Common Stock into a number of shares of Common Stock
equal to ___% of the ratio over a specified period of time of the Market
Value of one share of Liberty Media Group Common Stock to one share of
Common Stock.
Liquidation. In the event of the liquidation, dissolution or winding
up of the Company, (i) the holders of shares of Class A Common Stock and
Class B Common Stock would share equally, on a share for share basis, a
fraction of the funds, if any, of the Company remaining for distribution to
its common stockholders equal to the ratio of the aggregate Market
Capitalization of the Class A Common Stock and the Class B Common Stock to
the aggregate Market Capitalization of the Class A Common Stock, the Class
B Common Stock, the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock, and (ii) the holders of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock would share equally, on a share for share basis, a
fraction of the funds, if any, of the Company remaining for distribution to
its common stockholders equal to the ratio of the aggregate Market
Capitalization of the Series A Liberty Media Group Common Stock and
-23-
<PAGE>
the Series B Liberty Media Group Common Stock to the aggregate Market
Capitalization of the Class A Common Stock, the Class B Common Stock, the
Series A Liberty Media Group Common Stock and the Series B Liberty Media
Group Common Stock. 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. See "The Liberty Media Group Stock
Proposal--Description of Common Stock and Liberty Media Group Common Stock-
-Liquidation Rights".
NO INITIAL RETAINED 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 or reserved for
issuance upon conversion or exchange of convertible securities of the
Company and, accordingly, there will be no Retained Interest. A Retained
Interest would be created only if the Board of Directors determines to
contribute cash or property of the TCI Group as additional equity to the
Liberty Media Group or to purchase outstanding shares of Liberty Media
Group Common Stock with funds attributed to the TCI Group. See "The
Liberty Media Group Stock Proposal - No Initial Retained Interest".
DIVIDEND POLICY
The Company has never paid cash dividends on its 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 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 Common Stock and the Liberty Media Group Common Stock would be paid
on such basis as the Board of Directors determines. In making its
determination, the Board of Directors expects to follow a policy under
which it would 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" and "--Description of Common Stock and Liberty Media Group Common
Stock--Dividends".
STOCK EXCHANGE LISTINGS
The Company anticipates applying for listing of shares of Liberty
Media Group Common Stock on the Nasdaq National Market prior to the time
such shares are issued. Shares of Class A Common Stock and Class B Common
Stock will continue to be listed on the Nasdaq National Market under the
symbols "TCOMA" and "TCOMB", respectively.
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
could constitute a tax-free stock dividend. However, there are no
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<PAGE>
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".
PRICE RANGE OF COMMON STOCK
The Class A Common Stock and the Class B Common Stock are traded on
the Nasdaq National Market under the symbols "TCOMA" and "TCOMB",
respectively. The following table sets forth the high and low sales prices
of the Class A Common Stock and the Class B Common Stock as reported by the
Nasdaq National Market for the periods indicated. The prices do not
include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON
STOCK STOCK
----- -----
HIGH LOW HIGH LOW
------ ------ ------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1993
First Quarter 25 1/2 20 3/4 25 1/2 21
Second Quarter 24 17 1/2 24 18 3/8
Third Quarter 26 3/4 21 5/8 27 22
Fourth Quarter 33 1/4 24 7/8 40 25 1/2
Year ended December 31, 1994
First Quarter 30 1/4 20 3/8 32 3/4 22
Second Quarter 23 3/8 18 1/4 24 3/4 21 1/4
Third Quarter* 24 1/8 19 3/4 25 3/4 21 1/4
Fourth Quarter 25 20 1/4 25 1/2 21 1/2
Year ending December 31, 1995
First Quarter (through March 1, 1995) 22 7/8 22 1/4 24 3/8 24 3/8
</TABLE>
- - - ----------
* The TCI/Liberty Combination was consummated on August 4, 1994.
On February 8, 1995, the last trading day the 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 and Class
B Common Stock were $22.00 and $21.75, respectively. On __________,
the last trading day before the date of this Proxy Statement, the last
reported sale prices for shares of Class A Common Stock and Class B Common
Stock were $_______ and $_______, respectively.
As of the date of this Proxy Statement, there were approximately
_______ and _______ holders of the Class A Common Stock and the Class B
Common Stock, respectively.
-25-
<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 TeleCable Merger, the Company's investment in IP-IV, and the QVC
Transactions 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 TCI/Liberty Combination, the TeleCable Merger, the Company's investment
in IP-IV, and the QVC Transactions as if the same had occurred prior to
January 1, 1994. The pro forma financial data are not necessarily
indicative of the financial position or results of operations that would
have been obtained had the TCI/Liberty Combination, the TeleCable Merger,
the Company's investment in IP-IV, and the QVC Transactions been effective
at or prior to such assumed dates, or of the future results of operations
of the Company. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
PRO
FORMA
1994 1994 1993 1992 1991 1990
------ ----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF OPERATIONS DATA:
Revenue....................................... $ $ $ 4,153 $ 3,574 $ 3,214 $ 2,940
Operating, selling, general and
administrative expenses.................... (2,295) (1,937) (1,784) (1,678)
Depreciation and amortization................. (911) (764) (756) (716)
Operating income.............................. 916 864 674 546
Earnings (loss) from:
Continuing operations...................... (7) 7 (78) (191)
Discontinued operations.................... -- (15) (19) (63)
------ ----- ------- ------- ------- -------
(7) (8) (97) (254)
Dividend requirement on
redeemable preferred stocks................ (2) (15) -- --
------ ----- ------- ------- ------- -------
Net earnings (loss) attributable to
common stockholders........................ $ $ $ (9) $ (23) $ (97) $ (254)
====== ===== ======= ======= ======= =======
Primary earnings (loss) attributable
to common stockholders per
common and common equivalent share:
Continuing operations................... $ $ $(.02) $ (.01) $ (.22) $ (.54)
Discontinued operations................. -- (.04) (.05) (.18)
------ ----- ------- ------- ------- -------
$ $ $(.02) $ (.05) $ (.27) $ (.72)
====== ===== ======= ======= ======= =======
Primary weighted average common
shares outstanding......................... 433 424 360 355
OTHER DATA:
Operating income before
depreciation, amortization and
non-cash operating expenses(1)............. $ $ $ 1,858 $ 1,637 $ 1,430 $ 1,262
Consolidated basic subscribers................ 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.
-26-
<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................... $ 4,935 $ 4,562 $ 4,081 $ 4,156
Franchise costs, net.......................... 9,197 9,300 8,104 7,348
Net assets of discontinued operations......... -- -- -- -- 242 54
Total assets.................................. 16,520 16,310 15,166 14,106
Total debt.................................... 9,900 10,285 9,455 8,922
Stockholder's equity.......................... 2,112 1,726 1,570 748
Shares outstanding (net of treasury shares):
Class A Common Stock....................... 403 382 370 310
Class B Common Stock....................... 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
Transactions as if such transactions 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 Transactions as if the same had occurred prior to January 1,
1994. The pro forma combined financial data are not necessarily indicative
of the financial position or results of operations that would have been
obtained had the QVC Transactions been effective at or prior to such
assumed dates, or of the future results of operations of Liberty Media
Group. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
PRO FORMA
1994 1994 1993 1992 1991 1990
--------- ------ ------------ ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenue, including amounts from
TCI Group....................................... $ $ $1,206,900 $ 208,988 $ 126,321 $ 78,058
Cost of goods sold, operating, selling,
general and administrative expenses, including
amounts to TCI Group........................... (1,130,566) (188,845) (127,598) (89,407)
Depreciation and amortization...................... (40,139) (14,101) (13,913) (17,124)
Operating loss..................................... (4,171) (10,897) (16,588) (28,481)
Interest expense, including amounts to
TCI Group....................................... (14,386) (14,443) (9,398) (11,328)
Dividend and interest income, primarily
from affiliates................................. 23,145 11,974 25,353 27,942
Share of earnings of affiliates,
net............................................. 24,045 24,355 9,358 509
Net earnings ...................................... 24,946 14,504 31,157 912
OTHER DATA:
Operating income (loss) before
depreciation, amortization and
non-cash operating expenses(2).................. 76,334 20,143 (723) (11,349)
</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.
-27-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA
1994 1994 1993 1992 1991 1990
----------- ------ ---------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Investment in affiliates, accounted for under the
equity method................................... $ $ $ 229,292 $ 213,993 $ 208,296 $202,826
Investment in Turner Broadcasting System, Inc...... 487,073 487,073 487,073 405,731
Other investments, at cost......................... 235,425 75,670 62,848 60,758
Total assets....................................... 1,731,558 999,356 961,674 790,525
Total debt......................................... 399,680 289,168 280,190 49,621
Combined equity.................................... 892,315 627,787 642,711 681,935
</TABLE>
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<PAGE>
SPECIAL CONSIDERATIONS
Stockholders should carefully consider the following factors, in addition
to the other information contained elsewhere in this Proxy Statement, 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, stockholders'
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 supplemental financial information 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 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 Common Stock
or the Liberty Media Group Common Stock. In addition, any net losses of
either Group, dividends or distributions on, or repurchases of, the 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 payment of dividends on both the Common Stock and the Liberty
Media Group Common Stock. The combined financial statements of the Liberty
Media Group and the supplemental financial information 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 Liberty Media Corporation.
If the Liberty Media Group Stock Proposal is approved, the Company will
provide financial statements, management's discussion and analysis,
descriptions of business and other relevant information for the Company to
all holders of Common Stock and Liberty Media Group Common Stock and for
the Liberty Media Group to all holders of Liberty Media Group Common Stock.
The Company will also provide supplemental financial information of the TCI
Group to all holders of Common Stock and Liberty Media Group Common Stock.
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 ADDITIONAL STOCKHOLDER RIGHTS
Under the Liberty Media Group Stock Proposal, holders of Common Stock and
Liberty Media Group Common Stock would have only the rights of holders of
common stock and would not be provided any rights specifically related to
their separate class or series, other than (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 Common Stock
and Liberty Media Group Common Stock--Conversion and Redemption" and (ii)
certain limited class voting rights provided under the DGCL. Similarly,
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<PAGE>
separate meetings for the holders of Common Stock and Liberty Media Group
Common Stock will not be held. See "--Limited Separate Stockholder Voting
Rights; Effects on Voting Power".
LIMITED SEPARATE STOCKHOLDER VOTING RIGHTS; EFFECTS ON VOTING POWER
Under the Liberty Media Group Stock Proposal, subject to certain limited
exceptions, holders of 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. Holders of Common
Stock or Liberty Media Group Common Stock would not have any right to vote
on matters as a separate class or series (except pursuant to certain
limited class voting rights provided under the DGCL). Similarly, separate
meetings for the holders of Common Stock or Liberty Media Group Common
Stock would not be held. Certain matters on which holders of Common Stock
and Liberty Media Group Common Stock could be so entitled to vote as part
of one class could involve a divergence or the appearance of a divergence
of the interests of such holders. When a vote is taken on any matter as to
which all stock is voting together as one class, any class of Common Stock
or series of Liberty Media Group Common Stock, either alone or together
with other classes or series, that is entitled to more than the number of
votes required to approve such matter would be in a position to control the
outcome of the vote on such matter. Immediately following the
Distribution, the Class A Common Stock and Class B Common Stock would
represent a majority of the voting power of all classes and series entitled
to vote in the election of directors.
For example, the Amended Charter does not require that a merger or
consolidation of the Company be approved by a separate vote of holders of
any class or series of common stock, and Delaware law requires such
approval only in certain circumstances. As a result, if holders of any one
or more classes or series of the Company's common stock that possess a
majority of the voting power of all outstanding shares vote to approve a
merger or consolidation of the Company, then the merger or consolidation
could be consummated even if the holders of a majority of some other class
or series of the Company's common stock vote against the merger or
consolidation. See "Potential Divergence of Interests--Allocation of
Proceeds of Mergers or Consolidations".
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 will continue to
have one vote per share and ten votes per share, respectively. See "The
Liberty Media Group Stock Proposal--Description of Common Stock and Liberty
Media Group Common Stock--Voting Rights".
POTENTIAL DIVERGENCE OF INTERESTS
The existence of the Common Stock and the Liberty Media Group Common
Stock may give rise to occasions when the interests of the holders of
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 Common Stock at a premium, (ii) approve the disposition of all or
substantially all of the assets of the Liberty Media Group, (iii) allocate
consideration to be received by holders of common stock in connection with
a merger or consolidation involving the Company among holders of different
classes and 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 a Retained Interest, allocate the proceeds of issuances of Liberty
Media Group Common Stock either to the TCI Group in respect of the Retained
Interest or to the equity of the Liberty Media Group, (vi) pay or omit
dividends on Common Stock or Liberty
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<PAGE>
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.
OPTIONAL CONVERSION OF LIBERTY MEDIA GROUP COMMON STOCK INTO 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 Class A Common Stock and each outstanding share of Series B
Liberty Media Group Common Stock into shares of Class B Common Stock, in
each case at a __% premium. Such a conversion could be effected at any
time, including when either or both the Common Stock and the Liberty Media
Group Common Stock may be considered to be overvalued or undervalued, or
immediately prior to a Disposition of all or substantially all of the
properties and assets of the Liberty Media Group which would otherwise give
rise to a mandatory dividend, redemption or conversion of such shares
immediately following such Disposition as required by the Amended Charter.
Any such conversion at such a premium could be considered dilutive of the
interests of the holders of Common Stock. Such a conversion would preclude
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. Because the conversion ratios are separately computed (based
on relative market prices) for the Series A Liberty Media Group Common
Stock and the Series B Liberty Media Group Common Stock, such a conversion
could result in a change in relative voting rights to the extent the ratio
of the market price of the Series A Liberty Media Group Common Stock to the
market price of the Series B Liberty Media Group Common Stock is different
from the ratio of the market price of the Class A Common Stock to the
market price of the Class B Common Stock. Since the authority of the Board
of Directors to effect a conversion is discretionary, it could be exercised
at a time when such conversion might be disadvantageous to the holders of
one or more classes or series of common stock. See "-- Fiduciary Duties of
the Board of Directors".
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 only required 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, 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, require
the Company to either (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 each outstanding share of Series A Liberty
Media Group Common Stock into shares of Class A Common Stock and each
outstanding share of Series B Liberty Media Group Common Stock for shares
of Class B Common Stock, such conversion in each case to be at a __%
premium. The terms of the common stock of the Company 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 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. See "The Liberty Media
Group Stock Proposal -- Description of 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
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<PAGE>
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 is to be allocated
among holders of the Common Stock and the Liberty Media Group Common Stock.
In any such merger or consolidation, the percentage of the consideration to
be allocated to holders of Common Stock or Liberty Media Group Common Stock
under the method of allocation chosen by the Board of Directors may be
materially more or less than that which might have been allocated to such
holders had the Board of Directors chosen a different method of allocation.
See "--Limited Separate Stockholder Voting Rights; Effects on Voting
Power".
ALLOCATION OF PROCEEDS UPON ISSUANCE OF LIBERTY MEDIA GROUP COMMON STOCK
If and to the extent there is a Retained Interest in the Liberty Media
Group, 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, in which event the net proceeds
would be reflected entirely on the supplemental financial information of
the TCI Group in the case of the allocation of such proceeds to the TCI
Group or entirely on the combined financial statements of the Liberty Media
Group in the case of the allocation of such proceeds to the Liberty Media
Group. Any such allocation of the net proceeds of such sale to the TCI
Group would reduce the Retained Interest.
NO ASSURANCE OF PAYMENT OF DIVIDENDS
The Company has never paid cash dividends on its 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 Common Stock or the
Liberty Media Group Common Stock. Dividends on the Common Stock and the
Liberty Media Group Common Stock are limited to legally available funds of
the Company, which are determined on the basis of the entire Company and
are 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 Common Stock or the Liberty Media Group Common
Stock, and dividends on, and certain repurchases of, preferred stock, will
reduce the legally available funds of the Company available for payment of
dividends on both the Common Stock and the Liberty Media Group Common
Stock. Subject to limitations of the DGCL and the Amended Charter, the
Board of Directors may, in its sole discretion, declare and pay dividends
on Common Stock and Liberty Media Group Common Stock in any amount, and may
decide not to declare and pay such dividends, notwithstanding the amount of
assets available for dividends on any class, the amount of funds available
for such dividends, the amount of prior dividends declared or any other
factor. See "The Liberty Media Group Stock Proposal -- Description of
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
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<PAGE>
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 Common Stock and Liberty Media Group Common Stock. The
existence of the Common Stock and the Liberty Media Group Common Stock may
give rise to occasions when the interests of the holders of 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 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 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.
Disproportionate ownership interests of members of the Board of Directors
in the Common Stock and the Liberty Media Group Common Stock or disparate
values of the 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 classes or 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 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
supplemental financial information of the TCI Group, except debt incurred
by entities attributed to 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 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 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.
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<PAGE>
To the extent cash needs of the Liberty Media Group exceed cash provided
by the Liberty Media Group, funds may be transferred to the Liberty Media
Group from the TCI Group. Conversely, to the extent cash provided by the
Liberty Media Group exceeds cash needs of the Liberty Media Group, funds
may be transferred to the TCI Group by the Liberty Media Group. The TCI
Group will 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 included in 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 an increase in any Retained Interest
or, in the case of a transfer from the Liberty Media Group to the TCI
Group, reflected as a reduction in any Retained 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, in the case of a transfer from
the TCI Group to the Liberty Media Group, an increase in any Retained
Interest or, in the case of a transfer from the Liberty Media Group to the
TCI Group, a reduction in any Retained 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
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 certain corporations 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 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 the TCI Group could obtain
comparable financing from an unrelated financing source.
Although any increase in the Retained Interest resulting from an equity
contribution by the TCI Group to the Liberty Media Group or any decrease in
the Retained 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 Liberty Media Group Common Stock, 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 and the holders of outstanding shares of Liberty Media Group
Common Stock would not have an opportunity to participate in a similar
transaction.
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 in the
sole discretion of the Board of Directors 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 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".
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<PAGE>
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 Common
Stock and, accordingly, there can be no assurance that the combined market
values of the 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 Common Stock held by such stockholder prior to the Distribution.
See "Proxy Statement Summary--Price Range of Common Stock".
The market prices of the 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
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 Common Stock and the Liberty Media Group
Common Stock. In addition, the Company cannot predict the impact on the
market price of the 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 Common Stock or the discretion of the Board of Directors to make
various other determinations with respect to the Groups and the Company's
common stock. There is no assurance that the Liberty Media Group Common
Stock will be included in any stock market index in which the Common Stock
is now included, or that the 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 Common Stock and,
consequently, the market price thereof.
POTENTIAL CONVERSIONS OF LIBERTY MEDIA GROUP COMMON STOCK
The Liberty Media Group Stock Proposal will permit the conversion, solely
at the Company's option, at a premium, of all of the outstanding shares of
Liberty Media Group Common Stock into Common Stock upon the terms described
under "The Liberty Media Group Stock Proposal -- Description of Common
Stock and Liberty Media Group Common Stock -- Conversion and Redemption".
The Company cannot predict the impact on the market prices of the Common
Stock or the Liberty Media Group Common Stock on its ability to effect any
such conversion or the effect, if any, that the issuance of shares of
Common Stock in exchange for all of the then outstanding shares of Liberty
Media Group Common Stock would have on the market price of the Common Stock
or the Liberty Media Group Common Stock prevailing at such time. In
addition, any such conversion would dilute the interests of the holders of
Common Stock.
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS OF 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, the
Company would be
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<PAGE>
required 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 each outstanding share of Series A Liberty Media Group Common Stock
and Series B Liberty Group Common Stock into a number of shares of Common
Stock equal to ___% of the ratio of the Market Value of one share of such
series of Liberty Media Group Common Stock to one share of Common Stock
during a specified ten-Trading Day period following the consummation of
such Disposition. "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 separate independent company in connection with such
an 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 Conversions of
Liberty Media Group Common Stock" and "-- No Assurance as to Market Price"
above and "Description of 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
generally, 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 had such conversion or exchange occurred prior to the
Distribution. In addition, 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 purchase had the holder exercised such option to
purchase Class A Common Stock prior to the Distribution. The terms
established for the Distribution are such that a sufficient number of
shares of Series A Liberty Media Group Common Stock will be reserved for
issuance upon conversion or exchange of such preferred stock and debt
securities or exercise of such Liberty Media Group options. These reserved
shares will not constitute a Retained Interest in the Liberty Media Group
and will only be issued upon the conversion or exchange of such preferred
stock or debt 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 Retained 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, the Company has outstanding preferred stock
and debt securities convertible into or exchangeable for [55,766,890]
shares of Class A Common Stock and options to purchase [12,767,328]shares
of Class A Common Stock.
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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 Common
Stock and the Liberty Media Group Common Stock. See "The Liberty Media
Group Stock Proposal--Terms of Common Stock and Liberty Media Group Common
Stock--Voting Rights".
LIMITED APPROVAL RIGHTS OF FUTURE ISSUANCES
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 Common Stock or Liberty Media Group Common Stock. The
approval of the stockholders of the Company will not be solicited by the
Company for the issuance of authorized but unissued shares of Common Stock
or Liberty Media Group Common Stock, unless deemed advisable by the Board
of Directors or required by applicable law, regulation or Nasdaq National
Market or other stock exchange listing requirements.
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THE SPECIAL MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies from the holders of Class A Common Stock, Class B Common Stock and
Series C Preferred Stock by the Board of Directors for use at the Special
Meeting.
TIME AND PLACE; PURPOSES
The Special Meeting will be held at [PLACE], on [DATE], starting at
[TIME], local time. At the Special Meeting, the stockholders of the
Company will be asked to consider and vote upon the Liberty Media Group
Stock Proposal and such other matters as may properly come before the
Special 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 Common Stock and Series C
Preferred Stock entitled to notice of and to vote at the Special Meeting.
Only holders of record of shares of Class A Common Stock, Class B Common
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 Special Meeting. At the
close of business on the Record Date, there were [571,690,775] shares of
Class A Common Stock outstanding and entitled to vote at the Special
Meeting held by ____________ stockholders of record, [85,114,800] shares
of Class B Common 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 and Series C Preferred Stock entitled to vote is
necessary to constitute a quorum at the Special Meeting. 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 outstanding on the Record
Date, voting together as a single class, (ii) the holders of record of a
majority of the total number of shares of Class A Common Stock, voting as a
separate class, and (iii) the holders of record of a majority of the total
number of shares of Class B Common Stock, voting as a separate class, in
each case issued and outstanding on the Record Date, is required to approve
the Liberty Media Group Stock Proposal. 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
and (iii) Series C Preferred Stock is entitled to cast 100 votes per share,
in person or by proxy, on each proposal properly presented at the Special
Meeting.
The directors and officers of the Company as of the Record Date owned
[6,168,943] outstanding shares of the Class A Common Stock, [63,601,807]
outstanding shares of the Class B Common 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, of which [6,240,000] shares are subject to a repurchase right
by the Company and certain voting restrictions contained in Dr. Malone's
employment agreement with the Company and, in accordance therewith, will be
voted at the Special Meeting in the same proportions as votes represented
by all other shares of Common Stock are cast with respect to the Liberty
Media Group Stock Proposal. 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 Liberty Media Group Stock
Proposal. Such shares represent approximately [40.55]% of the total voting
power of the Class A Common Stock, Class B
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Common Stock and Series C Preferred Stock, [1.08]% of the total number of
the outstanding shares of Class A Common Stock and [67.39]% of the total
number of the outstanding shares of Class B Common Stock (exclusive of the
Restricted Voting Shares).
PROXIES
All shares of Class A Common Stock, Class B Common Stock and Series C
Preferred Stock represented by properly executed proxies received prior to
or at the Special 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 Liberty Media Group Stock
Proposal. 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 Special Meeting, will not be voted and, therefore, will have the same
effect as a vote cast against the Liberty Media Group Stock Proposal.
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 Special Meeting, and will likewise have the same effect as a vote cast
against the Liberty Media Group Stock Proposal.
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 Special Meeting and voting
in person. Attendance at the Special 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.
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 which, if approved, would constitute
adoption of the amendments to the Company's Charter set forth in Appendix
III hereto. The amendments would authorize _________ shares of a new class
of Liberty Media Group Common Stock, of which ___________ shares would be
designated as Series A Liberty Media Group Common Stock and ____________
shares would be designated as Series B Liberty Media Group Common Stock,
and establish the voting powers and relative, participating, optional and
other special rights and qualifications, limitations and restrictions
thereof.
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 hereto. It is
currently anticipated that such filing will be made as promptly as
practicable after the Special Meeting.
Subject to approval of the Liberty Media Group Stock Proposal by
stockholders, the Board of Directors intends to adopt resolutions on the
date of the Special Meeting or shortly thereafter
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declaring a distribution to holders of record of outstanding Common Stock
at the close of business on a record date established in such resolutions,
of shares of Series A Liberty Media Group Common Stock on the outstanding
shares of Class A Common Stock and shares of Series B Liberty Media Group
Common Stock on the outstanding shares 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
fractional number of shares of Series A Liberty Media Group Common Stock to
be distributed per share of Class A Common Stock will be the same as the
fractional number of shares of Series B Liberty Media Group Common Stock to
be distributed per share of Class B Common Stock. Such distribution ratio
will be determined by the Board of Directors at the time the resolutions
are adopted based on then prevailing market conditions.
If the Liberty Media Group Stock Proposal is approved by the stockholders
at the Special 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 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) issue shares of Liberty Media Group Common
Stock as a distribution on outstanding shares of Liberty Media Group Common
Stock, (ii) offer shares of Liberty Media Group Common Stock for cash in
one or more public offerings, (iii) issue shares of Liberty Media Group
Common Stock as consideration for acquisitions or investments, (iv) issue
shares of Liberty Media Group Common Stock to employees of the Company
pursuant to employee benefit plans or (v) issue shares of Liberty Media
Group Common Stock for any other proper corporate purpose. 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 or other stock exchange listing
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.
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BACKGROUND AND REASONS FOR THE LIBERTY MEDIA GROUP STOCK PROPOSAL
After study by management and external advisors, the Board of Directors
considered the Liberty Media Group Stock Proposal on [DATE], 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 authorization of the
Liberty Media Group Common Stock would enhance stockholder value over the
long term by permitting separate market valuations of the Common Stock and
the Liberty Media Group Common Stock, which would 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 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 "Special
Considerations--Stockholders of One Company; Financial Effects on One
Company Could Affect Other Businesses".
Among the factors considered by the Board of Directors were the
following:
. 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.
. Separate equity securities would afford increased flexibility to
raise capital and/or make acquisitions and investments for each
Group, including strategic partnering transactions, with an
equity security related specifically to the performance of such
Group.
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 supplemental
financial information of the TCI Group. The combined financial statements
of the Liberty Media Group and the supplemental financial information 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
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Liberty Media Group and the supplemental financial information of the TCI
Group 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 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 Group Could Affect Other Group" 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
in the supplemental financial information of the TCI Group, except (a)
debt incurred by entities attributed to 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 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.
(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 Class A Common Stock and Class B 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 to the extent the proceeds
of which are attributed to the TCI Group with respect to the Retained
Interest, if any, will be attributed entirely to the TCI 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 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 Retained Interest, 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 attributed entirely to 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 provide centralized cash
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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 Group, reflected as an increase in any Retained Interest
or, in the case of a transfer from the Liberty Media Group to the TCI
Group, reflected as a reduction in any Retained 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, in the case of a
transfer from the TCI Group to the Liberty Media Group, reflected as
an increase in any Retained Interest or, in the case of a transfer
from the Liberty Media Group to the TCI Group, reflected as a
reduction in any Retained 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
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
attributed to 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 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 the
TCI Group could obtain comparable financing from an unrelated
financing source.
(v) From time to time following the Distribution, the Board of
Directors could determine that a transfer of funds from the TCI Group
to the Liberty Media Group be reflected as an increase in any Retained
Interest or that a transfer of funds from the Liberty Media Group to
the TCI Group be reflected as a decrease in any Retained Interest. In
the event of a transfer of funds from the TCI Group to the Liberty
Media Group reflected as an increase in any Retained Interest, the
Number of Shares Issuable with Respect to the Retained 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 Retained Interest 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 reflected as a
decrease in any Retained Interest, the Number of Shares Issuable with
Respect to the Retained 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 Retained Interest would be
decreased and the Outstanding Interest Fraction would be increased
accordingly.
(vi) As a result of the foregoing, the supplemental financial
information 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 thereof
deemed outstanding. In the historical financial information included
in this Proxy Statement and the Appendices hereto
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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.
(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 in the supplemental
financial information 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 historical
combined statements of operations for Liberty Media Group included in
this Proxy Statement 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, by Liberty Media Corporation. During such periods, Liberty
Media Corporation was not allocated corporate general and
administrative costs.
(viii) Federal income taxes and certain state and local taxes
would be paid on a consolidated basis. However, pursuant to a tax
sharing arrangement, income taxes would be calculated on a separate
return basis for each Group (applying provisions of the Internal
Revenue Code of 1986, as amended, applicable state and local tax law
and related regulations as if the Group were a separate consolidated
group for tax purposes). Based on these separate calculations, an
allocation of tax liabilities would be made such that the Liberty
Media Group is responsible to the TCI Group for its gross share of the
consolidated tax liabilities and the TCI Group would reimburse the
Liberty Media Group for tax attributes used in excess of income tax
liability incurred. 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 of assets would be inventoried and
tracked for the entities comprising each Group.
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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 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 classes of Common Stock, would be made by the
Board of Directors as set forth under "Special Considerations--Fiduciary
Duties of the Board of Directors".
DESCRIPTION OF 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 AND
TO APPENDIX III TO THIS PROXY STATEMENT, 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 6%
Cumulative Redeemable Exchangeable Preferred Stock, par value $0.01 per
share (the "Class B Preferred Stock"), and 10,000,000 shares are designated
as Series Preferred Stock, par value $.01 per share (the "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 the 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 authorize
______ shares of a new class of Liberty Media Group Common Stock, of which
________ shares would be designated as Series A Liberty Media Group Common
Stock and ________ shares would be designated as Series B Liberty Media
Group Common Stock.
The authorized but unissued shares of 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 making distributions on outstanding shares of Liberty
Media Group Common Stock, 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 or other stock exchange listing requirements.
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VOTING RIGHTS
Under the Liberty Media Group Stock Proposal, holders of Class A
Common Stock will continue to be entitled to one vote for each share of
such stock held, and holders of Class B Common Stock will continue to be
entitled to ten votes for each share of such stock held, on all matters
presented to such stockholders. Holders of Series A Liberty Media Group
Common Stock will be entitled to one vote for each share of such stock
held, and holders of Series B Liberty Media Group Common Stock will be
entitled to ten votes for each share of such stock held on all matters
presented to such stockholders. Except as may otherwise be required by the
DGCL or in the instrument creating or evidencing any class or series of
preferred stock, the holders of 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.
The Liberty Media Group Stock Proposal provides that the term "Voting
Securities", as defined in the Amended Charter, includes the Class A Common
Stock, the Class B 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 or request of holders of 66 2/3% of the
total voting power of the then outstanding Voting Securities is required
for the removal of directors, the calling of special meetings of the
stockholders, 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,
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 and the dissolution of the Company.
Neither the holders of Class A Common Stock or Class B 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. 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, an increase or decrease in the authorized shares of a
class). 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 Common Stock and Liberty Media Group Common Stock) voting
together as a single class, if the holders of one or more classes or 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.
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DIVIDENDS
Dividends on Liberty Media Group Common Stock will be subject to the
same limitations as dividends on the existing 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 legally available funds of the Company, 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 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 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
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) $_____________ [an amount equal to the
stockholders equity of the Company attributable to the TCI Group
as of the end of the fiscal quarter preceding the first issuance
of the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock], increased or decreased, as
appropriate, to reflect, after [the end of such fiscal quarter],
(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 Class A Common
Stock or Class B 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 Class A Common Stock and Class
B 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 such date 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
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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) $______________ [an amount equal to
the stockholders equity of the Company attributable to the
Liberty Media Group as of the end of the fiscal quarter preceding
the first issuance of the Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock], increased or
decreased, as appropriate, to reflect, after [the end of such
fiscal quarter], (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 such date 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 Class A Common Stock or the
Class B 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.
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The Board of Directors, subject to the provisions described in the
preceding paragraph, will have the authority to declare and pay dividends
on all or less than all classes of common stock in equal or unequal
amounts, notwithstanding the amount of assets available for dividends on
any class, the respective voting and liquidation rights of any class or
series, the amount of prior dividends declared on any class or series or
any other factor. See "Dividend Policy."
At the time of any dividend or other distribution on the outstanding
shares of Liberty Media Group Common Stock (including any dividend of Net
Proceeds from the Disposition of all or substantially all of the properties
and assets of the Liberty Media Group), the TCI Group will be credited, and
the Liberty Media Group will be charged 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 Retained
Interest and the denominator of which is the Outstanding Interest Fraction.
See Appendix II for illustrations of the calculation of the Retained
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
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
Common Stock, such share distribution will be declared and paid only as
follows:
(i) a share distribution consisting of Class A Common Stock (or
Convertible Securities convertible into or exercisable for shares
of Class A Common Stock) to holders of Common Stock, on an equal
per share basis; or to holders of Class A Common Stock only, but
in such event there will also be a simultaneous share
distribution to holders of Class B Common Stock consisting of
shares of Class B Common Stock (or Convertible Securities
convertible into or exercisable for shares or Class B Common
Stock) on an equal per share basis;
(ii) a share distribution consisting of Class B Common Stock (or
Convertible Securities convertible into or exercisable for shares
or Class B Common Stock)to holders of Common Stock, on an equal
per share basis; or to holders of Class B Common Stock only, but
in such event there will also be a simultaneous share
distribution to holders of Class A Common Stock consisting of
shares of Class A Common Stock (or Convertible Securities
Convertible into or exercisable for shares of Class A Common
Stock) on an equal per share basis;
(iii) a share distribution consisting (A) solely of Series A Liberty
Media Group Common Stock or solely of Series B Liberty Media
Group Common Stock (or (in either case) Convertible Securities
convertible into or exercisable for shares solely of such series)
to holders of Class A Common Stock and Class B Common Stock on an
equal per share basis, or (B) solely of (1) 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 Class A Common Stock and (2) Series B
Liberty Media Group Common Stock (or Convertible Securities
convertible into or exercisable for shares of Series B Liberty
Media Group Common Stock on a like basis) to holders of Class B
Common Stock, on an equal per share basis; provided in each case
that the sum of (a) (1) the
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aggregate number of shares of Series A Liberty Media Group Common
Stock to be 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 issuable at such time 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 Retained Interest for the
Series A Liberty Media Group Common Stock and that the sum of (b)
(1) the aggregate number of shares of Series B Liberty Media
Group Common Stock to be 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
shares of such series that are issuable at such time 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
Retained Interest for the Series B Liberty Media Group Common
Stock; and
(iv) a share distribution consisting of any class of securities of the
Company other than Common Stock or Liberty Media Group Common
Stock (or Convertible Securities convertible into or exercisable
for shares solely of such classes or series), to the holders of
Common Stock on an equal per share basis.
The Company will not reclassify, subdivide or combine the Class A
Common Stock without reclassifying, subdividing or combining Class B Common
Stock, on an equal per share basis, and the Company will not reclassify,
subdivide or combine the Class B Common Stock without reclassifying,
subdividing or combining the Class A 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 to holders of 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 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 shares of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common
Stock (or Convertible Securities as aforesaid), to the holders of
Series A Liberty Media Group Common Stock and the holders of
Series B Liberty Media Group Common Stock, on an equal per share
basis.
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The Company will not reclassify, subdivide or combine the Series A
Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series B Liberty Media Group Common Stock, on an equal per
share basis, and the Company will not reclassify, subdivide or combine the
Series B Liberty Media Group Common Stock without reclassifying,
subdividing or combining the Series A Liberty Media Group Common Stock, on
an equal per share basis.
CONVERSION AND REDEMPTION
Conversion at the Option of the Holder. Each share of Class B Common
Stock will be convertible, at the option of the holder thereof, into one
share of Class A 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 Class B 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 Class A 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 Class A Common Stock or Series A Liberty Media
Group Common Stock on that date. Shares of Class A Common Stock will not
be convertible into shares of Class B 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 Class A Common Stock equal to _____% of
the Class A Market Value 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 Class B Common Stock equal to
_____% of the Class B Market Value Ratio, in each case determined as of the
fifth Trading Day prior to the date notice of conversion is mailed to
holders of such shares.
After the payment of any dividend or redemption price with respect to
the Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock as described in clauses (i) and (ii), respectively, of
the first paragraph under "--Mandatory Dividend, Redemption or Conversion
of Liberty Media Group Common Stock", the Board of Directors will have the
authority to declare that (i) each remaining outstanding share of Series A
Liberty Media Group Common Stock will be convertible into a number of fully
paid and nonassessable shares of Class A Common Stock equal to ___% of the
Class A Market Value Ratio, and (ii) each remaining outstanding share of
Series B Liberty Media Group Common Stock will be convertible into a number
of fully paid and nonassessable shares of Class B Common Stock equal to
___% of the Class B Market Value Ratio, in each case determined as of the
fifth Trading Day prior to a Conversion Date prior to the first anniversary
of the payment of such dividend or redemption price (as set forth in a
notice delivered 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 such series).
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For these purposes, the "Class A Market Value Ratio" or the "Class B
Market Value Ratio" means the quotient (calculated to the nearest five
decimal places) of (i) the sum of (A) four times the average ratio of C/X
for the five-Trading Day period ending on such date, (B) three times the
average ratio of C/X for the next preceding five-Trading Day period, (C)
two times the average ratio of C/X for the next preceding five-Trading Day
period and (D) the average ratio of C/X for the next preceding five-Trading
Day period, divided by (ii) ten, where C is the Market Value of one share
of Series A Liberty Media Group Common Stock, in the case of the Class A
Market Value Ratio, or Series B Liberty Media Group Common Stock, in the
case of the Class B Market Value Ratio, and X is the Market Value of one
share of Class A Common Stock, in the case of the Class A Market Value
Ratio, or Class B Common Stock, in the case of the Class B Market Value
Ratio.
Any such exchange would dilute the interests of holders of 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.
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 Retained
Interest, (y) any person, entity or group which the Company, directly or
indirectly, after giving affect 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 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
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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 such
consummation 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 Class A Common Stock equal to ____% of the average
daily ratio (calculated to the nearest five decimal places) of
the Market Value of one share of Series A Liberty Media Group
Common Stock to the Market Value of one share of Class A Common
Stock during the ten-Trading Day period referred to in clause
(ii) of this paragraph and (B) each outstanding share of Series B
Liberty Media Group Common Stock into a number of fully paid and
nonassessable shares of Class B Common Stock equal to ____% 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
Class B Common Stock during such ten-Trading Day period.
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 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 primarily engaged 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 purpose of the Related Business Transaction exception is to enable the
Company to enter into transactions with other entities operating or
proposing to operate in similar or complementary business areas as the
Liberty Media Group in which the properties or assets of the Liberty Media
Group may technically be "disposed of" without requiring a dividend on, or
redemption or conversion of, the outstanding Liberty Media Group Common
Stock.
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
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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 described in clause (iii) above provides the Company with
additional flexibility by allowing the Company to deliver consideration in
the form of shares of 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 the dividend or redemption described in
clause (i) or (ii) above or when the Company desired to retain such
proceeds.
If less than substantially all of the properties and assets of the
Liberty Media Group were disposed of by the Company in one transaction
(even if an additional transaction were consummated at a later time in
which additional properties and assets of the Liberty Media Group were
disposed of by the Company, which, together with the properties and assets
disposed of in the first transaction, would have constituted substantially
all of the properties and assets of the Liberty Media Group at the time of
the first transaction), the Company would not be required to pay a dividend
on, redeem or convert the outstanding shares of Liberty Media Group Common
Stock, unless such transactions constituted a series of related
transactions. The second transaction, however, could trigger such
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 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 Retained Interest 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 then-outstanding shares of Liberty Media Group
Common Stock were converted into 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
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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 then-outstanding 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 Subsidiary pursuant to the provisions described
under "--Redemption in Exchange for Stock of Subsidiary", 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 Subsidiary. 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 Subsidiary"), 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 the 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 the
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 of
common stock of the Liberty Media Group Subsidiary with relative voting
rights similar to the relative voting rights of the Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock, with
shares of Series A Liberty Media Group Common Stock receiving the class of
common stock of the Liberty Media Group Subsidiary with relative voting
rights similar to the relative voting rights of the Series A Liberty Media
Group Common Stock and shares of Series B Liberty Media Group Common Stock
receiving the class of common stock of the Liberty Media Group Subsidiary
with relative voting rights similar to the relative voting rights of the
Series B Liberty Media Group Common Stock, 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 the
Liberty Media Group Subsidiary without distinction between the common stock
of the Liberty Media Group Subsidiary issued in redemption of the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock.
General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above
under "--Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock", the Company will announce publicly by press release
(i) the Net Proceeds of such Disposition, (ii) the number of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media 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
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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 such 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) 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 the
Liberty Media Group Common Stock then outstanding would be subject to
redemption, (ii) the anticipated redemption date, (iii) the kind and per
share 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 shares of Liberty
Media Group Common Stock to be redeemed, (v) the number of outstanding
shares of 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 (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 eligible to participate in such redemption
only if they appropriately convert or exercise them prior to the date
referred to in clause (i) of this sentence and a statement as to what, if
anything, such holders will be eligible to receive pursuant to the terms of
such Convertible Securities and, if applicable, the provision described in
the last paragraph under "-- Mandatory Dividends Redemption or Conversion
of Liberty Media Group Common Stock" if such holder thereafter converts or
exercises such Convertible Securities.
In the event of any conversion or redemption 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
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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 shares of Liberty
Media Group Common Stock will be converted or redeemed, as the case may be,
(ii) the date of the conversion or redemption, (iii) in the event of a
partial redemption of Liberty Media Group Common Stock as described above
under "--Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock", the number of shares of Liberty Media Group Common
Stock to be redeemed, (iv) the kind and per share amount of shares of
capital stock or cash and/or securities or other property to be received by
such holder with respect to each share of Liberty Media Group Common Stock,
including details as to the calculation thereof, (v) 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 or cash and/or securities or other property and (vi)
in the case of a notice to holders of Convertible Securities and a
conversion of Liberty Media Group Common Stock, a statement to the effect
that a holder of such Convertible Securities will be entitled to receive
shares of Class A Common Stock or Class B Common Stock, as applicable, only
if such holder converts or exercises 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 holder 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 holder thereafter converts or exercises 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 or redemption date, as the case may be, at such holder's
address as the same appears on the transfer books of the Company. Neither
the failure to mail such notice to any particular holder of Liberty Media
Group Common Stock or of such Convertible Securities nor any defect therein
will affect the sufficiency thereof with respect to any other holder of
Liberty Media Group Common Stock or of such Convertible Securities, or the
validity of such conversion or redemption.
If the Company determines to redeem shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock as
described above under "--Redemption in Exchange for Stock of Subsidiary",
the Company will promptly cause to be given to each holder of record of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock to be redeemed and of Convertible Securities convertible into
or exercisable for shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock 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 will be redeemed
in exchange for shares of common stock of the Liberty Media Group
Subsidiary, (B) the Outstanding Interest Fraction, (C) the Redemption Date,
(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 to
be redeemed, 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, (E) a statement to the effect that, except as otherwise
provided below, dividends on shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock will cease to be paid
as of such Redemption Date, (F) the number of outstanding shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock to be redeemed 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 price thereof and (G) a
statement to the effect that a holder of Convertible Securities will only
be entitled to receive shares of common stock of the Liberty Media Group
Subsidiary upon redemption if such holder converts or exercises such
Convertible Securities on or prior to the Redemption Date and a statement
as to
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what, if anything, such holder 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 holder thereafter
converts or exercises such Convertible Securities. Such notice will be
sent by first-class mail, postage prepaid, not less than 30 Trading Days
nor more than 45 Trading Days prior to the Redemption Date, and in any case
to each holder of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock to be redeemed, at such holder's address
as the same appears on the transfer books of the Company. Neither the
failure to mail any such notice to any particular holder of Liberty Media
Group Common Stock or of such 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 such
Convertible Securities, or the validity of such redemption.
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 converted or 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.
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 same 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 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 referred to
below. If less than all of the shares of Liberty Media Group Common Stock
represented by any one certificate are to be converted or redeemed, the
Company will issue and
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deliver a new certificate for the shares of Liberty Media Group Common
Stock not converted or 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 fractional payment or rights to
dividends as provided above. 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 for Liberty
Media Group Common Stock, the Company will, however, be entitled to treat
the certificates for Liberty Media Group Common Stock that have not yet
been surrendered for conversion or redemption as evidencing the ownership
of the number of whole shares of the kind or kinds of capital stock for
which the shares of Liberty Media Group Common Stock represented by such
certificates have been converted or redeemed, notwithstanding the failure
to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue
or transfer taxes that may be payable in respect of the issue or delivery
of any shares of capital stock and/or other securities on conversion or
redemption of shares of Liberty Media Group Common Stock. The Company will
not, however, be required to pay any tax that may be payable in respect of
any transfer involved in the issue and delivery of any shares of capital
stock in a name other than that in which the shares of Liberty Media Group
Common Stock so converted or redeemed were registered and no such issue or
delivery will be made unless and until the person requesting such issue has
paid to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid.
LIQUIDATION RIGHTS
The Liberty Media Group Stock Proposal provides that, in the event of
a liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary, 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 Common Stock will share equally, on a share for share
basis, in any distribution of the Company's assets, after payment or
provisions for payment of the debts and other liabilities of the Company, 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 any distribution of the
Company's assets, after payment or provisions for payment of the debts and
other liabilities of the Company, 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
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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 Class A Common Stock and the Class B 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 Class A Common Stock, the Class B
Common Stock, the Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock. Neither a consolidation, merger nor sale
of assets will be construed to be a "liquidation", "dissolution" or
"winding up".
No holder of Liberty Media Group Common Stock shall have any special
right to receive specific assets of the Liberty Media Group in the case of
any dissolution, liquidation or winding up of the Company.
DETERMINATIONS BY THE BOARD OF DIRECTORS
The Amended Charter will provide that any determinations made by the
Board of Directors under any provision described under "--Description of
Common Stock and Liberty Media Group Common Stock" will be final and
binding on all stockholders of the Company. 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
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 RETAINED 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 or reserved for
issuance upon conversion or exchange of convertible securities of the
Company and, accordingly, there will be no Retained Interest. 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 a Retained Interest in the Liberty Media Group. A
Retained Interest would be created only if the Board of Directors
determines to contribute cash or property of the TCI Group as additional
equity to the Liberty Media Group or to purchase outstanding shares of
Liberty Media Group Common Stock with funds attributed to the TCI Group.
The "Outstanding Interest Fraction" will be a fraction the numerator of
which will be the aggregate number of shares of Liberty Media Group Common
Stock that are outstanding at any particular time and the denominator of
which will be the sum of such aggregate number of shares of Liberty Media
Group Common Stock and the related Number of Shares Issuable with Respect
to the Retained Interest. See Appendix III for the definition of "Number
of Shares Issuable with Respect to the Retained Interest".
Any Retained Interest in the Liberty Media Group would not be
represented by shares of Liberty Media Group Common Stock.
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The authorized shares of Liberty Media Group Common Stock in excess of
the total number of shares outstanding will be available for issuance
without further approval by the stockholders of the Company and may be
issued at any time at prices that could dilute the value of the outstanding
shares of Liberty Media Group Common Stock. If there is a Retained
Interest, as shares of Liberty Media Group Common Stock are subsequently
issued from time to time 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 with respect to the Retained Interest, the net proceeds of which
will be reflected in the supplemental financial information 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 discretion, after consideration
of a number of factors including, among others, 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" above. If there is a Retained Interest,
as additional shares of Liberty Media Group Common Stock are issued for the
account of the TCI Group with respect to the Retained Interest, the Number
of Shares Issuable with Respect to the Retained Interest would decrease and
the Outstanding Interest Fraction would increase accordingly. At the time
all of the Number of Shares Issuable with Respect to the Retained Interest
in the Liberty Media Group are issued, such number will be zero and shares
of Liberty Media Group Common Stock could no longer be issued for the
account of the TCI Group. If the net proceeds of any sale of Liberty Media
Group Common Stock were allocated to the Liberty Media Group, the Number of
Shares Issuable with Respect to the Retained Interest would not be reduced,
but the Outstanding Interest Fraction would be increased accordingly.
If there is a Retained Interest and the Board of Directors determines
to issue shares of Liberty Media Group Common Stock as a distribution on
the Common Stock, such distribution would be treated as a distribution of
shares issuable with respect to the Retained Interest, and as a result, the
Number of Shares Issuable with Respect to the Retained Interest would
decrease by the number of shares distributed to the holders of Common
Stock, resulting in a proportionate 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 Retained Interest 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
Retained Interest in the Liberty Media Group would not be increased, but
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 a
number of factors, including, among others, 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 Retained Interest and
decrease the Outstanding Interest Fraction. The Board of Directors could
determine, in its sole discretion, to make such contribution after
consideration of a number of factors, including, among others, the
financing needs and objectives of the Groups, the investment objectives of
the TCI Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic
conditions. The Board of Directors could, in its sole
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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, which transfers (other than transfers of cash or property that
reduce the Liberty Media Group's attributed debt, that are sales or that
are made with respect to the Retained Interest in the Liberty Media Group
upon the payment of any dividend or other distribution on Liberty Media
Group Common Stock) would decrease the Number of Shares Issuable with
Respect to the Retained Interest and increase the Outstanding Interest
Fraction.
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 Retained Interest and the
denominator of which is the Outstanding Interest Fraction.
See Appendix II for illustrations of the calculation of the Retained
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 Common Stock. If the
Liberty Media Group Stock Proposal is approved, the Board of Directors does
not currently intend to pay dividends on the 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.
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 Common Stock and the
Liberty Media Group Common Stock would be paid on such basis as the Board
of Directors determines. In making its determination, the Board of
Directors would consider, among other factors, the relative financial
condition, results of operations and business requirements of the
respective Groups. The Board of Directors will rely on the financial
statements of the Company and the Liberty Media Group and the supplemental
financial information of the TCI Group in making its dividend decisions.
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 Common Stock and the
Liberty Media Group Common Stock, see "--Description of 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.
STOCK EXCHANGE LISTINGS
The Company anticipates applying for listing of shares of Liberty
Media Group Common Stock on the Nasdaq National Market, and it is
anticipated that such shares will trade on the Nasdaq National Market prior
to the time such shares are issued. Shares of Class A Common Stock and
Class B Common Stock will continue to be listed on the Nasdaq National
Market under the symbols "TCOMA" and "TCOMB", respectively.
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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 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 EACH SUBSEQUENT OFFERING
OR OTHER DISTRIBUTION OF THE 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 Common Stock and would hold Liberty Media
Group Common Stock as a capital asset within the meaning of Section 1221
of the Code and is included for general information only. It does not
discuss all aspects of Federal income taxation that could be relevant to a
stockholder in light of such stockholder's particular tax circumstances and
does not apply to certain types of stockholders who could be subject to
special treatment under the Federal income tax laws. STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS WELL 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. The
Board reserves the right to issue shares of Liberty Media Group Common
Stock for any proper corporate purpose, and currently intends to issue
shares of Liberty Media Group Common Stock as a distribution on the Common
Stock. In the opinion of counsel, the Liberty Media Group Common Stock
would be common stock of the Company for Federal income tax purposes, and
if the Company were to distribute Liberty Media Group Common Stock to the
holders of Common Stock on a pro rata basis, then, depending upon the
circumstances of such distribution, counsel is of the view that such
distribution should constitute a tax-free stock dividend. In such case,
the basis of the Common Stock held by a stockholder immediately before the
distribution would be allocated between the Liberty Media Group Common
Stock received and such Common Stock in
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proportion to the fair market value of the Liberty Media Group Common Stock
received and such Common Stock, and the holding period of the Liberty Media
Group Common Stock and the Common Stock would include the holding period of
the Common Stock, assuming that the 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 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 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 in 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 Subsidiary, 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 Subsidiary 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 Subsidiary 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 redemption of Liberty Media Group Common Stock for Common Stock or a
conversion of Liberty Media Group Common Stock into 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 Common Stock, or shares of Common Stock for
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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 Common Stock may, depending
upon the transaction in which the Liberty Media Group Common Stock is
issued, become convertible into a combination of Common Stock and Liberty
Media Group Common Stock, or into an increased amount of 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.
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
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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 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
generally, 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 Retained Interest that then may
exist, in consideration of such issuance.
ADJUSTMENTS UNDER STOCK INCENTIVE 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 Class A Liberty Media Group
Common Stock determined by applying the distribution ratio established by
the Board of Directors in the resolutions declaring the Distribution to the
number of shares of Class A Common Stock that are subject to the
outstanding 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. Similarly the number of shares subject to
future awards under the 1994 Stock Incentive Plan will be adjusted to add
to the number of shares of Class A Common Stock with respect to which
awards may be granted a number of shares of Series A Liberty Media Group
Common Stock equal to the number of shares of Class A Common Stock with
respect to which awards may be issued multiplied by the distribution ratio.
In addition, the Compensation Committee will determine appropriate
adjustments as to shares subject to future awards under that Plan,
including provision for awards of options on, or stock appreciation rights
respecting, Liberty Media Group Common Stock. Options on, and stock
appreciation rights respecting, Liberty Media Group Common Stock will be
attributed to the Liberty Media Group.
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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.
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
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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 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 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 Common Stock, Class A
Preferred Stock, Class B Preferred Stock, Series C Preferred Stock, and
Series E Preferred Stock, and if the Liberty Media Group Stock Proposal is
approved, Liberty Media Group Common Stock, voting together as a single
class, vote in elections for directors. 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 million shares of Common Stock are currently authorized by the
Charter, of which [502,990,804] remain available for issuance. If the
Liberty Media Group Stock Proposal is approved by stockholders and
following the Distribution, there would be [502,990,804] million shares of
Common Stock, _____ million shares of Liberty Media Group Common Stock and
8,520,000 shares of Series Preferred Stock, authorized and available for
issuance. The issue and sale of shares Common Stock, Liberty Media Group
Common Stock and/or Series Preferred Stock could occur in connection with
an attempt to acquire control of the Company, and the terms of such shares
of Series Preferred Stock could be designed in part to impede the
acquisition of such control.
The Charter requires the affirmative vote of 66 2/3% of the total
voting power of the outstanding shares of Voting Stock, voting together as
a single class, to approve any amendment, alteration or repeal of any
provision of the Charter or the addition or insertion of other provisions
therein.
The Charter and the Company's Bylaws provide that a special meeting of
stockholders will be held at any time, subject to the rights of the holders
of any class or series of preferred stock, upon the call of the Secretary
of the Company upon (i) the written request of the holders of not less than
66 2/3% of the total voting power of the outstanding shares of Voting Stock
or (ii) at the request of not less than 75% of the members of the Board of
Directors. Subject to the rights of any class or series of preferred stock,
the Company's Bylaws require that written notice of the intent to make a
nomination at a meeting of stockholders must be received by the Secretary
of the Company, at the Company's principal executive offices, not later
than (a) with respect to an election of directors to be held at an annual
meeting of stockholders, 90 days in advance of such meeting, and (b) with
respect to an election of directors to be held at a special 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 filed pursuant to
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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, 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 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 "--Description of Common Stock and
Liberty Media Group Common Stock--Voting Rights" and "Special
Considerations --No Assurance as to Market Price".
Nevertheless, the existence of the Liberty Media Group Common Stock
could in certain circumstances pose obstacles, financial and otherwise, to
an acquiring person with particular objectives in mind. For example, the
effect of the provisions of voting rights and the requirement that the
Common Stock and the Liberty Media Group Common Stock vote as a single
voting class might discourage a potential acquiror from initiating a proxy
contest or tender offer as a result of the complexities involved in
acquiring a majority of the voting stock of the Company.
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 Common Stock Proposal,
the authorized shares of the Company's common stock would be increased, the
Company's common stock would be redesignated to comprise 1,250,000,000
shares of Common Stock and __________ shares of Liberty Media Group Common
Stock and certain of the terms of the Common Stock would be modified. Each
class of the Company's preferred stock described below will remain
authorized following the approval of such proposal.
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, there were
approximately [571,690,775] shares of Class A Common Stock and [85,114,800]
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.
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The Charter provides that there can be no stock dividend on, or stock
split, reverse stock split or reclassification of, either the Class A
Common Stock or the Class B Common Stock without a corresponding stock
dividend on, or stock split, reverse stock split or other reclassification
of, the other class of Common Stock.
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,
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, 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 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.
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In the event of any liquidation, dissolution or winding up of the
Company, the holders of Class B Preferred Stock are entitled to receive
from the assets of the Company available for distribution to stockholders
an amount in cash or property or a combination thereof, per share, equal to
the Stated Liquidation Value thereof, plus all accumulated and accrued but
unpaid dividends thereon to the date of payment.
The Class B Preferred Stock is redeemable at the option of the
Company, in whole at any time or in part from time to time, for a
redemption price per share payable in cash equal to the Stated Liquidation
Value thereof, plus all accumulated and accrued but unpaid dividends
thereon to and including the redemption date.
The Class B Preferred Stock is exchangeable at the option of the
Company in whole but not in part at any time for junior subordinated debt
securities of the Company ("Junior Exchange Notes"). If the Company
exercises its optional exchange right, each holder of outstanding shares of
Class B Preferred Stock will be entitled to receive in exchange therefor
newly issued Junior Exchange Notes of a series authorized and established
for the purpose of such exchange, the aggregate principal amount of which
will be equal to the aggregate Stated Liquidation Value of the shares of
Class B Preferred Stock so exchanged by such holder, plus all accumulated
and accrued but unpaid dividends thereon to and including the exchange
date. The Junior Exchange Notes will mature on the fifteenth anniversary
of the date of issuance and will be subject to earlier redemption at the
option of the Company, in whole or in part, for a redemption price equal to
the principal amount thereof plus accrued but unpaid interest. Interest
will accrue, and be payable annually, on the principal amount of the Junior
Exchange Notes at a rate per annum to be determined prior to issuance by
adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as
defined in the Indenture pursuant to which the Junior Exchange Notes will
be issued). Interest will accrue on overdue principal at the same rate,
but will not accrue on overdue interest.
Series Preferred Stock. The Series Preferred Stock is issuable, from
time to time, in one or more series, with such designations, preferences
and relative participating, optional or other special rights,
qualifications, limitations or restrictions thereof, as is stated and
expressed in a resolution or resolutions providing for the issue of such
series adopted by the Board of Directors.
All shares of any one series of the Series Preferred Stock are
required to be alike in every particular and all series are required to
rank equally and be identical in all respects, except insofar as they may
vary with respect to matters which the Board of Directors is expressly
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, 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
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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.
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, 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
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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.
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, 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 rank senior to the Common Stock, and if the Liberty Media Group
Common Stock 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 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
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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.
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DESCRIPTION OF BUSINESS OF LIBERTY MEDIA GROUP
BUSINESS
Liberty Media Group, through Liberty Media Corporation and its
subsidiaries and affiliates, is an investor in and manager of entities
engaged in the production, acquisition and distribution through all
available forms of media, including cable television systems, broadcast
television stations, home satellite dishes ("HSDs"), direct broadcast
satellite ("DBS"), on-line and interactive services, home video and
traditional retail outlets, of globally branded entertainment, educational
and informational programming and software, including multimedia products,
both analog and digital delivered. The various entertainment, education
and information programming and programming-related businesses in which
Liberty Media Group has interests fall into two categories: sports
programming services; and general entertainment and information services.
Liberty Media Group is also engaged in electronic retailing, direct
marketing, advertising sales, infomercials and transaction processing.
The following table sets forth Liberty Media Group's programming
interests which are held directly and indirectly through partnerships,
joint ventures, common stock investments and instruments convertible into
common stock. Ownership percentages in the table are approximate,
calculated as of March 1, 1995 and, where applicable, assume conversion to
common stock by all holders. In some cases, Liberty Media Group's interest
may be subject to buy/sell procedures, repurchase rights or, under certain
circumstances, dilution. Where applicable, the number of shares owned by
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.
SPORTS PROGRAMMING SERVICES
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
NATIONAL SPORTS
NETWORKS
<S> <C> <C> <C>
America One Liberty Sports, Inc. 14,941,000(1) 100%
Prime Network Prime SportsChannel 45,947,000 34%(2)(3)
NewSport Networks Associates 5,363,000
Prime Sports Radio Liberty Sports, Inc. N/A 100%
Prime Sports Showcase Liberty Sports, Inc. 1,800,000 100%
Liberty Satellite Sports(4) Affiliated Regional 1,401,000 68%(2)(3)
Communications, Ltd. ("ARC")
</TABLE>
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<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
REGIONAL SPORTS
NETWORKS
<S> <C> <C> <C>
Home Team Sports Home Team Sports Limited 2,810,000 20.5%(2)
Partnership
Prime Sports-Intermountain Liberty Sports, Inc. 535,000 100%
West
Prime Sports-KBL Liberty Sports, Inc. 1,623,000 100%
Prime Sports-Southwest ARC 4,138,000 68%(2)
Prime Sports-Midwest ARC 300,000 68%(2)
Prime Sports-Rocky Liberty Sports, Inc. 1,525,000 78.5%(2)
Mountain
Prime Sports-Northwest LMC Northwest Cable Sports, 2,188,000 60%(3)
Inc.
Prime Sports-West Liberty Sports, Inc. 4,170,000 100%
La Cadena Deportiva Liberty Sports Inc. 900,000 100%
Prime Sports-Upper Upper Midwest Cable Partners 429,000 38.6%(2)(3)
Midwest
SportsChannel Chicago SportsChannel Chicago 2,330,000 50%(3)
Associates
SportsChannel Pacific SportsChannel Pacific 3,242,000 50%(3)
Associates
SportsChannel SportsChannel Prism 2,355,000 23%(2)(3)
Philadelphia/PRISM Associates
SportSouth Network SportSouth Network, L.P. 4,270,000 44%(3)
Sunshine Network Sunshine Network JV 3,380,000 38%(2)(3)
INTERNATIONAL SPORTS
PROGRAMMING
Premier Sports Network LMC International, Inc. 2,000 50%
Prime International ARC 138,000 68%
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</TABLE>
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GENERAL ENTERTAINMENT AND INFORMATION SERVICES
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
MOVIE SERVICES
<S> <C> <C> <C>
Encore Encore Media Corporation 5,405,000 90%
Love Stories 304,000
Westerns 304,000
Mystery 304,000
Action 185,000
True Stories and Drama 180,000
WAM! America's Youth 185,000
Network
STARZ! QE+Ltd. 1,348,000 90%
Request TV Reiss Media Enterprises, Inc. 23,853,000(5) 40%(3)
Viewer's Choice PPVN Holding Company 26,386,000(5) 10%
EDUCATION/INFORMATION
Court TV Courtroom Television Network 15,550,000 33%(3)(6)
The Discovery Channel Discovery Communications, 61,500,000 49%
The Learning Channel Inc. 31,500,000
Discovery Asia 462,000
Discovery Europe 9,100,000
TLC Europe (7)
Discovery Latin America 2,900,000
What on Earth Ingenius 20,000(5) 50%
X*Change 6,500,000(5)
MacNeil/Lehrer Productions N/A 66%
GENERAL ENTERTAINMENT
Americana Television N/A 66%(3)
Productions LLC
BET Cable Network BET Holdings, Inc. 40,282,000 18%
BET Action Pay-Per-View (NYSE-BTV) 6,571,000 1,831,600 A Common
1,831,600 B Common
The Box Video Jukebox Network, Inc. 21,548,000(US) 5.5%
(NASDAQ-JUKE) 650,000(UK) 1,203,464 Common
Digital Music Express International Cablecasting 32,281,000(5) 8.6%(3)
("DMX") Technologies, Inc. 3,409,063 Common
(NASDAQ-TUNE)
E! Entertainment E! Entertainment Television, 26,792,000 10%(3)
Inc.
The Family Channel International Family 58,800,000 18.5%
Cable Health Club Entertainment, Inc. 1,002,000 1,670,986 Common
(NYSE-FAM) 3,300,000 Preferred(8)
2,070,000 Conv. notes(9)
International Channel International Cable Channels 5,839,000 45%(3)
Partnership Ltd.
</TABLE>
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<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CNN Turner Broadcasting System, 62,800,000 23%
Cartoon Network Inc. 12,100,000 225,000 A Common
Headline News (AMEX - TBS/A; TBS/B) 54,200,000 29,281,771 B Common
TNT 60,800,000 5,939,551 C Preferred(10)
Turner Classic Movies 3,200,000
WTBS 62,100,000
tv! Network TV Network Corporation 6,900,000 100%
- - - --------------------------------------------------------------------------------------
</TABLE>
ELECTRONIC RETAILING SERVICES
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Shopping Club Home Shopping Network 62,000,000(11) 41.5%(12)
(HSN 1, HSN 2, HSN Spree) (NYSE-HSN) 17,566,702 Common
20,000,000 B Common
QVC Network QVC, Inc. 50,000,000 42.6%
Q2 11,568,000
- - - --------------------------------------------------------------------------------------
</TABLE>
OTHER ASSETS
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------
DESCRIPTION SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
AT INTEREST
12/31/94
- - - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution of TBS Southern Satellite Systems, 58,522,000 100%
SuperStation signal Inc.
(in the U.S.)
Distribution of TBS Royal Communications, Inc. 916,000 100%
SuperStation signal
(in Canada)
Distribution of Netlink USA 380,000 100%
programming to HSD Netlink International 20,000
market
UHF/LPTV broadcast TV Silver King Communications, 28,000,000(1) 23%(13)
stations Inc. (NASDAQ-SKTV) 61,630 Common
2,000,000 B Common(13)
Hardware/software Asian Television and N/A 44%
sales and consulting Communications LLC
- - - --------------------------------------------------------------------------------------
</TABLE>
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(1) Number of television households in broadcast area.
(2) Includes indirect interest attributed through ARC's ownership. Gives
effect to a currently exercisable option by Group W Services, Inc.,
which, if exercised, would reduce Liberty Media Group's ownership
interest in ARC from 76.66% to 68%. Group W has given notice of its
intent to exercise such option, with a closing anticipated in the first
quarter of 1995.
(3) The interests of Liberty Media Group in these entities are presently or
will become subject to buy-sell procedures under which one owner may
initiate the procedure by giving notice setting forth 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 sell the initiating party's interest must also purchase the interest
of any other party that has elected to sell.
(4) Distributor of Sports Programming to HSD and DBS markets.
(5) Number of subscribers to whom service is available.
(6) Liberty Media Group has held discussions with the other general
partners regarding restructuring the partnership so that 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) $22,000,000 face amount, convertible at $6.67 per share.
(9) $23,000,000 face amount, convertible at $11.11 per share.
(10) Convertible into 6 shares of Class B Common stock for each share of
Preferred.
(11) Includes broadcast households and cable subscribers.
(12) Liberty Media Group has 80% voting power.
(13) Assumes exercise of an option to purchase 2,000,000 shares of Class B
common stock at $1.50 per share. See description of Silver King
Communications, Inc. in Other Assets below.
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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
"Greatest Sports Moments" (nostalgic sports programs). Prime Deportiva and
Women's Sports are intended for launch in 1995. Press Box and Greatest
Sports Moments are both produced by Liberty Sports. Prime Sports Showcase
will also feature other sports programming as part of the service. At
launch Prime Sports Showcase was distributed to 1.8 million subscribers,
all of which received the service pursuant to an affiliation agreement with
Satellite Services, Inc. ("SSI"), a wholly owned subsidiary of TCIC.
SSI purchases programming services from programming suppliers and then
makes such services available to TCIC's subsidiaries and affiliates.
"America One Television" is a 24-hour general entertainment network
currently providing programming to the broadcast television market.
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.
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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 ended 1994
with affiliate distribution in 22 US markets. The largest affiliated
markets are Boston, Houston and Pittsburgh. The programming service is
offered to radio stations on an inventory split 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 Liberty Media Group's regional
sports networks with radio in their respective markets.
REGIONAL SPORTS PROGRAMMING SERVICES
Liberty Media Group has varying interests in several regional sports
networks (the "Liberty Sports Networks"), which have been formed for the
purpose of acquiring, developing, producing, syndicating and distributing
sports programming of primarily local and regional interest by satellite to
cable television operators and other multi-channel video programming
distributors, and to HSD owners in specified geographic areas. The
following table sets forth for each of the Liberty Sports Networks the year
of launch, state service area, and significant teams with respect to whose
games the network currently has programming rights:
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<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------
SPORTS NETWORK YEAR LAUNCHED SERVICE AREA CURRENT TEAMS
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prime Sports Southwest 1983 AR, LA, NM, TX, OK Dallas Mavericks
(formerly Home Sports Houston Aeros
Entertainment) Houston Astros
Houston Rockets
Dallas Stars
San Antonio Spurs
Texas Rangers
Metro Conference
Big 8
SW Conference
Big 12 (1996)
Home Team Sports 1984 DC, DE, MD, NC, PA Baltimore Orioles
VA, WV Washington Bullets
Washington Capitals
Colonial Conference
Atlantic 10 Conference
Atlantic Coast Conference
Prime Sports-KBL 1985 MD, NY, OH, PA, WV Pittsburgh Penguins
(formerly KBL Sports Pittsburgh Pirates
Network) University of Pittsburgh
Atlantic 10 Conference
Prime Sports-Intermountain West 1990 ID, MT, NV, UT, WY Utah Jazz
Big 12 (1996)
Prime Sports-Midwest 1989 IL, IN, KY, OH, KS St. Louis Cardinals
MO St. Louis Blues
Prime Sports-Upper Midwest 1990 IA, MN, ND, SD, WI Minnesota Timberwolves
Prime Sports-Northwest 1988 AK, ID, MT, OR, WA Seattle Mariners
Seattle Supersonics
Big Sky Conference
PAC-10 Conference
Oregon State
University of Oregon
University of Washington
Washington State
Prime Sports-Rocky Mountain 1988 CO, KS, NE, NM, WY Denver Nuggets
(formerly Rocky Mountain Colorado State University
Prime Sports Network) Denver Grizzlies
Western Athletic Conference
Big 12 (1996)
Prime Sports-West 1985 AZ, CA, HI, NV Los Angeles Lakers
(formerly Prime Ticket Network) Los Angeles Kings
Anaheim Mighty Ducks
California Angels
San Diego Padres
PAC-10 Conference
University of Hawaii
Western Athletic Conference
</TABLE>
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<TABLE>
<S> <C> <C> <C>
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, NC, SC, Atlanta Braves
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>
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 34.2 million cable subscribers served at December 31,
1994, 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
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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
advertisement. Approximately 25% of the consolidated revenue derived from
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, 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.
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Minimum rights fee obligations for 1995 and subsequent years under the
sports rights contracts to which the Liberty Sports Networks were parties,
at December 31, 1994, are projected to be approximately $550 million in the
aggregate, most of which is payable over the next ten years. The
foregoing number includes an aggregate of approximately $352 million of
direct obligations of consolidated entities attributable to Liberty Media
Group. The value of the exhibition rights granted under these 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 relationship 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 collegiate
league, conference or association.
INTERNATIONAL SPORTS PROGRAMMING SERVICES
Liberty Sports also sells and delivers certain programming
internationally to satellite and cable programming distributors in Asia,
Europe, Latin America and South America. Such programming consists in part
of U.S. domestic sports programming to which Liberty Sports has acquired
international distribution rights and, in part, of programming acquired
outside the U.S.
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 2,000 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 December 31, 1994, the service was being
offered by cable operators and other distribution technologies to
approximately 20.4 million households, of which approximately 5.4 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. Based on subscriber levels at December 31, 1994,
these agreements require minimum payments aggregating approximately $178.1
million. EMC has entered into various other agreements where license fees
are contingent on future production, sales and certain other criteria.
Minimum license fees for these movies are not currently determinable. TCI
Development Corporation ("TCID"), a wholly owned subsidiary of TCIC, has
guaranteed the payment and performance of obligations under certain
agreements and Liberty Media Group has agreed to indemnify TCID in the
event that it is required to make any payments pursuant to such guarantees.
STARZ! is a first-run premium movie programming service which is managed by
EMC. As of December 31, 1994, STARZ! was offered by cable operators to
approximately 10.1 million subscribers, of which approximately 1.4 million
elected to receive STARZ!.
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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 negotiated percentage of pay-per
view revenue generated by their respective affiliated cable operators.
EDUCATION/INFORMATION SERVICES
The principal businesses of Discovery Communications, Inc.
("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 47.0% 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 31.5 million homes as of
December 1994. 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. In November 1994,
Discovery announced its intent to launch four new networks: "Animal
Planet", a nature network; "Quark!", a science and technology network;
"Time Traveler", a history network; and "Living", a home repair network.
In January 1995, 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.
Ingenius is a general partnership between 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 15.5 million
subscribers at December 31, 1994.
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GENERAL ENTERTAINMENT
Turner Broadcasting System, Inc. ("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 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 December 31, 1994, The Family Channel was
being provided to approximately 58.8 million subscribers. Approximately
24% of The Family Channel subscription base receive the service pursuant to
an affiliation agreement with SSI. In March 1993, IFE acquired MTM
Entertainment, Inc. ("MTM"). MTM is a California-based producer and
domestic and international distributor of television series and made-for-
television films. In 1994, IFE launched the "Cable Health Club" which
consists primarily of programming relating to health and fitness.
"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. The network's fiscal 1994 revenues were approximately 53% from
sales of advertising time and 45% from subscriber fees from cable systems.
As of December 31, 1994, BET Cable Network was being provided to
approximately 40 million subscribers. Approximately 23% of BET Cable
Network's subscribers receive the service pursuant to an affiliation
agreement with SSI. "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. The cost of producing original
movies is expected to be offset by anticipated revenue from home video
sales, foreign and syndication sales and, ultimately, sale to BET Cable
Network.
"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 26 million subscribers as of the end of December 1994.
International Cablecasting Technologies, Inc. ("ICT") is primarily
engaged in programming, distributing and marketing a premium digital music
service, Digital Music Express ("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, ICT also has delivered DMX by DBS to commercial
subscribers. ICT plans to expand the marketing of its DBS service to
residential customers. Both cable and DBS subscribers receive DMX
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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.
"International Channel" is a basic cable service providing multi-
lingual programming. As of December 31, 1994, International Channel was
being carried by 167 cable systems, which account for a total of 5.8
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 language. These services are scheduled to
launch during the fourth quarter of 1995 utilizing proprietary compression
technology.
"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 December 31, 1994, Network had approximately 7 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.
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 includes nearly 600 hours of original
programming highlighting traditional music, people and crafts which are
uniquely American.
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
entertainment and information programming companies described above in
which Liberty Media Group has interests (the "Programming Companies")
directly compete with other programming services for distribution and, when
distribution is obtained, the programming offered by the Programming
Companies competes, in varying degrees, for viewers and advertisers with
other cable programming services and off-air broadcast television, radio,
print media, motion picture theaters, video cassettes and other sources of
information and entertainment. Important competitive factors are the
prices charged for programming, the quantity, quality and variety of the
programming offered and effectiveness of marketing efforts. With the
advent of new compression technologies, 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
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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.
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
telephone companies.
Many of the Programming Companies' competitors are owned by large
publicly held companies which have greater financial resources than Liberty
Media Group and the Programming Companies.
Satellite Transponder Agreements. Liberty Media Group's 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 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 Liberty Media Group.
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The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which Liberty Media
Group has no control, including 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.
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 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.
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 Cable Television Consumer Protection and
Competition Act of 1992 ("1992 Cable Act") extensively regulate the cable
television industry.
The 1984 Cable Act, among other things, (a) requires cable television
systems with 36 or more "activated" channels to reserve a percentage of
such channels for commercial use by unaffiliated third parties; (b) permits
franchise authorities to require the cable operator to provide channel
capacity, equipment and facilities for public, educational and governmental
access; (c) limits the amount of fees required to be paid by the cable
operator to franchise authorities to a maximum of 5% of annual gross
revenues; and (d) regulates the revocation and renewal of franchises.
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 Liberty
Media Group. However, 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 upon Liberty
Media Group's 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
with cable operators (unless the FCC first determines the contract serves
the public interest) and generally prohibit a cable operator which has an
attributable interest in a programmer from improperly influencing the terms
and conditions of sale to unaffiliated multichannel video distributors.
Further, the 1992 Cable Act requires that such affiliated programmers make
their programming services available to cable
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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 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 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. The FCC subsequently
established September 1, 1993 as the effective date for its rate
regulations. 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
percent 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 percent. Thus, the revised benchmarks can result in additional rate
reductions of up to 7 percent 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 percent, pending completion of additional
cost studies by the FCC, and rate regulations have been relaxed to 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 percent, which rate may be subject to
change in the future. However, the FCC has presumptively excluded from the
ratebase 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 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.
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The FCC's rate regulations permit cable operators to adjust rates to
account for inflation and increases in certain external costs, including
increases in programming costs to the extent such increases exceed the rate
of inflation. However, a cable operator may pass through increases in the
cost of programming services affiliated with such cable operator to the
extent such costs exceed the rate of inflation only if the price charged by
the programmer to the affiliated cable operator reflects prevailing prices
offered in the marketplace by the programmer to unaffiliated third parties
or the fair market value of the programming.
The FCC's rate regulations also provide a mechanism for adjusting rates
when regulated tiers are affected by channel additions or deletions. Cable
operators adding or deleting channels on a regulated tier will adjust the
rate for that tier based on the number of channels offered after the
addition or deletion. Additional programming costs resulting from channel
additions on basic service will be accorded the same external treatment as
other program cost increases, and cable operators presently are permitted
to recover a mark-up on such programming cost increases. The rules
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 Liberty Media Group has an
ownership interest, while expanding the carriage of programming services
with lower license fees, including programming services in which Liberty
Media Group has an ownership interest.
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 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), 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. 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
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Broadcasting System, Inc. v. FCC on April 8, 1993. However, on June 27,
--------------------------------
1994, the Supreme Court vacated the District Court's decision upholding the
law as constitutional because genuine issues of material fact remain
unresolved. The "must-carry" and "retransmission consent" statutory
provisions and regulations remain in effect pending the outcome of the
ongoing proceedings before the District Court. Such statutorily mandated
expansion of carriage of broadcast stations coupled with the requirements
of the 1984 Cable Act noted above could adversely affect some or
substantially all of the programming services in which Liberty Media Group
holds an interest by decreasing the carriage of such services in cable
systems with limited channel capacity.
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Ownership Regulations. The 1992 Cable Act required the FCC to (1)
promulgate rules and regulations establishing reasonable limits on the
number of cable subscribers which may be served by a single multiple
systems cable operator or entities in which it has an attributable
interest; (2) 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 (3) consider the necessity and appropriateness
of imposing limitations on the degree to which multichannel video
programming distributors (including cable operators) may engage in the
creation or production of video programming. In 1993, the FCC adopted
regulations establishing a 30 percent limit on the number of homes passed
nationwide that a cable operator may reach through cable systems in which
it holds an attributable interest, (attributable for these purposes if its
ownership interest therein is 5% or greater or if there are any common
directors) with an increase to 35% if the additional cable systems are
minority-controlled. However, the FCC stayed the effectiveness of its
ownership limits pending the appeal of a September 16, 1993 decision by the
United States District Court for the District of Columbia which, among
other things, found unconstitutional the provision of the 1992 Cable Act
requiring the FCC to establish such ownership limits.
The FCC also adopted regulations in 1993 limiting carriage by a cable
operator of national programming services in which the operator holds an
attributable interest (using the same attribution standards as were adopted
for its limits on the number of homes passed nationwide that a cable
operator may reach through its cable systems) 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, which
currently are subject to pending petitions for reconsideration before the
FCC, may limit carriage of Liberty Media Group's programming services on
certain systems of cable operators affiliated with Liberty Media Group.
In the same rulemaking, the FCC concluded that additional restrictions
on the ability of multichannel distributors to engage in the creation or
production of video programming presently are unwarranted.
Numerous petitions have been filed with the FCC seeking reconsideration
of various aspects of the regulations implementing the 1992 Cable Act.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations,
also remain pending. 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 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.
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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 launchings by the United States space shuttle program
(as a result of priority allocations of cargo space to military rather than
commercial payloads), and uncertainties as to future satellite launches
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. 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. See Transmission of
SuperStation WTBS below and Satellite Transponder Arrangements above. The
other Programming Companies in which Liberty Media Group has interests have
separate arrangements with satellite service providers for transmission of
their services.
Financial Interest and Syndication. The FCC's "financial interest and
syndication" rules limit the ability of the three major broadcast networks
to distribute network programs through syndication to broadcast stations.
The major broadcast networks have not been restricted from distributing
network programs to cable or satellite programmers, such as the Programming
Companies. However, under the original rules, network programming has been
available to non-network broadcast television stations only through
syndicators in which the three major networks have no financial interest.
At the same time, networks have been prohibited from purchasing syndication
rights or obtaining financial interests in programs obtained from outside
(non-network) producers. In response to the decision of the United States
Court of Appeals for the Seventh Circuit in Schurz Communications, Inc. v.
------------------------------
FCC, the FCC released modified financial interest and syndication rules in
---
1993. Although the FCC relaxed the financial interest and syndication
rules in many respects, under the modified rules the three major networks
are prohibited from: (a) actively syndicating any prime-time entertainment
or first-run non-network programming to television stations in the United
States; (b) acquiring financial interests or domestic syndication rights in
any first-run non-network program or series distributed in the United
States unless that program or series was produced solely "in-house" by the
network; and (c) warehousing programming by withholding it from the
syndication market beyond certain defined periods. However, the rules are
scheduled to expire in November 1995.
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.
Copyright licensing procedures have not yet been negotiated for the
public performance of non-dramatic musical works in locally originated
programs and advertising carried by cable operators or used in connection
with various programming services provided by the Programming Companies.
The American Society of Composers, Authors and Publishers ("ASCAP") and
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Broadcast Music, Inc. ("BMI"), organizations which license the public
performance of musical compositions of their members or affiliated
composers, authors and publishers, respectively, had claimed that cable
programmers and cable system operators each must have a separate license to
lawfully exhibit programs and advertisements containing musical
compositions. Such split licensing has been held unlawful under the ASCAP
and BMI Consent Decrees, respectively, by the U.S. Court of Appeals for the
Second Circuit in the Turner case in 1992 and by U.S. District Court for
------
Washington, D.C. in the NCTA case in 1991. BMI has indicated that it does
----
not consider itself bound by this decision in the NCTA case.
----
ELECTRONIC RETAILING SERVICES
Liberty Media Group currently provides electronic retailing services
through a subsidiary, Home Shopping Network, Inc. ("HSN") and through an
equity affiliate, QVC, Inc. ("QVC").
HSN
As of March 1, 1995, 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
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. As of December 31, 1994, HSC
programming could be received by approximately 62 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
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Caribbean Islands equipped with standard satellite receiving facilities is
capable of receiving HSC programming.
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 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, 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. See Federal Government
Regulation of Satellite Transmissions below. 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.
Federal Government Regulation of Satellite Transmission. The FCC
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. HSN has been
granted two licenses for operation of C-Band satellite transmission
facilities and two licenses for operation of Ku-Band satellite transmission
facilities on a permanent basis in Clearwater and St. Petersburg.
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" being found unconstitutional, HSN embarked on
an aggressive campaign to bring the "must carry" households under contract
by volunteering to pay commissions to cable operators required to transmit
HSN 2. See Effect on HSN of the 1992 Cable Act, below. 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
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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. During 1994, HSN paid approximately $6,638,000 to SSI in commissions
and approximately $8,261,000 in up-front distribution fees.
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 compensation
during the year, and those stations, and possibly others, are expected to
continue to receive additional compensation 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 US. 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 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. Among the many provisions of the
1992 Cable Act is one that mandates that cable systems carry the signals of
local commercial television stations ("must carry") 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 stations broadcast signal. See Federal Regulation-
Programming Companies above.
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HSC's full-time broadcast affiliates have all requested "must carry" status
in lieu of a retransmission fee.
In July 1993, the FCC ruled that stations predominantly used for the
transmission of sales presentations or program-length commercials operate
in the public interest and are entitled to "must carry" status. A petition
for reconsideration of the FCC's ruling currently is pending before the
FCC. HSN has filed in opposition to that petition. In addition, the
limitation on carriage of affiliated programming entities, discussed in
Federal Regulation-Programming Companies above, may limit carriage of
HSN's programming services on certain systems of cable operations
affiliated with the Company.
In April 1993, a decision by the United States District Court for the
District of Columbia upheld the constitutional validity of the mandatory
signal carriage requirements of the 1992 Cable Act. On appeal, in a multi-
opinion decision released on June 27, 1994, the Supreme Court vacated the
District Court decision and remanded the case to the District Court to
permit the development of a full factual record concerning the need for
"must carry". Pending judicial resolution, the "must carry" rules remain
in effect. Therefore, HSN 2 programming carried by HSC's broadcast
affiliates generally is being transmitted by cable operators located within
the broadcast markets. As a result of "must carry", HSC has experienced
increased cable distribution of its programming due to an increase in the
number of cable systems that carry HSC programming.
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. 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. As a
revenue provider to the cable operator, 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 shop-at-home programming
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
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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.
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 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 operated in all such
markets, with the possible exception of New York City. HSN cannot quantify
the competitive effect of the foregoing or any other sources of video
programming on any of HSN's affiliated television stations, nor can it
predict whether such competition will have a material adverse effect on its
operations.
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
Liberty Media Group owns 42.6% of QVC. The remaining 57.4% of QVC is
owned by Comcast Corporation ("Comcast"), which manages the day-to-day
operations of QVC. Liberty Media Group and Comcast have pledged their
shares of QVC pursuant to a credit facility of QVC. For a description of
the transaction in which Liberty Media Group and Comcast increased their
respective interests in QVC to 42.6% and 57.4%, see Notes to the Combined
Financial Statements of the Liberty Media Group.
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 December 31, 1994, QVC's
programs were being transmitted by cable television systems on a full-time
basis to approximately 47 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
many of the same competitive factors that HSN does, described above under
Competition-HSN.
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OTHER ASSETS
TRANSMISSION OF TBS SUPERSTATION ("WTBS")
Through its wholly owned subsidiary Southern Satellite Systems, Inc.
("Southern") and Southern's wholly owned subsidiary, Royal Communications,
Inc. ("Royal"), Liberty Media Group transmits 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 at a cost of $1.8 million per
year. Southern makes the WTBS signal available to cable television system
operators and operators of other non-broadcast distribution media who
receive the signal on their earth stations and offer the service to their
subscribers. Southern also makes the WTBS signal available to HSD owners
through program packagers. A substantial portion of Southern's
consolidated revenue for calendar year 1994 was derived from the HSD
market. No payment to TBS is required for the transmission by Southern of
the WTBS signal. See Federal Regulation-Southern below. At December 31,
1994, Southern (and Royal) transmitted WTBS for reception by an estimated
59.4 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 916,000 homes in Canada were
receiving the service as of December 31, 1994. 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 to HSD owners.
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 Liberty Media Group therefore
believes that TBS has an economic incentive to maintain the audience appeal
of WTBS's programming.
Federal Regulation-Southern. 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,
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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.
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, Southern would not be permitted to
distribute WTBS to cable operators unless the cable operator and the
copyright owners or licensees of the programming contained on the WTBS
signal being retransmitted reach an agreement for the licensing of such
programming.
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. Thus, if the license granted under the SHV Act is
not further extended, satellite carriers will be required to negotiate
private licenses for the retransmission of copyrighted material to HSD
owners after 1999.
Syndicated Exclusivity. The FCC's syndicated exclusivity rules, which
became effective January 1, 1990, require cable systems with more than
1,000 subscribers to delete programming from distant broadcast signals if
exclusive local broadcast rights to such programming have been purchased by
a television station which broadcasts in the locale of the cable system and
such station requests the cable system to "black out" such programming.
These rules could lead to cable operators dropping distant broadcast
signals from their systems because of the administrative difficulty of
providing for the blackout and because the service may be less attractive
to subscribers if a material portion of its programming were blacked out.
Although such rules could therefore result in additional channels becoming
available for certain of the Programming Companies' services, they could
have an adverse effect on Southern's business if WTBS were to carry a
material amount of programming subject to deletion. TBS has stated that it
is programming WTBS to avoid blackouts and that, because it has a
reasonable basis for believing that deletions of its programming will not
be required, it is offering, as permitted by the FCC, to indemnify cable
operators that carry WTBS in order to ensure that its programming is not
blacked out. Southern cannot control TBS's programming decisions with
respect to WTBS, nor can it predict what the long-term response of the
cable television industry will be to the syndicated exclusivity rules.
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<PAGE>
An FCC license is also required to construct and operate the uplinking
equipment which transmits program signals to satellites. The FCC has
granted a license to Southern for its uplink of the WTBS signal and
licenses for a terrestrial path which carries the signal from the TBS
facilities to the uplink facilities, which licenses Southern has assigned
to LMC SatCom.
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 in AT&T Co. v. FCC has invalidated the FCC's permissive de-
---------------
tariffing rules for non-dominant carriers and its streamlined tariff filing
rules for such carriers. 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")
Netlink markets and distributes programming to the US HSD subscriber
market. As of December 31, 1994, approximately 380,000 HSD owners, or 18%
of the estimated authorized HSD subscriber market 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 1 million sales to date.
In addition, Netlink uplinks and sells the signals of nine broadcast
television stations to other HSD packagers and marketers in the US and,
through Netlink International, in Canada. As of December 31, 1994,
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.
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<PAGE>
Although Liberty Media Group is unable to predict the effects of DBS
competition, 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, 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.
SILVER KING COMMUNICATIONS, INC. ("SKC")
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 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, Liberty Media Group entered into an Option
Agreement with RMS Limited Partnership ("RMS") pursuant to which 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, 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, 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 Liberty Media
Group or its assignee receive all necessary FCC and other approvals prior
to the exercise. As of the date hereof, 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 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 Liberty
Media Group. If Liberty Media Group is unable to obtain consent to
exercise the option, Liberty Media Group may assign the option to a third
party.
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 Liberty Media Group.
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<PAGE>
EMPLOYEES
At December 31, 1994, consolidated entities attributed to 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 Liberty Media Group's various other facilities in
the communities in which Liberty Media Group owns and/or operates
programming interests.
PROPERTIES
Liberty Media Group's 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 Florida for its
subsidiary businesses. The facilities of consolidated entities attributed
to the Liberty Media Group are, in the opinion of management, suitable and
adequate by industry standards.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SSI purchases sports and other programming from certain majority owned
entities attributed to the Liberty Media Group. Charges for such
programming (which were based upon customary rates charged to others) were
$79,158,084 for 1994.
The TCI Group will provide certain cash management, legal, human
resources and other administrative services to the Liberty Media Group.
Costs of these services will be allocated to the Liberty Media Group on a
basis intended to approximate the cost at which the Liberty Media Group
could either provide such services with its own personnel or acquire them
from third parties.
The TCI Group will also provide certain services to the Liberty Media
Group on a cost-plus or arm's length basis. These services will include
encryption, compression and up-linking of Liberty Media Group programming
services and inclusion of Liberty Media Group programming services in its
various means of domestic and international distribution both in packaging
of services and a la carte, including in the Headend In The Sky program.
The Liberty Media Group will provide certain services to the TCI Group
on a cost-plus basis. These services will include video production
services, affiliate sales and marketing for foreign programming services
owned by the TCI Group if and to the extent such services are
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<PAGE>
offered in the United States, sales of national advertising where buyers
may want to purchase advertising time on programming services and local
cable systems. The Liberty Media Group may also provide distribution and
marketing of home video and CD-ROM products by the TCI Group and direct
marketing services, offering products and services to targeted groups of
customers served by the TCI Group, in exchange for a percentage of the
sales generated by such efforts.
Both groups will take advantage of available means to promote each
other's products and services and to package, promote and position them in
ways to maximize their availability and appeal to potential customers.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of February 10, 1995, information with
respect to the ownership of Class A Common Stock and 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 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 of Dr. Malone includes interests of such individual 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 such persons, which shares are voted at
the discretion of the trustee.
<TABLE>
<CAPTION>
Percent
Name and Address of Amount and Nature of of Voting
Title of Class Beneficial Owner Beneficial Ownership Class(1) Power
- - - ---------------- ------------------- -------------------- -------- ------
<S> <C> <C> <C> <C>
Class A Bob Magness, Chairman of 4,626,938(2)(3)(4) * 26.25%
Class B the Board and a Director 37,132,076(2)(4)(7) 43.63%
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) * 18.04%
Class B and a Director 25,697,083(6)(7)(8) 30.19%
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% 6.98%
Class B 400 Tribune Building 9,112,500(4)(7) 10.71%
Class B Pref. Salt Lake City, Utah 67,536 4.17%
Series C Pref. -- --
Class A Associated Communications 12,479,976 2.18% 5.81%
Class B Corporation 7,071,852 8.31%
Class B Pref. 200 Gateway Towers 41,598 2.57%
Series C Pref. Pittsburgh, Pennsylvania -- --
Class A The Equitable Life Assurance 30,733,246(9) 5.38% 2.15%
Class B Society of the United States -- --
Class B Pref. 787 Seventh Avenue -- --
Series C Pref. New York, New York -- --
Class A The Capital Group 42,352,189(10) 7.41% 2.96%
Class B Companies, Inc. -- --
Class B Pref. 333 South Hope Street -- --
Series C Pref. Los Angeles, California -- --
</TABLE>
- - - ----------
* Less than one percent.
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<PAGE>
(1) Based on 571,690,775 shares of Class A Common Stock, 85,114,800 shares
of Class B Common Stock, 1,620,076 shares of Class B Preferred stock and
70,559 shares of Series C Preferred Stock outstanding on February 10, 1995
(after elimination of shares of the Company held by subsidiaries of the
Company).
(2) Bob 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 Bob 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.
(4) Bob 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 Class A shares for each Class B share 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.
(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 6,240,000 and 80,000 Restricted Voting Shares,
respectively, that 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 Common Stock
and Class B Preferred Stock in the table which are not subject to such
repurchase rights and voting requirements represent 13.62% of the total
voting power of the shares of Common Stock and Class B Preferred Stock
outstanding (excluding 6,240,000 and 80,000 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 Life Assurance Society of the
United States which Schedule 13G reflects that said corporation has sole
voting power over 21,927,390 shares and shared voting power over 619,318
shares of Class A Common Stock. No information is given in respect to
voting power over the remaining shares.
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<PAGE>
(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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of February 10, 1995, information with
respect to the ownership Class A Common Stock and Class B Common Stock (other
than directors' qualifying shares), Class B Preferred Stock and Series C
Preferred Stock by all directors and each of the named executive officers of the
Company, other than those listed in the table in Security Ownership of Certain
Beneficial Owners, and by all executive officers and directors of the Company as
a group. Shares issuable upon exercise or conversion of convertible securities
are deemed to be outstanding for the purpose of computing the percentage
ownership and overall voting power of persons beneficially owning such
convertible securities, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership or overall voting power of any
other person. Voting power in the table is computed with respect to a general
election of directors and therefore the Class B Preferred Stock is included in
the calculation. The number of Class A and Class B shares in the table include
interests of the following directors or executive officers or of members of the
group of directors and executive officers in shares held by the trustee of the
ESPP and shares held by the trustee of United Artists Entertainment Company's
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 ESPP for the benefit of such person, which shares are voted at the
discretion of the trustee.
<TABLE>
<CAPTION>
Percent
Amount and Nature of of Voting
Title of Class Name of Beneficial Owner Beneficial Ownership Class(1) Power
- - - ---------------- --------------------------- --------------------- -------- ------
<S> <C> <C> <C> <C>
Class A Donne F. Fisher 543,934(2) * *
Class B 249,072 *
Class B Pref. 3,464 *
Series C Pref. -- --
Class A John W. Gallivan 2,124(3) * *
Class B -- --
Class B Pref. 14 *
Series C Pref. -- --
Class A Kim Magness -- -- *
Class B 518,000 *
Class B Pref. -- --
Series C Pref. -- --
Class A Jerome H. Kern 2,000,000(4) * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A R. E. Turner 60,000 * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A Tony Coehlo 800 * *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percent
Amount and Nature of of Voting
Title of Class Name of Beneficial Owner Beneficial Ownership Class(1) Power
- - - ---------------- --------------------------- --------------------- -------- ------
<S> <C> <C> <C> <C>
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A Fred A. Vierra 762,551(5) * *
Class B -- --
Class B Pref. 200 *
Series C Pref. -- --
Class A J.C. Sparkman 247,359(6) * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A Brendan R. Clouston 1,208,969(7) * *
Class B 230 *
Class B Pref. -- --
Series C Pref. -- --
Class A Robert A. Naify 23,638,860(8) 3.98% 1.63%
Class B -- --
Class B Pref. 1,000 *
Series C Pref. -- --
Class A All directors and 37,713,064(1)(2)(3) 1.08% 44.89%
executive (4)(5)(6)(7)
officers as a group (19 (8)(9)(10)
persons)
Class B 63,601,807(1) 74.72%
Class B Pref. 438,884 27.09%
Series C Pref. -- --
</TABLE>
- - - ----------
* Less than one percent.
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<PAGE>
(1) See notes 1 through 8 to the table in Security Ownership of Certain
Beneficial Owners.
(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.
(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. Options to acquire 800,000 shares are currently exercisable.
(5) Assumes the exercise in full of 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 such options are fully
exercisable. Also 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. Options to acquire 40,000 shares
of Class A Common Stock are currently exercisable. Also assumes the
exercise in full of stock options granted in tandem with stock appreciation
rights in November of 1993 to acquire 100,000 shares of Class A Common
Stock. Options to acquire 25,000 shares of Class A Common Stock are
currently exercisable. Additionally 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 these
options are exercisable until November 17, 1995.
(6) 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. Options to acquire 40,000 shares of Class A Common
Stock are currently exercisable.
(7) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 500,000 shares of
Class A Common Stock. Options to acquire 200,000 shares of Class A Common
Stock are currently exercisable. Additionally, assumes the exercise in
full of stock options granted in tandem with stock appreciation rights in
November of 1993 to acquire 500,000 shares of Class A Common Stock.
Options to acquire 125,000 shares of Class A Common Stock are currently
exercisable. Also 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.
(8) 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.
(9) 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 1,330,000 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 5
above and Mr. Kern holds an option to acquire
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<PAGE>
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 become
exercisable (as to 20% of the shares covered thereby) in November of 1994
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.
(10) 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 Series B
cumulative compounding redeemable preferred stock; Mr. Kim Magness, a
director of the Company, owns 29 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 Diane D. Kern. Mr. Donne Fisher, a director and
executive officer of the Company, pursuant to a Restricted Stock Award
Agreement dated December 10, 1992, was transferred the right, title and
interest in and to 124.03 shares (having a liquidation value of $4 million)
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.
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<PAGE>
LEGAL MATTERS
The validity of the reclassification of the 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 Special Meeting with the opportunity to make a statement if
KPMG so desires and will be available to respond to appropriate questions.
The consolidated balance sheets of TCI Communications, Inc. (formerly
Tele-Communications, Inc.) and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1993, and all related schedules, have been included and
incorporated by reference herein in reliance upon the reports, dated March
21, 1994, 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 refer to a change in the method of account for income taxes in
1993.
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 and incorporated by reference
herein in reliance upon the report, dated March 18, 1994, 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 report 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 programming services of Tele-Communications, Inc. and its
affiliate, Liberty Media Corporation) as of December 31, 1993 and 1992, and
the related combined statements of operations and equity, and cash flows
for each of the years in the three-year period ended December 31, 1993 have
been included herein in reliance upon the report, dated February 15, 1995,
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 contains an emphasis paragraph that
states that the combined financial statements of Liberty Media Group are
presented for purposes of additional analysis of the consolidated financial
statements of TCI Communications, Inc. (formerly Tele-Communications, Inc.)
and subsidiaries and should be read in connection with the December 31,
1993 consolidated financial statements of TCI Communications, Inc.
and subsidiaries and Liberty Media Corporation and subsidiaries.
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
three-year period ended January 31, 1994 have been included and
-113-
<PAGE>
incorporated by reference herein in reliance upon the report, dated March
4, 1994, 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
report 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 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
1995 annual meeting of stockholders must be received by the Company by
_____________, 1995 in order to be considered for inclusion in proxy
materials for the 1995 annual meeting.
-114-
<PAGE>
APPENDIX I
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page on which
term is defined
in the
Term Proxy Statement
- - - ---- -----------------
<S> <C>
1984 Cable Act................................................... 91
1992 Cable Act................................................... 91
Acclaim.......................................................... 13
Amended Charter.................................................. 6
ARC.............................................................. 76
ASCAP............................................................ 95
ATP.............................................................. 89
Australis........................................................ 86
BMI.............................................................. 96
Cable Partners................................................... 15
Charter.......................................................... 6
Class A Common Stock............................................. 1
Class A Market Value Ratio....................................... 52
Class A Preferred Stock.......................................... 45
Class B Common Stock............................................. 1
Class B Market Value Ratio....................................... 52
Class B Preferred Stock.......................................... 45
Code............................................................. 63
Comcast.......................................................... 13
Commission....................................................... 4
Communications Act............................................... 95
Common Stock..................................................... 1
Company.......................................................... 1, 4
Company Earnings (Loss) Attributable to the Liberty Media Group.. 48
Company Earnings (Loss) Attributable to the TCI Group............ 47
Convertible Securities........................................... Appendix III - 18
Copyright Act.................................................... 101
Cox.............................................................. 14
CRT.............................................................. 102
DBS.............................................................. 76
DGCL............................................................. 17
Discovery........................................................ 87
Disposition...................................................... 52
Distribution..................................................... 1
DMX.............................................................. 78
E!............................................................... 88
EMC.............................................................. 86
ESPP............................................................. 107
Exchange Act..................................................... 4
FCC.............................................................. 14
GE............................................................... 97
Group............................................................ 2
Groups........................................................... 2
HSC.............................................................. 96
HSDs............................................................. 76
HSN.............................................................. 96
Hughes........................................................... 97
ICT.............................................................. 88
IFE.............................................................. 88
IP-IV............................................................ 14
Junior Exchange Notes............................................ 71
Junior Stock..................................................... 74
Kearns........................................................... 108
KPMG............................................................. 113
Liberty.......................................................... 4
Liberty Media Group.............................................. 1
Liberty Media Group Available Dividend Amount.................... 48
Liberty Media Group Common Stock................................. 1
Liberty Media Group Stock Proposal............................... 1
Liberty Media Group Subsidiary................................... 55
Liberty Sports Networks.......................................... 82
</TABLE>
I-1
<PAGE>
APPENDIX I
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page on which
term is defined
in the
Term Proxy Statement
- - - ---- -----------------
<S> <C>
Liberty Sports................................................... 81
LPTV............................................................. 98
Market Capitalization............................................ Appendix III - 21
Market Value..................................................... Appendix III - 21
MLP.............................................................. 87
MSTV............................................................. 81
MTAs............................................................. 14
MTM.............................................................. 88
Netlink.......................................................... 103
Net Proceeds..................................................... 53
NewTelco......................................................... 15
Number of Shares Issuable with Respect to the Retained Interest.. Appendix III - 22
Old TCI.......................................................... 12
Outstanding Interest Fraction.................................... 60
Parity Stock..................................................... 74
PCS.............................................................. 14
PCS Auctions..................................................... 14
Programming Companies............................................ 89
PSC.............................................................. 81
PSR.............................................................. 82
Purchaser........................................................ 13
Qualifying Securities............................................ 53
QVC.............................................................. 13
QVC Merger....................................................... 14
QVC Tender Offer................................................. 13
RCS.............................................................. 14
Record Date...................................................... 15
Related Business Transaction..................................... 53
Restricted Voting Shares......................................... 15
Retained Interest................................................ 1
RMS.............................................................. 104
Royal............................................................ 101
Series A Liberty Media Group Common Stock........................ 1
Series B Liberty Media Group Common Stock........................ 1
Series C Preferred Stock......................................... 15
Series D Preferred Stock......................................... 45
Series E Preferred Stock......................................... 45
Series Preferred Stock........................................... 45
Service.......................................................... 63
share distribution............................................... 49
SHV Act.......................................................... 101
SKC.............................................................. 98
Southern......................................................... 101
Special Meeting.................................................. 1
Special Securities............................................... 72
Special Termination Right........................................ 97
Sprint........................................................... 14
SSI.............................................................. 81
Stated Liquidation Value......................................... 70
TBS.............................................................. 88
TCG.............................................................. 13
TCI Group........................................................ 1
TCI Group Available Dividend Amount.............................. 47
TCI/Liberty Combination.......................................... 4
TCIC............................................................. 4
TCID............................................................. 86
Tele-Vue......................................................... 14
TeleCable........................................................ 13
TeleCable Merger................................................. 14
Telewest......................................................... 13
TIN.............................................................. 65
Trading Day...................................................... Appendix III - 26
UACI............................................................. 111
VJN.............................................................. 89
</TABLE>
I-2
<PAGE>
APPENDIX I
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
Page on which
term is defined
in the
Term Proxy Statement
- - - ---- -----------------
<S> <C>
Voting Securities................................................ 46
Voting Stock..................................................... 68
VRU System....................................................... 98
WirelessCo....................................................... 14
</TABLE>
I-3
<PAGE>
APPENDIX II
ILLUSTRATION OF CERTAIN TERMS
[THE NUMBERS APPEARING IN THIS APPENDIX WILL BE REVISED WHEN THE NUMBER
OF AUTHORIZED SHARES OF LIBERTY MEDIA GROUP COMMON STOCK ARE ESTABLISHED.]
The following illustrations demonstrate the calculations of the
Retained Interest in the Liberty Media Group based on the assumptions set
forth herein and using 40 million shares as the number of authorized shares
of Liberty Media Group Common Stock and 20 million shares as the number of
shares of Liberty Media Group Common Stock that, prior to the first
issuance of such shares, constitute the Number of Shares Issuable with
Respect to the Retained Interest in the Liberty Media Group. 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 and the other Appendices thereto. Capitalized terms used herein
have the respective meanings ascribed to them in the Proxy Statement. See
Appendix I--Glossary of Certain Defined Terms.
At any given time, the Outstanding Interest Fraction with respect to
the Liberty Media Group, which represents the fractional interest in the
equity value of the Liberty Media Group that is held by the holders of 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 Retained Interest
The balance of the equity of the Liberty Media Group is represented by
the Retained Interest. The sum of the Outstanding Interest Fraction and
the Retained Interest will always equal 100%.
DISTRIBUTION
The following illustration assumes the initial issuance by the Company
of 10 million shares of Liberty Media Group Common Stock from the Number of
Shares Issuable with Respect to the Retained Interest pursuant to the
Distribution.
. The Number of Shares Issuable with Respect to the Retained
Interest would decrease by the number of shares of Liberty Media
Group Common Stock issued for the account of the TCI Group.
Number of Shares Issuable with Respect to the
Retained Interest prior to the Distribution.. 20 million
Shares issued in the Distribution............. 10 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after the Distribution..... 10 million
==========
II-1
<PAGE>
. As a result, the Outstanding Interest Fraction is 50%, calculated
as follows:
10 million
-----------------------
10 million + 10 million
The Retained Interest would accordingly represent an interest of
50% in the equity of 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 100%
(representing the ratio of the Retained Interest (50%) to the
Outstanding Interest Fraction (50%)) of the aggregate amount of
any dividend or other distribution paid on the outstanding
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 10 million shares of Liberty Media Group
Common Stock outstanding (an aggregate of $10 million), the TCI
Group would be credited with $10 million, and the Liberty Media
Group would be charged with that amount in addition to the $10
million dividend to the holders of Liberty Media Group Common
Stock (a total of $20 million).
. Immediately after the Distribution, the Company would have 30
million authorized and unissued shares of Liberty Media Group
Common Stock remaining (40 million minus 10 million issued and
outstanding).
FUTURE OFFERINGS OF LIBERTY MEDIA GROUP COMMON STOCK
The following illustrations reflect the sale by the Company of 5
million shares of Liberty Media Group Common Stock after the Distribution.
Offering for the Liberty Media Group
Assume all such shares are identified as issued for the account of the
Liberty Media Group as an additional equity interest in the Liberty Media
Group, with the net proceeds credited to the Liberty Media Group.
Shares previously issued and outstanding.... 10 million
Newly issued shares......................... 5 million
----------
Total issued and outstanding after offering. 15 million
==========
. The Number of Shares Issuable with Respect to the Retained
Interest (10 million) 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 60%, calculated as
follows:
15 million
-----------------------
15 million + 10 million
The Retained Interest would accordingly represent an interest of
40% in the equity of the Liberty Media Group.
II-2
<PAGE>
. In this case, the TCI Group would be credited, and the Liberty
Media Group would be charged, with an amount equal to 67%
(representing the ratio of the Retained Interest (40%) to the
Outstanding Interest Fraction (60%)) of the aggregate amount of
any dividend or other distribution paid on the outstanding
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 25 million authorized and unissued shares
of Liberty Media Group Common Stock remaining (40 million minus
15 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 Retained Interest, with the net proceeds
credited to the TCI Group.
Shares previously issued and outstanding... 10 million
Newly issued shares........................ 5 million
----------
Total issued and outstanding after offering 15 million
==========
. The Number of Shares Issuable with Respect to the Retained Interest
would decrease by the number of shares of Liberty Media Group
Common Stock issued for the account of the TCI Group.
Number of Shares Issuable with Respect to the
Retained Interest prior to offering......... 10 million
Shares issued in offering.................... 5 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after offering............ 5 million
==========
. The Outstanding Interest Fraction would be 75%, calculated as
follows:
15 million
----------------------
15 million + 5 million
The Retained Interest would accordingly represent an interest of
25% in the equity of 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 33%
(representing the ratio of the Retained Interest (25%) to the
Outstanding Interest Fraction (75%)) of the aggregate amount of any
dividend or other distribution paid on the outstanding 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 25 million authorized and unissued shares of
Liberty Media Group Common Stock remaining (40 million minus 15
million issued and outstanding).
II-3
<PAGE>
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 Number of Shares
Issuable with Respect to the Retained Interest 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 Number of Shares Issuable with
Respect to the Retained Interest 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.
REPURCHASES OF LIBERTY MEDIA GROUP COMMON STOCK
The following illustrations reflect the repurchase by the Company of 5
million shares of Liberty Media Group Common Stock after the Distribution.
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.
Shares previously issued and outstanding..... 10 million
Shares repurchased........................... 5 million
----------
Total issued and outstanding after repurchase 5 million
==========
. The Number of Shares Issuable with Respect to the Retained Interest
(10 million) would not be changed by the repurchase of any shares
of Liberty Media Group Common Stock with funds attributed to the
Liberty Media Group.
. The Outstanding Interest Fraction would be 33%, calculated as
follows:
5 million
----------------------
5 million + 10 million
The Retained Interest would accordingly represent an interest of
67% in the equity of the Liberty Media Group.
. The Company would have 35 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 5 million
issued and outstanding).
II-4
<PAGE>
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.
Shares previously issued and outstanding. 10 million
Shares repurchased....................... 5 million
----------
Total issued and outstanding after
repurchase.............................. 5 million
==========
. The Number of Shares Issuable with Respect to the Retained Interest
would be increased by the number of shares of Liberty Media Group
Common Stock repurchased with funds attributed to the TCI Group.
Number of Shares Issuable with Respect to the
Retained Interest prior to repurchase........ 10 million
Shares repurchased with funds attributed to
the TCI Group................................ 5 million
----------
Number of Shares Issuable with respect to the
Retained Interest after repurchase........... 15 million
==========
. The Outstanding Interest Fraction would be 25%, calculated as
follows:
5 million
----------------------
5 million + 15 million
The Retained Interest would accordingly represent an interest of
75% in the equity of the Liberty Media Group.
. The Company would have 35 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 5 million
issued and outstanding).
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 Common Stock, respectively, after the Distribution.
Liberty Media Group Common Stock Dividend on Liberty Media Group
Common Stock
Assume the Company declares a dividend of one share of Liberty Media
Group Common Stock on each outstanding share of Liberty Media Group Common
Stock.
Shares previously issued and outstanding... 10 million
Newly issued shares........................ 10 million
----------
Total issued and outstanding after dividend 20 million
==========
II-5
<PAGE>
. The Number of Shares Issuable with Respect to the Retained
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.
Number of Shares Issuable with Respect to the
Retained Interest prior to dividend.......... 10 million
Adjustment to reflect dividend of shares on
outstanding shares of Liberty Media Group
Common Stock................................. 10 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after dividend............. 20 million
==========
. The Outstanding Interest Fraction would be 50%, calculated as
follows:
20 million
-----------------------
20 million + 20 million
The Retained Interest would accordingly represent an interest of
50% in the equity of the Liberty Media Group.
. The Company would have 20 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 20 million
issued and outstanding).
Liberty Media Group Common Stock Dividend on Common Stock
Assume an aggregate of 600 million shares of Common Stock are
outstanding and the Company declares a dividend of .01 shares of Liberty
Media Group Common Stock on each outstanding share of Common Stock.
Shares previously issued and outstanding... 10 million
Newly issued shares........................ 6 million
----------
Total issued and outstanding after dividend 16 million
==========
. Any dividend of shares of Liberty Media Group Common Stock to the
holders of shares of Common Stock will be treated as a dividend
from the Number of Shares Issuable with Respect to the Retained
Interest. As a result, the Number of Shares Issuable with
Respect to the Retained Interest would decrease by the number of
shares of Liberty Media Group Common Stock distributed to the
holders of Common Stock as a dividend.
Number of Shares Issuable with Respect to the
Retained Interest prior to dividend......... 10 million
Shares distributed on outstanding shares of
Common Stock................................ 6 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after dividend............ 4 million
==========
The Company will not distribute to holders of 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
Retained Interest.
II-6
<PAGE>
. The Outstanding Interest Fraction would be 80%, calculated as follows:
16 million
----------------------
16 million + 4 million
The Retained Interest would accordingly represent an interest of
20% in the equity of the Liberty Media Group.
. The Company would have 24 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 16 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 after the Distribution of $160 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.
Shares previously issued and outstanding....... 10 million
Newly issued shares............................ 0 million
----------
Total issued and outstanding after contribution 10 million
==========
. The Number of Shares Issuable with Respect to the Retained Interest
would be increased to reflect the contribution to the Liberty
Media Group of assets theretofore attributed to the TCI Group.
Number of Shares Issuable with Respect to the
Retained Interest prior to contribution........ 10 million
Adjustment to reflect contribution to the
Liberty Media Group of assets attributed to the
TCI Group...................................... 8 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after contribution........... 18 million
==========
. The Outstanding Interest Fraction would be 36%, calculated as
follows:
10 million
-----------------------
10 million + 18 million
The Retained Interest would accordingly represent an interest of
64% in the equity of the Liberty Media Group.
. The Company would have 30 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 10 million
issued and outstanding).
II-7
<PAGE>
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 after the Distribution of $160 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.
Shares previously issued and outstanding... 10 million
Newly issued shares........................ 0 million
----------
Total issued and outstanding after transfer 10 million
==========
. The Number of Shares Issuable with Respect to the Retained Interest
would be decreased to reflect the contribution to the TCI Group
of assets theretofore attributed to the Liberty Media Group.
Number of Shares Issuable with Respect to the
Retained Interest prior to transfer......... 10 million
Adjustment to reflect transfer to the TCI
Group of assets attributed to the Liberty
Media Group................................. 8 million
----------
Number of Shares Issuable with Respect to the
Retained Interest after transfer............ 2 million
==========
The Liberty Media Group will not make transfers of assets to the TCI
Group the fair value of which exceeds the Market Value of the Number
of Shares Issuable with Respect to the Retained Interest.
. The Outstanding Interest Fraction would be 83%, calculated as
follows:
10 million
----------------------
10 million + 2 million
The Retained Interest would accordingly represent an interest of 17%
in the equity of the Liberty Media Group.
. The Company would have 30 million authorized and unissued shares of
Liberty Media Group Common Stock (40 million minus 10 million
issued and outstanding).
II-8
<PAGE>
APPENDIX III
PROPOSED AMENDMENTS
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
The first paragraph of Article IV of the Restated Certificate of
Incorporation is proposed to 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 _________________________ (______________)
shares, of which _________________________ (____________) 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 one hundred million (1,100,000,000) 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) ____________ (________) shares of Common Stock shall be of a class
designated as Liberty Media Group 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;
(d) 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;
(e) 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
(f) 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.
III-1
<PAGE>
Section E of Article IV of the Restated Certificate of Incorporation
is proposed to be amended to read in its entirety as follows:
SECTION E
CLASS A COMMON STOCK AND CLASS B COMMON STOCK; AND
LIBERTY MEDIA GROUP COMMON STOCK
Each share of the Class A Common Stock, par value $1.00 per share (the
"Class A Common Stock"), and each share of the Class B Common Stock, par value
$1.00 per share (the "Class B Common Stock"), of the Corporation shall, except
as otherwise provided in this Section E, be identical in all respects and shall
have equal rights and privileges.
________ (________) shares of Liberty Media Group Common Stock, par
value $1.00 per share (the "Liberty Media Group 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 _______ (_______) shares of Liberty
Media Group Common Stock shall be of a series designated as Series B Liberty
Media Group Common Stock (the "Series B Liberty Media Group Common Stock").
Each share of Series A Liberty Media Group Common Stock and each share of Series
B Liberty Media Group Common Stock of the Corporation 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 Class A Common Stock shall be entitled to one vote for each
share of such stock held, and holders of Class B 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 Class A Common Stock and the holders
of shares of Class B Common Stock shall vote with 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 Class A Common Stock, of Class
B 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 Class A Common Stock, the holders of shares of Class B
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 a 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
III-2
<PAGE>
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 Class A Common Stock, the holders of Class B
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 decrease the number of authorized shares of
any such 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 or the holders of shares of Series B
Liberty Media 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 CLASS B COMMON STOCK INTO CLASS A COMMON STOCK.
Each share of Class B Common Stock shall be convertible, at the option of the
holder thereof, into one share of Class A Common Stock. Any such conversion may
be effected by any holder of Class B Common Stock by surrendering such holder's
certificate or certificates for the Class B Common Stock to be converted, duly
endorsed, at the office of the Corporation or any transfer agent for the Class B
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 Class
B Common Stock represented by such certificate and stating the name or names in
which such holder desires the certificate or certificates for Class A 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 Class A 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
Class A Common Stock issuable on such conversion shall be treated for all
purposes as the record holder or holders of such Class A Common Stock on that
date. A number of shares of Class A Common Stock equal to the number of shares
of Class B Common Stock outstanding from time to time shall be set aside and
reserved for issuance upon conversion of shares of Class B Common Stock. Shares
of Class B 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 Class A Common Stock shall not be convertible
into shares of Class B Common Stock.
III-3
<PAGE>
(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 CLASS
A COMMON STOCK AND SERIES B LIBERTY MEDIA GROUP COMMON STOCK INTO CLASS B COMMON
STOCK AT THE OPTION OF THE CORPORATION. (i) At the option of the Corporation
by action of its Board of Directors, (A) each share of Series A Liberty Media
Group Common Stock shall be convertible into a number of fully paid and
nonassessable shares of Class A Common Stock equal to ___% of the Class A Market
Value 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
Class B Common Stock equal to ___% of the Class B Market Value Ratio, in each
case determined as of the fifth Trading Day prior to the date the notice of
conversion is mailed to the holders of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock.
III-4
<PAGE>
(ii) After the payment of any dividend or redemption price with
respect to the Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock pursuant to clause (i) or (ii), respectively, of
paragraph 5(b) of this Section E, the Board of Directors shall have the
authority to declare that (A) each remaining outstanding share of Series A
Liberty Media Group Common Stock shall be convertible into a number of fully
paid and nonassessable shares of Class A Common Stock equal to ___% of the Class
A Market Value Ratio, and (B) each remaining outstanding share of Series B
Liberty Media Group Common Stock shall be convertible into a number of fully
paid and nonassessable shares of Class B Common Stock equal to ___% of the Class
B Market Value Ratio, in each case determined as of the fifth Trading Day prior
to a Conversion Date prior to the first anniversary of the payment of such
dividend or redemption price (as set forth in a notice delivered in accordance
with paragraph 5(d)(ii) of this Section E 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 such series).
(iii) For purposes of this paragraph 2(c), the "Class A Market Value
Ratio" or the "Class B Market Value Ratio", as of any date, shall mean the
quotient (calculated to the nearest five decimal places) of (A) the sum of (1)
four times the average ratio of C/X for the five-Trading Day period ending on
such date, (2) three times the average ratio of C/X for the next preceding five-
Trading Day period, (3) two times the average ratio of C/X for the next
preceding five-Trading Day period and (4) the average ratio of C/X for the next
preceding five-Trading Day period, divided by (B) ten, where C is the Market
Value of one share of Series A Liberty Media Group Common Stock, in the case of
the Class A Market Value Ratio, or Series B Liberty Media Group Common Stock, in
the case of the Class B Market Value Ratio, and X is the Market Value of one
share of Class A Common Stock, in the case of the Class A Market Value Ratio, or
Class B Common Stock, in the case of the Class B Market Value Ratio.
(iv) The Corporation shall not convert shares of Series A Liberty
Media Group Common Stock into shares of Class A Common Stock without converting
shares of Series B Liberty Media Group Common Stock into shares of Class B
Common Stock, and the Corporation shall not convert shares of Series B Liberty
Media Group Common Stock into shares of Class B Common Stock without converting
shares of Series A Liberty Media Group Common Stock into shares of Class A
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 CLASS A COMMON STOCK AND CLASS B COMMON STOCK.
Dividends on the Class A Common Stock and the Class B 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 Class A Common Stock, the Corporation also shall pay to the holders
of Class B Common Stock a dividend per share at least equal to the dividend per
share
III-5
<PAGE>
paid to the holders of Class A Common Stock, and whenever a dividend is paid to
the holders of Class B Common Stock, the Corporation shall also pay to the
holders of Class A Common Stock a dividend per share at least equal to the
dividend per share paid to the holders of Class B 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 CLASSES OF COMMON STOCK OR SERIES
OF LIBERTY MEDIA GROUP 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 classes of Common
Stock in equal or unequal amounts, notwithstanding the amount of assets
available for dividends on any class, the respective voting and liquidation
rights of any class or series, the amount of prior dividends declared on any
class or series or any other factor.
4. Share Distributions.
-------------------
(a) DISTRIBUTIONS ON CLASS A COMMON STOCK AND CLASS B COMMON STOCK.
If at any time a distribution paid in Class A Common Stock, Class B 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 Class A Common
Stock or Class B Common Stock, such share distribution may be declared and paid
only as follows:
(i) a share distribution consisting of Class A Common Stock (or
Convertible Securities convertible into or exercisable for shares of Class A
Common Stock) to holders of Class A Common Stock and Class B Common Stock, on an
equal per share basis; or to holders of Class A Common Stock only, but in such
event there shall also be a simultaneous share distribution to holders of Class
B Common Stock consisting of shares of Class B Common Stock (or Convertible
Securities convertible into or exercisable for shares of Class B Common Stock)
on an equal per share basis;
III-6
<PAGE>
(ii) a share distribution consisting of Class B Common Stock (or
Convertible Securities convertible into or exercisable for shares of Class B
Common Stock) to holders of Class B Common Stock and Class A Common Stock, on an
equal per share basis; or to holders of Class B Common Stock only, but in such
event there shall also be a simultaneous share distribution to holders of Class
A Common Stock consisting of shares of Class A Common Stock (or Convertible
Securities convertible into or exercisable for shares of Class A Common Stock)on
an equal per share basis;
(iii) a share distribution consisting solely of Series A Liberty Media
Group Common Stock or solely of Series B Liberty Media Group Common Stock (or
(in either case) Convertible Securities convertible into or exercisable for
shares solely of such series) to holders of Class A Common Stock and Class B
Common Stock on an equal per share basis, or solely 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 Class A
Common Stock and 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 on a like basis) to holders of Class B Common
Stock, on an equal per share basis; provided in each case that the sum of (A)
(I) the aggregate number of shares of Series A Liberty Media Group Common Stock
to be issued (or the number of such shares which would be issuable upon
conversion or exercise of any Convertible Securities to be so issued) and (II)
the number of such shares of such series that are issuable at such time 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 Retained Interest for the Series A Liberty Media
Group Common Stock and that the sum of (B) (I) the aggregate number of shares of
Series B Liberty Media Group Common Stock to be issued (or the number of such
shares which would be issuable upon conversion or exercise of any Convertible
Securities to be so issued) and (II) the number of shares of such series that
are issuable at such time 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 Retained Interest for
the Series B Liberty Media Group Common Stock; and
(iv) a share distribution consisting of any class of securities of the
Corporation other than Class A Common Stock, Class B Common Stock, Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
(or Convertible Securities convertible or exercisable for shares solely of such
classes or series), to the holders of Class A Common Stock and the holders of
Class B Common Stock on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Class A
Common Stock without reclassifying, subdividing or combining Class B Common
Stock, on an equal per share basis, and the Corporation shall not reclassify,
subdivide or combine the Class B Common Stock without reclassifying, subdividing
or combining the Class A Common Stock, on an equal per share basis.
III-7
<PAGE>
(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 to holders of 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 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 shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock (or Convertible
Securities as aforesaid), to the holders of Series A Liberty Media Group Common
Stock and the holders of Series B Liberty Media Group Common Stock, on an equal
per share basis.
The Corporation shall not reclassify, subdivide or combine the Series
A Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series B Liberty Media Group Common Stock, on an equal per share
basis, and the Corporation shall not reclassify, subdivide or combine the Series
B Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series A Liberty Media Group Common Stock, on an equal per share
basis.
5. Redemption and Other Provisions Relating to the Series A Liberty
----------------------------------------------------------------
Media Group Common Stock and Series B Liberty Media Group Common
----------------------------------------------------------------
Stock.
-----
(a) REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. At any time at
which all of the assets and liabilities 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 Subsidiary"), 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
III-8
<PAGE>
outstanding shares of common stock of the 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 the 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)(ii). 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 of common stock of the Liberty Media Group Subsidiary with
relative voting rights similar to the relative voting rights of the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
with shares of Series A Liberty Media Group Common Stock receiving the class of
common stock of the Liberty Media Group Subsidiary with relative voting rights
similar to the relative voting rights of the Series A Liberty Media Group Common
Stock and shares of Series B Liberty Media Group Common Stock receiving the
class of common stock of the Liberty Media Group Subsidiary with relative voting
rights similar to the relative voting rights of the Series B Liberty Media Group
Common Stock, 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 the Liberty Media Group Subsidiary without distinction
between the common stock of the Liberty Media Group Subsidiary issued in
redemption of the Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock.
(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 Retained Interest for the Series A Liberty Media Group Common
Stock and the Number of Shares Issuable with Respect to the Retained Interest
for the Series B Liberty Media Group Common Stock, (y) any person, entity or
group which the Corporation, directly or indirectly, after giving affect 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
III-9
<PAGE>
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 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 such consummation
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 Class
A Common Stock equal to ___% of the average daily ratio (calculated to the
nearest five decimal places) of the Market Value of one share of Series A
Liberty Media Group Common Stock to the Market Value of one share of Class A
Common Stock during the ten-Trading Day period referred to in clause
III-10
<PAGE>
(ii) of this paragraph 5(b) and (2) each outstanding share of Series B Liberty
Media Group Common Stock into a number of fully paid and nonassessable shares of
Class B Common Stock equal to ___% 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 Class B
Common Stock during such ten-Trading Day period.
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.
(c) OTHER REDEMPTIONS. After any Conversion Date or Redemption Date
on which all outstanding shares of Series A Liberty Media Group Common Stock or
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 then-outstanding shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock were
converted into Class A Common Stock or Class B 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
III-11
<PAGE>
action had such Convertible Security been converted or exercised
immediately prior thereto; or
(ii) in the event then-outstanding shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock were
redeemed in whole pursuant to paragraph 5(b)(ii) 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 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. 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 such 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
III-12
<PAGE>
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. If the Corporation determines to undertake a redemption pursuant to
clause (ii) 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 the Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock then outstanding would be subject to redemption, (B)
the anticipated Redemption Date, (C) the kind and per share 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 shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock to be redeemed, (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 and (F) in the case
of holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities shall be eligible to participate in such redemption
only if they appropriately convert or exercise them prior to the date referred
to in clause (A) of this sentence and a statement as to what, if anything, such
holders shall be eligible to receive pursuant to the terms of such Convertible
Securities and, if applicable, paragraph 5(c) of this Section E if such holder
thereafter converts or exercises such Convertible Securities.
(ii) In the event of any conversion or redemption pursuant to
paragraph 2(c) of this Section E or pursuant to this paragraph 5 (other than
pursuant to subparagraphs (a) or (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 shares
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock shall be converted or redeemed, as the case may be, (B) the
Conversion Date or the Redemption Date, as the case may be, (C) in the event of
a partial redemption of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock pursuant to clause (ii) of paragraph 5(b) of
this Section E, the number of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock to be redeemed, (D) the kind
and per share amount of shares of capital stock or cash and/or securities or
other property to be received by such holder 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, (E) the place or places
where certificates for shares of Series A Liberty Media Group Common Stock or
Series B Liberty
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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 such capital stock or cash and/or securities or other
property and (F) in the case of a notice to holders of Convertible Securities
and a conversion of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, a statement to the effect that a holder of
such Convertible Securities shall be entitled to receive shares of Class A
Common Stock or Class B Common Stock, as applicable, only if such holder
converts or exercises 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 holder thereafter converts or exercises 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 or
Redemption Date, as the case may be, at such holder's address as the same
appears on the transfer books of the Corporation. Neither the failure to mail
such notice to any particular holder of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock or of such Convertible
Securities nor any defect therein shall affect the sufficiency thereof with
respect to any other holder of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock or of such Convertible Securities, or
the validity of such conversion or redemption.
(iii) 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 record of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock to be redeemed and of
Convertible Securities convertible into or exercisable for shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock 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 Subsidiary, (B) the Outstanding Interest Fraction, (C) the Redemption
Date, (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 to be
redeemed, 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 Subsidiary,
(E) a statement, to the effect that, subject to paragraph 5(d)(vi) of this
Section E, dividends on shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock shall cease to be paid as of such
Redemption Date, (F) the number of outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock to be redeemed
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 (G) a statement to the effect that a holder of Convertible
Securities shall only be entitled to receive shares of common stock of the
Liberty Media Group Subsidiary upon redemption if such holder converts or
exercises such Convertible Securities on or prior to the Redemption Date and
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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) this Section E if such holder thereafter converts or exercises
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, and in any case to each holder of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock to be
redeemed, at such holder's address as the same appears on the transfer books of
the Corporation. Neither the failure to mail any notice required by this
paragraph 5(d)(iii) to any particular holder of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock or of such 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 such
Convertible Securities, or the validity of such redemption.
(iv) 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 last sentence of subparagraph 5(d)(i) of this Section E.
(v) 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 same
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.
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<PAGE>
(vi) 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.
(vii) 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 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 fractional payment
contemplated by paragraph 5(d)(v). 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 converted or 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 converted or redeemed.
(viii) 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 fractional
payment contemplated by paragraph 5(d)(v) and rights to dividends as provided in
paragraph 5(d)(iv) 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
III-16
<PAGE>
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.
(ix) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of capital stock and/or other securities on conversion or
redemption of shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock pursuant to this Section E. The Corporation
shall not, however, be required to pay any tax that may be payable in respect of
any transfer involved in the issue and delivery of any shares of capital stock
in a name other than that in which the shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock so converted or
redeemed were registered and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount of
any such tax, or has established to the satisfaction of the Corporation that
such tax has been paid.
6. Liquidation.
-----------
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
Class A Common Stock and the holders of the Class B Common Stock shall share
equally, on a share for share basis, in any distribution of the Corporation's
assets upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, after payment or provisions for payment of the debts
and other liabilities of the Corporation, 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-
III-17
<PAGE>
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 any
distribution of the Corporation's assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provisions for payment of the debts and other liabilities of the Corporation,
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 Class
A Common Stock and Class B 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 Class A Common Stock, the Class B Common Stock, the Series A Liberty
Media Group Common Stock and the Series B Liberty Media Group Common Stock.
Neither the consolidation or merger of the Corporation with or into any other
Corporation or Corporations nor the sale, transfer or lease of all or
substantially all of the assets of the Corporation shall itself be deemed to be
a liquidation, dissolution or winding up of the Corporation within the meaning
of this paragraph 6.
7. Determinations by the Board of Directors.
-----------------------------------------
Any determinations made by the Board of Directors under any provision
in this Section E shall be final and binding on all stockholders of the
Corporation. 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 an exchange 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 class
or series of Common Stock,
III-18
<PAGE>
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 such date 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 such date 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.
"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.
"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 businesses, 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
III-19
<PAGE>
(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 Retained 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 one less the
Outstanding Interest Fraction in effect immediately prior to such dividend or
other distribution and the denominator of which is equal to such Outstanding
Interest Fraction 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)
$________ [an amount equal to the stockholders equity of the Corporation
attributable to the Liberty Media Group as of the end of the fiscal quarter
preceding the first issuance of the Series A Liberty Media Group Common
III-20
<PAGE>
Stock or Series B Liberty Media Group Common Stock], increased or decreased, as
appropriate, to reflect, after [the end of such fiscal quarter], (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.
"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.
"Market Value" of any class or series of capital stock of the Corporation
on any Trading 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 Trading Day or in
case no such reported sale takes place on such Trading Day the average of the
reported closing bid and asked prices regular way of a share of such class or
series 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 class or 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 class or 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 class or 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
III-21
<PAGE>
otherwise) of outstanding shares of such class or series of Common Stock or (ii)
the "ex" date or any similar date for any dividend or distribution with respect
to any such class or series of Common Stock in shares of such class or series of
Common Stock shall be appropriately adjusted to reflect such subdivision,
combination, dividend or distribution.
"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 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 Retained Interest", after
the initial issuance of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, for Series A Liberty Media Group
Common Stock shall be zero and for 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 or the Series B 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 or Series B Liberty Media Group Common Stock
and other reclassifications of Series A Liberty Media Group Common Stock or
Series B 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 or Series B 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 or Series B Liberty Media Group Common Stock
issued or delivered upon conversion or exercise of Convertible
III-22
<PAGE>
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 or Series B Liberty Media
Group Common Stock issued by the Corporation as a dividend or distribution to
holders of Class A Common Stock and Class B Common Stock, (iv) the aggregate
number of shares of Series A Liberty Media Group Common Stock or Series B
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
Class A Common Stock and Class B Common Stock and (v) the aggregate number of
shares of Series A Liberty Media Group Common Stock or Series B 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 Retained Interest for Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock,
as determined by the Board of Directors, divided by the Market Value of one
share of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, as applicable, 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 or Series B Liberty Media Group Common
Stock repurchased by the Corporation, the consideration for which is attributed
to the TCI Group, (ii) the aggregate number of shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock (rounded, if
necessary, to the nearest whole number), equal to the fair value (as determined
by the Board of Directors) of assets or properties, theretofore attributed to
the TCI Group that are contributed to the Liberty Media Group in consideration
of an increase in the Number of Shares Issuable with Respect to the Retained
Interest for Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, as determined by the Board of Directors, divided by the
Market Value of one share of Series A Liberty Media Group Common Stock or Series
B Liberty Media Group Common Stock, as applicable, as of the date of such
contribution and (iii) the aggregate number of shares of Series A Liberty Media
Group Common Stock or 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.
Whenever a change in the Number of Shares Issuable with Respect to the Retained
Interest, for Series A Liberty Media Group Common Stock and for Series B Liberty
Media Group Common Stock, as applicable, occurs, the Corporation shall prepare
and file a statement of such change with the Secretary of the Corporation.
"Outstanding Interest Fraction" with respect to the Liberty Media Group 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
III-23
<PAGE>
Stock outstanding on such date and (b) the aggregate Number of Shares Issuable
with Respect to the Retained Interest for both such series 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
primarily engaged 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.
"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 one less the Outstanding 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 Retained 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
III-24
<PAGE>
to one less the Outstanding Interest Fraction in effect immediately prior to
such dividend or other distribution and the denominator of which is equal to
such Outstanding Interest Fraction; and
(d) any assets or properties transferred from the Liberty Media Group
to the TCI Group;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group, the TCI Group shall no
longer include such assets or properties so contributed or transferred (other
than pursuant to its interest in the Liberty Media Group pursuant to clause (b)
above). If the Corporation shall pay a dividend or make some other distribution
with respect to shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock payable in Convertible Securities attributed to
the Liberty Media Group, the TCI Group shall be deemed to hold an amount of such
Convertible Securities equal to the amount so distributed multiplied by the
fraction specified in clause (c) of this definition (determined as of a time
immediately prior to such distribution), and to the extent interest or dividends
are paid on such Convertible Securities so distributable, the TCI Group shall
include a corresponding ratable amount of the kind of assets paid as such
interest or dividends in respect of the Convertible Securities so deemed to be
held by the TCI Group. The Corporation may also, to the extent such Convertible
Securities are at the time convertible 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)
$_______ [an amount equal to the stockholders equity of the Corporation
attributable to the TCI Group as of the end of the fiscal quarter preceding the
first issuance of the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock], increased or decreased, as appropriate, to
reflect, after [the end of such fiscal quarter] (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 Class A Common Stock or Class B
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
III-25
<PAGE>
the TCI Group and the aggregate par value of all outstanding shares of Class A
Common Stock and Class B 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 Common Stock is not traded on the National
Association of Securities Dealers Automated Quotations National Market System or
in the over-the-counter market.
III-26
<PAGE>
Section C of Article V of the Restated Certificate of Incorporation is
proposed to be amended 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 at least 66 2/3% of the
total voting power of the then outstanding Voting Securities (as hereinafter
defined), voting together as a single class. Except as may otherwise 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.
The term "Voting Securities" shall include the Class A Common Stock, the Class B
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.
III-27
<PAGE>
APPENDIX IV
FINANCIAL INFORMATION
INDEX TO APPENDIX IV
<TABLE>
<CAPTION>
TELE-COMMUNICATIONS, INC.
<S> <C>
Condensed Pro Forma Combined Financial Statements
Condensed Pro Forma Combined Financial Statements, September 30, 1994 (unaudited).... IV - 3
Condensed Pro Forma Combined Balance Sheet, September 30, 1994 (unaudited)........... IV - 4
Condensed Pro forma Combined Statement of Operations, Nine months
ended September 30, 1994 (unaudited)............................................... IV - 5
Condensed Pro Forma Combined Statement of Operations, Year
ended December 31, 1993 (unaudited)................................................ IV - 6
Notes to Condensed Pro Forma Combined Financial Statements,
September 30, 1994 (unaudited)..................................................... IV - 7 to IV - 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1993, 1992 and 1991............................. IV - 13 to IV - 22
Consolidated Financial Statements
Independent Auditors' Report......................................................... IV - 23
Consolidated Balance Sheets, December 31, 1993 and 1992.............................. IV - 24 to IV - 25
Consolidated Statements of Operations, Years ended December 31,
1993, 1992 and 1991................................................................ IV - 26
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 1993, 1992 and 1991................................................... IV - 27
Consolidated Statements of Cash Flows, Years ended December 31,
1993, 1992 and 1991................................................................ IV - 28 to IV - 29
Notes to Consolidated Financial Statements, December 31, 1993,
1992 and 1991...................................................................... IV - 30 to IV - 62
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Nine months ended September 30, 1994 and 1993............................ IV - 63 to IV - 70
Consolidated Financial Statements
Consolidated Balance Sheets, September 30, 1994 and
December 31, 1993 (unaudited)...................................................... IV - 71 to IV - 72
Consolidated Statements of Operations, Three months ended
September 30, 1994 and 1993 and nine months ended
September 30, 1994 and 1993 (unaudited)............................................ IV - 73
Consolidated Statement of Stockholders' Equity, Nine months ended
September 30, 1994 (unaudited)..................................................... IV - 74
Consolidated Statements of Cash Flows, Nine months ended September 30,
1994 and 1993 (unaudited).......................................................... IV - 75
Notes to Consolidated Financial Statements, September 30, 1994 (unaudited)........... IV - 76 to IV - 100
LIBERTY MEDIA CORPORATION
Consolidated Financial Statements
Independent Auditors' Report....................................................... IV - 101
Consolidated Balance Sheets, December 31, 1993 and 1992............................ IV - 102 to IV - 103
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 - 104
</TABLE>
IV-1
<PAGE>
<TABLE>
<S> <C>
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 - 105 to IV - 106
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 - 107 to IV - 108
Notes to Consolidated Financial Statements, December 31, 1993,
1992 and 1991...................................................................... IV - 109 to IV - 150
LIBERTY MEDIA GROUP
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Years ended December 31, 1993, 1992 and 1991.................. IV - 151 to IV - 165
Combined Financial Statements
Independent Auditors' Report......................................................... IV - 166
Combined Balance Sheets, December 31, 1993 and 1992.................................. IV - 167
Combined Statements of Operations and Equity, Years ended December 31, 1993,
1992 and 1991...................................................................... IV - 168
Combined Statements of Cash Flows, Years ended December 31, 1993,
1992 and 1991...................................................................... IV - 169
Notes to Combined Financial Statements, December 31, 1993,
1992 and 1991...................................................................... IV - 170 to IV - 191
QVC, INC./*/
Consolidated Financial Statements
Independent Auditors' Report......................................................... IV - 192
Consolidated Balance Sheets, January 31, 1994 and 1993............................... IV - 193
Consolidated Statements of Operations, Fiscal years ended 1993, 1992
and 1991........................................................................... IV - 194
Consolidated Statements of Cash Flows, Fiscal years ended 1993, 1992
and 1991........................................................................... IV - 195
Consolidated Statements of Shareholders' Equity...................................... IV - 196
Notes to Consolidated Financial Statements........................................... IV - 197 to IV - 213
Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 1994 and January 31, 1994 (unaudited)....... IV - 214
Consolidated Statements of Operations, three months ended October 31, 1994
and 1993 and nine months ended October 31, 1994 and 1993 (unaudited)............... IV - 215
Consolidated Statements of Cash Flows, nine months ended October 31,
1994 and 1993 (unaudited).......................................................... IV - 216
Consolidated Statement of Shareholders' Equity (unaudited)........................... IV - 217
Notes to Consolidated Financial Statements (unaudited)............................... IV - 218 to IV - 223
</TABLE>
/*/ Financial statements of business to be acquired (pursuant to Regulation
S-X, Rule 3-05).
IV-2
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
Tele-Communications, Inc. ("TCI"), dated as of September 30, 1994, assumes that
(i) the merger with TeleCable Corporation (the "TeleCable Merger"), (ii) the
investment in InterMedia Partners IV, L.P. ("IP-IV") and (iii) the transactions
whereby TCI and Comcast Corporation ("Comcast") became beneficial owners of all
the outstanding capital stock of QVC (the "QVC Transactions") had occurred as of
such date. See notes (2), (3) and (4).
The following unaudited condensed pro forma combined statements of
operations of TCI for the nine months ended September 30, 1994 and the year
ended December 31, 1993 assume that the TeleCable Merger, the investment in IP-
IV, the QVC Transactions and the transaction whereby Liberty Media Corporation
("Liberty") became a wholly-owned subsidiary of TCI (the "TCI/Liberty
Combination") (see note (1)) had occurred as of January 1, 1993.
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
TCI/Liberty Combination, the investment in IP-IV and the QVC Transactions had
occurred as of January 1, 1993. These condensed pro forma combined financial
statements of TCI should be read in conjunction with the respective historical
financial statements and the related notes thereto of TCI.
IV-3
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Balance Sheet
(unaudited)
September 30, 1994
<TABLE>
<CAPTION>
IP-IV QVC
TCI TeleCable Pro forma pro forma Transactions TCI
Assets Historical Historical(2) adjustments(2) (3) pro forma (4) Pro forma
- - - ------ ---------- ------------- -------------- --------- ------------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Cash, receivables and other $ 369 16 -- -- (7) (4) 378
current assets
Investment in affiliates and 2,218 22 -- 7 (9) 7 (4) 2,854
Turner Broadcasting System, 600 (10)
Inc., and related receivables
Property and equipment, net of 5,729 258 333 (5) -- -- 6,320
accumulated depreciation
Franchise costs, intangibles and 10,801 21 1,020 (5)
other assets, net of 783 (6) -- -- 12,625
amortization ------- ---- -------- ------- --------- -------
$19,117 317 2,136 607 -- 22,177
======= ==== ======== ======= ========= =======
Liabilities and Stockholders' Equity
- - - ------------------------------------
Payables and accruals $ 1,182 31 -- -- -- 1,213
Debt 10,654 282 -- 7 (9) -- 11,543
600 (10)
Deferred income taxes 3,729 48 783 (6) -- -- 4,560
Other liabilities 131 6 -- -- -- 137
------- ---- -------- ------- --------- ------
Total liabilities 15,696 367 783 607 -- 17,453
------- ---- -------- ------- --------- ------
Minority interests 446 3 -- -- -- 449
Series D. Preferred Stock -- -- 300 (8) -- -- 300
Stockholders' equity:
Preferred Stock -- -- -- -- -- --
Class A common stock 571 -- 42 (8) -- -- 613
Class B common stock 89 7 (7) (7) -- -- 89
Additional paid-in capital 2,833 (262) 958 (8) -- -- 3,791
262 (7)
Cumulative foreign currency
translation adjustment (5) -- -- -- -- (5)
Unrealized holding gains for
available-for sale securities 433 4 (4) (7) -- -- 433
Retained earnings (deficit) (285) 201 (201) (7) -- -- (285)
Receivable from related party (15) (3) 3 (7) -- -- (15)
Treasury stock (646) -- -- -- -- (646)
------- ---- -------- ------- -------- ------
2,975 (53) 1,053 -- -- 3,975
------- ---- -------- ------- -------- ------
$19,117 317 2,136 607 -- 22,177
======= ==== ======== ======= ======== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-4
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30, 1994
---------------------------------------------------------------------
Pro forma IP-IV QVC
TCI Liberty TeleCable adjustments Pro forma Transactions TCI
Historical Historical(1) Historical(2) (1)(2) (3) Pro forma(4) Pro forma
---------- ------------ ------------ ------------- ----------- ----------- ---------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,427 790 222 (37) (11) -- -- 4,402
Operating, selling, general
and administrative expenses
and compensation relating to
stock appreciation rights (2,080) (627) (127) 37 (11) -- -- (2,896)
Depreciation and amortization (722) (32) (34) (35) (12) -- -- (823)
------- ------- ------- ------ ------ ------ -------
Operating income 625 32 61 (35) -- -- 683
Interest expense (568) (22) (17) 12 (13) (27) (18) -- (622)
Interest and dividend income 26 15 -- (12) (13) 54 (19) -- 83
Share of earnings of Liberty 125 -- -- (125) (14) -- -- --
Share of earnings (losses) of (56) 23 -- -- 2 (20) 13 (22) (137)
affiliates, net (90) (21) (29) (23)
Gain on dispositions -- 183 -- -- -- -- 183
Other expense, net (4) (11) (1) -- -- -- (16)
------- ------- ------- ------ ------ ------ -------
Earnings before income taxes 148 220 43 (160) (61) (16) 174
Income tax expense (85) (95) (17) 65 (15) 25 (15) 6 (15) (101)
------- ------- ------- ------ ------ ------ -------
Net earnings 63 125 26 (95) (36) (10) 73
Dividend requirement on (3) (14) -- (12) (16) -- -- (21)
redeemable preferred stocks 8 (17)
------- ------- ------- ------ ------ ------ -------
Net earnings attributable
to common shareholders $ 60 111 26 (99) (36) (10) 52 (27)
======= ======= ======= ====== ====== ====== =======
Primary and fully diluted
earnings attributable to
common shareholder per
common and common
equivalent share $ .12 $ .10 (28)
======= =======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-5
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1993
-----------------------------------------------------------------------------------
Pro forma IP-IV QVC
TCI Liberty TeleCable adjustments Pro forma Transactions TCI
Historical Historical(1) Historical(2) (1)(2) (3) Pro forma(4) Pro forma
---------- ------------ ------------ ----------- --------- ----------- ---------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 4,153 1,153 287 (55) (11) -- -- 5,538
Operating, selling, general and
administrative expenses and
compensation relation to stock
appreciation rights (2,326) (1,105) (163) 55 (11) -- -- (3,539)
Depreciation and amortization (911) (49) (45) (48) (12) -- -- (1,053)
------- ------- ------- ------- ----- ------ ------
Operating income (loss) 916 (1) 79 (48) -- -- 946
Interest expense (731) (31) (24) 17 (13) (36) (18) -- (805)
Interest and dividend income 34 23 -- (17) (13) 72 (19) -- 112
Share of earnings of Liberty 4 -- -- (4) (14) -- -- --
Share of earnings (losses) of
affiliates, net (76) 34 -- -- 6 (20) 12 (22) (139)
(76) (21) (39) (23)
Gain on dispositions 42 32 2 -- -- -- 76
Loss on transactions with TCIC -- (30) -- -- -- -- (30) (26)
Loss on early extinguishment of
debt (17) (2) -- -- -- -- (19)
Other expense, net (11) (9) -- -- -- -- (20)
------- ------- ------- ------- ----- ------ ------
Earnings (loss) before income
taxes 161 16 57 (52) (34) (27) 121
Income tax expense
(168) (12) (23) 22 (15) 14 (15) 11 (15) (156)
------- ------- ------- ------- ----- ------ ------
Net earnings (loss) (7) 4 34 (30) (20) (16) (35)
Dividend requirement on redeemable
preferred stocks (2) (32) -- (17) (16) -- -- (26)
9 (17)
2 (24)
14 (25)
Net loss attributable to
common shareholders $ (9) (28) 34 (22) (20) (16) (61) (27)
======= ======= ======= ======= ===== ======= ======
Loss per common share $ (.02) $ (.10) (29)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
IV-6
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
(1) The TCI/Liberty Combination, which was consummated on August 4, 1994, was
structured as a tax free exchange whereby the common stock of TCI
Communications, Inc. (formerly Tele-Communications, Inc. or "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 a preferred
stock of TCI having designations, preferences, rights and qualifications,
limitations and restrictions substantially identical to the shares of
preferred stock being converted. 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 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 the Merger
Agreement whereby TeleCable will be merged into TCIC. Such merger was
consummated 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 will
accrue dividends at a rate of 5.5% per annum, will be convertible into 10
million shares of TCI Class A common stock. The Series D Preferred Stock
will be redeemable at the option of TCI after five years and at the option
of either TCI or the holder after ten years. Although 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, management does not believe that any such adjustments will be
material.
(3) On January 20, 1995, Tele-Vue, Viacom, IP-IV and RCS Pacific entered into
the Agreement pursuant to which RCS Pacific will 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 Agreement. A subsidiary of TCI has agreed to loan
IV-7
<PAGE>
$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 by delivery to Tele-Vue of its 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 such note, and payment of such note is
expected to be made with the proceeds of the sale of the TCI stock pledged
as collateral. TCI will guarantee that RCS Pacific will receive, upon sale
of such stock, an amount equal to the principal amount of, and accrued
interest on, the note delivered to Tele-Vue. The consummation of the
transactions contemplated by the Agreement is conditioned, among other
things, on receipt of approvals of various franchise and other governmental
authorities and receipts of "minority tax certificates" from the FCC.
There can be no assurance that such transaction will be consummated on
terms acceptable to the Company.
(4) Liberty, Comcast Corporation ("Comcast"), QVC Programming Holdings, Inc.
(the "Purchaser"), a corporation which is jointly owned by Comcast and
Liberty, and QVC, Inc. ("QVC") are parties to an Agreement and Plan of
Merger dated as of August 4, 1994, as amended (the "QVC Merger Agreement").
Pursuant to the QVC Merger Agreement, the Purchaser commenced an offer to
purchase all outstanding shares of Common Stock ("QVC Common Stock") and
Series B Preferred Stock and Series C Preferred Stock ("QVC Preferred
Stock" and together with the QVC Common Stock, the "Shares") of QVC at $46
per share of QVC Common Stock and $460 per share of QVC Preferred Stock,
net to the seller in cash, upon the terms and subject to the conditions set
forth in the Offer to Purchase, as supplemented, and the related Letters of
Transmittal (which collectively constitute the "QVC Tender Offer").
Following expiration of the QVC Tender Offer at midnight, New York City
time, on February 9, 1995, the Purchaser accepted for payment all Shares
tendered to it. The Shares tendered constituted approximately 98.7% of the
QVC Common Stock outstanding and approximately 100% and 99% of the two
classes of Preferred Stock outstanding (in each case based upon information
as to the number of Shares outstanding supplied to the Purchaser by QVC).
Previously, the Purchaser had entered into a Tender Offer Facility with
certain banks and had entered into a credit facility with QVC (the "QVC
Credit Facility") in connection with the financing of the purchase of
Shares in the QVC Tender Offer.
In connection with the acceptance of Shares for payment in the QVC Tender
Offer, Comcast, Liberty and the Purchaser entered into a Stockholders
Agreement, dated as of February 9, 1995 (the "Stockholders Agreement").
Pursuant to the Stockholders Agreement, Liberty contributed to the capital
of the Purchaser all of the Shares of QVC owned by it as well as $7 million
in cash in exchange for the issuance to it of common
IV-8
<PAGE>
stock of the Purchaser constituting approximately 42.6% of the authorized
and outstanding equity of the Purchaser. Comcast contributed to the
capital of the Purchaser all of the Shares of QVC owned by it as well as
$267 million in cash in exchange for its approximately 57.4% equity
interest in the Purchaser.
Following consummation of the QVC Tender Offer, on February 15, 1995 the
Purchaser was merged with and into QVC (the "QVC Merger"), with QVC being
the surviving corporation in the QVC Merger. In the QVC Merger, all
remaining Shares were converted into an amount of cash equal to the price
offered in the QVC Tender Offer. Following the QVC Merger, Comcast and
Liberty beneficially owned all of the outstanding capital stock of 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 (as the surviving corporation following the QVC Merger)
pursuant to such credit facility.
In connection with the transactions contemplated under the Stockholders
Agreement, TCI has undertaken to cause Liberty to comply with each of its
representations, warranties, covenants, agreements and obligations under
the Stockholders Agreement. Such undertaking 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.
TCI's ownership of QVC was received in the Mergers. 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 QVC
Tender Offer and the QVC Merger, the Company is 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 price of TeleCable to its tangible
and intangible assets. The cost allocations were estimated using
information available at the date of preparation of these condensed pro
forma combined financial statements and will be adjusted upon final
appraisal of the assets acquired. Therefore, the actual allocations may
differ from those allocations reflected herein.
(6) Represents the estimated incremental deferred income tax liability
associated with the TeleCable purchase price allocations, as described in
note (5) above. The adjustment assumes a combined federal and state income
tax rate of 41%.
(7) Represents the elimination of TeleCable's historical stockholders' deficit,
including the note receivable from the employee stock purchase plan.
Pursuant to the TeleCable Merger Agreement, any portion of such note
receivable that remains unpaid at closing will not be included in the
calculation of net liabilities to be assumed by TCI at closing.
IV-9
<PAGE>
(8) Represents the issuance by TCI to TeleCable 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 liquidation value of $300
million. See note (2) above.
(9) Represents TCI's capital contribution to IP-IV.
(10) Represents borrowings by TCI, the proceeds of which will be loaned to IP-IV
who will in turn loan the proceeds to RCS Pacific.
(11) 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 (2)
above.
(12) Represents depreciation and amortization of TeleCable's allocated excess
purchase price based upon weighted average lives of 12-1/2 years for
property and equipment and 40 years for franchise costs. See note (1).
(13) Represents the elimination of interest on intercompany indebtedness between
TCIC and Liberty. See note (1) above.
(14) Represents the elimination of TCIC's share of Liberty's historical
earnings.
(15) Reflects the estimated income tax effect of the pro forma adjustments.
(16) Represents the dividend requirements on TCI's Series D Preferred Stock
(issued in connection with the TeleCable Merger - see note 2).
(17) Represents the elimination of the preferred stock dividend requirement on
certain preferred stock of Liberty repurchased from TCIC in June of 1993.
(18) Reflects assumed interest expense on borrowing by TCI to provide a $600
million loan and $7 million capital contribution to IP-IV. Such interest
expense is calculated at the assumed rate of 6% per annum.
(19) Represents assumed interest income on note receivable described in note 9.
Such interest income is calculated at the assumed rate of 12% per annum.
(20) Represents TCI's share of historical earnings of IP-IV based upon
historical earnings of the cable television systems to be acquired by RCS
Pacific from Tele-Vue.
(21) Represents the adjustment to TCI's share of historical earnings of IP-IV to
reflect the acquisition of certain cable television systems by RCS Pacific.
Such adjustment reflects TCI's 25% interest in IP-IV through such time as
the capital contribution of the general partner of IP-IV has been reduced
to zero through allocated share of losses. After such
IV-10
<PAGE>
time, the adjustment reflects the recognition by TCI of 100% of the losses
of IP-IV. Such losses result from assumed additional depreciation and
amortization of the allocated excess purchase price and from assumed
additional interest expense on the assumed indebtedness incurred by RCS
Pacific to fund the purchase price.
(22) Reflects the incremental increase in TCI's share of QVC's historical
earnings resulting from the consummation of the QVC Transactions.
(23) Represents the adjustment to TCI's share of the pro forma loss of the
Purchaser after giving effect to the consummation of the QVC Transactions.
Such adjustment reflects the estimated incremental interest, depreciation
and amortization expense, net of income taxes, that will be incurred by the
Purchaser following the consummation of the QVC Transactions.
(24) Reflects the elimination of the preferred stock dividend requirement on
TCIC preferred stock converted into common stock of TCIC during the year
ended December 31, 1993.
(25) Represents the elimination of the preferred stock dividend requirements on
Liberty preferred stock held by TCIC converted into preferred stock of TCI.
(26) Amount not eliminated for pro forma purposes as a reserve for an impairment
would have been required (based upon fair market value of underlying asset)
equal to the loss recognized by Liberty.
(27) Should TCI elect to sell $600 million of TCI Class A common stock to RCS
Pacific and should RCS Pacific elect to pay a portion of the consideration
with a note payable in the principal amount of $600 million, net earnings
attributable to common shareholders would be $59 million (or $.09 per
share) for the nine months ended September 30, 1994 and net loss
attributable to common shareholders would be $49 million (or $.08 per
share) for the year ended December 31, 1993, respectively.
(28) Reflects primary and fully diluted earnings per common and common
equivalent share based upon 650,386,837 weighted average shares. Such
amount is calculated utilizing 517,168,689 weighted average shares of TCI
at September 30, 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 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 nine months ended September 30,
1994 because their inclusion would be anti-dilutive.
IV-11
<PAGE>
(29) Reflects loss per common share based upon 591,282,340 weighted average
shares. Such amount is calculated utilizing (i) 432,566,150 weighted
average shares of TCIC at December 31, 1993 (such amount representing
TCIC's weighted average shares, as disclosed in its historical financial
statements) reduced by 6,525,721 shares of TCIC common stock previously
held by Liberty (ii) 126,932,745 weighted averages shares of Liberty at
December 31, 1993 (such amount representing Liberty's weighted average
shares, as disclosed in its historical financial statements and Liberty
common stock repurchased from TCIC in 1993, all of which have been adjusted
by 0.975 of a share) reduced by 3,390,834 shares of Liberty common stock
(as adjusted by 0.975 of a share) previously held by TCIC and (iii) 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, 1993
because their inclusion would be anti-dilutive.
IV-12
<PAGE>
TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Summary of Operations
---------------------
The following table sets forth, for the periods indicated, the
percentage relationship that certain items bear to revenue and the percentage
increase or decrease of the dollar amount of such items as compared to the prior
period. This summary provides trend data relating to the Company's normal
recurring operations. Other items of significance are discussed separately
under the captions "Other Income and Expense", "Income Taxes" and "Net Loss"
below. Amounts set forth below reflect the Company's motion picture theatre
exhibition industry segment as discontinued operations. Additionally, amounts
set forth below have been restated to reflect the Company's implementation of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement No. 109").
<TABLE>
<CAPTION>
Relationship to Period to Period
Revenue Increase
Years ended Years ended
December 31, December 31,
------------------------- -------------------
1993 1992 1991 1992-93 1991-92
------ -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 16.2% 11.2%
Operating costs and
expenses before
depreciation and
amortization 56.0 54.4 55.5 19.5% 9.1%
Depreciation and amortization 21.9 21.4 23.5 19.2% 1.1%
----- ----- -----
Operating income 22.1% 24.2% 21.0% 6.0% 28.2%
===== ===== =====
</TABLE>
Revenue increased by approximately 16.2% 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 Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"). Revenue increased 11.2% from 1991 to 1992.
Approximately 3% to 5% of such increase resulted from growth in subscriber
levels within the Company's cable television systems and additional services
sold to existing customers and 5% to 7% resulted from increases in prices
charged for cable services. In 1994, the Company anticipates that it will
experience a
IV-13
<PAGE>
decrease in the price charged for those services that are subject to rate
regulation under the 1992 Cable Act. See related discussion below.
Operating costs and expenses have historically remained relatively
constant as a percentage of revenue. However, operating costs and expenses
increased in 1993 primarily as a result of an acquisition in late 1992.
Additionally, in 1993, the Company incurred certain one-time direct charges
relating to the implementation of the new Federal Communications Commission
("FCC") regulations, as further described below. 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.
In 1992, the Company experienced an improvement in its operating costs
and expenses due primarily to certain efficiencies and cost savings arising from
the integration of the operations and management of United Artists Entertainment
Company ("UAE") upon TCI's acquisition in late 1991 of the remaining minority
interests in the equity of UAE. Additionally, 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.
The Company cannot determine whether and to what extent increases in
the cost of programming will effect its operating costs. Additionally, the
Company cannot predict how these increases in the cost of programming will
affect its revenue but intends to recover additional costs to the extent allowed
by the FCC's rate regulations as described below.
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.
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993, the
FCC adopted certain rate regulations required by the 1992 Cable Act and imposed
a moratorium on certain rate increases. Such rate regulations became effective
on September 1, 1993. The rate increase moratorium, which began on April 5,
1993, continues in effect through May 15, 1994 for franchise areas not subject
to regulation. 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
IV-14
<PAGE>
competition" or to services offered on an individual service basis, such as
premium movie and pay-per-view services.
The Company's new rates for Regulated Services, which were implemented
September 1, 1993, are subject to review by the FCC if a complaint has been
filed or the appropriate local franchising authority if such authority has been
certified. The Company estimated that, on an annualized basis, implementation
of the 1993 rate regulations would result in a reduction to revenue ranging from
$140 million to $160 million. The Company experienced a $44 million revenue
reduction during the four months ended December 31, 1993 and incurred $21
million in one-time direct expenses in connection with the implementation of the
FCC's regulations.
On February 22, 1994, the FCC announced that it had adopted revised
benchmark rate regulations which will apply to rates and charges for Regulated
Services on and after the effective date of these rules. After its initial
review of the effect of the FCC further rate reductions, the Company estimated
that its revenue could be further decreased by approximately $144 million on an
annualized basis. The estimate was based upon the FCC Executive Summary dated
February 22, 1994 which stated that those cable television systems electing not
to make a cost-of-service showing will be required to set their rates for
Regulated Services at a level equal to the higher of the FCC's revised benchmark
rates or the operator's September 30, 1992 rates minus 17 percent. Thus, the
revised benchmarks may result in additional rate reductions of up to 7 percent
beyond the maximum reductions established under the FCC's initial benchmark
regulations. Although the text of the FCC's revised benchmark regulation has
not been released, it is currently anticipated that the rules will take effect
on or about May 15, 1994. The actual reduction in revenue may differ depending
on the terms of the final regulations and the completion of a more detailed
analysis of the new rate regulations and the Company's rates and services.
The estimated reductions in revenue resulting from the FCC's actions
in 1993 and 1994 are 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.
The FCC's benchmark rate regulations permit cable operators to adjust
rates to account for inflation and increases in certain external costs,
including increases in programming costs and compulsory copyright fees, to the
extent such increases exceed the rate of inflation. However, these increases
may be required to be offset by a productivity factor.
The revised benchmark regulations also provide a mechanism for
adjusting rates when regulated tiers are affected by channel additions or
deletions. The FCC has indicated that cable operators adding or deleting
channels on a regulated tier will be required to adjust the per-channel
benchmark for that tier based on the number of channels offered after the
addition or deletion. The FCC also stated that the additional programming costs
resulting from channel additions will be accorded the same external treatment as
other program cost increases, and that cable operators will be permitted to
recover a mark-up on their programming expenses.
IV-15
<PAGE>
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. Under this methodology, cable operators
may recover, through the rates they charge for Regulated Services, their normal
operating expenses plus an interim rate of return of 11.25%, which rate may be
subject to change in the future.
Based on the foregoing, the Company believes that the 1993 and 1994
rate regulations will have a material adverse effect on its results of
operations.
Other Income and Expense
------------------------
The Company's weighted average interest rate on borrowings was 7.2%,
7.6% and 9.0% during 1993, 1992 and 1991, respectively. At December 31, 1993,
after considering the net effect of various interest rate hedge and exchange
agreements (see note 6 to the consolidated financial statements) aggregating
$1,322 million, the Company had $5,123 million (or 52%) of fixed-rate debt with
a weighted average interest rate of 9.0% and $4,777 million (or 48%) of
variable-rate debt with interest rates approximating the prime rate (6% at
December 31, 1993).
The Company is a partner in certain joint ventures that are currently
operating and constructing cable television and telephone systems in the United
Kingdom and other parts of Europe. These joint ventures, which are accounted
for under the equity method, have generated losses of which the Company's share
in 1993 and 1992 amounted to $47 million and $37 million, respectively,
including $3 million and $6 million in 1993 and 1992, respectively, resulting
from foreign currency transaction losses. In contrast to the Company's domestic
operations, the Company's results of operations in the United Kingdom and Europe
will continue to be subject to fluctuations in the applicable foreign currency
exchange rates. At December 31, 1993, the Company's stockholders' equity
includes a cumulative foreign currency translation loss of $29 million.
The Company sold certain investments and other assets for an aggregate
net pre-tax gain of $42 million, $9 million and $43 million in 1993, 1992 and
1991, respectively.
During 1993, 1992 and 1991, the Company recorded losses of $17
million, $67 million and $7 million, respectively, from early extinguishment of
debt during such periods. 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 $34 million, $69 million and $53
million in 1993, 1992 and 1991, respectively. Included in the 1992 and 1991
amounts was $30 million and $26 million, respectively, 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.
IV-16
<PAGE>
Income Taxes
------------
The Company has adopted Statement No. 109. Statement No. 109 changed
the Company's method of accounting for income taxes from the deferred method to
the asset and liability method. The Company restated its financial statements
for the years beginning January 1, 1986 through December 31, 1992. The effect
of the implementation of Statement No. 109 at December 31, 1992 was a $2 million
decrease in receivables, $48 million net increase in investments, $178 million
net increase in property and equipment, $2,901 million net increase in franchise
costs, $2 million increase in other assets, $34 million increase in other
liabilities, $2,865 million increase in deferred taxes payable and $228 million
decrease in accumulated deficit. Under Statement No. 109, the effect on
deferred taxes of a change in tax rates is recognized in the consolidated
statement of operations in the period that includes the enactment.
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 the Company's income tax expense and deferred income tax liability.
Net Loss
--------
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.
The Company's earnings from continuing operations (before preferred
stock dividends) for 1992 of $7 million represented an improvement as compared
to the Company's loss from continuing operations of $78 million for the
corresponding period of 1991 due primarily to improved operating results by the
Company in its cable television business. Also, the general decline in interest
rates had a positive impact on the Company's net results.
On March 28, 1991, the Company contributed its interests in certain of
its cable television programming businesses and cable television systems to
Liberty Media Corporation ("Liberty") in exchange for several different classes
and series of preferred stock of Liberty. On that same date, Liberty issued
shares of its common stock to TCI shareholders (certain of whom were TCI
officers and directors) who tendered shares of TCI Class A and Class B
IV-17
<PAGE>
common stock pursuant to an exchange offer (see note 3 to the accompanying
consolidated financial statements). Due to the significant economic interest
held by TCI through its ownership of Liberty preferred stock and Liberty common
stock and other related party considerations, TCI has accounted for its
investment in Liberty under the equity method. The Company does not recognize
any income relating to dividends, including preferred stock dividends, and the
Company has continued to record earnings or losses generated by the interests
contributed to Liberty (by recognizing 100% of Liberty's earnings or losses
before deducting preferred stock dividends). Consequently, the contribution of
such assets to Liberty has had no effect on the net reported results of the
Company. For a discussion of the proposed merger of Liberty and TCI, see
Liquidity and Capital Resources below.
On May 12, 1992, the Company sold its motion picture theatre business
and certain theatre-related real estate assets (see note 12 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, 1993.
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. 114, "Accounting by Creditors for Impairment of a Loan"
("Statement No. 114"). As the Company's present accounting policies generally
are in conformity with the provisions of Statement No. 114, the Company does not
expect that Statement No. 114 will have a material effect on the Company's
consolidated financial statements. Statement No. 114 is effective for years
beginning after December 15, 1994.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December 15, 1993.
Under the new rules, debt securities that the Company has both the positive
intent and ability to hold to maturity are carried at amortized cost. Debt
securities that the Company does not have the positive intent and ability to
hold to maturity and all marketable equity securities are classified as
available-for-sale or trading and carried at fair value. Unrealized holding
gains and losses on securities classified as available-for sale are
IV-18
<PAGE>
carried as a separate component of shareholders' equity. Unrealized holding
gains and losses on securities classified as trading are reported in earnings.
The Company holds no material debt securities. Marketable equity
securities are currently reported by the Company at the lower of cost or market
("LOCOM") and net unrealized losses are reported in earnings. The Company will
apply the new rules starting in the first quarter of 1994. Application of the
new rules will result in an estimated increase of approximately $300 million in
stockholders' equity as of January 1 1994, representing the recognition of
unrealized appreciation, net of taxes, for the Company's investment in equity
securities determined to be available-for-sale, previously carried at LOCOM.
Liquidity and Capital Resources
-------------------------------
On January 31, 1994, TCI announced that TCI and Liberty had entered
into a definitive agreement (the "TCI/Liberty Agreement"), dated as of January
27, 1994 to combine the two companies. As previously announced, the transaction
will be structured as a tax free exchange of Class A and Class B shares of both
companies and preferred stock of Liberty for like shares of a newly formed
holding company, TCI/Liberty Holding Company ("TCI/Liberty"). TCI shareholders
will receive one share of TCI/Liberty for each of their shares. Liberty common
shareholders will receive 0.975 of a share of TCI/Liberty for each of their
common shares. The transaction is subject to the approval of both sets of
shareholders as well as various regulatory approvals and other customary
conditions. Subject to timely receipt of such approvals, which cannot be
assured, it is anticipated the closing of such transaction will take place
during 1994.
The Company generally finances acquisitions and capital expenditures
through net cash provided by operating and financing activities. Although
amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities, the borrowing capacity resulting from such
acquisitions, construction and internal growth has been and is expected to
continue to be adequate to fund the shortfall. See the Company's consolidated
statements of cash flows included in the accompanying consolidated financial
statements.
The Company had approximately $2.2 billion in unused lines of credit
at December 31, 1993, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although the Company was in
compliance with the restrictive covenants contained in its credit facilities at
said date, additional borrowings under the credit facilities are subject to the
Company's 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). Based upon preliminary calculations,
the Company believes that the aforementioned 1993 and 1994 rate regulations will
not materially impact the availability under its lines of credit or its ability
to repay indebtedness as it matures. See note 6 to the accompanying
consolidated financial statements for additional information regarding the
material terms of the Company's lines of credit.
IV-19
<PAGE>
In October of 1992, the Company received full investment grade status
by all accredited rating agencies. Such ratings added to the Company's ability
to sell publicly greater amounts of fixed-rate debt securities with longer
maturities. The increased maturities of the debt securities sold by the Company
and the use of the proceeds of such sales to decrease bank borrowings are
expected to improve the Company's liquidity due to decreased principal payments
required in the next five years.
During the year ended December 31, 1993, the Company sold $3 billion
of publicly-placed fixed-rate senior notes with interest rates ranging from
4.81% to 9.25% and maturity dates ranging from 1995 to 2023. The proceeds from
the sale of these notes were used to repay variable-rate bank debt.
On October 28, 1993, the Company called for redemption all 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 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.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of operating
income before depreciation, amortization and other non-cash operating expenses
($1,858 million, $1,637 million and $1,430 million in 1993, 1992 and 1991,
respectively) to interest expense ($731 million, $718 million and $826 million
in 1993, 1992 and 1991, respectively), is determined by reference to the
consolidated statements of operations. The Company's interest coverage ratio
was 254%, 228% and 173% for 1993, 1992 and 1991, 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,
more than half of which results from fixed rate indebtedness. The Company's
improved operating results in 1993 and 1992 and a general decline in interest
rates during 1992 led to an improvement in the Company's interest coverage
ratio.
As security for borrowings under one of its credit facilities, the
Company pledged a portion of the common stock it holds of Turner Broadcasting
System, Inc. having a value of approximately $643 million at December 31, 1993.
Borrowings under this credit facility (which amounted to $250 million at
December 31, 1993) are due in August of 1994. On or before such date, the
Company expects to repay these borrowings.
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 for franchise renewal. However, in the event they are renewed, the Company
cannot predict the
IV-20
<PAGE>
impact of any new or different conditions that might be imposed by the
franchising authorities in connection with such renewals.
The Company is upgrading and installing optical fiber in its cable
systems at a rate such that in three 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 $947 million in 1993 and the
Company's capital budget for 1994 is $1.2 billion to provide for the continued
rebuilding of its cable systems. The Company has suspended $500 million of its
1994 capital spending pending further clarification of the FCC's February 22,
1994 revised benchmark regulations and the FCC's announced intention to adopt an
experimental incentive plan which would provide cable operators with incentives
to upgrade their systems and offer new services.
The Company is obligated to pay fees for the license to exhibit
certain qualifying films that are released theatrically by various motion
picture studios from January 1, 1993 through December 31, 2002 (the "Film
License Obligations"). The aggregate minimum liability under certain of the
license agreements is approximately $105 million. The aggregate amount of the
Film License Obligations under other license agreements is not currently
estimable because such amount is dependent upon the number of qualifying films
produced by the motion picture studios, the amount of United States theatrical
film rentals for such qualifying films, and certain other factors.
Nevertheless, the Company's aggregate payments under the Film License
Obligations could prove to be significant.
The Company 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. 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 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'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.
Certain subsidiaries' loan agreements contain restrictions regarding
transfers of funds to the parent company in the form of loans, advances or cash
dividends. The amount of net assets of such subsidiaries exceeds the Company's
consolidated net assets. However, net cash provided by operating activities of
other 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.
IV-21
<PAGE>
Management believes that net cash provided by operating activities,
the Company's ability to obtain additional financing (including its available
lines of credit and its access to public debt markets as an investment grade
debt security issuer) and proceeds from disposition of assets will provide
adequate sources of short-term and long-term liquidity in the future.
IV-22
<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, 1993 and 1992, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1993.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tele-Communications,
Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Denver, Colorado
March 21, 1994
IV-23
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1993 and 1992
<TABLE>
<CAPTION>
Assets 1993 1992*
- - - ------------------------------------------------------- --------- ---------
<S> <C> <C>
amounts in millions
Cash $ 1 34
Trade and other receivables, net 232 201
Media Corporation
("Liberty") (note 3) 489 432
Investment in other affiliates, accounted for under
the equity method, and related receivables (note 4) 645 721
Investment in Turner Broadcasting System, Inc.
(note 5) 491 491
Property and equipment, at cost:
Land 73 71
Distribution systems 6,629 6,075
Support equipment and buildings 818 712
------- ------
7,520 6,858
Less accumulated depreciation 2,585 2,296
------- ------
4,935 4,562
------- ------
Franchise costs 10,620 10,467
Less accumulated amortization 1,423 1,167
------- ------
9,197 9,300
------- ------
Other assets, at cost, net of amortization 530 569
------- ------
$16,520 16,310
======= ======
*Reclassified and restated - see notes 1, 3 and 10.
</TABLE>
IV-24
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
<TABLE>
<CAPTION>
1993 1992*
---------- ---------
Liabilities and Stockholders' Equity amounts in millions
- - - ------------------------------------
<S> <C> <C>
Accounts payable $ 124 99
Accrued interest 157 94
Other accrued expenses 500 465
Debt (note 6) 9,900 10,285
Deferred income taxes (note 10) 3,310 3,164
Other liabilities 114 87
------- ------
Total liabilities 14,105 14,194
------- ------
Minority interests in equity of consolidated subsidiaries 285 280
Redeemable preferred stocks (note 7) 18 110
Stockholders' equity (note 8):
Preferred stock, $1 par value.
Authorized 10,000,000 shares, issued and outstanding
6,201 and 4,778,595 shares of redeemable preferred
stocks in 1993 and 1992 -- --
Class A common stock, $1 par value.
Authorized 1,000,000,000 shares; issued 481,837,347
shares in 1993 and 461,722,382 shares in 1992 482 462
Class B common stock, $1 par value.
Authorized 100,000,000 shares; issued 47,258,787 shares
in 1993 and 47,708,677 shares in 1992 47 48
Additional paid-in capital 2,293 1,909
Cumulative foreign currency translation adjustment (29) (19)
Accumulated deficit (348) (341)
------- ------
2,445 2,059
Treasury stock, at cost (79,335,038 shares of Class A
common stock) (333) (333)
------- ------
Total stockholders' equity 2,112 1,726
------- ------
Commitments and contingencies (note 11)
$16,520 16,310
======= ======
</TABLE>
*Restated and reclassified - see notes 1, 3 and 10.
See accompanying notes to consolidated financial statements.
IV-25
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 * 1991 *
-------- -------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue (note 3) $4,153 3,574 3,214
Operating costs and expenses:
Operating (note 3) 1,190 1,028 1,021
Selling, general and administrative (note 4) 1,105 909 763
Compensation relating to stock appreciation rights 31 1 --
(note 8)
Restructuring charge -- 8 --
Depreciation 622 512 529
Amortization 289 252 227
------ ------ ------
3,237 2,710 2,540
------ ------ ------
Operating income 916 864 674
Other income (expense):
Interest expense (731) (718) (826)
Interest and dividend income 34 69 53
Share of earnings of Liberty (note 3) 4 22 40
Share of losses of other affiliates (note 4) (76) (105) (60)
Gain on disposition of assets, net 42 9 43
Premium received on redemption of preferred stock
investment (note 4) -- 14 --
Loss on early extinguishment of debt (notes 4 and 6) (17) (67) (7)
Minority interests in earnings of
consolidated subsidiaries, net (5) (41) (24)
Other, net (6) (2) (1)
------- ------- ------
(755) (819) (782)
------- ------- ------
Earnings (loss) from continuing operations before
income taxes 161 45 (108)
Income tax benefit (expense) (note 10) (168) (38) 30
------- ------- ------
Earnings (loss) from continuing operations (7) 7 (78)
Loss from discontinued operations, net of -- (15) (19)
income taxes (note 12) ------ ------- ------
Net loss (7) (8) (97)
Dividend requirement on redeemable preferred stocks (2) (15) --
------ ------ ------
Net loss attributable to
common shareholders $ (9) (23) (97)
======= ======= ======
Loss attributable to common shareholders per common
share (note 1):
Continuing operations $(.02) (.01) (.22)
Discontinued operations -- (.04) (.05)
------ ------ ------
$(.02) (.05) (.27)
====== ====== ======
</TABLE>
*Restated and reclassified - see notes 1, 3 and 10.
See accompanying notes to consolidated financial statements.
IV-26
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
Cumulative
foreign
Common stock Additional currency Total
------------------ paid-in translation Accumulated Treasury stockholders'
Class A Class B capital adjustment deficit * stock equity *
-------- -------- ----------- ---------------- ------------ --------- --------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 $310 48 626 -- (436) -- 548
Restatement for change in
accounting principle for
income taxes -- -- -- -- 200 -- 200
------- ------- ----- ------- -------- -------- -----
Balance at January 1, 1991,
as restated 310 48 626 -- (236) -- 748
Net loss -- -- -- -- (97) -- (97)
Issuance of common stock upon
conversion of debentures -- -- 4 -- -- -- 4
Issuance of common stock upon
exercise of options -- 2 3 -- -- -- 5
Income tax effect of stock option
deduction -- -- 7 -- -- -- 7
Retirement of common stock upon
redemption of Liberty preferred
stock (5) -- (86) -- -- -- (91)
Issuance of shares of Class A
common stock for an acquisition 1 -- 10 -- -- -- 11
Issuance of common stock
upon acquisition of remaining
minority interest in United
Artists Entertainment Company
("UAE") 143 -- 1,190 -- -- (333) 1,000
Acquisition and retirement
of common stock -- (1) (16) -- -- -- (17)
------- ------- ----- ------- -------- -------- -----
Balance at December 31, 1991 449 49 1,738 -- (333) (333) 1,570
Net loss -- -- -- -- (8) -- (8)
Conversion of public debentures
(note 6) 7 -- 105 -- -- -- 112
Issuance of common stock upon
exercise of options 1 -- 13 -- -- -- 14
Issuance of Class A common stock
for acquisition and
investment 5 -- 93 -- -- -- 98
Dividends on redeemable
preferred stocks -- -- (15) -- -- -- (15)
Foreign currency translation
adjustment -- -- -- (19) -- -- (19)
Acquisition and retirement
of common stock -- (1) (25) -- -- -- (26)
------- ------- ----- ------- -------- -------- -----
Balance at December 31, 1992 462 48 1,909 (19) (341) (333) 1,726
Net loss -- -- -- -- (7) -- (7)
Issuance of common stock
upon conversion of notes
(note 6) 20 -- 383 -- -- -- 403
Issuance of common stock upon
exercise of options -- -- 7 -- -- -- 7
Dividends on redeemable
preferred stocks -- -- (2) -- -- -- (2)
Foreign currency translation
adjustment -- -- -- -- -- (10)
Acquisition and retirement
of common stock -- (1) (4) -- -- -- (5)
------- ------- ----- ------- -------- -------- -----
Balance at December 31, 1993 $482 47 2,293 (29) (348) (333) 2,112
======= ======= ===== ======= ======== ======== =====
</TABLE>
*Restated - see notes 1, 3 and 10.
See accompanying notes to consolidated financial statements.
IV-27
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 * 1991 *
------ ------ -------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7) (8) (97)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Discontinued operations -- 15 19
Restructuring charge -- 8 --
Payment of restructuring charge (8) -- --
Depreciation and amortization 911 764 756
Share of earnings of Liberty (4) (22) (40)
Share of losses of other affiliates 76 105 60
Gain on disposition of assets (42) (9) (43)
Premium received on preferred stock
investment redemption -- (14) --
Payment of premium received on preferred
stock investment redemption 14 -- --
Loss on early extinguishment of debt 17 67 7
Compensation relating to
stock appreciation rights 31 1 --
Payment for stock appreciation rights -- (80) (45)
Minority interests in earnings 5 41 24
Deferred income tax expense (benefit) 139 28 (39)
Amortization of debt discount 27 27 16
Noncash interest and dividend income (7) (40) (28)
Other noncash charges -- -- (2)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables (32) (3) (36)
Change in accrued interest 63 -- (14)
Change in other accruals and payables 68 77 45
------ ------ ------
Net cash provided by
operating activities 1,251 957 583
------ ------ ------
</TABLE>
(continued)
IV-28
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
1993 1992 * 1991 *
------- ------------ --------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from investing activities:
Cash paid for acquisitions (158) (1,256) (399)
Capital expended for property and equipment (947) (526) (566)
Cash proceeds from disposition of assets 149 66 103
Cash proceeds from disposition of
discontinued operations -- 220 --
Discontinued operations -- 9 31
Additional investments in and loans to
affiliates and others (361) (205) (192)
Payment received on preferred stock
investment redemption 183 -- --
Return of capital from affiliates 1 1 34
Repayment of loans by affiliates and others 62 32 35
Other investing activities (99) (155) (138)
------ ------ ------
Net cash used in
investing activities (1,170) (1,814) (1,092)
------ ------ ------
Cash flows from financing activities:
Borrowings of debt 6,305 5,354 5,918
Repayments of debt (6,321) (4,435) (5,412)
Borrowings of short-term notes to affiliate -- -- 22
Repayment of short-term notes to affiliate -- (22) --
Sales of equity securities of subsidiaries -- -- 9
Preferred stock dividends of subsidiaries (6) (6) (19)
Preferred stock dividends (2) (15) --
Repurchase of preferred stock (92) (5) --
Issuances of common stock 6 7 2
Repurchases of common stock (4) (19) (9)
------ ------ ------
Net cash provided (used) by
financing activities (114) 859 511
------ ------ ------
Net increase (decrease) in cash (33) 2 2
Cash at beginning of year 34 32 30
------ ------ ------
Cash at end of year $ 1 34 32
====== ====== ======
</TABLE>
*Restated and reclassified - see notes 1, 3 and 10.
See accompanying notes to consolidated financial statements.
IV-29
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(1) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Tele-
Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or
the "Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
Restated Financial Statements for Implementation of Statement of Financial
--------------------------------------------------------------------------
Accounting Standards No. 109, "Accounting 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
January 1, 1986. The accompanying 1992 and 1991 consolidated financial
statements and related notes have been restated to reflect the
implementation of Statement No. 109. See note 10.
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1993 and 1992 was not material.
Investments
-----------
Investments in which the ownership interest is less than 20% are generally
carried at cost. Investments in marketable equity securities are carried
at the lower of aggregate cost or market and any declines in value which
are other than temporary are reflected as a reduction in the Company's
carrying value of such investment. For those investments in affiliates in
which the Company's voting interest is 20% to 50%, the equity method of
accounting is generally used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize the Company's share
of the net earnings or losses of the affiliates as they occur rather than
as dividends or other distributions are received, limited to the extent of
the Company's investment in, advances to and guarantees for the investee.
The Company's share of net earnings or losses of affiliates includes the
amortization of purchase adjustments.
(continued)
IV-30
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Property and Equipment
----------------------
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including
interest during construction and applicable overhead, are capitalized.
During 1993, 1992 and 1991, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for
support equipment and buildings. Beginning in April of 1993, based upon
changes in Federal Communications Commission ("FCC") regulations, the
Company revised its estimate of useful lives of certain distribution
equipment to correspond to the Company's anticipated remaining period of
ownership of such equipment. This revision resulted in a decrease to net
earnings of approximately $12 million ($.03 per share) for the year ended
December 31, 1993.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or
other dispositions of property, the original cost and cost of removal of
such property are charged to accumulated depreciation, and salvage, if any,
is credited thereto. Gains or losses are only recognized in connection
with the sales of properties in their entirety. However, recognition of
gains on sales of properties to affiliates accounted for under the equity
method is deferred in proportion to the Company's ownership interest in
such affiliates.
Franchise Costs
---------------
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years.
Costs incurred by the Company in obtaining franchises are being amortized
on a straight-line basis over the life of the franchise, generally 10 to 20
years.
Minority Interests
------------------
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the common equity of those consolidated subsidiaries. Further,
the minority interests' share of losses is not recognized if the minority
holders of common equity of consolidated subsidiaries have the right to
cause the Company to repurchase such holders' common equity.
(continued)
IV-31
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Included in minority interests in equity of consolidated subsidiaries are
$50 million and $46 million at December 31, 1993 and 1992, respectively, of
preferred stocks (and accumulated dividends thereon) of certain
subsidiaries. The current dividend requirements on these preferred stocks
aggregate $6 million per annum and such dividend requirements are reflected
as minority interests in the accompanying consolidated statements of
operations.
Foreign Currency Translation
----------------------------
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement of
operations items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity.
Loss Per Common Shares
----------------------
The loss per common share for 1993, 1992 and 1991 was computed by dividing
net loss by the weighted average number of common shares outstanding during
such periods (432.6 million, 424.1 million and 359.9 million for 1993, 1992
and 1991, respectively). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their inclusion
would be anti-dilutive.
Reclassification
----------------
Certain amounts have been reclassified for comparability with the 1993
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $641 million, $689 million and $829 million for
1993, 1992 and 1991, respectively. Also, during these years, cash paid for
income taxes was not material.
(continued)
IV-32
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1993 1992 1991
------- ------- ---------
amounts in millions
<S> <C> <C> <C>
Acquisitions:
Fair value of assets acquired $ 172 1,231 1,877
Liabilities assumed, net of current assets (7) 21 (12)
Deferred tax asset (liability)
recorded in acquisitions (7) 7 (337)
Minority interests in equity
of acquired entities -- -- (3)
Value of TCI preferred stock issued
in acquisitions -- -- (115)
Value of TCI common stock issued
in acquisitions -- (3) (1,011)
------ ----- --------
Cash paid for acquisitions $ 158 1,256 399
====== ===== ========
Value of TCI Class A common stock issued
as part of purchase price of equity
investment $ -- 95 --
====== ===== ========
Note received upon disposition of assets $ -- 15 --
====== ===== ========
Contribution of certain interests
to Liberty in exchange for
preferred stock (see note 3) $ -- -- 530
====== ===== ========
Common stock received upon
redemption of preferred stock
of Liberty (see note 3) $ -- -- 91
====== ===== ========
</TABLE>
IV-33
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1993 1992 1991
-------- ------ ------
amounts in millions
<S> <C> <C> <C>
Receipt of notes receivable upon
disposition of Liberty common stock
and preferred stock (note 3) $ 182 -- --
======== ====== ======
Noncash capital contribution to
Community Cable Television ("CCT")
(note 3) $ 22 -- --
======== ====== ======
Noncash exchange of equity investment
for consolidated subsidiary and
equity investment $ 22 -- --
======== ====== ======
Contribution of assets to an affiliate $ -- -- 108
======== ====== ======
Effect of foreign currency translation
adjustment on book value of
foreign equity investments $ 10 19 --
======== ====== ======
Common stock issued upon conversion
of notes (with accrued
interest through conversion) $ 403 112 4
======== ====== ======
Common stock surrendered in lieu
of cash upon exercise of
stock options $ 1 7 3
======== ====== ======
Note payable issued for
repurchase of common stock $ -- -- 5
======== ====== ======
Exchange of preferred stock investment
for marketable equity securities $ -- -- 156
======== ====== ======
Deferred tax liability resulting from
stock option deduction $ -- -- 7
======== ====== ======
</TABLE>
(continued)
IV-34
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(3) Investment in Liberty
---------------------
As of January 27, 1994, TCI and Liberty entered into a definitive agreement
to combine the two companies. The transaction will be structured as a tax
free exchange of Class A and Class B shares of both companies and preferred
stock of Liberty for like shares of a newly formed holding company,
TCI/Liberty Holding Company ("TCI/Liberty"). TCI shareholders will receive
one share of TCI/Liberty for each of their shares. Liberty common
shareholders will receive 0.975 of a share of TCI/Liberty for each of their
common shares. The transaction is subject to the approval of both sets of
shareholders as well as various regulatory approvals and other customary
conditions. Subject to timely receipt of such approvals, which cannot be
assured, it is anticipated the closing of such transaction will take place
during 1994.
TCI owns 3,477,778 shares of Liberty Class A common stock (after giving
effect to the repurchase by Liberty during the year ended December 31, 1993
of 927,900 shares of Class A common stock) and 55,070 shares of Liberty
Class E, 6% Cumulative Redeemable Exchangeable Junior Preferred Stock
received in January of 1993 upon conversion of the Liberty Class A
Redeemable Convertible Preferred Stock. Such common shares represent less
than 5% of the outstanding Class A common stock of Liberty.
Of the remaining classes of preferred stock of Liberty held by the Company,
one class entitles TCI to elect a number of members of Liberty's board of
directors equal to no less than 11% of the total number of directors and
another class is exchangeable for TCI common stock.
Due to the significant economic interest held by TCI through its ownership
of Liberty preferred stock and Liberty common stock and other related party
considerations, TCI has accounted for its investment in Liberty under the
equity method. Accordingly, the Company has not recognized any income
relating to dividends, including preferred stock dividends, and the Company
has continued to record the earnings or losses generated by the interests
contributed to Liberty (by recognizing 100% of Liberty's earnings or losses
before deducting preferred stock dividends).
(continued)
IV-35
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
On December 30, 1991, TCI Liberty, Inc. ("TCIL"), a wholly-owned subsidiary
of TCI, entered into a Commercial Paper Purchase Agreement with Liberty
whereby TCIL could from time to time sell short-term notes to Liberty from
TCIL of up to an aggregate amount of $100 million. TCIL borrowed $22
million from Liberty on December 31, 1991, pursuant to the Commercial Paper
Purchase Agreement. The full amount, including interest, was repaid on
January 15, 1992. Interest rates on the short-term notes were determined
by the parties by reference to prevailing money-market rates. This
agreement was terminated on March 23, 1993.
During 1992, the Company and Liberty formed CCT, a general partnership
created for the purpose of acquiring and operating cable television systems
with Tele-Communications of Colorado, Inc. ("TCIC"), an indirect wholly-
owned subsidiary of TCI, owning a 49.999% interest and Liberty Cable
Partner, Inc. ("LCP"), an indirect wholly-owned subsidiary of Liberty,
owning a 50.001% interest.
Pursuant to an amendment to the CCT General Partnership Agreement (the
"Amendment"), certain non-cash contributions previously made to CCT were
rescinded, TCIC contributed to CCT a $10,590,000 promissory note of TCI
Development Corporation ("TCID") as of the date of the originally
contributed assets, and LCP agreed to contribute its equity and debt
interests in Daniels & Associates Partners Limited ("DAPL"), a general
partner of Mile Hi Cablevision Associates, Ltd. ("Mile Hi"), to CCT
immediately prior to the closing of the acquisition of Mile Hi described
below which closed on March 15, 1993. TCIC also agreed to contribute, at
the time of the contribution by LCP of its DAPL interests, a TCID
promissory note in the amount of $66,900,000.
On March 12, 1993, the CCT General Partnership Agreement was further
amended (the "Second Amendment"). Under the Second Amendment, LCP agreed
to contribute its Mile Hi partnership interest but not a loan receivable
from Mile Hi in the amount of $50 million (including accrued interest) (the
"Mile Hi Note") (both of which it received upon the liquidation of DAPL on
March 12, 1993 as described below) to CCT in exchange for 50.001% of a
newly created Class B partnership interest in CCT. TCIC agreed to
contribute a $21,795,000 promissory note from TCID in exchange for 49.999%
of the Class B partnership interests in place of the $66,900,000 note which
was to be contributed under the Amendment. On March 15, 1993, each party
made its respective contribution required by the Second Amendment.
(continued)
IV-36
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
On June 3, 1993, Liberty and TCI completed the transactions contemplated by
a recapitalization agreement (the "Recapitalization Agreement"). Pursuant
to the Recapitalization Agreement, Liberty repurchased 927,900 shares of
Liberty Class A common stock owned by TCI and repurchased all of the
outstanding shares of the Liberty Class C Redeemable Exchangeable Preferred
Stock. The total purchase price of $194 million was paid through the
delivery of cash amounting to $12 million and promissory notes of Liberty
in the aggregate principal amount of $182 million.
In connection with the Recapitalization Agreement, TCIC and LCP entered
into an Option-Put Agreement (the "Option-Put Agreement"), which was
amended on November 30, 1993. Under the amended Option-Put Agreement,
between June 30, 1994 and September 28, 1994, and between January 1, 1996
and January 31, 1996, TCIC will have the option to purchase all of LCP's
interest in CCT and the Mile Hi Note for an amount equal to $77 million
plus interest accruing at the rate of 11.6% per annum on such amount from
June 3, 1993. Between April 1, 1995 and June 29, 1995, and between January
1, 1997 and January 31, 1997, LCP will have the right to require TCIC to
purchase LCP's interest in CCT and the Mile Hi Note for an amount equal to
$77 million plus interest on such amount accruing at the rate of 11.6% per
annum from June 3, 1993.
Under a separate agreement, on June 3, 1993, TCI Holdings, Inc. ("TCIH"), a
wholly-owned subsidiary of TCI, purchased a 16% limited partnership
interest in Intermedia Partners from LCP and all of LCP's interest in a
special allocation of income and gain of $7 million under the partnership
agreement of Intermedia Partners for a purchase price of approximately $9
million. TCIH also received an option to purchase LCP's remaining 6.37%
limited partnership interest in Intermedia Partners prior to December 31,
1995 for a price equal to $4 million plus interest at 8% per annum from
June 3, 1993.
In September of 1993, Encore QE Programming Corp. ("QEPC"), a wholly-owned
subsidiary of Encore Media Corporation ("EMC"), a 90% owned subsidiary of
Liberty, entered into a limited partnership agreement with TCI Starz, Inc.
("TCIS"), a wholly-owned subsidiary of TCI, for the purpose of developing,
operating and distributing STARZ!, a first-run movie premium programming
service launched in 1994. QEPC is the general partner and TCIS is the
limited partner. Losses are allocated 1% to QEPC and 99% to TCIS. Profits
are allocated 1% to QEPC and 99% to TCIS until certain defined criteria are
met. Subsequently, profits are allocated 20% to QEPC and 80% to TCIS.
TCIS has the option, exercisable at any time and without payment of
additional consideration, to convert its limited partner interest to an 80%
general partner interest with QEPC's partnership interest simultaneously
converting to a 20% limited partnership interest. In addition, during
specific
(continued)
IV-37
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
periods commencing April 1999 and April 2001, respectively, QEPC may
require TCIS to purchase, or TCIS may require QEPC to sell, the partnership
interest of QEPC in the partnership for a formula-based price. EMC is paid
a management fee equal to 20% of "managed costs" as defined, in order to
manage the service. EMC manages the service and has agreed to provide the
limited partnership with certain programming under a programming agreement
whereby the partnership will pay its pro rata share of the total costs
incurred by EMC for such programming. The Company accounts for the
partnership as a consolidated subsidiary. (See note 11).
On March 15, 1993, Mile Hi Cable Partners, L.P. ("New Mile Hi") acquired
all the general and limited interests in Mile Hi, the owner of the cable
television system serving Denver, Colorado. New Mile Hi is a limited
partnership formed among CCT (78% limited partnership interest), Daniels
Cablevision, Inc. ("DCI") (1% limited partner) and P & B Johnson Corp.
("PBJC") (21% general partnership interest), a corporation controlled by
Robert L. Johnson, a member of Liberty's board of directors. As a result
of the acquisition, New Mile Hi is a consolidated subsidiary of Liberty for
financial reporting purposes.
Prior to the acquisition, LCP indirectly owned a 32.175% interest in Mile
Hi through its ownership of a limited partnership interest in DAPL, one of
Mile Hi's general partners. The other partners in Mile Hi were Time Warner
Entertainment Company, L.P., various individual investors and Mile Hi
Cablevision, Inc., a corporation in which all the other partners in Mile Hi
were the shareholders.
DAPL was liquidated on March 12, 1993, at which time LCP received a
liquidating distribution consisting of its proportionate interest in DAPL's
partnership interest in Mile Hi, representing the aforementioned 32.175%
interest in Mile Hi. The subsidiary of Liberty also received the Mile Hi
Note in novation of a loan receivable from DAPL in an equal amount.
The total value of the acquisition was approximately $180 million. Of that
amount, approximately $70 million was in the form of Mile Hi debt paid at
the closing. Another $50 million was in the form of the Mile Hi Note,
which debt was assumed by New Mile Hi and then by CCT. Of the remaining
$60 million, approximately $40 million was paid in cash to partners in Mile
Hi in exchange for their partnership interests. The remaining $20 million
of interest in Mile Hi was acquired by New Mile Hi through the contribution
by Liberty's subsidiary to CCT and by CCT to New Mile Hi of the 32.175%
interest in Mile Hi received in the DAPL liquidation and by DCI's
contribution to New Mile Hi of a 0.4% interest in Mile Hi.
(continued)
IV-38
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Of the estimated $110 million in cash required by New Mile Hi to complete
the transaction, $105 million was loaned to New Mile Hi by CCT and $5
million was provided by PBJC as a capital contribution to New Mile Hi. Of
the $5 million contributed by PBJC, approximately $4 million was provided
by CCT through loans to Mr. Johnson and trusts for the benefit of his
children. CCT funded its loans to New Mile Hi and the Johnson interests by
borrowing $93 million under its revolving credit facility and by borrowing
$16 million from TCIC in the form of a subordinated note.
Liberty's investment in Mile Hi, which was previously accounted for under
the cost method, was received from TCI in the March 28, 1991 transaction
whereby TCI contributed its interests in certain programming businesses and
cable television systems in exchange for several different classes and
series of preferred stock of Liberty.
Liberty adopted Statement No. 109 in 1993 and has applied the provisions of
Statement No. 109 retroactively to March 28, 1991.
During the year ended December 31, 1992, Liberty increased its economic and
voting interest in Lenfest Communications, Inc. ("LCI") to 50% and,
accordingly, adopted the equity method of accounting. Liberty's investment
in LCI, which was previously accounted for under the cost method, was
received from TCI in March of 1991. Additionally, LCI adopted Statement
No. 109 in 1993 and has applied its provisions on a retroactive basis.
As a result of the aforementioned acquisition of Mile Hi and the
implementation of Statement No. 109 by Liberty and LCI, the Company
restated the carrying amount of its investment in Liberty preferred stock
at December 31, 1992 through an increase of $19 million. Included in the
restated balance is the recognition of previously reserved interest income
on the Mile Hi Note. These restatements resulted in an increase of $6
million to the Company's results of operations for the year ended December
31, 1992, a decrease of $2 million for the year ended December 31, 1991 and
an increase of $7 million for prior years.
Also, during the year ended December 31, 1992, Liberty increased its
economic and voting interest in Columbia Associates, L.P. ("Columbia") to
39.609% and, accordingly, adopted the equity method of accounting.
Liberty's investment in Columbia, which was previously accounted for under
the cost method, was received from TCI in March of 1991.
On December 31, 1992, Liberty sold certain notes receivable of Intermedia
Partners to TCI for $36,300,000 in cash.
(continued)
IV-39
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
The Company purchases sports and other programming from certain
subsidiaries of Liberty. Charges to TCI (which are based upon customary
rates charged to others) for such programming were $44 million, $44 million
and $25 million for the years ended December 31, 1993 and 1992 and the
period from March 29, 1991 through December 31, 1991 respectively. Such
amounts are included in operating expenses in the accompanying consolidated
statements of operations. Certain subsidiaries of Liberty purchase from
TCI, at TCI's cost plus an administrative fee, certain pay television and
other programming. In addition, a consolidated subsidiary of Liberty pays
a commission to TCI for merchandise sales to customers who are subscribers
of TCI's cable systems. Aggregate commission and charges for such
programming were $11 million, $3 million and $2 million for the years ended
December 31, 1993 and 1992 and the period from March 29, 1991 through
December 31, 1991, respectively. Such amounts are recorded in revenue in
the accompanying consolidated statements of operations.
Summarized unaudited financial information of Liberty as of December 31,
1993 and 1992 and for the years ended December 31, 1993 and 1992 and the
period from March 29, 1991 through December 31, 1991 is as follows:
<TABLE>
<CAPTION>
December 31,
Consolidated Financial Position 1993 1992
------------------------------- ------ ----
amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 91 96
Investment in TCI common stock 104 104
Receivable from TCI -- 5
Other investments and related receivables 372 453
Other assets, net 870 172
------ ----
Total assets $1,437 830
====== ====
Debt $ 446 167
Deferred income taxes 2 15
Other liabilities 307 54
Minority interests 175 10
Redeemable preferred stocks 155 155
Stockholders' equity 352 429
------ ----
Total liabilities and stockholders' equity $1,437 830
====== ====
</TABLE>
(continued)
IV-40
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
<TABLE>
<CAPTION>
Consolidated Operations 1993 1992 1991
----------------------- -------- ------ -----
amounts in millions
<S> <C> <C> <C>
Revenue $1,153 157 85
Operating expenses (1,105) (144) (74)
Depreciation and amortization (49) (16) (10)
------ ---- ----
Operating income (loss) (1) (3) 1
Interest expense (31) (7) (5)
Other, net 36 32 44
------ ---- ----
Net earnings $ 4 22 40
====== ==== ====
</TABLE>
(4) Investments in Other Affiliates
-------------------------------
Investments in affiliates, other than Liberty (see note 3), accounted for
under the equity method, amounted to $567 million and $650 million at
December 31, 1993 and 1992, respectively.
On December 2, 1992, SCI Holdings, Inc. ("SCI") consummated a transaction
(the "Split-Off") that resulted in the ownership of its cable systems being
split between its two stockholders, which stockholders were Comcast
Corporation ("Comcast") and the Company. Prior to the Split-Off, the
Company had an investment in the common stock of SCI and the preferred
stock of its wholly-owned subsidiary, Storer Communications, Inc.
("Storer").
The Split-Off, which permitted refinancing of substantially all of the
publicly held debt of SCI and the preferred stock of SCI's wholly-owned
subsidiary, Storer, was effected by the distribution of approximately 50%
of the net assets of SCI to three holding companies formed by the Company
(the "Holding Companies").
Prior to the Split-off, the Company contributed its SCI common stock to the
Holding Companies in exchange for 100% of such Holding Companies' common
stock. The amount of SCI common stock contributed to each of the Holding
Companies was based upon the proportionate value of net assets to be
received by each of the Holding Companies in the Split-Off. SCI then
merged into Storer and the SCI common stock held by the Holding Companies
was converted into Storer common stock.
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
(continued)
IV-41
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
redeemed approximately $274 million of its debt securities held by Storer.
In turn, Storer utilized substantially all of the proceeds of such
contributions and redemptions to repurchase its preferred stock and
extinguished all of its debt. The Company's share of Storer's loss on
early extinguishment of debt was $52 million and such amount is included in
loss on early extinguishment of debt in the accompanying consolidated
statements of operations. Additionally, the Company received a premium,
amounting to $14 million, on the repurchase of the Storer preferred stock.
Such amount is reflected separately in the accompanying consolidated
financial statements.
In the Split-Off, Storer redeemed its common stock held by the Holding
Companies in exchange for 100% of the capital stock of certain operating
subsidiaries of Storer.
Immediately following the Split-Off, the Company owned a majority of the
common stock of the Holding Companies and Comcast owned 100% of the common
stock of Storer. As such, the Company, which previously accounted for its
investment in SCI using the equity method, now consolidates its investment
in the Holding Companies. The tangible assets of the Holding Companies
were recorded at predecessor cost.
In connection with the Company's 1988 acquisition of an equity interest in
SCI, a subsidiary of the Company issued certain debt and equity securities
to Storer for $650 million. Such debt securities were redeemed and the
equity securities were received by one of the Holding Companies in the
Split-Off. Interest charges and preferred stock dividend requirements on
these debt and equity securities, prior to the Split-Off, aggregated $81
million and $89 million for the period ended December 2, 1992 and the year
ended December 31, 1991. The Company's share of losses of SCI, prior to
the Split-Off for the period ended December 2, 1992 and the year ended
December 31, 1991 amounted to $51 million and $54 million, as adjusted for
the effect of interest and dividends accounted for by Storer as capital
transactions due to their related party nature.
The Company had a management consulting agreement with Storer which
provided for the operational management of certain of Storer's cable
television systems by TCI. This agreement provided for a management fee
based on 3.5% of the revenue of those cable television systems managed by
the Company. The Company also entered into a programming service agreement
with Storer whereby the Company, for a fee, managed Storer's purchases of
programming. The total management fees under the consulting and
programming service agreements, prior to the Split-Off, amounted to $7
million in each of the period from January 1 1992 through December 2, 1992
and the year ended December 31, 1991 (which amounts are recorded as a
reduction of selling, general and administrative expenses in the
accompanying consolidated statements of operations).
(continued)
IV-42
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
The Company is a partner in certain joint ventures, accounted for under the
equity method, which have operations in the United Kingdom and other parts
of Europe. These joint ventures, which are currently operating and
constructing cable television and telephone systems, have generated losses
to the Company in 1993 and 1992 amounting to $47 million and $37 million,
including $3 million and $6 million in 1993 and 1992, respectively,
resulting from foreign currency transaction losses.
Summarized unaudited financial information for affiliates other than
Liberty (including those contributed to Liberty through March 28, 1991), is
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1993 1992
---- ----
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $1,059 757
Franchise costs, net 266 211
Other assets, net 727 467
------ -----
Total assets $2,052 1,435
====== =====
Debt $ 593 661
Due to TCI 78 71
Other liabilities 338 185
Owners' equity 1,043 518
------ -----
Total liabilities and equity $2,052 1,435
====== =====
<CAPTION>
Years ended December 31,
------------------------
1993 1992 1991
------ ------ ------
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 713 1,224 1,461
Operating expenses (648) (786) (993)
Depreciation and amortization (127) (303) (329)
------ ----- -----
Operating income (loss) (62) 135 139
Interest expense (37) (295) (374)
Other, net 98 (234) (47)
------ ----- -----
Net loss $ (1) (394) (282)
====== ===== =====
</TABLE>
(continued)
IV-43
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
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.
----------------------------------------------
In 1987, the Company and several other cable television operators purchased
shares of two classes of preferred stock of Turner Broadcasting System,
Inc. ("TBS"). During 1991, TBS made an offer to exchange shares of one
class of its preferred stock (and accrued dividends thereon) for shares of
TBS common stock and, as a result, the Company received common shares
valued at $178 million. Shares of the other class of preferred stock have
voting rights and are convertible into shares of TBS common stock. The
holders of those preferred shares, as a group, are entitled to elect seven
of fifteen members of the board of directors of TBS, and the Company
appoints three such representatives. However, voting control over TBS
continues to be held by its chairman of the board and chief executive
officer (an unrelated third party). The Company's total holdings of TBS
common and preferred stocks represent an approximate 12% voting interest
for those matters for which preferred and common stock vote as a single
class.
The Company's investment in TBS common stock had an aggregate market value
of $803 million and $628 million (which exceeded cost by $485 million and
$310 million) at December 31, 1993 and 1992, respectively. In addition,
the Company's investment in TBS preferred stock had an aggregate market
value of $954 million and $746 million, based upon the common market value,
(which exceeded cost by $781 million and $573 million) at December 31, 1993
and 1992, respectively.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective for fiscal years beginning after
December 15, 1993. Under the new rules, debt securities that the Company
has both the positive intent and ability to hold to maturity are carried at
amortized cost. Debt securities that the Company does not have the
positive intent and ability to hold to maturity and all marketable equity
securities are classified as available-for-sale or trading and carried at
fair value. Unrealized holding gains and losses on securities classified
as available-for sale are carried as a separate component of shareholders'
equity. Unrealized holding gains and losses on securities classified as
trading are reported in earnings.
(continued)
IV-44
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
The Company holds no material debt securities. Marketable equity
securities are currently reported by the Company at the lower of cost or
market ("LOCOM") and net unrealized losses are reported in earnings. The
Company will apply the new rules starting in the first quarter of 1994.
Application of the new rules will result in an estimated increase of
approximately $300 million in stockholders' equity as of January 1 1994,
representing the recognition of unrealized appreciation, net of taxes, for
the Company's investment in equity securities determined to be available-
for-sale, previously carried at LOCOM.
(6) Debt
<TABLE>
<CAPTION>
Debt is summarized as follows:
Weighted-average December 31,
interest rate at ---------------
December 31, 1993 1993 1992
----------------- ---- ----
amounts in millions
<S> <C> <C> <C>
Parent company debt:
Senior notes 8.6% $5,052 1,960
Liquid Yield Option/TM/ Notes (a) -- -- 386
Bank credit facilities 6.0% 80 500
Commercial paper 4.1% 44 50
Other debt 2 1
------ ------
5,178 2,897
Debt of subsidiaries:
Bank credit facilities 4.6% 3,264 5,526
Commercial paper -- -- 12
Notes payable 10.3% 1,321 1,732
Convertible notes (b) 9.5% 47 48
Other debt 90 70
------ ------
$9,900 10,285
====== ======
</TABLE>
(a) These subordinated notes, which were stated net of unamortized
discount of $764 million at December 31, 1992, were issued through a
public offering. On October 28, 1993, the Company called for
redemption all of its remaining Liquid Yield Option/TM/ Notes. In
connection with such call for redemption, Notes aggregating $405
million were converted into 18,694,377 shares of Class A common stock
and Notes aggregating less than $1 million were redeemed together with
accrued interest to the redemption date. Prior to the aforementioned
redemption, Notes aggregating $6 million were converted into 259,537
shares of TCI Class A common stock during 1993.
(continued)
IV-45
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(b) These convertible notes, which are stated net of unamortized discount
of $197 million and $201 million on December 31, 1993 and 1992,
respectively, mature on December 18, 2021. The notes require (so long
as conversion of the notes has not occurred) an annual interest
payment through 2003 equal to 1.85% of the face amount of the notes.
During the year ended December 31, 1993, certain of these notes were
converted into 819,000 shares of Class A common stock. At December 31,
1993, the notes were convertible, at the option of the holders, into
an aggregate of 41,060,990 shares of Class A common stock.
During the year ended December 31, 1992, TCI called for redemption all of
its 7% convertible subordinated debentures. Debentures aggregating $114
million were converted into 6,636,881 shares of Class A common stock and
the remaining debentures were redeemed at 104.2% of the principal amount
together with accrued interest to the redemption date.
The Company's bank credit facilities and various other debt instruments
generally contain restrictive covenants which require, among other things,
the maintenance of certain earnings, specified cash flow and financial
ratios (primarily the ratios of cash flow to total debt and cash flow to
debt service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and dividend
payments.
As security for borrowings under one of its credit facilities, the Company
pledged a portion of the common stock (with a quoted market value of
approximately $643 million at December 31, 1993) it holds of TBS.
In order to provide interest rate protection on a portion of its variable
rate indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays fixed interest rates, ranging
from 7.7% to 9.9%, on notional amounts of $608 million. The Company has
also entered into various other exchange agreements, pursuant to which it
pays variable interest rates on notional amounts of $2,275 million. The
Company is exposed to credit losses for the periodic settlements of amounts
due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate nonperformance by the counterparties and, in
any event, such amounts were not material at December 31, 1993.
The Company has also entered into various interest rate hedge agreements on
notional amounts of $345 million which fix the maximum variable interest
rates, at rates ranging from 10% to 11%. The term of such agreements is
approximately two years.
TCI and certain of its subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, TCI and certain of its
(continued)
IV-46
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
subsidiaries pay fees, ranging from 1/4% to 1/2% per annum, on the average
unborrowed portion of the total amount available for borrowings under bank
credit facilities.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The fair
value of debt, which has a carrying value of $9,900 million, was $10,572
million at December 31, 1993.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
December 31, 1993, taking into consideration current interest rates and
assuming the current creditworthiness of the counterparties. The Company
would receive $13 million at December 31, 1993 upon termination of the
agreements.
Annual maturities of debt for each of the next five years are as follows:
<TABLE>
<CAPTION>
Parent Total
------ -----
<S> <C> <C>
amounts in millions
1994 $ 69* 927*
1995 212 705
1996 210 993
1997 151 885
1998 349 799
</TABLE>
* Includes $44 million of commercial paper.
(continued)
IV-47
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(7) Redeemable Preferred Stocks
---------------------------
<TABLE>
<CAPTION>
December 31,
-------------------
1993 1992
--------- --------
amounts in millions
<S> <C> <C>
12-7/8% Cumulative Compounding
Preferred Stock, Series A;
issued and outstanding 4,772,394
shares in 1992 (a) $ -- 92
6-3/4% Convertible Preferred Stock,
Series B; issued and outstanding
6,201 shares at December 31, 1992 (b) -- 18
4-1/2% Convertible Preferred Stock,
Series C; issued and outstanding
6,201 shares at December 31, 1993 (b) 18 --
----- -----
$ 18 110
===== =====
</TABLE>
(a) The 12-7/8% Cumulative Compounding Preferred Stock was stated at its
redemption value of $19.25 per share. Dividends were cumulative and
accrued at 12-7/8% of the redemption value. In October of 1992, the
Company acquired and retired 250,000 shares of this preferred stock in
the open market for a purchase price of $19.56 per share. All
remaining outstanding shares of such preferred stock were redeemed on
February 1, 1993 for a redemption price of $19.25 per share plus all
unpaid dividends accrued thereon.
(b) The 4-1/2% Convertible Preferred Stock is stated at its redemption
value of $3,000 per share, and each share is convertible into 204
shares of TCI Class A common stock. In 1993, the Company designated
this Series C Convertible Preferred Stock with all of the same
attributes of the Series B Convertible Preferred Stock except that
dividends on each share of the Series C stock accrued on a daily basis
at the rate of 4-1/2% per annum instead of 6-3/4% per annum, and such
Series C stock was not subject to optional redemption by the Company
until after January 10, 1994. During the year ended December 31,
1993, the shares so designated were exchanged for the existing Series
B shares. Subsequent to December 31, 1993, all of the Series C shares
were converted into 1,265,004 shares of TCI Class A common stock.
(continued)
IV-48
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(8) Stockholders' Equity
--------------------
Common Stock
------------
The Class A common stock has one vote per share and the Class B common
stock has ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock.
Employee Benefit Plans
----------------------
The Company has an Employee Stock Purchase Plan ("ESPP") to provide
employees an opportunity for ownership in the Company and to create a
retirement fund. Terms of the ESPP provide for employees to contribute up
to 10% of their compensation to a trust for investment in TCI common stock.
The Company, by annual resolution of the Board of Directors, contributes up
to 100% of the amount contributed by employees. Certain of the Company's
subsidiaries have their own employee benefit plans. Contributions to all
plans aggregated $16 million, $13 million and $12 million for 1993, 1992
and 1991, respectively.
Stock Options
-------------
Two officers (one of whom is also a director) each held an option to
acquire 200,000 shares of Class A common stock at an adjusted purchase
price of $10.00 per share. One of such officers received payment of
$550,000 from the Company in December of 1991 upon cancellation of a
portion of his option covering 100,000 shares. The amount paid was based
on the then market value of Class A common stock of $15.50 per share. The
same officer received payments of $512,500 and $569,000 from the Company
(based on the then market value of Class A common stock of $20.25 and
$21.375 per share) in July and December of 1992, respectively, in
cancellation of the remainder of his option covering 100,000 shares of TCI
Class A common stock. The other officer received payment of $2,276,000
from the Company in December of 1992 upon cancellation of his option
covering 200,000 shares of TCI Class A common stock. The amount paid was
based on the then market value of Class A common stock of $21.375 per
share.
The Company had an Incentive Stock Option Plan ("ISOP") which has expired.
Options granted under the ISOP (prior to its expiration) have an option
price equal to the fair market value on the date of grant, are all
currently exercisable and expire five years from the date of grant.
Options to purchase 217,008 shares of TCI Class A common stock are
outstanding at December 31, 1993, with a price of $17.25 per share. During
the years ended December 31, 1993, 1992 and 1991, options to acquire
96,242, 321,406 and 78,642 shares, respectively were exercised at prices
ranging from $10.00 to $17.25 per share and options for 25,000, 12,000 and
15,000 shares, respectively, were cancelled.
(continued)
IV-49
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
TCI assumed certain stock options previously granted by UAE to certain of
its employees. These options, which are currently exercisable, represent
the right, as of December 31, 1993, to acquire 167,328 shares of TCI Class
A common stock at adjusted purchase prices ranging from $8.83 to $18.63 per
share. During the year ended December 31, 1993, no options were exercised
or cancelled. No additional options may be granted by UAE.
The Company has adopted the 1992 Stock Incentive Plan (the "Plan"). The
Plan provides for awards to be made with respect to a maximum of 10 million
shares of Class A common stock. Awards may be made as grants of stock
options, stock appreciation rights, restricted shares, stock units or any
combination thereof. On November 11, 1992, stock options in tandem with
stock appreciation rights to purchase 4,020,000 shares of Class A common
stock were granted pursuant to the Plan to certain officers and other key
employees at a purchase price of $16.75 per share. Such options become
exercisable and vest evenly over five years, first became exercisable
beginning November 11, 1993 and expire on November 11, 2002. During the
year ended December 31, 1993, stock options covering 50,000 shares of Class
A common stock were cancelled upon termination of employment. On October
12, 1993, stock options in tandem with stock appreciation rights to
purchase 1,355,000 shares of TCI Class A common stock were granted pursuant
to the Plan to certain officers and other key employees at a purchase price
of $16.75 per share. On November 12, 1993, an additional grant of stock
options in tandem with stock appreciation rights to purchase 600,000 shares
of TCI Class A common stock were granted to two officers at a purchase
price of $16.75 per share. Such options become exercisable and vest evenly
over four years, first become exercisable beginning October 12, 1994 and
expire on October 12, 2003. Separately from the Plan, an additional grant
of stock options in tandem with stock appreciation rights to purchase
2,000,000 shares of TCI Class A common stock at a purchase price of $16.75
per share was made on November 12, 1993 to an individual who thereafter
became a director of the Company. Twenty percent of such options vested
and became exercisable immediately and the remainder become exercisable
evenly over 4 years. The options expire October 12, 1998. Estimates of
the compensation relating to these grants have been recorded through
December 31, 1993, but are subject to future adjustment based upon market
value and, ultimately, on the final determination of market value when the
rights are exercised.
Two officers (who are also directors) each held an option, expiring
December 31, 1991, to acquire 1,200,000 shares of Class B common stock at
an adjusted purchase price of $1.10 per share. In June of 1991, one of the
aforementioned officers exercised in full his option to acquire 1,200,000
shares of Class B common stock by delivery of 80,000 shares of Class B
common stock valued at $16.50 per share and, on the same date, sold 400,000
of such option shares (at a price of $16.50 per share) to TCI for cash and
a short-term note. In December of 1991, the other officer exercised his
option to purchase 900,000 shares of Class B common stock by delivery of
63,871 shares of Class A common stock valued at $15.50 per share. Such
officer agreed to forego exercising the balance of his option to purchase
300,000 shares
(continued)
IV-50
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
of Class B common stock in exchange for the payment by the Company of
$4,320,000 as compensation to be applied towards federal and state income
taxes withheld by the Company for his account.
Other
-----
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1993, there were 50,635,330 Class A shares of TCI common
stock reserved for issuance under exercise privileges related to options
and convertible debt securities described in this note 8 and in notes 6 and
7. In addition, one share of Class A common stock is reserved for each
share of Class B common stock.
(9) Transactions with Officers and Directors
----------------------------------------
On December 10, 1992, pursuant to a restricted stock award agreement, an
officer, who is also a director, of the Company was transferred the right,
title and interest in and to 124.03 shares (having a liquidation value of
$4 million) of the 12% Series B cumulative compounding preferred stock of
WestMarc Communications, Inc. (a wholly-owned subsidiary of the Company)
owned by the Company. Such preferred stock is subject to forfeiture in the
event of certain circumstances from the date of grant through February 1,
2002, decreasing by 10% on February 1 of each year.
On December 14, 1992, an officer, who is also a director, sold 100,000
shares of Class B common stock to the Company for $2,138,000.
(continued)
IV-51
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(10) Income Taxes
------------
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which the Company
owns less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying consolidated financial
statements.
The Financial Accounting Standards Board Statement No. 109 requires a
change from the deferred method of accounting for income taxes of APB
Opinion No. 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement No. 109, deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under Statement No. 109, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company adopted Statement No. 109 in 1993 and has applied the
provisions of Statement No. 109 retroactively to January 1, 1986. The
Company restated its financial statements for the years beginning January
1, 1986 through December 31, 1992. The effect of the implementation of
Statement No. 109 at December 31, 1992 was a $2 million decrease in
receivables, $48 million net increase in investments, $178 million net
increase in property and equipment, $2,901 million net increase in
franchise costs, $2 million increase in other assets, $34 million increase
in other liabilities, $2,865 million increase in deferred taxes payable and
$228 million decrease in accumulated deficit.
(continued)
IV-52
<PAGE>
TELE-COMMUNICATIONS, INC.
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 loss
and loss per common share for the years ended December 31, 1992 and 1991:
<TABLE>
<CAPTION>
December 31,
------------------------
1992 1991
------- --------
amounts in millions
<S> <C> <C>
Net loss as previously reported $(34) (103)
Effect of restatements:
Liberty, including the effects
of Mile Hi and LCI (note 3) 6 (2)
Statement No. 109 20 8
----- -----
As restated $ (8) (97)
===== =====
Per share amounts as previously reported $(.12) (.29)
Effect of restatements:
Liberty, including the effects
of Mile Hi and LCI (note 3) 02 --
Statement No. 109 .05 .02
----- -----
As restated $(.05) (.27)
===== =====
</TABLE>
(continued)
IV-53
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Income tax benefit (expense) attributable to income or loss from continuing
operations for the years ended December 31, 1993, 1992 and 1991 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- --------- ------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1993:
Federal $ (14) (119) (133)
State and local (15) (20) (35)
------- -------- -----
$ (29) (139) (168)
======= ======== =====
Year ended December 31, 1992:
Federal $ -- (24) (24)
State and local (10) (4) (14)
------- -------- -----
$ (10) (28) (38)
======= ======== =====
Year ended December 31, 1991:
Federal $ (2) 33 31
State and local (7) 6 (1)
------- -------- -----
(9) 39 30
======= ======== =====
</TABLE>
The significant components of deferred income tax benefit (expense) for the
years ended December 31, 1993, 1992 and 1991 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------
1993 1992 1991
-------- ----- ----
amounts in millions
<S> <C> <C> <C>
Deferred tax benefit (expense)
(exclusive of effects of other
components listed below) $ (63) (28) 39
Adjustment to deferred tax assets and
liabilities for enacted change in
tax rates (76) -- --
------- ---- ----
$ (139) (28) 39
======= ==== ====
</TABLE>
(continued)
IV-54
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
Income tax benefit (expense) attributable to income or loss from continuing
operations differs from the amounts computed by applying the Federal income
tax rate of 35% in 1993 and 34% in 1992 and 1991 as a result of the
following:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------
1993 1992 1991
-------- ----- -----
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax benefit (expense) $(56) (15) 37
Adjustment to deferred tax assets and
liabilities for enacted change in
Federal income tax rate (76) -- --
Dividends excluded for income tax purposes 4 10 13
Amortization not deductible for tax purposes (12) (8) (7)
Minority interest in earnings of
consolidated subsidiaries (1) (14) (13)
Recognition of losses of consolidated
partnership (8) -- --
State and local income taxes, net of Federal
income tax benefit (23) (9) 1
Other 4 (2) (1)
------- ---- ----
$ (168) (38) 30
======= ==== ====
</TABLE>
(continued)
IV-55
<PAGE>
TELE-COMMUNICATIONS, INC.
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
--------------------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 590 665
Less - valuation allowance (90) (88)
Investment tax credit carryforwards 140 140
Less - valuation allowance (36) (34)
Alternative minimum tax credit
carryforwards 19 11
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 266 321
Future deductible amounts principally
due to non-deductible accruals 27 19
Other 13 5
------ -----
Net deferred tax assets 929 1,039
------ -----
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,193 1,136
Franchise costs, principally due to
differences in amortization 2,784 2,720
Investment in affiliates, due
principally to undistributed
earnings of affiliates 256 332
Other 6 15
------ -----
Total gross deferred tax liabilities 4,239 4,203
------ -----
Net deferred tax liability $3,310 3,164
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1993 was
$126 million. Such balance increased by $4 million from December 31, 1992.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1993 will be recorded as
reductions of franchise costs.
(continued)
IV-56
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
At December 31, 1993, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $1,071 million of which, if
not utilized to reduce taxable income in future periods, $8 million expires
through 1998, $17 million in 2001, $76 million in 2002, $153 million in
2003, $132 million in 2004, $384 million in 2005 and $301 million in 2006.
Certain subsidiaries of the Company had additional net operating loss
carryforwards for income tax purposes aggregating approximately $368
million and these net operating losses are subject to certain rules
limiting their usage.
At December 31, 1993, the Company had remaining available investment tax
credits of approximately $85 million which, if not utilized to offset
future Federal income taxes payable, expire at various dates through 2005.
Certain subsidiaries of the Company had additional investment tax credit
carryforwards aggregating approximately $55 million and these investment
tax credit carryforwards are subject to certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the
Internal Revenue Service ("IRS") for the years 1979 through 1992. In the
opinion of management, any additional tax liability, not previously
provided for, resulting from these examinations, ultimately determined to
be payable, should not have a material adverse effect on the consolidated
financial position of the Company. The Company pursued a course of action
on certain issues (primarily the deductibility of franchise cost
amortization) the IRS had raised and such issues were argued before the
United States Tax Court. During 1990, the Company received a favorable
decision regarding these issues. The IRS appealed this decision but the
Company prevailed in the appeal. The IRS may further appeal the decision
to the Supreme Court until March 27, 1994.
New tax legislation was enacted in the third quarter of 1993 which, among
other matters, increased the corporate Federal income tax rate from 34% to
35%. The Company has reflected the tax rate change in its consolidated
statements of operations in accordance with the treatment prescribed by
Statement No. 109. Such tax rate change resulted in an increase of $76
million to income tax expense and deferred income tax liability.
(11) Commitments and Contingencies
-----------------------------
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. Such rate regulations
became effective on September 1, 1993. The rate increase moratorium, which
began on April 5, 1993, continues in effect through May 15, 1994. As a
result of such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject
to the jurisdiction of local franchising authorities and the FCC. Basic
and tier service rates are evaluated against
(continued)
IV-57
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
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 in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, since the Company's rates for Regulated Services are subject to
review, the Company may be subject to a refund liability. The amount of
refunds, if any, which could be payable by the Company in the event that
systems' rates are successfully challenged by franchising authorities is
not currently estimable.
In connection with the acquisition from TCI of a 19.9% minority interest in
Heritage Communications, Inc. ("Heritage") by Comcast, Comcast has the
right, through December 31, 1994, to require TCI to purchase or cause to be
purchased from Comcast all shares of Heritage directly or indirectly owned
by Comcast for either cash or assets or, at TCI's election, shares of TCI
common stock. The purchase price of the shares of Heritage directly or
indirectly owned by Comcast will be determined by external appraisal.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios from January 1, 1993 through December 31, 2002 (the "Film License
Obligations"). The aggregate minimum liability under certain of the
license agreements is approximately $105 million. The aggregate amount of
the Film License Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films produced by the motion picture studios, the amount of
United States theatrical film rentals for such qualifying films, and
certain other factors. Nevertheless, the Company's aggregate payments
under the Film License Obligations could prove to be significant.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$237 million at December 31, 1993.
(continued)
IV-58
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
The Company leases business offices, has entered into pole rental
agreements and uses certain equipment under lease arrangements. Minimum
rental expense under such arrangements, net of sublease rentals, amounted
to $59 million, $57 million and $52 million for 1993, 1992 and 1991,
respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1994 $16
1995 12
1996 9
1997 7
1998 6
</TABLE>
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1994.
(continued)
IV-59
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(12) Discontinued Operations
-----------------------
The Company sold its motion picture theatre business and certain theatre-
related real estate assets on May 12, 1992. The selling price (including
liabilities assumed) was approximately $680 million. In connection with
the disposition, the Company paid $92.5 million for certain preferred stock
of the buyer. No gain or loss was recognized in connection with this
transaction as the net assets of discontinued operations were reflected at
their net realizable value.
Operating results for the theatre operations for the period from January 1,
1992 through May 12, 1992 and the year ended December 31, 1991 are reported
separately in the consolidated statements of operations under the caption
"Loss from discontinued operations" and include:
<TABLE>
<CAPTION>
1992 1991
------ ------
amounts in millions
<S> <C> <C>
Revenue $211 613
Loss before income taxes $(16) (18)
Income tax benefit (expense) $ 1 (1)
Net loss $(15) (19)
</TABLE>
(continued)
IV-60
<PAGE>
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
(13) Quarterly Financial Information (Unaudited)
-------------------------------------------
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
1993:
----
Revenue $1,018 1,042 1,044 1,049
Operating income:
As previously reported $ 247 255 248
Adjustment to revise estimate of useful
lives of certain distribution equipment -- (6) (6)
Adjustment to properly reflect compensation
relating to stock appreciation rights -- (3) (6)
------- ------- -------
As adjusted $ 247 246 236 187
======= ======= ======= =======
Gain (loss) on disposition of assets $ 40 5 4 (7)
Income tax benefit (expense):
As previously reported $ (38) (21) (116)
Adjustment to revise estimate of useful
lives of certain distribution equipment -- 3 3
Adjustment to properly reflect compensation
relating to stock appreciation rights -- 1 2
Adjustment to income taxes upon
revision of Statement No. 109 -- -- (3)
------- ------- -------
As adjusted $ (38) (17) (114) 1
======= ======= ======= =======
Net earnings (loss):
As previously reported $ 53 31 (55)
Adjustment to revise estimate of useful
lives of certain distribution equipment -- (3) (3)
Adjustment to properly reflect compensation
relating to stock appreciation rights -- (2) (4)
Adjustment to income taxes upon
revision of Statement No. 109 -- -- (3)
------- ------- -------
As adjusted $ 53 26 (65) (21)
======= ======= ======= =======
Primary and fully diluted earnings (loss)
attributable to common shareholder per
common and common equivalent share:
As previously reported $ .11 .07 (.13)
Adjustment to revise estimate of useful
lives of certain distribution equipment -- (.01) --
Adjustment to properly reflect compensation
relating to stock appreciation rights -- -- (.01)
Adjustment to income taxes upon revision
of Statement No. 109 -- -- --
------- ------- -------
As adjusted $ .11 .06 (.14) (.05)
======= ======= ======= =======
</TABLE>
(continued)
IV-61
<PAGE>
TELE-COMMUNICATIONS, INC.
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 millions,
except per share amounts
<S> <C> <C> <C> <C>
1992:
- - - ----
Revenue $ 856 879 896 943
Operating income:
As previously reported $ 197 225 242 226
Adjustment to depreciation and amortization
upon revision of Statement No. 109 (2) (1) -- (23)
------- ------- --- -------
As adjusted $ 195 224 242 203
======= ======= === =======
Gain (loss) on disposition of assets $ 3 (3) (1) 10
Income tax benefit (expense):
As previously reported $ 1 (15) 6 (49)
Adjustment to income taxes for the
restatement of share of earnings
of Liberty (note 3) -- (3) (5) 3
Adjustment to revise/implement
Statement No. 109 1 -- -- 23
------- ------- --- -------
As adjusted $ 2 (18) 1 (23)
======= ======= === =======
Earnings (loss) from continuing operations:
As previously reported $ (18) 9 63 (51)
Adjustment to restate share of earnings
of Liberty (note 3) -- 4 7 (5)
Adjustment to depreciation, amortization
and income taxes upon revision/
implementation of Statement No. 109 (1) (1) -- --
------- ------- --- -------
As adjusted $ (19) 12 70 (56)
======= ======= === =======
Loss from discontinued operations $ -- (15) -- --
======= ======= === =======
Net earnings (loss):
As previously reported (18) (6) 63 (51)
Adjustment to restate share of earnings
of Liberty (note 3) -- 4 7 (5)
Adjustment to depreciation, amortization
and income taxes upon revision/
implementation of Statement No. 109 (1) (1) -- --
------- ------- --- -------
As adjusted $ (19) (3) 70 (56)
======= ======= === =======
Primary and fully diluted earnings (loss)
attributable to common shareholders per
common and common equivalent share:
Continuing operations:
As previously reported $(.05) .01 .13 (.12)
Adjustment to restate share of earnings
of Liberty (note 3) -- .01 .01 (.01)
Adjustment to depreciation, amortization
and income taxes upon revision/
implementation of Statement No. 109 (.01) -- -- --
------- ------- --- -------
As adjusted (.06) .02 .14 (.13)
Discontinued operations -- (.03) -- --
------- ------- --- -------
$(.06) (.01) .14 (.13)
======= ======= === =======
</TABLE>
IV-62
<PAGE>
TELE-COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
Material changes in financial condition.
- - - ---------------------------------------
On August 4, 1994, TCIC and Liberty consummated the Mergers. The transaction
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 TCI. TCIC
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.
TCI has not assumed any of TCIC's or Liberty's indebtedness or other obligations
that were outstanding at the time the Mergers were consummated. The Mergers
were accounted for using predecessor cost due to related party considerations.
On August 5, 1994, Liberty, Comcast and QVC announced that they had entered into
the QVC Merger Agreement pursuant to which Comcast and Liberty would acquire
QVC. In accordance with the QVC Merger Agreement, Comcast and Liberty commenced
a tender offer for all shares of stock of QVC at a net cash price of $46 per
share of QVC common stock and a net cash price of $460 per share of QVC
preferred stock. Following expiration of the tender offer, a corporation
controlled by both Comcast and Liberty will merge with QVC and any remaining
shares of QVC will be converted into cash at the same price as offered in the
tender offer.
The total cost of the acquisition of the QVC stock not currently owned by
Comcast or Liberty will be approximately $1.42 billion. Comcast and Liberty
have agreed to fund approximately $267 million and $20 million, respectively, of
the acquisition with the balance expected to be provided through debt financing
which, after the merger, will be an obligation of QVC. The transaction is
conditioned upon Comcast and Liberty obtaining the requisite financing on
satisfactory terms to purchase all of the outstanding shares of QVC, upon
receipt of certain governmental approvals and other customary conditions.
Liberty expects that the funds required to make Liberty's $20 million cash
contribution will come from a combination of working capital and general
corporate funds and existing credit facilities of Liberty and/or TCIC.
As of August 8, 1994, TCI, TCIC and TeleCable entered into a merger agreement,
whereby TeleCable will be merged with and into TCIC. The aggregate purchase
price of $1.6 billion will be paid with shares of TCI Class A common stock
(currently estimated to be approximately 42 million shares), assumption of
liabilities amounting to approximately $300 million and 1 million shares of a
new TCI convertible preferred stock with an aggregate initial liquidation value
of $300 million. Such preferred stock shall accrue dividends at 5-1/2% per
annum, shall be convertible at the option of its holders into 10 million shares
of TCI Class A common stock and shall be redeemable by TCI after 5 years or the
holder can cause TCI to redeem after 10 years. The merger requires the approval
of the shareholders of TeleCable and various franchise and other governmental
authorities.
IV-63
<PAGE>
Subsequent to September 30, 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
intend to bid for PCS licenses in PCS Auctions to be conducted by the FCC.
WirelessCo has applied for eligibility to bid for licenses in 39 of the 51 MTAs
for which PCS licenses will be auctioned by the FCC commencing in December 1994.
WirelessCo may also invest in, affiliate with or acquire licenses from
successful bidders in the PCS Auctions. The Company owns a 30% interest in
WirelessCo. Subsidiaries of Cox, Sprint and the Company have also formed a
separate partnership, in which the Company owns a 35.3% interest, to bid for PCS
licenses for the Philadelphia MTA. The Company cannot predict the cost of
obtaining licenses in the PCS Auctions or the likelihood that WirelessCo and the
Philadelphia partnership will be successful bidders for any of the PCS licenses
for which they have applied to bid. If the respective bidding strategies of
WirelessCo and the Philadelphia partnership are successful, however, the capital
required to fund the license costs and the construction of the PCS systems will
be substantial and the Company's share thereof would represent a material
increase in its capital requirements. The Company anticipates that it would
finance its share of the required capital through borrowings under existing new
credit facilities, although there can be no assurance that additional financing
would be available on terms desired by the Company.
The Cable Partners and Sprint have also agreed upon the basis upon which they
would negotiate a definitive agreement for the formation of NewTelco to engage
in the business of providing local wireline communications services to
residences and businesses on a nationwide basis, using cable television
facilities of the Cable Partners and other cable television operators that agree
to affiliate with NewTelco. The parties intend that the Cable Partners would
contribute their interests in TCG and its affiliated entities and other
competitive access businesses to NewTelco. The Company currently owns an
approximately 29.9% interest in TCG and would own a 30% interest in NewTelco.
The modification or repeal of existing regulatory and legislative barriers to
competition in the local telephony market will be necessary in order for
NewTelco to provide its proposed services in most states. Formation of NewTelco
is subject to certain conditions including the negotiation of a definitive
partnership agreement and contribution agreement. The contributions of TCG and
other competitive access businesses to NewTelco will be subject, among other
things, to the receipt of necessary regulatory and other consents and approvals.
The Company is a holding company and its assets consist solely 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
IV-64
<PAGE>
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 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 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.
The amount of net assets of subsidiaries subject to such restrictions exceeds
the Company's consolidated net assets.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Although amounts expended for acquisitions and capital expenditures exceed net
cash provided by operating activities, the borrowing capacity resulting from
such acquisitions, construction and internal growth has been and is expected to
continue to be adequate to fund the shortfall. See the Company's consolidated
statements of cash flows included in the accompanying consolidated financial
statements.
Subsidiaries of the Company had approximately $1.9 billion in unused lines of
credit at September 30, 1994, 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. TCI
has not assumed any of TCIC's or Liberty's indebtedness or other obligations
that were outstanding at the time the Mergers were consummated. See note 8 to
the accompanying consolidated financial statements for additional information
regarding the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage".
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other noncash credits or
charges) ($1,339 million and $1,409 million for the nine months ended September
30, 1994 and 1993, respectively) to interest expense ($568 million and $549
million for the nine months ended September 30, 1994 and 1993, respectively), is
determined by reference to the consolidated statements of operations. The
Company's interest coverage ratio was 236% and 257% for the nine months ended
September 30, 1994 and 1993, respectively. Management of the Company believes
that the foregoing interest coverage ratio is adequate in light of the
consistent and nonseasonal nature of its cable television operations and the
relative predictability of the Company's interest expense, more than half of
which results
IV-65
<PAGE>
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.
In July 1994, Rainbow purchased a 49.9% general partnership interest in AMC from
Liberty under the terms of a buy/sell provision contained in the AMC partnership
agreement for total cash proceeds of $180 million. Liberty used a portion of
these proceeds to repay debt to TCI totaling $105 million of principal plus $7
million of accrued interest.
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.
Approximately thirty-five percent of the franchises held by TCIC, involving
approximately 3.8 million basic subscribers, expire within five years. There
can be no assurance that the franchises for TCIC's systems will be renewed as
they expire although TCIC 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, as amended (the "1984 Cable Act") for
franchise renewal. However, in the event they are renewed, TCIC cannot predict
the impact of any new or different conditions that might be imposed by the
franchising authorities in connection with such renewals. To date, they have
not varied significantly from the original terms.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios from January 1, 1993 through December 31, 2002. The aggregate minimum
liability under certain of the license agreements is approximately $368 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 is upgrading and installing optical fiber in its cable systems at a
rate such that in three years TCIC anticipates that it will be serving the
majority of its customers with state-of-the-art fiber optic cable systems.
Through September 30, 1994, TCIC's capital expenditures amounted to $944
million. However, the Company is continually reevaluating its capital
expenditures and such expenditures are subject to change based upon the effects
to the Company's liquidity arising from rate regulation.
The Company competes with operators of alternative methods of distribution of
the same or similar video programming as that offered by its cable systems.
Technologies competitive with cable television have been encouraged by Congress
and the FCC to offer services in direct
IV-66
<PAGE>
competition with existing cable systems. One such competitor 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; one DBS operator 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 declines, equipment needed to receive
these transmissions is expected that the Company will experience increased and
substantial competition from DBS operators. The 1984 Cable Act, the regulations
of the FCC and the Modification of Final Judgment entered in United States v.
AT&T currently prohibit Regional Bell operating companies from providing video
programming and other information services directly to subscribers in their
telephone service areas (except in limited circumstances in rural areas). In
separate decisions, four United States District Courts have held that the cross-
entry prohibition in the 1984 Cable Act is unconstitutional as a violation of
the telephone companies First Amendment right to free expression. All four
decisions have been appealed (or are expected to be appealed). If the current
cross-entry restrictions are removed to relaxed, the Company could face
increased competition from telephone companies which, in most cases, have
greater financial resources than the Company.
The FCC has 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 providers. Although local exchange telephone carriers, providing "video-
dialtone" under the existing rules are allowed only a limited financial interest
in programming services and must limit their role largely to that of a
traditional "common carrier," the current status of these rules is uncertain
under the court decisions referred to above. Numerous local exchange telephone
carriers have filed applications with the FCC for authorization to construct
video-dialtone systems and to provide such services. This alternative means of
distribution of video services to consumer's homes, could eventually become a
substantial competitor to the Company's cable and other video delivery systems.
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)
and proceeds from disposition of assets will provide adequate sources of short-
term and long-term liquidity in the future.
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.
Based on its analysis and interpretation of the FCC's 1993 and 1994 rate
regulations, the Company estimates that the implementation of such regulations
will result in an aggregate
IV-67
<PAGE>
annualized reduction of revenue and operating income ranging from $280 million
to $300 million. 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.
Subject to certain limitations, the FCC's rate regulations generally permit
cable operators to adjust rates to account for inflation and increases in
certain external costs, including increases in programming costs and compulsory
copyright fees and any increase in the number of regulated channels.
Cable operators may justify rates higher than the benchmark rates established by
the FCC through demonstrating unusually high 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%, which rate may be subject to
change in the future.
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 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 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 a material effect on its results of operations.
The "must carry" provisions mandate that cable companies within a broadcast
television station's reach, retransmit its signal. On July 2, 1993, the FCC
voted to extend "must carry" rules to broadcast television stations with shop-
at-home formats. "Must carry" requirements went into effect on October 6, 1993,
and HSN, a consolidated subsidiary of Liberty, experienced growth in carriage as
a result. The new law was challenged in the courts, and on June 27, 1994, the
United States Supreme Court in Turner Broadcasting System, Inc. v. F.C.C.
vacated the Federal District Court's decision upholding the law as
constitutional because genuine issues of material fact remained unresolved. The
"must carry" statute and regulations remain in place pending the outcome of
further proceedings before the Federal District Court. If "must carry"
ultimately is ruled unconstitutional, a portion of this growth in cable carriage
may be reversed and HSN's revenues may be adversely effected.
IV-68
<PAGE>
Revenue increased by approximately 10% for the nine months ended September 30,
1994 compared to the corresponding period of 1993. Such increase was the result
of the Mergers (7%), the growth in subscriber levels within the Company's cable
television systems (4%), the effect of certain 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 1992 Cable Act. In the third
quarter of 1994, the Company experienced a decrease in the price charged for
those services that are subject to rate regulation under the 1992 Cable Act.
Operating costs and expenses have increased by 18% for the nine months ended
September 30, 1994 compared to the corresponding period of 1993. The
consolidation of Liberty resulted in an increase of $205 million 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. Additionally, the Company
incurred $30 million of programming and marketing costs associated with the
launch in 1994 of a new premium programming service to its subscribers. The
Company cannot determine whether and to what extent increases in the cost of
programming will effect its operating costs. Additionally, the Company cannot
predict how these increases in the cost of programming will affect its revenue
but intends to recover additional costs to the extent allowed by the
aforementioned FCC rate regulations. The Company recorded an adjustment of $8
million in 1994 to reduce 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 is a shareholder of TeleWest Communications plc (formerly TCI/US
West Cable Communications Group) ("TeleWest UK"), a company that is currently
operating and constructing cable television and telephone systems in the United
Kingdom ("UK"). TeleWest UK, which is accounted for under the equity method,
had a carrying value at September 30, 1994 of $296 million and accounted for $32
million and $17 million of the Company's share of its affiliates' losses in 1994
and 1993, respectively. In February 1994, the Company acquired a consolidated
investment in Flextech plc ("Flextech"), a programming and video distribution
company located in the UK. Flextech accounted for $135 million of the Company's
total assets and $65 million of the Company's equity investments at September
30, 1994 and has generated losses in 1994 of $18 million (before deducting the
minority interests' 40% share of such losses). In addition, the Company has
other less significant investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia and certain other
foreign countries. In the aggregate, such other investments had a carrying
value of $46 million at September 30, 1994 and accounted for $14 million of the
Company's share of its affiliates' losses in 1994.
In connection with its investments in the above-described foreign entities, the
Company is exposed to the risk that unfavorable and potentially volatile
fluctuations in exchange rates with respect to the UK pound 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 realized and unrealized losses with respect to
transactions denominated
IV-69
<PAGE>
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 currencies. Due to the difficulty in accurately
predicting the timing and amounts of future cash inflows and outflows associated
with the Company's foreign investments, the Company presently does not believe
that it is prudent to hedge its exposure to currency risk on a long-term basis.
The Company's net earnings (before preferred stock dividends)of $25 million for
the three months ended September 30, 1994 represented an increase of $90 million
as compared to the Company's net loss (before preferred stock dividends) of $65
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
Mergers (principally resulting from the gain recognized by Liberty upon the sale
of its investment in AMC) 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.
The Company's net earnings (before preferred stock dividends) of $63 million for
the nine months ended September 30, 1994 represented an increase of $49 million
as compared to the Company's net earnings (before preferred stock dividends) of
$14 million for the corresponding period of 1993. Such increase is principally
the result of the aforementioned increase in share of earnings of Liberty prior
to the Mergers, the decrease in income tax expense, net of the aforementioned
reduction in rates charged for Regulated Services and the decrease in gain on
disposition of assets.
IV-70
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
Assets amounts in millions
- - - ------
<S> <C> <C>
Cash $ 46 1
Trade and other receivables, net 323 232
Investment in Liberty Media Corporation
("Liberty") (note 4) -- 489
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 988 645
Investment in Turner Broadcasting
System, Inc.
("TBS") (note 6) 764 491
Investment in QVC, Inc. ("QVC") (note 7) 466 2
Property and equipment, at cost:
Land 95 73
Distribution systems 7,636 6,629
Support equipment and buildings 1,117 818
------- ------
Less accumulated depreciation 3,119 2,585
------- ------
8,848 7,520
5,729 4,935
------- ------
Franchise costs 11,019 10,620
Less accumulated amortization 1,628 1,423
------- ------
9,391 9,197
------- ------
Other assets, at cost, net of amortization 1,410 528
------- ------
$19,117 16,520
======= ======
</TABLE>
(continued)
IV-71
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
Liabilities and Stockholders' Equity amounts in millions
- - - ------------------------------------
<S> <C> <C>
Accounts payable $ 230 124
Accrued interest 151 157
Other accrued expenses 801 500
Debt (note 8) 10,654 9,900
Deferred income taxes 3,729 3,310
Other liabilities 131 114
------- ------
Total liabilities 15,696 14,105
------- ------
Minority interests in equity
of consolidated subsidiaries 446 285
Redeemable preferred stocks -- 18
Stockholders' equity (notes 1, 4, 6 and 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 570,799,618 shares in 1994
and 481,837,347 shares in 1993 571 482
Class B common stock, $1 par value
Authorized 150,000,000 shares;
issued 89,514,429 shares in 1994
and 47,258,787 shares in 1993 89 47
Additional paid-in capital 2,833 2,293
Cumulative foreign currency (5)
translation adjustment (29)
Unrealized holding gains for
available-for-sale securities 433 --
Note receivable from related party (15) --
Accumulated deficit (285) (348)
------- ------
3,621 2,445
Treasury stock, at cost (85,713,880
and 79,335,038 shares of Class A
common stock in 1994 and 1993 and
3,537,712 shares of Class B common
stock in 1994) (646) (333)
------- ------
Total stockholders' equity 2,975 2,112
------- ------
Commitments and contingencies (note 10)
$19,117 16,520
======= ======
See accompanying notes to consolidated financial statements.
</TABLE>
(continued)
IV-72
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
--------------- ---------------
1994 1993 1994 1993
------- ------ ------- ------
<S> <C> <C> <C> <C>
amounts in millions,
except per share amounts
Revenue (note 4) $1,286 1,044 3,427 3,104
Operating costs and expenses:
Operating (note 4) 485 298 1,129 889
Selling, general and administrative 364 276 959 806
Compensation relating to stock
appreciation rights -- 6 -- 9
Adjustment to compensation relating
to stock appreciation rights 10 -- (8) --
Depreciation 163 158 499 454
Amortization 78 70 223 217
------ ----- ----- -----
1,100 808 2,802 2,375
------ ----- ----- -----
Operating income 186 236 625 729
Other income (expense):
Interest expense (205) (186) (568) (549)
Interest and dividend income 6 11 26 23
Share of earnings of Liberty
(note 4) 101 11 125 4
Share of losses of other affiliates,
net (note 5) (26) (17) (56) (44)
Gain on disposition of assets 2 4 7 49
Loss on early extinguishment of debt (1) (6) (3) (17)
Minority interests in earnings of
consolidated subsidiaries, net -- (2) -- (6)
Other, net (5) (2) (8) (6)
------ ----- ----- -----
(128) (187) (477) (546)
------ ----- ----- -----
Earnings before income taxes 58 49 148 183
Income tax expense (33) (114) (85) (169)
------ ----- ----- -----
Net earnings (loss) 25 (65) 63 14
Dividend requirements on
preferred stocks (3) (1) (3) (2)
------ ----- ----- -----
Net earnings (loss) attributable
to common shareholders $ 22 (66) 60 12
===== ===== ===== =====
Primary and fully diluted earnings
(loss) attributable to common
shareholders per common and common
equivalent share (note 2) $.04 (.14) .12 .03
====== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
IV-73
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1994
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
Class B Series C Common stock Additional currency available- from
Preferred Preferred --------------- paid-in translation for-sale reated
Stock Stock Class A Class B capital adjustment securities party
--------- --------- ------ ------- ----------- ------------ ------------ -----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ -- -- 482 47 2,293 (29) -- --
Net earnings -- -- -- -- -- -- -- --
Conversion of
redeemable preferred
stock -- -- 1 -- 17 -- -- --
Issuance of common stock
upon conversion of notes
(note 8) -- -- 3 -- -- -- -- --
Consummation of the
Mergers (notes 1 and 4) -- -- 85 42 355 -- 286 (15)
Issuance of Series C
Preferred Stock in
acquisition (note 9) -- -- -- -- 168 -- -- --
Accreted dividends on
all classes of preferred
stock -- -- -- -- (3) -- -- --
Accreted dividends on
all classes of preferred
stock not subject to
mandatory redemption
requirements -- -- -- -- 3 -- -- --
Foreign currency
translation adjustment -- -- -- -- -- 24 -- --
Unrealized holding gains
for available-for-sale
securities (note 6) -- -- -- -- -- -- 147 --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, $ -- -- 571 89 2,833 (5) 433 (15)
1994 ======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
Total
Accumulated Treasury stockholders'
deficit stock equity
----------- -------- -------------
<S> <C> <C> <C>
Balance at January 1, 1994 (348) (333) 2,112
Net earnings 63 -- 63
Conversion of redeemable
preferred stock -- -- 18
Issuance of common stock upon
conversion of notes (note 8) -- -- 3
Consummation of the
Mergers (notes 1 and 4) -- (313) 440
Issuance of Series C
Preferred Stock in
acquisition (note 9) -- -- 168
Accreted dividends on
all classes of preferred
stock -- -- (3)
Accreted dividends on
all classes of preferred
stock not subject to
mandatory redemption
requirements -- -- 3
Foreign currency
translation adjustment -- -- 24
Unrealized holding gains
for available-for-sale
securities (note 6) -- -- 147
-------- -------- --------
Balance at September 30, 1994 (285) (646) 2,975
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
(continued)
IV-74
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1994 1993
---------- ---------
<S> <C> <C>
amounts in millions
(see note 3)
Cash flows from operating activities:
Net earnings $ 63 14
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 722 671
Compensation relating to stock appreciation rights -- 9
Adjustment to compensation relating to stock
appreciation rights (8) --
Share of earnings of Liberty (125) (4)
Share of losses of other affiliates 56 44
Deferred income tax expense 42 146
Minority interests in earnings -- 6
Amortization of debt discount 1 22
Loss on early extinguishment of debt 3 17
Gain on disposition of assets (7) (49)
Payment of premium received on
preferred stock investment redemption -- 14
Noncash interest and dividend income (6) (5)
Changes in operating assets and liabilities,
net of the effect of acquisitions: (1) (13)
Change in receivables (16) 39
Change in accrued interest (1) (13)
Change in other accruals and payables 63 14
------- ------
Net cash provided by operating activities 787 925
------- ------
Cash flows from investing activities:
Cash received from acquisitions 67 --
Cash paid for acquisitions -- (73)
Capital expended for property and equipment (949) (686)
Proceeds from disposition of assets 32 146
Payment received on preferred
stock investment redemption -- 183
Additional investments in and (308) (257)
loans to affiliates and others
Repayment of loans by affiliates and others 144 45
Return of capital from affiliates 22 1
Other investing activities (312) (104)
------- ------
Net cash used in investing activities (1,304) (745)
------- ------
Cash flows from financing activities:
Borrowings of debt 3,014 5,653
Repayments of debt (2,449) (5,769)
Preferred stock dividends of subsidiaries (3) (4)
Preferred stock dividends -- (2)
Repurchase of preferred stock -- (92)
Issuance of common stock -- 6
Repurchases of common stock -- (4)
------- ------
Net cash provided (used) by financing activities 562 (212)
------- ------
Net increase (decrease) in cash 45 (32)
Cash at beginning of period 1 34
------- ------
Cash at end of period $ 46 2
======= ======
See accompanying notes to consolidated financial statements.
</TABLE>
(continued)
IV-75
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
September 30, 1994
(unaudited)
(1) General
-------
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.
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 "Mergers"). 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 Mergers, 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 4). Upon
consummation of the Mergers, 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.
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 TCIC's Annual Report on
Form 10-K, as amended, for the year ended December 31, 1993.
Certain amounts have been reclassified for comparability with the 1994
presentation.
(continued)
IV-76
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(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 (571.1 million for the three months ended
September 30, 1994; and 517.2 million and 431.9 million for the nine months
ended September 30, 1994 and 1993, respectively). Shares issuable upon
conversion of the Convertible Notes (see note 8) have not been included in
the computation of weighted average shares outstanding for the nine months
ended September 30, 1993 because their inclusion would be anti-dilutive.
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 (571.1 million for the three months ended
September 30, 1994; and 517.2 million and 432.2 million for the nine months
ended September 30, 1994 and 1993, respectively). Shares issuable upon
conversion of the Series C Preferred Stock (see note 9) have not been
included in the computations of weighted average shares for the three
months and the nine months ended September 30, 1994 because their effect
would be anti-dilutive. Shares issuable upon conversion of the Convertible
Notes (see note 8) and certain convertible notes and preferred stock
converted subsequent to September 30, 1993 have not been included in the
computations of weighted average shares outstanding for the nine months
ended September 30, 1993 because their inclusion would be anti-dilutive.
Loss per common share attributable to common shareholders for the three
months ended September 30, 1993 was computed by dividing net loss
attributable to common shareholders by the weighted average number of
common shares outstanding (430.8 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 $573 million and $488 million for the nine
months ended September 30, 1994 and 1993, respectively. Also, during these
periods, cash paid for income taxes was not material.
(continued)
IV-77
<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>
Nine months ended
September 30,
---------------------
1994 1993
----------- --------
<S> <C> <C>
amounts in millions
Cash received from acquisitions:
Fair value of assets acquired $1,398 --
Liabilities assumed (449) --
Deferred tax liability recorded --
in acquisitions (244)
Minority interests in equity of --
acquired entities (164)
Note receivable from related party assumed 15 --
Common stock and preferred stock issued --
in acquisitions (650)
Common stock issued to TCIC and Liberty --
in the Mergers reflected as treasury
stock (note 4) 313
Unrealized gains on available-for-sale
securities reflected on acquired entities (286) --
------ ----
Cash received from acquisitions $ (67) --
====== ====
Cash paid for acquisitions:
Fair value of assets acquired $ -- 80
Liabilities assumed -- (7)
------ ----
$ -- 73
====== ====
</TABLE>
(continued)
IV-78
<PAGE>
<TABLE>
<CAPTION>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Nine Months ended
September 30,
-------------------
1994 1993
--------- --------
<S> <C> <C>
amounts in millions
Common stock issued upon conversion of
redeemable preferred stock $ 18 --
===== ====
Accreted and unpaid preferred stock dividends $ 3 --
===== ====
Effect of foreign currency translation adjustment on
book value of foreign equity investments $ 24 2
===== ====
Unrealized gains, net of deferred income taxes, on
available-for-sale securities exclusive of unrealized
gains recorded in the acquisition of Liberty $ 147 --
===== ====
Noncash exchange of equity investments and
consolidated subsidiaries for consolidated subsidiary $ 38 --
===== ====
Common stock issued upon conversion of notes $ 3 3
===== ====
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 $ -- 19
===== ====
Noncash capital contribution to
Community Cable Television ("CCT") $ -- 22
===== ====
</TABLE>
(4) 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 Mergers, TCIC received 3,390,833 shares of Class A common stock of TCI
and 55,070 shares of TCI Class B 6%
(continued)
IV-79
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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).
Upon consummation of the Mergers, 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 (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 common stock upon
consummation of the Mergers.
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 Mergers were consummated.
The Mergers were accounted for using predecessor cost due to the
aforementioned related party considerations.
Prior to the Mergers, 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
and $33 million for the period from January 1, 1994 through August 4, 1994
and for the nine months ended September 30, 1993, 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 $10
(continued)
IV-80
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
million and $7 million for the period from January 1, 1994 through August
4, 1994 and for the nine months ended September 30, 1993, respectively.
Such amounts are recorded in revenue in the accompanying consolidated
statements of operations.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased a 49.9%
general partnership interest in American Movie Classics Company ("AMC")
from Liberty 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 for less than $1 million. The proceeds of $180,249,000
included the economic benefit of Liberty's consulting agreement with AMC
assigned by Liberty to Cablevision Systems Corporation, the parent company
of Rainbow. The gain recognized by Liberty in connection with the
disposition of AMC was $183 million.
Summarized unaudited financial information of Liberty for the period from
January 1, 1994 through August 4, 1994 and for the nine months ended
September 30, 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
amounts in millions
Consolidated Operations
- - - -----------------------
Revenue $ 790 796
Operating expenses (726) (762)
Depreciation and amortization (32) (33)
-------- -------
Operating income 32 1
Interest expense (22) (21)
Other, net 115 24
-------- -------
Net earnings $ 125 4
======== =======
</TABLE>
(continued)
IV-81
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
-------------------------
Summarized unaudited results of operations for affiliates, other than
Liberty, accounted for under the equity method, are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1994 1993
--------- --------
<S> <C> <C>
amounts in millions
Combined Operations
- - - -------------------
Revenue $ 927 649
Operating expenses (837) (595)
Depreciation and amortization (128) (123)
--------- --------
Operating income (38) (69)
Interest expense (43) (48)
Other, net (162) (11)
--------- --------
Net earnings $(243) (128)
========= ========
</TABLE>
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at September
30, 1994 are TeleWest Communications plc (carrying value of $296 million),
Discovery Communications, Inc. (carrying value of $116 million) and
Teleport Communications Group, Inc. (carrying value of $105 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.
(continued)
IV-82
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(6) 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.
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 shareholders' equity. Unrealized holding gains and losses on
securities classified as trading are reported in earnings.
The Company applied the new rules beginning in the first quarter of 1994.
Application of the new rules resulted in a net increase of $191 million to
stockholders' equity in the first quarter of 1994, representing the
recognition of unrealized appreciation, net of taxes, for the Company's
investment in equity securities determined to be available-for-sale. Such
amount was subsequently adjusted to $433 million at September 30, 1994,
inclusive of the effect of $286 million recorded in the Mergers. The
majority of such unrealized gain was reflected on the Company's investment
in TBS common stock and QVC common stock (see note 7). The Company holds
no material debt securities.
(7) Investment in QVC, Inc.
-----------------------
On August 5, 1994, Liberty, Comcast Corporation ("Comcast") and QVC
announced that they had entered into a definitive merger agreement (the
"QVC Merger Agreement") pursuant to which Comcast and Liberty would acquire
all of the outstanding equity securities of QVC which they do not already
own. In accordance with the QVC Merger Agreement, on August 11, 1994, a
corporation owned by Comcast and Liberty (the "Purchaser") commenced a
tender offer for all shares of stock of QVC at a net cash price
(continued)
IV-83
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
of $46 per share of QVC common stock and a net cash price of $460 per share
of QVC preferred stock. Following consummation of the tender offer, a
corporation controlled by both Comcast and Liberty will merge with QVC (the
"QVC Merger") and any remaining shares of QVC will be converted in the QVC
Merger into cash at the same price as offered in the tender offer.
The total amount of funds required to purchase all shares of QVC stock not
owned by Comcast or Liberty in the tender offer and the merger and to pay
certain related fees and expenses is estimated to be approximately $1.42
billion. In addition to the QVC stock owned by Comcast and Liberty, which
will be contributed to the Purchaser immediately prior to the consummation
of the tender offer, Comcast is required to contribute $296 million and
Liberty is required to contribute approximately $6.5 million in cash to the
Purchaser. The balance of the funds necessary to consummate the
acquisition will be obtained from borrowings by QVC and subordinated debt
of the Purchaser. The transaction is conditioned upon the majority of the
fully diluted QVC common stock being tendered in the offer, the Purchaser
obtaining the requisite financing on satisfactory terms, upon receipt of
certain governmental approvals and other customary conditions. Should the
transaction be consummated, Liberty would indirectly own approximately 43%
of QVC and would account for its investment under the equity method.
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 Liberty 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 an indirect wholly-owned subsidiary of TCIC are not met. Under the
terms of a certain agreement pursuant to which Liberty acquired from TCIC a
substantial number of the QVC securities it now beneficially owns, TCIC has
agreed to reimburse Liberty 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 Liberty acquired them from
TCIC, which is substantially below the current market price of such shares.
The agreement between Comcast and Liberty regarding the acquisition of QVC
provides that Comcast and Liberty will, in connection with the consummation
of the QVC Merger, cause QVC to waive its repurchase rights and to agree
that all shares held by Comcast, Liberty and TCIC are fully vested and not
subject to repurchase rights. Other than the waiver of such repurchase
rights, the above-described carriage obligation is not affected by the QVC
Merger.
(continued)
IV-84
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(8) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
amounts in millions
Senior notes $ 5,412 5,052
Bank credit facilities 3,704 3,344
Commercial paper 292 44
Notes payable 1,039 1,321
Convertible notes (a) 45 47
Other debt 162 92
------------- ------------
$10,654 9,900
============= ============
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $186 million and $197 million at September 30, 1994 and December
31, 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 July and August of 1994, certain of these notes
were converted into 2,350,000 shares of Class A common stock. At
September 30, 1994, the notes were convertible, at the option of the
holders, into an aggregate of 38,710,990 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
$580 million at September 30, 1994) it holds of TBS.
In order to provide interest rate protection on a portion of its variable
rate indebtedness, certain subsidiaries of the Company have entered into
various interest rate exchange agreements. The Company is exposed to
credit losses for the periodic settlements of
(continued)
IV-85
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate nonperformance by the counterparties.
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
September 30, 1994, taking into consideration current interest rates and
the current creditworthiness of the counterparties. The Company would be
required to pay $161 million at September 30, 1994 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 $10,654 million, was $10,791 million at September 30, 1994.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
TCI has not assumed any of TCIC's or Liberty's indebtedness or other
obligations that were outstanding at the time the Mergers were consummated.
(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.
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
(continued)
IV-86
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 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 1,675,026 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 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).
No interest or additional dividends will accrue or be payable (whether in
cash, shares of TCI Class A common stock or otherwise) with respect to any
dividend payment on the Class B Preferred Stock that may be in arrears or
with respect to that portion of any other payment on the Class B Preferred
Stock that is in arrears which consists of accumulated or accrued and
unpaid dividends. For so long as any dividends are in arrears on the Class
B Preferred Stock and until all dividends accrued up to the
(continued)
IV-87
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
immediately preceding dividend payment date on the Class B 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 purpose, no dividends may be
declared or paid on the TCI common stock or on any parity stock or other
junior stock and no money or assets may be set aside for such purpose,
except for dividends declared and paid on parity stock contemporaneously
and on a pro rata basis with dividends declared and paid on the Class B
Preferred Stock. The Class B Preferred Stock will rank 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 will
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
(continued)
IV-88
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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). The Indenture will not limit the amount of
Senior Debt or any other debt, secured or unsecured, of TCI or any
subsidiary. There can be no assurance as to the establishment or
continuity of any trading market for the Junior Exchange Notes that would
be issued if TCI exercised its optional exchange right. 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. For so long as
any dividends are in arrears on the Class B Preferred Stock and until all
dividends accrued up to the immediately preceding dividend payment date on
the Class B 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 purpose,
TCI may not declare or pay any dividend on or make any distribution with
respect to any junior stock or parity stock or set aside any money or
(continued)
IV-89
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
assets for any such purpose, except for dividends declared and paid on
parity stock contemporaneously and on a pro rata basis with dividends
declared and paid on the Class B Preferred Stock. 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"). Without limiting the generality of the foregoing, the number of
authorized shares of Class B Preferred Stock may be increased or decreased
(but not below the number of shares of Class B Preferred Stock then
outstanding) by the affirmative vote of the holders of 66-2/3% of the total
voting power of the then outstanding shares of TCI common stock and any
class or series of TCI preferred stock entitled to vote generally on
matters presented to TCI stockholders for a vote, voting together as a
single class, and the Class B Preferred Stock will not be entitled to vote
with respect to any proposed amendment to the TCI Charter that would create
or designate any class or series of TCI preferred stock that would rank
prior to, pari passu, or junior to the Class B Preferred Stock.
(continued)
IV-90
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Series Preferred Stock. The TCI Series Preferred Stock will be 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.
Series C Convertible Preferred Stock. TCI has issued 70,559 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series C," (the "Series C Preferred Stock") 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, each of which are discussed in greater detail
below, 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 sums or 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 will be entitled to receive and,
subject to any prohibition or restriction contained in any instrument
evidencing indebtedness of TCI, TCI will be obligated to pay preferential
cumulative cash dividends out of funds legally available therefor.
Dividends will 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 will be 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
(continued)
IV-91
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 will 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 will rank 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 will be 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 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
(continued)
IV-92
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
of each purchase or exchange offer are substantially identically relative
to the respective liquidation prices of the shares of Series C Preferred
Stock and each series or class of such parity stock, or (ii) shares of
Series C Preferred Stock, parity stock or junior stock in exchange for, or
through the application of the proceeds of the sale of, shares of junior
stock.
The Series C Preferred Stock will be subject to restrictions on transfer
although it will have certain customary registration rights with respect to
the underlying shares of TCI Class A common stock. The Series C Preferred
Stock will vote on all matters submitted to a vote of the holders of the
TCI common stock, will have 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 will vote as a single class with the TCI common stock.
The Series C Preferred Stock will have 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 will be 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. Without limiting the generality of the
foregoing, the number of authorized shares of Series C Preferred Stock may
be increased or decreased (but not below the number of shares of Series C
Preferred Stock then outstanding) by the affirmative vote of the holders of
66-2/3 of the total voting power of the then outstanding shares of TCI
common stock and any class or series of TCI preferred stock entitled to
vote generally on matters presented to TCI stockholders for a vote, voting
together as a single class, and the Series C Preferred Stock will not be
entitled to vote with respect to any proposed amendment to the TCI Charter
that would create or designate any class or series of TCI preferred stock
that would rank pari passu with, or junior to the Series C Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. Subsequent to September
30, 1994, the Company reorganized its subsidiaries based upon four lines of
business: Domestic Cable and Communications; Programming; International
Cable and Programming; and Technology/Venture Capital. In connection with
such reorganization, the Board of Directors created and authorized the
issuance of the Redeemable Convertible Preferred Stock, Series E ("Series E
Preferred Stock"), 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 will eliminate in consolidation.
(continued)
IV-93
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The holders of the Series E 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 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 and the Series C 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.
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
(continued)
IV-94
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
following descriptions represent the terms of the assumed options and/or
stock appreciation rights.
Stock options to purchase 180,508 shares of TCI Class A common stock at an
adjusted purchase price of $17.25 per share were outstanding at September
30, 1994. During the nine months ended September 30, 1994, options to
acquire 33,000 shares were exercised and options for 3,500 shares were
canceled. Such options expired on November 9, 1994.
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 September 30, 1994. During the nine months ended September
30, 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
3,970,000 shares of Class A common stock at a purchase price of $16.75 per
share were outstanding at September 30, 1994. 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
1,947,500 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at September 30, 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 nine
months ended September 30, 1994, stock options covering 7,500 shares of
Class A common stock were canceled upon termination of employment.
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 September 30, 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
share of TCI Class A common stock at an adjusted purchase price of $19.56
were outstanding at September 30, 1994. The options vest in five equal
annual installments commencing June 3, 1994 and expire in June 2003.
(continued)
IV-95
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Stock appreciation rights with respect to 1,423,500 shares of TCI Class A
common stock were outstanding at September 30, 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.
Estimated compensation relating to stock appreciation rights has been
recorded through September 30, 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.
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 bears interest at 7.54% per annum. At the date of the
Mergers, the Company recorded the net assumed note receivable, amounting to
approximately $15 million, from such officer as a reduction of
stockholders' equity.
The shares issued by Liberty upon exercise of this 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 Mergers. 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 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 September 30, 1994, there were 55,505,226 shares of TCI Class A common
stock reserved for issuance under exercise privileges related to options
and convertible debt securities described in this note 9 and in note 8. In
addition, one share of Class A common stock is reserved for each share of
Class B common stock.
(continued)
IV-96
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(10) Commitments and Contingencies
-----------------------------
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993,
the Federal Communications Commission ("FCC") adopted certain rate
regulations required by the 1992 Cable Act and imposed a moratorium on
certain rate increases. 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.
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 is expected to consummate in
1995.
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
(continued)
IV-97
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(the "Film License Obligations"). The aggregate minimum liability under
certain of the license agreements is approximately $368 million. The
aggregate amount of the Film License Obligations under other license
agreements is not currently estimable because such amount is dependent upon
the number of qualifying films produced by the motion picture studios, the
amount of United States theatrical film rentals for such qualifying films,
and certain other factors. Nevertheless, the Company's aggregate payments
under the Film License Obligations could prove to be significant.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$247 million at September 30, 1994.
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 September 30, 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.
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.
(11) Proposed Merger with TeleCable Corporation
------------------------------------------
As of August 8, 1994, TCI, TCIC and TeleCable Corporation ("TeleCable")
entered into a merger agreement whereby TeleCable will be merged with and
into TCIC. The aggregate purchase price of $1.6 billion will be paid with
shares of TCI Class A common stock (currently estimated to be approximately
42 million shares), assumption of liabilities
(continued)
IV-98
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
amounting to approximately $300 million and 1 million shares of a new TCI
convertible preferred stock with an aggregate initial liquidation value of
$300 million. Such preferred stock shall accrue dividends at 5-1/2% per
annum, shall be convertible at the option of its holders into 10 million
shares of TCI Class A common stock and shall be redeemable by TCI after 5
years or the holder can cause TCI to redeem after 10 years. The merger
requires the approval of the shareholders of TeleCable and various
franchise and other governmental authorities.
(12) Subsequent Event
----------------
Subsequent to September 30, 1994, subsidiaries of the Company, Comcast, Cox
Cable 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 intend to bid for broadband personal
communications services ("PCS") licenses in auctions (the "PCS Auctions")
to be conducted by the FCC. WirelessCo has applied for eligibility to bid
for licenses in 39 of the 51 Major Trading Areas ("MTAs") for which PCS
licenses will be auctioned by the FCC commencing in December 1994.
WirelessCo may also invest in, affiliate with or acquire licenses from
successful bidders in the PCS Auctions. The Company owns a 30% interest in
WirelessCo. Subsidiaries of Cox, Sprint and the Company have also formed a
separate partnership, in which the Company owns a 35.3% interest, to bid
for PCS licenses for the Philadelphia MTA. The Company cannot predict the
cost of obtaining licenses in the PCS Auctions or the likelihood that
WirelessCo and the Philadelphia partnership will be successful bidders for
any of the PCS licenses for which they have applied to bid. If the
respective bidding strategies of WirelessCo and the Philadelphia
partnership are successful, however, the capital required to fund the
license costs and the construction of the PCS systems will be substantial
and the Company's share thereof would represent a material increase in its
capital requirements.
The Company, Comcast, Cox (collectively, the "Cable Partners") and Sprint
have also agreed upon the basis upon which they would negotiate a
definitive agreement for the formation of a partnership ("NewTelco") to
engage in the business of providing local wireline communications services
to residences and businesses on a nationwide basis, using cable television
facilities of the Cable Partners and other cable television operators that
agree to affiliate with NewTelco. The parties intend that the Cable
Partners would contribute their interests in Teleport Communications Group,
Inc. ("TCG") and its affiliated entities and other competitive access
businesses to NewTelco. The Company currently owns an approximately 29.9%
interest in TCG and would own a 30% interest in NewTelco. The modification
or repeal of existing regulatory and legislative barriers
(continued)
IV-99
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
to competition in the local telephony market will be necessary in order for
NewTelco to provide its proposed services in most states. Formation of
NewTelco is subject to certain conditions including the negotiation of a
definitive partnership agreement and contribution agreement. The
contributions of TCG and other competitive access businesses to NewTelco
will be subject, among other things, to the receipt of necessary regulatory
and other consents and approvals.
IV-100
<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."
Denver, Colorado KPMG PEAT MARWICK LLP
March 18, 1994
IV-101
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
<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 112,500 --
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
========== =======
(continued)
</TABLE>
IV-102
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------------------------
December 31,
--------------------
1993 1992
----------- -------
<S> <C> <C>
amount in thousands
Liabilities and Stockholders' Equity
- - - ------------------------------------
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-103
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
<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*
------------ ------------ ------------ ------------
<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 166,242 113,769 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 442,152 120,851 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) (7,048) (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 31,982 -- -- | --
Loss on transactions with TCI (note 16) (30,296) (17,826) -- | --
Minority interests in losses of |
consolidated subsidiaries 289 4,734 5,816 | 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-104
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
- - - -----------------------------------------------------------------------------------------------------------------------------------
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*
------- ------- -------- ------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
amounts in thousands
Predecessor Companies:
- - - ----------------------
BALANCE AT JANUARY 1, 1991 $ -- -- -- -- -- 497,503 (60,916) -- 436,587
Restatement for change in
accounting principle for
income taxes -- -- -- -- -- -- 59,833 __ 58,833
------- ------- ------- ------- -------- -------- ---------- ------- --------
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>
(continued)
IV-105
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity, continued
- - - -----------------------------------------------------------------------------------------------------------------------------------
Note
receivable Total
Preferred Stock Common Stock Additional from stock-
---------------- ----------------- paid-in Retained related holders'
Class C Class E Class A Class B capital* earnings party equity*
------- ------- -------- ------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
amounts in thousands
Liberty (continued)
- - - -------------------
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-106
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
- - - --------------------------------------------------------------------------------------------------------------
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*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
amounts in thousands (see notes 4 and 5)
Cash flows from operating activities:
Net earnings $ 4,795 22,384 40,321 | 226
Adjustments to reconcile net earnings to |
net cash provided (used) by operating |
activities: |
Depreciation and amortization 49,269 15,546 10,632 | 3,993
Compensation relating to stock |
appreciation rights 40,366 16,939 1,398 | --
Payment of compensation relating to |
stock appreciation rights (21,541) (166) -- | --
Share of (earnings) losses of |
affiliates, net, (34,044) (17,815) (13,955) | 2,414
Loss on transactions with TCI 30,296 17,826 -- | --
Premium received upon redemption |
of preferred stock investment -- (8,248) -- | --
Deferred income tax (benefit) |
expense (12,206) 7,952 15,181 | (650)
Minority interests in losses (289) (4,734) (5,618) | (3,817)
Noncash interest and dividends (4,941) (7,547) (18,446) | (6,662)
Gain on sale of investment (31,972) -- -- | --
Litigation settlements 7,475 -- -- | --
Payment of premium received upon |
redemption of preferred stock |
investment 8,248 -- -- | --
Loss on early extinguishment of debt, |
net of tax 2,191 -- -- | --
Amortization of debt discount -- 520 1,483 | 455
Recognition of deferred gain -- -- (16,412) | --
Other noncash charges 8,925 -- -- | 12
Changes in operating assets and |
liabilities, net of effect of |
acquisitions: |
Change in receivables (15,318) (85) (1,647) | (1,695)
Change in inventories (7,606) -- -- | --
Change in due to/from TCI, other |
than repayment for commercial |
paper 22,660 (735) (4,051) | (150
Change in prepaid expenses (10,347) (606) (3,345) | (1,487)
Change in payables and accruals 43,810 5,353 11,083 | 1,832
--------- -------- ------- | ------
Net cash provided (used) by |
operating activities 79,771 46,584 16,624 | (5,529)
--------- -------- ------- | ------
</TABLE>
(continued)
IV-107
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, continued
- - - --------------------------------------------------------------------------------------------------------------
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*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
amounts in thousands (see notes 4 and 5)
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 29,933 | --
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-108
<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
(continued)
IV-109
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
Company's preferred stocks with an aggregate issue price of $624,295,000;
and the one share of Liberty common stock owned by TCI on the date thereof
was redeemed for its par value.
In these notes to the consolidated financial statements, any reference to
TCI in connection with the issuance of the Company's preferred stock
includes subsidiaries of TCI.
(2) BASIS OF PRESENTATION
For financial reporting purposes, the Exchange and the Contribution (the
"Transactions") are deemed to be effective on March 31, 1991. The
statements of operations and cash flows for the years ended December 31,
1993 and 1992 and the nine months ended December 31, 1991 present the
results of operations and cash flows of the Company after giving effect to
the Transactions. The accompanying statements of operations and cash flows
for the three months ended March 31, 1991, representing a combination of
certain programming interests and cable television assets of TCI (referred
to herein as the "Predecessor Companies"), are presented for comparative
purposes.
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
(continued)
IV-110
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 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.
(continued)
IV-111
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
----------------------
Property and equipment, including significant improvements, is stated at
cost which includes acquisition costs allocated to tangible assets
acquired. Construction costs, including interest during construction and
applicable overhead, are capitalized. Interest capitalized during the
periods presented was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 5 to 15 years for cable distribution systems, 3 to 40 years for
support equipment and buildings and 6 to 13 years for computer and
broadcast equipment.
Repairs and maintenance and any gains or losses on disposition of assets in
their entirety are included in operations. However, recognition of gains
on sales of properties to affiliates accounted for under the equity method
is deferred in proportion to the Company's ownership interest in such
affiliates.
FRANCHISE COSTS
---------------
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years.
Costs incurred by Liberty in obtaining franchises are being amortized on a
straight-line basis over the life of the franchise, generally 10 to 20
years.
EXCESS COST OVER ACQUIRED NET ASSETS
------------------------------------
Excess cost over acquired net assets consists of the difference between the
cost of acquiring programming entities and amounts assigned to their
tangible assets. Such amounts are amortized on a straight-line basis over
30 years.
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.
(continued)
IV-112
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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, 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, 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.
(continued)
IV-113
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1993, 1992 and 1991
- - - -------------------------------------------------------------------------------------------------------
Significant noncash investing and financing activities:
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
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Amounts in thousands
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) -- -- | --
--------- ------------ ------------ |-----------
$ 264,170 57,016 -- | --
========= ============ ============ |===========
|
Cash resulting from consolidation of |
a certain affiliate net of payment |
therefore: |
Fair value of assets acquired $ (26,186) -- | --
Net liabilities assumed -- 27,485 -- | --
Payment for additional interest -- (39) -- | --
--------- ------------ ------------ |-----------
$ -- 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 | --
=========== ============ ============ |===========
(continued)
</TABLE>
IV-114
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1993, 1992 and 1991
- - - -------------------------------------------------------------------------------------------------------
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
------------- ------------- ------------ |------------
<S> <C> <C> <C> |<C>
Amounts in thousands |
|
|
Partial repayment of note |
receivable with common stock |
of an affiliate $ -- -- 18,867 | --
============ ============ ============ |============
Deferred tax liability recorded as |
a reduction to paid-in capital $ -- -- 5,298 | --
============ ============ ============ |============
Deferred tax asset recorded as |
an increase to retained |
earnings $ -- -- 11,849 | --
============ ============ ============ |============
Transfers of assets (other than in |
the Contribution), net of |
liabilities, from TCI $ -- -- -- | 3,763
============ ============ ============ |============
</TABLE>
(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 $ 438,958 661,546
Franchise, costs, net 678,232 623,904
Investments 362,748 234,675
Feature film inventory 112,183 60,217
Cable distribution rights 99,579 116,557
Excess cost, other intangibles
and other assets 911,794 620,582
---------- ---------
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
=========== =========
(continued)
</TABLE>
IV-115
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1993, 1992 and 1991
- - - -------------------------------------------------------------------------------------------------------
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 (87,544) (120,618) (129,909) | (42,296)
Other, net (128,075) (73,174) (28,802) | (7,262)
----------- ---------- ----------- |------------
|
Net earnings |
(loss) $ 121,184 55,156 4,879 | (4,262)
=========== ========== =========== |============
(continued)
</TABLE>
IV-116
<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 -- 32,689
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
("AMD") (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 10,985
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).
(continued)
IV-117
<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*
------------ ------------ ------------ | ---------
<S> <C> <C> <C> |<C>
amounts in thousands |
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 10,840 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 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.
(continued)
IV-118
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
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.
(continued)
IV-119
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 investment 46,457 46,459
Note receivable including accrued interest (b) 132,303 ---
Receivable for redemption of preferred stock investment --- 112,583
Other investments and related receivables 12,000 2,001
-------- -------
$220,218 212,993
======== =======
</TABLE>
(a) The marketable equity securities, which are being accounted for at the
lower of cost or market, had an aggregate market value of $111,549,000
and $55,825,000 (which exceeded cost by $85,738,000 and $46,984,000)
at December 31, 1993 and December 31, 1992, respectively.
(b) In December 1992, Home Shopping Network, Inc. ("HSN"), a cost
investment of the Company at that time and a consolidated subsidiary
of the Company at December 31, 1993 (see note 9), distributed the
capital stock of Silver King Communications, Inc. ("SKC"), formerly a
wholly owned subsidiary of HSN, to their stockholders of record,
including Liberty. This transaction was treated as a stock dividend
by HSN. At the time of said dividend, intercompany indebtedness in an
amount of approximately $135 million owed by SKC to HSN was converted
into a secured long-term senior loan to SKC (a cost investment of the
Company). 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.
(continued)
IV-120
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
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.
(continued)
IV-121
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 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.
(continued)
IV-122
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
(10) LITIGATION SETTLEMENTS
The Company has reached agreements in principle to settle certain lawsuits
related to HSN. Under the terms of the settlements, the Company will pay
approximately the following (amounts in thousands):
<TABLE>
<S> <C>
Civil actions pending Court approval in Delaware and Colorado to
be paid by the parent $13,000
Civil actions pending Court approval in the United States District
Court for the Middle District of Florida to be paid by HSN 8,500
Settlement to Western Hemisphere, Inc. to be paid by HSN 4,500
Settlements to be paid by HSN which will be reimbursed by Roy
M. Speer, former chairman of the board of HSN 3,000
-------
Accrued litigation settlements $29,000
=======
</TABLE>
Any attorneys' fees awarded by the Courts to the plaintiffs' attorneys in
such actions will be paid out of the above amounts. The portion of the
accrued litigation settlements to be paid by the parent which will be paid
to the class who sold shares of HSN common stock to Liberty as part of the
June 1, 1993 purchase (approximately $5.5 million) (see note 9), was
capitalized as additional acquisition costs. The portion of the accrued
litigation settlements to be paid by HSN were capitalized by the Company as
additional acquisition costs. A receivable amounting to $3 million has
been recorded by the Company in anticipation of reimbursement by Roy M.
Speer.
(continued)
IV-123
<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
------------------ --------- ---------
amounts in thousands
<S> <C> <C> <C>
Parent company debt:
Note payable to TCI (a) 11.6% $ 76,952 ---
Note payable to TCI (b) 6.0% 104,644 ---
-------- --------
Debt of subsidiaries: 181,596 ---
Note payable to TCI (c) 6.0% 4,322 4,322
-------- --------
Debt due TCI 185,918 4,322
-------- --------
Note payable to bank (d) 7.3% 5,815 6,257
Note payable to bank (e) 4.4% 23,425 25,954
Note payable to bank (f) 4.7% 79,500 25,000
Liability to seller (g) --- 19,637 19,637
Unsecured note payable (h) 6.0% 545 1,635
Convertible note payable (i) 10.0% 13,131 12,121
Notes payable to bank (j) 5.5% 110,000 ---
Note payable to affiliate --- --- 61,391
Note payable to bank --- --- 7,000
Other debt, with varying rates and maturities 8.9% 8,127 4,335
-------- --------
260,180 163,330
-------- --------
$446,098 $167,652
======== ========
</TABLE>
(a) Payable by Liberty.
------------------
The notes payable are due on February 1, 1997 and are secured by the
Company's partnership interest in CCT and in the Mile Hi Note.
(b) Payable by Liberty.
------------------
These notes payable were amended to extend the due date from December
3, 1993 to the earlier of June 30, 1994 or ten days following
termination of the proposed 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.
(continued)
IV-124
<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 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
(continued)
IV-125
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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%.
(continued)
IV-126
<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 by TCI in TCI's consolidated Federal income tax
return, became available for use by Liberty in its own consolidated Federal
income tax return.
(continued)
IV-127
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
(continued)
IV-128
<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
------------------------------ --------------
Year ended Nine months Three months
December ended ended
31, December 31, March 31,
1992 1991 1991
------------- --------------- --------------
<S> <C> <C> <C>
amounts in thousands, except per share data
Net earnings as previously reported $13,933 42,331 | 613
Effect of restatements |
Mile Hi and Mile Hi Note (note 9) 2,329 1,851 | 367
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 previously reported $ (0.22) 0.15 |
Effect of restatements: |
Mile Hi and Mile Hi Note (note 9) 0.02 0.02 |
Lenfest and TKR (note 6) 0.05 (0.03) |
State No. 109 (0.01) (0.01) |
------- ------ |
As restated $ (0.16) 0.13 |
======= ====== |
</TABLE>
(continued)
IV-129
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income tax benefit (expense) consists of:
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
-------- ------ ------- | ----
(23,729) (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>
(continued)
IV-130
<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>
(continued)
IV-131
<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>
(continued)
IV-132
<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
--------- ---------
amounts in thousands
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $ 8,833 $ 22,507
Charitable contribution carryforward 910 --
Investment tax credit carryforward 3,422 4,095
Alternative minimum tax carryforward 5,317 2,499
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes in
excess of losses recognized for income tax purposes 44,209 59,819
Inventory costing 7,248 --
Provision for returns and allowance 4,669 --
Provision for 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.
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
(continued)
IV-133
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 accredit 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 accrue 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 accrue dividends, then the Convertible Subordinated
Notes will be zero coupon notes, the issue price of which shall be equal to
the liquidation price of the shares of Convertible Exchangeable Preferred
Stock for which they are exchanged as of the date of such exchange, and the
principal amount of which shall be equal to the liquidation price of such
shares of Convertible Exchangeable Preferred Stock at March 28, 2006. If
the shares of Convertible Exchangeable Preferred Stock that are being
exchanged for Convertible Subordinated Notes provide for the accrual and
payment of cash dividends, the principal amount of such Convertible
Subordinated Notes shall be equal to the liquidation price of the shares of
Convertible Exchangeable Preferred Stock for which they are exchanged as of
the date of such exchange, plus (to the
(continued)
IV-134
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 accredit 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
accredit value of such shares as of the date of exchange. The terms of the
Exchangeable Subordinated Notes shall otherwise be substantially similar to
those of the Class B Preferred Stock for which they are exchanged, except
for such variations as may be appropriate to reflect the differences
between debt securities and equity securities and except that such
Exchangeable Subordinated Notes will be exchangeable at the option of the
Company at any time after issuance thereof for Convertible Subordinated
Notes of the Company, but will not be exchangeable or redeemable for shares
of Convertible Exchangeable Preferred Stock or for another issue of
Exchangeable Subordinated Notes. The rate at which the Exchangeable
Subordinated Notes may be exchanged for shares of TCI common stock at the
option of the holder shall be calculated so that the aggregate principal
amount of the Exchangeable Subordinated Notes issued in exchange for shares
of the Class B Preferred Stock will be exchangeable into the same aggregate
number of shares of TCI common stock as the shares of Class B Preferred
Stock for which they were exchanged.
The shares of Class B Preferred Stock are also exchangeable or redeemable
at the option of the holder as described below.
The shares of Class B Preferred Stock, unless previously redeemed, will be
exchangeable at the option of the holder at any time in whole or in part
for shares of TCI common stock. The Company will have the option of
delivering shares of TCI Class A common stock or TCI Class B common stock
or any combination thereof upon such exchange. The exchange rate for the
Class B Preferred Stock is 54.34 shares of TCI common stock for each share
of Class B Preferred Stock, subject to adjustment under certain conditions.
The exchange rights of the shares of Class B Preferred Stock will expire at
the close of business on the business day immediately preceding March 28,
2006 or, in the case of shares of Class B Preferred Stock called for
redemption or exchange, at the close of business on the date specified for
such redemption or exchange, unless in either case the Company defaults in
the payment of the redemption price or the making of the exchange.
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
(continued)
IV-135
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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
accredit 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 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.
(continued)
IV-136
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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) $ 10,974 105,353 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 9,479 -- -- 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 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
(continued)
IV-137
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
(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
(continued)
IV-138
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 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
(continued)
IV-139
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
(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-
(continued)
IV-140
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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 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
(continued)
IV-141
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
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
(continued)
IV-142
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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.
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
(continued)
IV-143
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
material restrictions on such person's full rights of ownership of such
shares, provided that one of the essential facts giving rise to such decree
or that renders such decree applicable to such person is the dual ownership
by such person of voting securities of both the Company and TCI. In each
case, the Company would guarantee the sale price for certain of the shares
to be sold. The Company believes that it would not be required to make any
material payments in such event as the Company anticipates that the
aggregate proceeds derived from any sale of such stock to the public or
other third parties would approximate the guaranteed sales price, before
giving effect to any required tax adjustment.
The guaranteed sale price for shares of Liberty common stock that
constitute "Covered Shares" (as defined) would be determined on the basis
of the proportionate share that such shares represent of the fair market
value of the Company on a going concern or liquidation value basis
(whichever method yields a higher valuation), subject to an upward
adjustment for taxes. If income taxes are payable by such persons with
respect to such sales, the amount of the adjustment would be approximately
$10.78 per share (assuming an effective tax rate of 37% based on Federal
and state income tax rates in effect on December 31, 1993 and a sale price
of $29-1/8 per share based on the last reported sale price for the Class A
common stock on that date). In the aggregate, 41,162,880 shares of Liberty
common stock are currently covered by the agreement. The Company believes
that the likelihood of the occurrence of a put triggering event is remote.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 ("1992 Cable Act"). In 1993, the
FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. Such rate regulations
became effective on September 1, 1993. The rate increase moratorium, which
began on April 5, 1993, continues in effect through May 15, 1994. As a
result of such actions, the Company's basic and tier service rates and its
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):
1994 $15,345
1995 11,503
1996 8,580
1997 5,926
1998 1,300
(continued)
IV-144
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
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):
1994 $22,810
1995 20,029
1996 19,526
1997 19,296
1998 14,985
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.
(continued)
IV-145
<PAGE>
LIBERTY MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1993, 1992 and 1991
- - - --------------------------------------------------------------------------------
(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:
<TABLE>
<CAPTION>
Home
Corporate Shopping Cable Programming Total
---------- -------- ------- ----------- ----------
amounts in thousands
<S> <C> <C> <C> <C> <C>
LIBERTY:
-------
Year ended December 31, 1993:
----------------------------
Revenue $ -- 942,940 56,744 153,572 1,153,256
========= ======= ======= ======= =========
Revenue from TCI $ -- -- -- 44,074 44,074
========= ======= ======= ======= =========
Operating income (loss) $ (43,327) 15,975 9,834 16,615 (903)
========= ======= ======= ======= =========
Depreciation and amortization $ 164 24,029 11,169 13,907 49,269
========= ======= ======= ======= =========
Capital expenditures, including
acquisitions $ 426 13,156 8,374 3,520 25,476
========= ======= ======= ======= =========
Identifiable assets $ 142,430 781,258 283,552 229,308 1,436,548
========= ======= ======= ======= =========
Year ended December 31, 1992:
----------------------------
Revenue $ -- -- 21,549 134,964 156,513
========= ======= ======= ======= =========
Revenue from TCI $ -- -- -- 42,834 42,834
========= ======= ======= ======= =========
Operating income (loss) $ (14,337) -- 5,617 5,324 (3,396)
========= ======= ======= ======= =========
Depreciation and amortization $ 126 -- 3,406 12,014 15,546
========= ======= ======= ======= =========
Capital expenditures, including
acquisitions $ 37 -- 10,655 1,826 12,518
========= ======= ======= ======= =========
Identifiable assets $ 199,846 61,536 355,372 213,433 830,187
========= ======= ======= ======= =========
</TABLE>
(continued)
IV-146
<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
<S> <C> <C> <C> <C> <C>
Nine months ended
December 31, 1991:
- - - -----------------
Revenue $ -- -- 9,479 75,918 85,397
======== ====== ======= ======= =======
Revenue from TCI $ -- -- -- 25,191 25,191
======== ====== ======= ======= =======
Operating income (loss) $ (2,278) -- 2,273 790 785
======== ====== ======= ======= =======
Depreciation and amortization $ 89 -- 1,551 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 amortization $ -- -- 563 3,430 3,993
======== ====== ======= ======= =======
Capital expenditures, including
acquisitions $ -- -- 196 649 845
======== ====== ======= ======= =======
Identifiable assets $ 1,607 44,801 286,864 202,349 535,621
======== ====== ======= ======= =======
</TABLE>
(continued)
IV-147
<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
<S> <C> <C> <C> <C>
1993:
- - - ----
Revenue $ 179,072 303,685 313,083 357,416
Operating income (loss) $ 2,089 (2,603) 1,302 (1,691)
Gain on sale of investment $ 10,613 -- -- 21,359
Loss on transactions with TCI $ -- (30,296) -- --
Extraordinary item, net $ (1,792) (399) -- --
Net earnings (loss) $ 10,454 (18,016) 11,161 1,196
Net earnings (loss) attributable
to common shareholders $ (441) (27,520) 5,429 (4,645)
Primary and fully diluted
earnings (loss) per common
and common equivalent share $ 0.00 (0.21) 0.04 (0.04)
</TABLE>
(continued)
IV-148
<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 915 1,349 1,186 1,216
Adjustment to revise/
implement Statement
No. 109 (2,675) 3,712 8,488 (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 915 1,349 1,186 1,216
Adjustment to revise/
implement Statement
No. 109 (2,675) 3,712 8,448 (10,976)
-------- ------ ------ -------
As adjusted $(11,272) 3,536 13,924 (25,435)
======== ====== ====== =======
</TABLE>
(continued)
IV-149
<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 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-150
<PAGE>
LIBERTY MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991.
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 Common Stock") which corresponds to TCI's businesses that are engaged in
two principal lines of business: (i) production, acquisition and distribution
of globally branded entertainment, education and information programming
services and software for distribution through all available formats and media
and (ii) home shopping via television and other interactive media; direct
marketing, advertising sales, infomercials and transaction processing ("Liberty
Media Group"). While the Liberty Group Common Stock would constitute common
stock of TCI, it is intended to reflect the separate performance of such
businesses. TCI intends to distribute to its security holders one hundred
percent of the equity value of TCI attributable to Liberty Media Group.
As of January 27, 1994, TCI Communications, Inc. (formerly Tele-
Communications, Inc.) ("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 businesses and
assets of TCI and Liberty that are engaged in its principal lines of business.
Summary of Operations
- - - ---------------------
Liberty Media Group is engaged in two principal lines of business: (i)
production, acquisition and distribution of globally branded entertainment,
education and information programming services and software for distribution
through all available formats and media and (ii) home shopping via television
and other interactive media; direct marketing, advertising sales, infomercials
and transaction processing. During February of 1993, Liberty Media Group
acquired a majority interest in Home Shopping Network, Inc. ("HSN"). To enhance
the reader's understanding, separate financial data has been provided below for
Home Shopping Programming Services, which include a retail function, and other
Entertainment and Information Programming Services. 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
IV-151
<PAGE>
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>
Years ended December 31,
-------------------------------------------------
1993 1992 1991
-------------- -------------- -----------------
dollar amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
ENTERTAINMENT AND INFORMATION
- - - -------------------------------
PROGRAMMING SERVICES
- - - -------------------------------
Revenue 100% $263,960 100% $208,988 100% $126,321
Operating, selling,
general and
administrative 85% 224,874 92% 192,863 99% 125,741
Depreciation and
amortization 6% 16,058 7% 14,088 11% 13,908
--- -------- --- -------- ---- ---------
Operating income (loss) 9% $ 23,028 1% $ 2,037 (10)% $(13,328)
=== ======== === ======== ==== =========
HOME SHOPPING
- - - -------------------------------
PROGRAMMING SERVICES
- - - -------------------------------
Revenue 100% $942,940 -- -- -- --
Cost of Sales 65% 611,526 -- -- -- --
Operating, selling,
general and
administrative 31% 291,410 -- -- -- --
Depreciation and
amortization 2% 24,029 -- -- -- --
--- -------- --- -------- ---- ---------
Operating income 2% $ 15,975 -- -- -- --
=== ======== === ======== ==== =========
</TABLE>
IV-152
<PAGE>
Entertainment and Information Programming Services
- - - --------------------------------------------------
Revenue from entertainment and information programming services
increased by 26%, or $55.0 million, from 1992 to 1993. Higher revenue from
Netlink USA, a marketer and distributor of programming to the United States home
satellite dish subscriber market ("Netlink"), responsible for $35 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 programming businesses ($8.8 million) and
increased subscription revenue generated by Southern Satellite Systems, Inc.
("Southern") through the transmission of the signal for WTBS, a 24-hour
independent UHF television station originated by Turner Broadcasting Systems,
Inc., and Encore Media Corporation ("EMC") ($9.3 million). Aggregate revenue
increased by 65%, or $82.7 million from 1991 to 1992. Netlink generated $40.8
million of this increase, the result of subscriber growth and price increases.
Approximately $15.6 million of the increase was attributable to a full year of
operations at EMC, which launched its "Encore" subscription movie service during
1991, and $22.9 million was due to the increase in subscription and advertising
revenue generated by the consolidated sports programming businesses. Operating
expenses, exclusive of depreciation and amortization, increased by 17% or $32.0
million from 1992 to 1993. This increase was the result of a $28.7 million
increase in costs for Netlink, the result of higher license fees due to
subscriber growth and higher costs at EMC primarily associated with the
introduction of new programming. Operating expenses, exclusive of depreciation
and amortization, increased 53%, or $67.1 million, from 1991 to 1992, primarily
due to a $29.6 million increase in costs for Netlink due to higher license fees
related to subscriber growth, a full year of operations at EMC ($13.4 million of
the increase) and a $19.3 million increase in operating expenses of the sports
networks, primarily from increased sports programming rights purchases and
production costs.
Home Shopping Programming Services
- - - ----------------------------------
This information reflects the results of Home Shopping Network, Inc.
("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 for 1993 represented 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 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.
IV-153
<PAGE>
The Cable Television Consumer Protection and Competition Act of 1992
(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 Federal Communications Commission ("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.
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 retailing 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 impacts its business, but not to the
same extent it impacts the retail industry in general.
Corporate Expenses
- - - ------------------
Corporate expenses, which are not reflected in the table, increased by
234% in 1993 and by 297% in 1992. These changes consisted primarily of
increases of $20.6 million and $15.5 million in 1993 and 1992, respectively, in
compensation related to stock appreciation rights. The amount of expense
associated with the stock appreciation rights was a function of the difference
between the grant price of the stock appreciation right and the prevailing
market price of Liberty's common stock. An additional $2.8 million of
compensation related to stock appreciation rights in 1993 was associated with
HSN.
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
IV-154
<PAGE>
accompanying combined financial statements, but are subject to future adjustment
based upon the market value of the underlying 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 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.
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 believed to
be reasonable and to approximate the costs Liberty Media Group would incur for
comparable services on a stand alone basis. Such costs are expected to
aggregate approximately $3,100,000 for the year ended December 31, 1995. 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 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, 1993, 1992 and 1991, aggregated $195,000, $3,283,000
and $2,813,000, respectively, and are included in selling, general and
administrative expenses in the accompanying combined statements of operations.
From January 1, 1993 through the TCI/Liberty Combination, no employees of
Liberty Media Corporation's subsidiaries remained on the TCI payroll.
The management and allocation policies with respect to cash
management, corporate expenses, allocation of assets and liabilities and
intercompany transactions adopted by the Board of Directors of TCI may be
modified or rescinded in the sole discretion of the Board
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<PAGE>
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.
Other Income and Expense
- - - ------------------------
Interest expense was $14.4 million, $14.4 million, and $9.4 million in
1993, 1992, and 1991, respectively. The increase in 1992 was caused by
borrowings under a revolving line of credit that was established in December
1991 by Communication Capital Corporation ("CCC"), a subsidiary of Liberty Media
Group. Average borrowings under the CCC facility were $164 million during 1992.
The consolidation of HSN debt 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 the CCC line of credit as a result of average borrowings
decreasing to $31 million during 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 could obtain comparable financing from an
unrelated financing source.
Dividend and interest income was $23.1 million, $12.0 million and
$25.4 million in 1993, 1992 and 1991, respectively. The increase in 1993 was
primarily the result of the consolidation of HSN. The decrease in 1992 was due
to a decrease in dividend income as a result of an exchange by Liberty Media
Group of certain preferred stock in Turner Broadcasting System, Inc. ("TBS") for
shares of TBS common stock in June 1991, and a decrease in interest income due
to the repayment in late 1991 of a note receivable from an equity affiliate.
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 American Movie Classics
Company ("AMC") and SportsChannel Chicago Associates. These improvements were
offset by a loss of $7.1 million in 1993 related to Liberty Media Group's
interest in Home Team Sports Limited Partnership ("HTS"), compared with Liberty
Media Group's share of earnings of $700,000 for HTS in 1992. This decrease was
the result of an adjustment by Liberty Media Group to amortization of its excess
cost assigned to certain programming rights contracts. This adjustment resulted
in a one-time charge of $7.8 million in 1993, and will result in an increase in
annual amortization expense for the next two years of approximately $1.0
million, after which time such excess costs will have been fully amortized.
Excluding this adjustment, HTS' 1993 earnings were comparable with 1992
earnings. Included in 1993 share of earnings of affiliates was $11.3 million
from AMC. Liberty Media Group's interest in AMC was sold in 1994.
IV-156
<PAGE>
Also included in 1993 share of earnings of affiliates was $14.1
million from QVC, Inc. ("QVC"). In November 1993, Liberty Media Group sold 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 18.8%. 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 a 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 stockholders'
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's share of earnings in affiliates increased by
$15.0 million from 1991 to 1992. The reason for the increase was improved
results at several equity affiliates, including QVC, SportsChannel Chicago
Associates and Discovery Communications, Inc.
Liberty Media Group, Comcast, QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Liberty Media Group and
Comcast, and QVC are parties to an Agreement and Plan of Merger dated 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.
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
- - - ------------
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 continued to maintain that it has
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meritorious positions regarding the deductibility of the payments and intends to
file a refund claim with the IRS during 1995.
At December 31, 1993, Liberty Media Group had net operating and
capital loss carryforwards for income tax purposes aggregating approximately
$37.8 million.
A tax sharing arrangement exists between TCI and Liberty Media Group
and encompasses both federal and state tax consequences. The arrangement relies
upon the Internal Revenue Code of 1986, as amended, applicable state and local
tax law and related regulations. Liberty Media Group will be responsible to TCI
for its gross individual share of the consolidated tax liabilities and TCI will
reimburse Liberty Media Group for tax attributes used in excess of income tax
liability incurred. 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 of assets will be inventoried and tracked for the entities comprising
Liberty Media Group.
Other Items
- - - -----------
Inflation has not had a significant impact on Liberty Media Group's
results of operations during the three-year period ended December 31, 1993.
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"), which will be
effective for years beginning after December 31, 1994. Liberty Media Group does
not believe that Statement No. 112 will have a material effect on its combined
financial statements.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December 15, 1993.
Under the new rules, debt securities that 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 as a separate component of shareholders' equity. Unrealized holding
gains and losses on securities classified as trading are reported in earnings.
Presently, Liberty Media Group has no material debt securities.
Marketable equity securities are currently reported at the lower of cost or
market and net unrealized losses are reported in earnings. Liberty Media Group
will apply the new rules starting in the first quarter of 1994. Application of
the new rules resulted in an estimated increase of $334 million in stockholders'
equity as of January 1, 1994, representing the recognition of unrealized
appreciation, net of taxes, for Liberty Media Group's investment in equity
securities determined to be available-for-sale, previously carried at the lower
of cost or market.
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<PAGE>
Liquidity and Capital Resources
- - - -------------------------------
During 1993, Liberty Media Group entered into numerous transactions
which significantly impacted its liquidity. The net result of such activities
during 1993, along with cash flow from operations, was a 13% or $12.0 million
decrease in its cash balance, resulting in combined cash and cash
equivalents of $83 million as of December 31, 1993. The following provides a
brief description of the significant non-operating items that impacted liquidity
during 1993:
(a) In February 1993, Liberty Media Group acquired 20 million
Class B common shares of HSN for aggregate consideration of $181
million including cash consideration of $58 million. In June
1993, Liberty Media Group completed a cash tender offer for
shares of HSN common stock for an aggregate cash price of $114
million. The cash portions of these transactions were paid out
of Liberty Media Group's available cash balances.
(b) In October and November 1993, stock appreciation rights were
exercised by certain officers of Liberty Media Group, resulting
in proceeds to these officers of $21.5 million which amount was
paid out of Liberty Media Group's available cash balances.
(c) In November 1993, Comcast Corporation exercised its right to
purchase from Liberty Media Group 1.7 million shares of QVC
common stock for total cash proceeds to Liberty Media Group of
$31.5 million.
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 531% and 139% for the years
ended December 31, 1993 and 1992, respectively. For the year ended December 31,
1991, operating income before non-cash charges was a loss. 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.
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
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<PAGE>
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 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 Common 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 Common 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
- - - --------------------
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.
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 from TCI. 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,
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<PAGE>
advances or cash dividends. However, other subsidiaries, principally Southern,
are not restricted from making transfers of funds to other members of the group.
The cash provided by operating activities of Southern, which is the satellite
carrier for the signal of a major independent television station, is a primary
source of cash available for distribution to Liberty Media Group. However,
Southern does not have an agreement with the independent station with respect to
the retransmission of its signal and there are no specific statutory
restrictions per se which would prevent any other satellite carriers from
retransmitting such signal to cable operators and others. If the business of
Southern is adversely affected by competitive or other factors, it may have an
adverse effect on the ability of Liberty Media Group to generate adequate cash
to meet its obligations.
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, $250 million of which was outstanding at December 31, 1993. 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 had a $40 million revolving credit
facility, all of which was available at December 31, 1993. In August 1994,
HSN's credit facility was increased to $100 million. In April 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. Both the HSN and ARCH facilities restrict the transfer of funds
to affiliated companies, and include various financial covenants, including
maintenance of certain financial ratios.
In July 1994, Rainbow Program Enterprises ("Rainbow") purchased a
49.9% 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 $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.
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
- - - --------------------
Pursuant to the QVC Merger Agreement described above, the Purchaser
commenced an offer to purchase all outstanding shares of Common Stock ("QVC
Common Stock") and Series B Preferred Stock and Series C Preferred Stock ("QVC
Preferred Stock" and together with the QVC Common Stock, the "Shares") of QVC at
$46 per share of QVC Common Stock and $460 per share of QVC Preferred Stock, net
to the seller in cash, upon the terms and
IV-161
<PAGE>
subject to the conditions set forth in the Offer to Purchase, as supplemented,
and the related Letters of Transmittal (which collectively constitute the "QVC
Tender Offer").
Following expiration of the QVC Tender Offer at midnight, New York
City time, on February 9, 1995, the Purchaser accepted for payment all Shares
tendered to it. The Shares tendered constituted approximately 98.7% of the QVC
Common Stock outstanding and approximately 100% and 99% of the two classes of
Preferred Stock outstanding (in each case based upon information as to the
number of Shares outstanding supplied to the Purchaser by QVC). Previously, the
Purchaser had entered into a Tender Offer Facility with certain banks and had
entered into a credit facility with QVC (the "QVC Credit Facility") in
connection with the financing of the purchase of Shares in the QVC Tender Offer.
In connection with the acceptance of Shares for payment in the QVC
Tender Offer, Comcast, Liberty Media Group and the Purchaser entered into a
Stockholders Agreement, dated as of February 9, 1995 (the "Stockholders
Agreement"). Pursuant to the Stockholders Agreement, Liberty Media Group
contributed to the capital of the Purchaser all of the Shares of QVC owned by it
as well as $7 million in cash in exchange for the issuance to it of common stock
of the Purchaser constituting approximately 42.6% of the authorized and
outstanding equity of the Purchaser. Comcast contributed to the capital of the
Purchaser all of the Shares of QVC owned by it as well as $267 million in cash
in exchange for its approximately 57.4% equity interest in the Purchaser.
Following consummation of the QVC Tender Offer, on February 15, 1995
the Purchaser was merged with and into QVC (the "QVC Merger"), with QVC being
the surviving corporation in the QVC Merger. In the QVC Merger, all remaining
Shares were converted into an amount of cash equal to the price offered in the
QVC Tender Offer. Following the QVC Merger, Comcast and Liberty Media Group
beneficially owned all of the outstanding capital stock of 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 (as the surviving corporation following the QVC Merger) pursuant
to such credit facility.
In connection with the transactions contemplated under the
Stockholders Agreement, TCI has undertaken to cause Liberty Media Group 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 Liberty Group Stock
have been distributed, and such securities impute a market capitalization in
excess of $2 billion.
As of December 31, 1993, Liberty Media Group had consolidated debt
maturities of $29 million in 1994 and $47 million in 1995. HSN had a $25 million
principal payment due
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<PAGE>
in 1994 and principal payments totaling $35 million in 1995. HSN repaid the
outstanding balance on its loans in August 1994. (See Sources of Liquidity
above)
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, Liberty Media Group and HSN expect to pay $29
million during 1995. Of this amount, $16 million represents an obligation of
HSN. HSN expects to collect $3 million from another party for that party's
share of the settlements, resulting in a net cash impact to HSN and Liberty
Media Group of $13 million each.
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, 1993, Liberty
Media Group's future minimum obligation related to certain film licensing
agreements was $217 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 obligation for certain sports program rights
contracts as of December 31, 1993 was $43 million. It is expected that
sufficient cash will be generated by the programming services to satisfy these
commitments. However, the 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.
TCI provides certain centralized cash management functions for Liberty
Media Group. Such transfers of funds between TCI and Liberty Media Group will
be included in borrowings from or loans to TCI, or if determined by the Board of
Directors, as an equity contribution.
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
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<PAGE>
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 subject to rate regulation although packages or collective offerings of
such service 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 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.
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, 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. 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.
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<PAGE>
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 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, which
currently are subject to pending petitions for reconsideration before the FCC,
may limit carriage of Liberty Media Group's programming services on certain
cable systems of TCI and its affiliates.
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.
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<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, 1993
and 1992 and for each of the years in the three-year period ended December 31,
1993.
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,
1993 and 1992, and the related combined statements of operations and equity, and
cash flows for each of the years in the three-year period ended December 31,
1993. These combined financial statements are the responsibility of the
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, 1993 and 1992, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 15, 1995
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<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,
1993 1992
---------- --------
amounts in thousands
Assets
- - - ------
<S> <C> <C>
Cash and cash equivalents $ 82,544 94,593
Trade and other receivables, net 70,283 20,674
Inventories, net 112,008 1,095
Prepaid expenses 25,301 6,100
Investments in affiliates, accounted for under
the equity method, and related receivables
(note 4) 229,292 213,993
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 487,073 487,073
Other investments, at cost, and related
receivables (note 6) 235,425 75,670
Deferred tax asset (note 10) 13,680 11,779
Property and equipment, at cost (note 7):
Land 20,374 39
Support equipment and buildings 130,495 30,464
Computer and broadcast equipment 61,820 --
---------- -------
212,689 30,503
Less accumulated depreciation 28,710 11,186
---------- -------
183,979 19,317
---------- -------
Excess cost over acquired net assets (note 7) 262,535 24,349
Less accumulated amortization 10,284 779
---------- -------
252,251 23,570
---------- -------
Other intangibles 99,751 83,802
Less accumulated amortization 67,095 41,608
---------- -------
32,656 42,194
---------- -------
Other assets, at cost, net of amortization 7,066 3,298
---------- -------
$1,731,558 999,356
========== =======
<CAPTION>
Liabilities and Combined Equity
- - - -------------------------------
<S> <C> <C>
Accounts payable $ 100,692 11,012
Accrued liabilities 90,571 20,067
Accrued litigation settlements (note 8) 29,000 --
Accrued compensation relating to stock
appreciation rights (note 11) 36,996 18,171
Income taxes payable 24,624 806
Deferred revenue 43,839 28,110
Debt (note 9) 399,680 289,168
Other liabilities 1,522 3,112
---------- -------
Total liabilities 726,924 370,446
---------- -------
Minority interests in equity of
consolidated subsidiaries 112,319 1,123
Combined equity (note 11) 892,315 627,787
---------- -------
$1,731,558 999,356
========== =======
</TABLE>
Commitments and contingencies (notes 4, 8, 10 and 12)
See accompanying notes to combined financial statements.
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)
Combined Statements of Operations and Equity
<TABLE>
<CAPTION>
Year ended
December 31,
1993 1992 1991
-------------------------------------
amounts in thousands
<S> <C> <C> <C>
Revenue:
Net sales from home shopping services (note 7) $ 942,940 -- --
Programming services:
From TCI 47,448 45,970 49,415
From others 216,512 163,018 76,906
---------- ------- -------
1,206,900 208,988 126,321
---------- ------- -------
Cost of sales, operating costs and expenses:
Cost of sales 611,526 -- --
Operating 247,268 135,530 87,629
Selling, general and administrative 267,086 46,897 37,096
Charges by TCI 4,686 6,418 2,873
Compensation relating to stock
appreciation rights (note 11) 40,366 16,939 1,398
Depreciation 19,386 2,933 2,356
Amortization 20,753 11,168 11,557
---------- ------- -------
1,211,071 219,885 142,909
---------- ------- -------
Operating loss (4,171) (10,897) (16,588)
Other income (expense):
Interest expense (12,683) (12,275) (6,148)
Interest expense to TCI (1,703) (2,168) (3,250)
Dividend and interest income, primarily
from affiliates 23,145 11,974 25,353
Share of earnings of affiliates, net (note 4) 24,045 24,355 9,358
Gain on disposition of assets 31,972 8,240 11,028
Loss on early extinguishment of debt (3,554) -- --
Minority interests in losses of
consolidated subsidiaries 32 5,511 9,364
Recognition of deferred gain upon
repayment of note receivable from
affiliate -- -- 16,412
Litigation settlements (note 8) (7,475) -- --
Other, net (1,586) (1,277) (130)
---------- ------- -------
52,193 34,360 61,987
---------- ------- -------
Earnings before income taxes 48,022 23,463 45,399
Income tax expense (note 10) (23,076) (8,959) (14,242)
---------- ------- -------
Net earnings (note 7) 24,946 14,504 31,157
Combined equity:
Beginning of year 627,787 642,711 681,935
Change in borrowings from or
loans to TCI 239,582 (29,428) (70,381)
---------- ------- -------
End of year $ 892,315 627,787 642,711
========== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
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)
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
December 31,
1993 1992 1991
-----------------------------------------------
amounts in thousands
(see note 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 24,946 14,504 31,157
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 40,139 14,101 13,913
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 of affiliates, net (24,045) (24,355) (9,358)
Loss on early extinguishment of debt 3,554 -- --
Deferred income tax expense (benefit) (1,311) 8,852 11,837
Minority interests in losses (32) (5,511) (9,364)
Gain on disposition of assets (31,972) (8,240) (11,028)
Litigation settlements 7,475 -- --
Amortization of debt discount -- 520 1,938
Recognition of deferred gain -- -- (16,412)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Change in receivables (34,532) 3,226 (6,331)
Change in inventories (8,672) 80 (269)
Change in prepaid expenses (10,678) 1,296 (6,877)
Change in payables, accruals and deferred revenue 55,305 23,592 14,486
---------- ------- -------
Net cash provided by operating activities 39,002 44,838 15,090
---------- ------- -------
Cash flows from investing activities:
Cash paid for acquisitions (160,440) (32,930) --
Capital expended for property and equipment (18,910) (2,116) (2,384)
Additional investments in and loans to affiliates and
others (48,457) (45,010) (148,871)
Return of capital from affiliates 4,750 42,295 17,430
Collections on loans to affiliates and others 20,136 4,148 79,342
Proceeds from disposition of assets 44,061 -- --
Other investing activities, net (1,417) (3,751) 153
---------- ------- -------
Net cash used in investing activities (160,277) (37,364) (54,330)
---------- ------- -------
Cash flows from financing activities:
Borrowings of debt 1,140,400 344,066 238,269
Repayments of debt (1,197,181) (337,628) (9,638)
Change in borrowings from or loans to TCI 117,075 (18,773) (114,636)
Contributions by minority shareholders of subsidiaries 48,932 2,773 4,602
---------- ------- -------
Net cash provided (used) by financing
activities 109,226 (9,562) 118,597
---------- ------- -------
Net increase (decrease) in cash and cash
equivalents (12,049) (2,088) 79,357
Cash and cash equivalents at beginning of
year 94,593 96,681 17,324
---------- ------- -------
Cash and cash equivalents at end of year $ 82,544 94,593 96,681
========== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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
December 31, 1993, 1992 and 1991
(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 corresponds to TCI's business which produces
and distributes cable television programming services ("Liberty Media
Group"). While the Liberty Group Stock would constitute common stock of
TCI, it is intended to reflect the separate performance of such business.
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
currently anticipated to be attributed to the Liberty Media Group.
The subsidiaries of TCI and Liberty currently anticipated to be
attributable to Liberty Media Group, as well as certain investments held by
these or other subsidiaries of TCI and Liberty also anticipated to be
attributable 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)
Investments
-----------
BET Holdings, Inc.
(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
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. (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 business which
provides domestic cable television and telephony services, (ii) TCI's
international business which provides international cable television and
telephony services and certain international programming services and (iii)
TCI's technology and venture business. 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.
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
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 Stock would be holders of common stock of TCI and
would continue to be subject to risks associated with an investment
(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
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 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 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.
(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 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 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
(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
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.
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 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.
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.
Deferred Revenue
----------------
Deferred revenue represents advance billings primarily to home satellite
dish owners. Such revenue is recognized in the month service is provided.
(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
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. Liberty Media Group'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 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 TCI 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. TCI 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 $16,519,000, $10,583,000 and $6,465,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. Cash paid for
income taxes during the years ended December 31, 1993, 1992 and 1991 was
$7,331,000, $9,805,000 and $12,457,000, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------
1993 1992 1991
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 540,254 32,930 --
Net liabilities assumed (195,648) -- --
Deferred tax asset
recorded upon acquisition 1,115 -- --
Contribution to combined
equity from TCI for acquisition (123,000) -- --
Minority interests in equity
of acquired entities (62,281) -- --
---------- --------- --------
$ 160,440 32,930 --
========== ========= ========
Noncash proceeds on
disposition $ -- 12,643 --
========== ========= ========
</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)
(4) Investments in Affiliates
-------------------------
Summarized unaudited financial information for affiliates accounted for under
the equity method is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1993 1992
---- ----
amounts in thousands
<S> <C> <C>
Combined Financial Position
- - - ---------------------------
Property and equipment, net $ 136,144 124,668
Feature film inventory 112,183 60,217
Cable distribution rights 99,579 116,557
Excess cost, other intangibles
and other assets 1,042,387 878,043
---------- ---------
Total assets $1,390,293 1,179,485
========== =========
Debt $ 203,813 284,240
Due to Liberty Group 4,254 3,848
Feature film rights payable 104,096 38,578
Other liabilities 458,614 401,082
Owners' equity 619,516 451,737
---------- ---------
Total liabilities and
equity $1,390,293 1,179,485
========== =========
</TABLE>
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------------
1993 1992 1991
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Combined Operations
- - - -------------------
Revenue $1,799,780 1,518,508 728,907
Operating expenses (1,515,697) (1,272,238) (543,149)
Depreciation and amortization (50,157) (80,941) (80,337)
---------- --------- --------
Operating income 233,926 165,329 105,421
Interest expense (12,582) (26,005) (41,279)
Other, net (118,281) (53,098) (44,122)
---------- --------- --------
Net earnings $ 103,063 86,226 20,020
========== ========= ========
</TABLE>
(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
The following table reflects the carrying value of Liberty Media Group's
investments, accounted for under the equity method, including related
receivables:
<TABLE>
<CAPTION>
December 31,
1993 1992
----------- ---------
amounts in thousands
<S> <C> <C>
Discovery $106,089 100,635
QVC 61,545 59,556
Sunshine 9,131 12,202
AMC (11,026) (22,125)
Sports 32,561 31,385
HTS 4,610 10,958
Other investments 26,382 21,382
-------- -------
$229,292 213,993
======== =======
</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,
1993 1992 1991
---- ---- ----
amounts in thousands
<S> <C> <C> <C>
Discovery $ 5,454 5,721 2,601
QVC 14,078 13,322 5,985
Sunshine (957) (1,055) (2,266)
AMC 11,313 7,839 7,859
Sports 5,859 3,348 176
HTS (7,076) 748 109
Other (4,626) (5,568) (5,106)
------- ------ ------
$24,045 24,355 9,358
======= ====== ======
</TABLE>
The common stock of QVC was publicly traded at December 31, 1993. Based on
the trading price of QVC common stock at December 31, 1993, Liberty Media
Group's investment in QVC had a market value of $414,014,000 (which
exceeded its cost by $352,469,000) (excluding the effect of the Diller
option described below).
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
(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
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.
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.
Liberty Media Group, Comcast, QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation which is jointly owned by Comcast and Liberty
Media Group, and QVC are parties to an Agreement and Plan of Merger dated
as of August 4, 1994, as amended (the "QVC Merger Agreement"). Pursuant to
the QVC Merger Agreement, the Purchaser commenced an offer to purchase all
outstanding shares of common stock ("QVC Common Stock") and Series B
Preferred Stock and Series C Preferred Stock ("QVC Preferred Stock" and
together with the QVC Common Stock, the "Shares") of QVC at $46 per share
of QVC Common Stock and $460 per share of QVC Preferred Stock, net to the
seller in cash, upon the terms and subject to the conditions set forth in
the Offer to Purchase, as supplemented, and the related Letters of
Transmittal (which collectively constitute the "QVC Tender Offer").
Following expiration of the QVC Tender Offer at midnight, New York City
time, on February 9, 1995, the Purchaser accepted for payment all Shares
tendered to it. The Shares tendered constituted approximately 98.7% of the
QVC Common Stock outstanding and approximately 100% and 99% of the two
classes of Preferred Stock outstanding (in each case based upon information
as to the number of Shares outstanding supplied to the Purchaser by QVC).
Previously, the Purchaser had entered into a Tender Offer Facility with
certain banks and had entered into a credit facility with QVC (the "QVC
Credit Facility") in connection with the financing of the purchase of
Shares in the QVC Tender Offer.
In connection with the acceptance of shares for payment in the QVC Tender
Offer, Comcast, Liberty Media Group and the Purchaser entered into a
stockholders agreement, dated February 9, 1995 (the "Current Stockholders
Agreement"). Pursuant to the Current Stockholders Agreement, Liberty Media
Group contributed to the capital of the Purchaser all of the Shares of QVC
owned by it as well as $7 million in cash in exchange for the issuance to
it of common stock of the Purchaser constituting approximately 42.6% of the
authorized and outstanding equity of the Purchaser. Comcast contributed to
the capital of the Purchaser all of the Shares of QVC owned by it and $267
million in cash in exchange for its approximately 57.4% equity interest in
the Purchaser.
(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
Following consummation of the QVC Tender Offer, on February 15, 1995, the
Purchaser was merged with and into QVC (the "QVC Merger"), with QVC being
the surviving corporation in the QVC Merger. In the QVC Merger, all
remaining Shares were converted into an amount of cash equal to the price
offered in the QVC Tender Offer. Following the QVC Merger, Comcast and
Liberty Media Group beneficially owned all of the outstanding capital stock
of 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 (as the surviving corporation
following the QVC Merger) pursuant to such credit facility.
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 obtained 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
$180,249,000 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.
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-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
(5) Investment in Turner Broadcasting System, Inc.
----------------------------------------------
In 1987, Liberty Media Group and several other cable television operators
purchased shares of two classes of preferred stock of TBS. During 1991,
TBS made an offer to exchange shares of one class of its preferred stock
(and accrued dividends thereon) for shares of TBS common stock and, as a
result, Liberty Media Group received common shares valued at $178 million.
Shares of the other class of preferred stock have voting rights and are
convertible into shares of TBS Class B 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 and $620 million (which exceeded cost by $478
million and $306 million) at December 31, 1993 and 1992, respectively. In
addition, Liberty Media Group's investment in TBS preferred stock had an
aggregate market value of $954 million and $746 million, based upon the
market value of the common stock into which it is convertible, (which
exceeded cost by $781 million and $573 million) at December 31, 1993 and
1992, respectively.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," effective for fiscal years beginning after
December 15, 1993. Under the new rules, debt securities that 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 as a separate
component of shareholders' equity. Unrealized holding gains and losses on
securities classified as trading are reported in earnings.
Liberty Media Group holds no material debt securities. Marketable equity
securities as of December 31, 1993 are reported by Liberty Media Group at
the lower of cost or market ("LOCOM") and net unrealized losses are
reported in earnings. Liberty Media Group applied the new rules starting
in the first quarter of 1994. Application of the new rules resulted in an
estimated increase of approximately $333,861,000 in combined equity as of
January 1, 1994, representing the recognition of unrealized appreciation,
net of taxes, for Liberty Media Group's investment in equity securities
determined to be available-for-sale, previously carried at LOCOM. Such
securities are represented by Liberty Media Group's investment in TBS
common stock and Liberty Media Group's other marketable equity securities
described in note 6.
(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
(6) 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>
Marketable equity securities (a) $ 35,237 18,269
Convertible debt, accrued interest and preferred
stock investment 46,457 46,459
Note receivable including accrued interest (b) 132,303 --
Other investments and related receivables 21,428 10,942
-------- ------
$235,425 75,670
======== ======
</TABLE>
(a) The marketable equity securities, which were accounted for at the
lower of cost or market, had an aggregate market value of $122,628,000
and $75,427,000 (which exceeded cost by $87,391,000 and $57,158,000)
at December 31, 1993 and December 31, 1992, respectively.
(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
$432 million and $181 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.
(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
(7) Acquisitions
------------
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.
The acquisition of HSN was accounted for by the purchase method.
Accordingly, the results of operations of such acquired entity has been
combined with those of Liberty Media Group since its date of acquisition.
On a pro forma basis, Liberty Group's revenue would have been increased by
approximately $103,640,000 and $1,071,827,000 and net earnings would have
been decreased by approximately $8,720,000 and $5,390,000 for the years
ended December 31, 1993 and 1992, respectively, had the acquisition
occurred prior to January 1, 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 Liberty Media Group operated the
acquired entity prior to January 1, 1992.
(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
(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 will pay approximately the following (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Civil actions pending Court approval in Delaware
and Colorado $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 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.
(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
(9) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at --------------------
December 31, 1993 1993 1992
----------------- ---------- --------
amounts in thousands
<S> <C> <C> <C>
Liability to seller (a) --- $ 19,637 19,637
Unsecured note payable (b) 6.0% 545 1,635
Convertible note payable (c) 10.0% 13,131 12,121
Notes payable to bank (d) 5.5% 110,000 ---
Bank credit facility (e) 6.8% 250,000 245,000
Note payable to bank --- --- 7,000
Other debt, with varying rates and
maturities 8.9% 6,367 3,775
-------- -------
$399,680 289,168
======== =======
</TABLE>
(a) Payable by ARC
--------------
The liability represented the discounted amount estimated under an
"Earnout Rights" agreement. The agreement required annual payments
during a five-year period contingent upon the operations from ARC's
"DBS Business," as defined in the agreement. The annual payments were
equal to 86% of the Earnings Before Depreciation, Interest and Income
Taxes ("EBDIT"), as defined, of the DBS Business over the base EBDIT.
The minimum amount required under the agreement was $20 million. At
December 31, 1992, the estimated liability was revised to the
calculated amount under the agreement, less previous payments. 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 11.65% limited partnership interest in ARC.
(continued)
IV-183
<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
(d) 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 remained
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 borrowed $140 million under the above
mentioned bank financing agreements. These proceeds, together with
available working capital of HSN, were used to retire $143,252,000
principal amount of the Unsecured 11-3/4% Senior Notes, due October
15, 1996 (the "Senior Notes"), at 104% of the principal amount plus
accrued interest to the redemption date. During August and September
of 1993, HSN repaid $30 million of the outstanding balance on the
revolving credit facility.
In 1993, HSN entered into interest rate exchange agreements with
certain financial institutions to limit its exposure from interest
rate volatility. These agreements have notional principal amounts
aggregating $115 million, of which $25 million, $35 million and $30
million of the senior term loans, have fixed maximum variable interest
rates if the London Interbank Offering Rate ("LIBOR") exceeds 6% until
June 1994, 6% until June 1995 and 7% until October 1995, respectively.
The senior unsecured revolving credit facility has a principal amount
of $25 million with a fixed maximum variable interest rate if LIBOR
exceeds 6% until April 1994. The three month LIBOR rate at December
31, 1993 was 3.3125%.
On May 11, 1993, HSN retired the remaining $16,915,000 principal
balance of its Unsecured 5-1/2% Convertible Subordinated Debentures,
due April 22, 2002 (the "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 $789 million at
December 31, 1993) it holds of TBS.
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-184
<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 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.
Debt maturities are as follows: 1994 - $29,267,000; 1995 - $48,697,000;
1996 - $401,000; 1997 - $276,987,000 and 1998 - $32,900,000.
(10) Income Taxes
------------
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which 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.
A tax sharing arrangement exists between TCI and Liberty Media Group and
encompasses both federal and state tax consequences. The arrangement
relies upon the Internal Revenue Code of 1986, as amended, applicable state
and local tax law and related regulations. Liberty Media Group will be
responsible to TCI for its gross individual share of the consolidated tax
liabilities and TCI will reimburse Liberty Media Group for tax attributes
used in excess of income tax liability incurred. 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 of assets will be
inventoried and tracked for the entities comprising Liberty Media Group.
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
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.
(continued)
IV-185
<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. 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 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. TCI and Liberty adopted Statement No.
109 in 1993 and applied the provisions of Statement No. 109 retroactively
to January 1, 1986.
Income tax benefit (expense) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
---------- --------- ---------
amounts in thousands
<S> <C> <C> <C>
Year ended December 31, 1993:
State and local intergroup tax expense
allocation (3,052) (1,616) (4,668)
Federal intergroup tax benefit (expense)
allocation (20,781) 2,373 (18,408)
Intergroup alternative minimum tax allocation (554) 554 --
--------- -------- --------
(24,387) 1,311 (23,076)
========= ======== ========
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)
========= ======== ========
Year ended December 31, 1991:
State and local intergroup tax expense
allocation (2,848) (253) (3,101)
Federal intergroup tax benefit (expense)
allocation 2,310 (13,451) (11,141)
Intergroup alternative minimum tax allocation (1,867) 1,867 --
--------- -------- --------
$(2,405) (11,837) (14,242)
========= ======== ========
</TABLE>
(continued)
IV-186
<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 1993 and 34% in 1992 and 1991 as a result of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
1993 1992 1991
--------------------------------
unts in thousands
<S> <C> <C> <C>
Computed expected tax expense $(16,807) (7,977) (15,436)
Dividends excluded for income tax purposes 1,104 766 4,122
Amortization not deductible for income tax
purposes (2,886) -- --
Excess executive compensation (688) -- --
State and local income taxes, net of Federal
income tax benefit (3,023) (892) (2,047)
Other, net (776) (856) (881)
-------- ------ -------
$(23,076) (8,959) (14,242)
======== ====== =======
</TABLE>
(continued)
IV-187
<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, 1993 and 1992 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
1993 1992
------ ------
amounts in thousands
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $15,503 17,858
Charitable contribution carryforward 910 --
Allocated alternative minimum tax paid
credit carryforward 2,444 1,890
Inventory costing 7,248 --
Provision for returns and allowance 10,949 --
Future deductible amount attributable to accrued stock
appreciation rights and deferred compensation 16,660 7,268
Future deductible amount related to accrued litigation
settlements 3,065 --
Other future deductible amounts primarily due to
non-deductible accruals 3,635 128
------- ------
Deferred tax assets 60,414 27,144
------- ------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation 11,482 1,259
Intangible assets, primarily due to differences in amortization 5,393 756
Investments in affiliates, due principally to undistributed
earnings of affiliates 29,859 13,350
------- ------
Deferred tax liabilities 46,734 15,365
------- ------
Net deferred tax assets $13,680 11,779
======= ======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1993 and 1992.
At December 31, 1993, Liberty Media Group had net operating and capital
loss carryforwards for income tax purposes aggregating approximately
$37,813,000 which, if not utilized to reduce taxable income in future
periods, expire as follows: $6,000 in 2000, $1,146,000 in 2001, $2,335,000
in 2002, $11,580,000 in 2003, $953,000 in 2004, $11,721,000 in 2005,
$10,007,000 in 2006 and $65,000 in 2007. At December 31, 1993, Liberty
Media Group had allocated alternative minimum tax paid credit carryforwards
aggregating approximately $2,444,000. All such carryforwards were utilized
in 1994.
New tax legislation was enacted in the third quarter of 1993 which, among
other matters, increased the corporate Federal income tax rate from 34% to
35%. Liberty Media Group has reflected the tax rate
(continued)
IV-188
<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
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.
(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. 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.
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.
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, 1993, 1992 and 1991,
aggregated $195,000, $3,283,000 and
(continued)
IV-189
<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
$2,813,000, respectively, and are included in selling, general and
administrative expenses in the accompanying combined statements of
operations. 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 $1,200,000.
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.
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 could obtain comparable
financing from an unrelated financing source.
(12) Commitments and Contingencies
-----------------------------
Liberty Media Group has long-term sports program rights contracts which
require payments through 1998. Future payments by year are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1994 $15,345
1995 11,503
1996 8,580
1997 5,926
1998 1,300
</TABLE>
Liberty 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 $29,250,000, $19,568,000 and $12,090,000 for the years
ended December 31, 1993, 1992 and 1991, respectively.
(continued)
IV-190
<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
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
thousands):
<TABLE>
<S> <C>
1994 $25,140
1995 23,369
1996 21,515
1997 21,219
1998 16,007
</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.
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, 1993, these agreements require minimum payments
aggregating approximately $217 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.
IV-191
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
QVC, INC.:
We have audited 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. 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 used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QVC, Inc. and
subsidiaries as of January 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 13 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Philadelphia, Pennsylvania KPMG Peat Marwick LLP
March 4, 1994
IV-192
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
January 31,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,873 $ 4,279
Accounts receivable, less allowance for doubtful accounts
of $52,759 in 1994 and $21,316 in 1993 (Note 2) 183,162 97,008
Inventories 148,208 118,712
Deferred taxes (Note 13) 59,749 10,680
Prepaid expenses 5,536 3, 716
-------- --------
Total current assets 412,528 234,395
Property, plant and equipment (Note 3) 80,579 72,863
Cable television distribution rights (Note 4) 99,579 115,248
Other assets (Note 5) 33,664 9,028
Excess of cost over acquired net assets, less accumulated
amortization of $43,551 in 1994 and $33,710 in 1993 251,810 268,161
-------- --------
Total assets $878,160 $699,695
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 7) $ 3,114 $ 24,073
Accounts payable-trade 81,594 51,622
Accrued liabilities (Note 6) 225,989 151,358
-------- --------
Total current liabilities 310,697 227,053
-------- --------
Long-term debt, less current maturities (Note 7) 7,044 7,586
-------- --------
Total liabilities 317,741 234,639
-------- --------
Commitments and contingencies (Notes 8 and 14)
Shareholders' equity (Notes 9 and 10):
Convertible Preferred Stock, par value $.10 56 93
Common Stock, par value $.01 399 357
Additional paid-in capital 446,027 409,970
Retained earnings 113,937 54,636
-------- --------
Total shareholders' equity 560,419 465,056
-------- --------
Total liabilities and shareholders' equity $878,160 $699,695
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-193
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------
1993 1992 1991
------------ ------------ ----------
<S> <C> <C> <C>
Net revenue $1,222,104 $1,070,587 $921,804
Cost of goods sold 723,175 621,840 534,650
---------- ---------- --------
Gross profit 498,929 448,747 387,154
---------- ---------- --------
Operating expenses:
Variable costs 171,242 160,420 145,348
General and administrative 132,743 123,604 110,747
Depreciation 16,682 17,105 16,679
Amortization of intangible assets 26,019 29,420 29,983
---------- ---------- --------
346,686 330,549 302,757
---------- ---------- --------
Operating income 152,243 118,198 84,397
---------- ---------- --------
Other income (expense):
Costs of Paramount tender offer (Note 16) (34,800) -- --
Losses from joint ventures (Note 5) (11,432) -- --
Interest expense (1,590) (18,364) (38,979)
Interest income 10,865 8,834 7,480
---------- ---------- --------
(36,957) (9,530) (31,499)
---------- ---------- --------
Income before income taxes, extraordinary item
and cumulative effect of a change in
accounting principle 115,286 108,668 52,898
Income tax provision (Note 13) (59,975) (52,080) (31,165)
---------- ---------- --------
Income before extraordinary item and
cumulative effect of a change in
accounting principle 55,311 56,588 21,733
Extraordinary item -- loss on extinguishment of
debt, net of tax benefit (Note 5) -- (1,496) (2,108)
Cumulative effect of a change in accounting
for income taxes (Note 13) 3,990 -- --
---------- ---------- --------
Net income $ 59,301 $ 55,092 $ 19,625
========== ========== ========
Income per share (Note 11):
Primary:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ 1.10 $ 1.32 $ .68
Extraordinary item, net of tax benefit -- (.03) (.07)
Cumulative effect of a change in accounting
for income taxes .08 -- --
---------- ---------- --------
Net income $ 1.18 $ 1.29 $ .61
========== ========== ========
Fully diluted:
Income before extraordinary item and cumulative
effect of a change in accounting principle $ 1.10 $ 1.27 $ .67
Extraordinary item, net of tax benefit -- (.03) (.06)
Cumulative effect of a change in accounting
for income taxes .0 -- --
---------- ---------- --------
Net income $ 1.18 $ 1.24 $ .61
========== ========== ========
Weighted average number of common and
common equivalent shares used in
computing income per share:
Primary 50,062 43,890 31,959
========== ========== ========
Fully diluted 50,205 45,386 38,313
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-194
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 59,301 $ 55,092 $ 19,625
Adjustments for non-cash items included
in net income:
Cumulative effect of a change in accounting
for income taxes (3,990) -- --
Loss on extinguishment of debt -- 2,720 3,838
Losses from joint ventures 11,432 -- --
Depreciation 16,682 17,105 16,679
Amortization of intangible assets 26,019 29,420 29,983
Grant of executive stock award -- 4,869 --
Provision for income taxes not requiring
a cash outlay 3,366 20,275 15,800
Interest incurred but not paid -- 96 9,199
Issuance of Common Stock under
Standby Equity Agreement -- -- 614
Losses on termination of capitalized lease
and sales of fixed assets 190 90 464
Changes in other non-current assets (3,458) 5,303 642
Effects of changes in working capital items
(Note 15) (36,239) (33,557) 40,107
-------- --------- ---------
Net cash provided by operating activities 73,303 101,413 136,951
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures (24,588) (21,137) (11,870)
Investments in and advances to joint ventures (22,626) -- --
Proceeds from sales of property, plant
and equipment -- 28 9,010
Adjustments to purchase price of
CVN Companies, Inc. -- 5 (230)
Changes in other non-current assets (347) (494) 330
-------- --------- ---------
Net cash used in investing activities (47,561) (21,598) (2,760)
-------- --------- ---------
Cash flows from financing activities:
Payments under Senior term loan (21,000) (135,297) (128,101)
Principal payments under capitalized
leases, mortgages and other debt (502) (5,300) (12,905)
Borrowings under revolving credit facilities 20,000 -- 40,414
Payments against revolving credit facilities (20,000) -- (40,414)
Proceeds from exercise of stock options and other 1,169 16,687 891
Net proceeds from sale of Common Stock -- -- 51,082
Proceeds from exercise of warrants 6,185 11,570 --
Payment of unsecured note payable -- -- (31,444)
-------- --------- ---------
Net cash used in financing activities (14,148) (112,340) (120,477)
-------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 11,594 (32,525) 13,714
Cash and cash equivalents at beginning of year 4,279 36,804 23,090
-------- --------- ---------
Cash and cash equivalents at end of year $ 15,873 $ 4,279 $ 36,804
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-195
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Convertible Additional Retained
Preferred Common Paid-in Earnings Treasury
Stock Stock Capital (Deficit) Stock Total
------------ ------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1991 $125 $176 $228,628 $ (20,081) $ (68) $208,780
Net income for year -- -- -- 19,625 -- 19,625
Income tax benefit resulting from certain
capital stock transactions -- -- 11,500 -- -- 11,500
Proceeds from the exercise of employee stock
options -- -- 893 -- -- 893
Issuance of Common Stock under Standby
Equity Agreement -- 1 613 -- -- 614
Excess of value assigned over amount
received for Series B Convertible
Preferred Stock -- -- (239) -- -- (239)
Issuance of shares of Common Stock and
warrants in lieu of cash interest
payments -- 2 2,998 -- -- 3,000
Purchases of Treasury Stock -- -- -- -- (2) (2)
Net proceeds from public offering of
Common Stock -- 37 51,045 -- -- 51,082
Common Stock exchanged to retire
unsecured note payable -- 23 31,422 -- -- 31,445
Conversion of shares (11) 11 -- -- -- --
Adjustments to warrants exchanged and
Common Stock issued in connection
with the CVN -- -- (912) -- -- (912)
----------- ---- -------- ---------- -------- --------
Balance January 31, 1992 114 250 325,948 (456) (70) 325,786
----------- ---- -------- ---------- -------- --------
Net income for year -- -- -- 55,092 -- 55,092
Income tax benefit resulting from capital
stock transactions, exercise of stock
options and net operating loss
carryforward -- -- 22,312 -- -- 22,312
Proceeds from the exercise of employee
stock options -- 13 16,708 -- (31) 16,690
Proceeds from exercise of warrants -- 11 11,559 -- -- 11,570
Grant of executive stock award -- 2 4,867 -- -- 4,869
Convertible subordinated note exchanged for
Common Stock, net of unamortized debt
placement fees of $1,260 -- 17 28,723 -- -- 28,740
Common Stock issued in warrant exchange
offer (Note 10) -- 68 91,394 -- (91,462) --
Conversion of shares (20) 20 -- -- -- --
Purchases of Treasury Stock -- -- -- -- (3) (3)
Retirement of Treasury Stock (1) (24) (91,541) -- 91,566 --
----------- ---- -------- ---------- -------- --------
Balance January 31, 1993 93 357 409,970 54,636 -- 465,056
----------- ---- -------- ---------- -------- --------
Net income for year -- -- -- 59,301 -- 59,301
Income tax benefit resulting from cumulative
effect of a change in accounting for
income taxes -- -- 27,053 -- -- 27,053
Income tax benefit resulting from exercise
of stock options -- -- 1,655 -- -- 1,655
Proceeds from the exercise of employee stock
options -- 1 1,168 -- -- 1,169
Proceeds from exercise of warrants -- 4 6,181 -- -- 6,185
Conversion of shares (37) 37 -- -- -- --
----------- ---- -------- ---------- -------- --------
Balance January, 31, 1994 $ 56 $399 $466,027 $113,937 -- $560,419
=========== ==== ======== ========== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
IV-196
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all subsidiaries. Investments in the Company's joint ventures (50%
or less owned) are accounted for under the equity method. All significant
intercompany accounts and transactions are eliminated in consolidation.
FISCAL YEAR.
The Company's fiscal year ends on January 31. Fiscal years are
designated in the financial statements and notes by the calendar year in which
the fiscal year commences.
CASH AND CASH EQUIVALENTS.
All highly-liquid debt instruments purchased with a maturity of three
months or less are classified as cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate the fair
value of those assets.
INVENTORIES.
Inventories, consisting primarily of products held for sale, are
stated at the lower of cost or market. Cost is determined by the average cost
method which approximates the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT.
The cost of property, plant and equipment is capitalized and
depreciated over their estimated useful lives using the straight-line method.
When assets are sold or retired, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in income. The cost
of maintenance and repairs is charged to expense as incurred.
EXCESS OF COST OVER ACQUIRED NET ASSETS.
The excess of cost over acquired net assets is amortized over thirty
years using the straight-line method.
TRANSLATION OF FOREIGN CURRENCIES.
All balance sheet items for foreign operations are translated at the
current exchange rate as of the balance sheet date, and income and expense items
are translated at average currency exchange rates for the year. Exchange gains
and losses resulting from foreign currency transactions are included in losses
from joint ventures.
NET SALES AND RETURNS.
Revenue is recognized at time of shipment to customers. The Company's
policy is to allow customers to return merchandise for full credit up to thirty
days after date of shipment. An allowance for returned merchandise is provided
as a percentage of sales based on historical experience. The return provision
was approximately 21, 19, and 18 percent of sales in fiscal 1993, 1992 and 1991,
respectively.
CAPITALIZATION OF START-UP COSTS.
The Company capitalizes all direct incremental costs incurred prior to
operations for new broadcast ventures. These costs are amortized over a period
of eighteen months starting at the commencement of broadcast operations.
INCOME TAXES.
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
cumulative effect of the change in the method of accounting for income taxes was
included in the first quarter of 1993 Consolidated Statements of Operations and
Shareholders' Equity. Prior years' financial statements were not restated.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
(continued)
IV-197
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company previously used the asset and liability method under SFAS 96.
Under the asset and liability method of SFAS 96, deferred tax assets and
liabilities were recognized for all events that had been recognized in the
financial statements. Under SFAS 96, the future tax consequences of recovering
assets or settling liabilities at their financial statement carrying amounts
were considered in calculating deferred taxes. Generally, SFAS 96 prohibited
consideration of any other future events in calculating deferred taxes.
NOTE 2 -- ACCOUNTS RECEIVABLE
The Company has an agreement with an unrelated third party which provides
for the sale and servicing of accounts receivable originating from the Company's
revolving credit card. The Company sold accounts receivable at face value of
$418.2 million, $392.7 million and $290.4 million under this agreement in fiscal
1993, 1992 and 1991, respectively. The Company remains obligated to repurchase
uncollectible accounts pursuant to the recourse provisions of the agreement and
is required to maintain a specified percentage of all outstanding receivables
transferred under the program as a deposit with the third party to secure its
obligations under the agreement. The Company is required to pay certain finance
and servicing fees which are offset by finance charges on customer account
balances. The net amount of this finance charge income is included as interest
income and is comprised of the following (in millions):
<TABLE>
<CAPTION>
Fiscal Year
-----------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Finance charges on customer account balances $26.2 $23.2 $20.0
----- ----- -----
Funding fees 8.7 8.1 7.7
Service fees 10.5 9.5 9.4
----- ----- -----
19.2 17.6 17.1
----- ----- -----
Net finance income $ 7.0 $ 5.6 $ 2.9
===== ===== =====
</TABLE>
The uncollected balances of accounts receivable sold under this program are
$201.2 million and $180.3 million at January 31, 1994 and 1993, respectively, of
which $170.1 million and $71.5 million represent deposits under the agreement
and are included in accounts receivable. The total reserve balances maintained
for the repurchase of uncollectible accounts are $55.7 million and $42.6 million
at January 31, 1994 and 1993, respectively. Approximately $8.6 million and
$25.7 million of the reserve balances are included in accrued liabilities at
January 31, 1994 and 1993, respectively; the remaining balances are included
with allowance for doubtful accounts.
Receivables sold under this agreement are considered financial instruments
with off-balance sheet risk as defined in Statement of Financial Accounting
Standards No. 105.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
January 31, Estimated
----------- Useful
1994 1993 Life
------------ ---------- -----------
(in thousands)
<S> <C> <C> <C>
Land $ 3,977 $ 3,228 --
Buildings and improvements 50,627 45,385 20-30 years
Furniture and other equipment 33,866 30,246 3- 8 years
Broadcast equipment 8,942 12,478 5- 7 years
Computer equipment and software 20,005 18,047 3- 5 years
Construction in progress 1,684 482 --
-------- --------
119,101 109,866
Less -- accumulated depreciation (38,522) (37,003)
-------- --------
Net property, plant and equipment $ 80,579 $ 72,863
======== ========
</TABLE>
(continued)
IV-198
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In July 1993, the Company completed construction of a 50,000 square foot
telecommunications center in Chesapeake, Virginia for a total cost of
approximately $6.9 million. This new telecommunications center replaced a
facility that was leased.
NOTE 4 -- CABLE TELEVISION DISTRIBUTION RIGHTS
Cable television distribution rights consist of the following:
<TABLE>
<CAPTION>
January 31,
-----------------------
1994 1993
------------ ---------
(in thousands)
<S> <C> <C>
Cable television distribution rights $162,142 $166,082
Less -- accumulated amortization (62,563) (50,834)
-------- --------
Net cable television distribution rights $ 99,579 $115,248
======== ========
</TABLE>
The amounts assigned to cable television distribution rights arose
principally from excess fair values assigned, as determined by independent
appraisals, to Convertible Preferred Stock issued to cable system operators in
exchange for distribution agreements.
Cable television distribution rights are amortized by the straight-line
method over the lives of the individual agreements. The remaining weighted
average life for all cable television distribution rights is approximately 10
years at January 31, 1994.
<TABLE>
<CAPTION>
NOTE 5 -- OTHER ASSETS
Other assets consist of the following:
January 31,
-----------------
1994 1993
------- ------
(in thousands)
<S> <C> <C>
Deferred taxes (Note 13) $17,265 $ 7,120
Investments in and advances to joint ventures,
net of accumulated losses 11,194 --
Start-up costs 3,459 --
Satellite transponder rights 1,000 1,000
Debt placement fees 162 15,292
Other 1,072 1,475
------- -------
34,152 24,887
Less -- accumulated amortization (488) (15,859)
------- -------
Net other assets $33,664 $ 9,028
======= =======
</TABLE>
During fiscal 1993, the Company established electronic retailing program
service in England ("QVC --The Shopping Channel") and Mexico ("CVC"), through
joint venture agreements with British Sky Broadcasting Limited and Grupo
Televisa, S.A. de C.V., respectively. The joint venture in England began
broadcasting on October 1, 1993 and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in England
requires, among other things, that the Company provide all funding to the joint
venture until it is profitable. The Company will then recover all prior
funding, before any profits are shared. Accordingly, for 1993, the Company has
included 100% of the loss on operations of this venture in the Consolidated
Statements of Operations. The operating results of the joint venture in Mexico
are shared equally by the partners.
(continued)
IV-199
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Summarized financial information for "QVC -- The Shopping Channel" and
"CVC" on a 100% basis as of and for the period ended January 31, 1994 follows
(unaudited -- in thousands):
<TABLE>
<CAPTION>
QVC--THE
SHOPPING CHANNEL CVC
----------------- --------
<S> <C> <C>
Current assets $ $5,608 $ 9,687
Property, plant and equipment, net 1,645 1,665
Unamortized start-up costs 2,205 1,650
Current liabilities 4,181 9,507
Net revenue 2,994 2,316
Gross profit 514 248
Loss (8,943) (3,606)
</TABLE>
In fiscal 1993, the Company also entered a joint venture with Tribute
Entertainment Company and Regal Communications to form QRT Enterprises ("QRT").
QRT produces and syndicates "Can We Shop" with Joan Rivers, which commenced
broadcasting January 17, 1994. "Can We Shop" is a one-hour, Monday through
Friday television show through which merchandise is sold. The Company's one-
third share of QRT's operating loss amounted to $386,000 in 1993.
In fiscal 1993, the Company made a $3.8 million investment in Friday
Holdings, L.P., a limited partnership. The limited partnership's purpose is to
establish or acquire businesses in the communications field and to develop
information products. The Company's one-third share of Friday Holdings'
operating loss amounted to $300,000 in 1993.
During the year, the Company also capitalized $3.5 million in costs
relating to Q2, a new televised shopping/programming service, scheduled to be
launched in the spring of 1994 in the United States. The capitalized start-up
costs will be amortized over eighteen months starting at the commencement of
broadcast operations.
Debt placement fees on the Senior term loan arising out of the CVN
acquisition have been amortized over the expected life of the debt using the
effective interest rate method. On March 5, 1993, the Company retired the
Senior term loan. Debt placement fees of $15.1 million associated with the
Senior term loan were fully amortized and the cost and accumulated amortization
were removed from the accounts. During fiscal 1992, the Company prepaid $86.3
million of the Senior term loan. As a result, the amortization of debt
placement fees of $2.7 million was accelerated and reported as an extraordinary
loss of $1.5 million, net of $1.2 million income tax benefit. During fiscal
1991, the Company prepaid $98.1 million of the Senior term loan, and the
amortization of debt placement fees of $3.8 million was accelerated and reported
as an extraordinary loss of $2.1 million, net of $1.7 million income tax
benefit.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
January 31,
-----------------------
1994 1993
------ ------
(in thousands)
<S> <C> <C>
Income taxes (Note 13) $ 80,879 $ 25,889
Reserve for uncollectible accounts under
revolving
credit program (Note 2) 8,636 25,699
Non-inventory accounts payable 35,452 26,418
Accrued compensation and benefits 13,996 13,035
Sales and other taxes 11,324 12,079
Allowance for sales returns 17,787 11,344
Other 57,915 36,894
-------- --------
$225,989 $151,358
======== ========
</TABLE>
(continued)
IV-200
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 7 -- LONG DEBT
Aggregate amounts of outstanding long-term debt consist of the following:
<TABLE>
<CAPTION>
January 31,
-------------------
1994 1993
---- ----
(in thousands)
<S> <C> <C>
10.4% Mortgage notes payable in monthly
installments until 1998 $ 10,158 $ 10,659
Senior term loan -- 21,000
------- --------
10,158 31,659
Less -- current portion (3,114) (24,073)
-------- --------
$ 7,044 $ 7,586
======== ========
</TABLE>
The Company has a $60.0 million bank revolving credit facility to finance
operations as well as to fund letters of credit for merchandise purchases.
Interest on outstanding amounts under this agreement is payable at the bank's
prime rate or other interest rate options. A commitment fee of .25% is payable
on the unused portion of the revolving credit facility. The credit agreement
requires the Company to maintain certain ratios for total liabilities to
shareholders' equity and for coverage of fixed charges. The Company borrowed
$20.0 million under the facility in March 1993 and retired the remaining balance
on the Senior term loan. All amounts borrowed under the facility were repaid
from net cash provided by operating activities during the first quarter of 1993.
Outstanding letters of credit totaled approximately $7.8 million at January 31,
1994.
The interest rate on the outstanding balance of the Senior term loan was
4.4% at January 31, 1993.
Maturities of the 10.4% mortgage notes payable for the five years
subsequent to January 31, 1994 are $3,114,000 in 1994; $601,000 in 1995;
$666,000 in 1996; $739,000 in 1997 and $5,038,000 in 1998.
NOTE 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS
Future minimum payments under all non-cancellable operating leases and
transponder service agreements with initial terms of one year or more at January
31, 1994 consist of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1994 $ 8,029
1995 6,405
1996 5,450
1997 5,173
1998 5,287
Thereafter 34,001
-------
Total $64,345
=======
</TABLE>
Expense for operating leases, principally for data processing equipment and
facilities, and for transponder service agreements amounted to $11,280,000,
$12,895,000 and $13,047,000 in fiscal years 1993, 1992 and 1991, respectively.
In November 1992, the Company started to transmit the QVC program on a
protected, non-preemptible transponder on the C-4 Satellite at a monthly cost
that averages $224,000 over the term of the twelve-year agreement.
In December 1992, the Company started to transmit The QVC Fashion Channel
on a protected non-preemptible transponder on the C-3 Satellite at a cost of
$205,000 per month over the term of the twelve-year agreement.
(continued)
IV-201
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 9 -- CAPITAL STOCK
The Company has 175,000,000 shares of Common Stock authorized. There were
39,895,447 shares outstanding at January 31, 1994 and 35,734,062 shares
outstanding at January 31, 1993. The reasons for the increase in the number of
shares of Common Stock outstanding were the conversion of Convertible Preferred
Stock (3,659,040), the exercise of warrants (408,908) and the exercise of
employee stock options (93,437). The following table summarizes the convertible
preferred shares at January 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED OUTSTANDING PAR VALUE
------------- ----------- ----------------
1994 AND 1993 1994 1993 1994 1993
------------- ----- ---- --------- -----
<S> <C> <C> <C> <C> <C>
Series A 10 -- -- $ -- $ --
Series B 1,000 28 55 3 6
Series C 1,000 531 788 53 79
Series D 300 1 83 -- 8
----- -----
$ 56 $ 93
===== =====
</TABLE>
The shares of Convertible Preferred Stock were issued to cable system
operators in connection with their signing or extending cable television
distribution agreements in prior years.
CONVERTIBILITY.
Each share of Series B, Series C and Series D Convertible Preferred Stock
is convertible into ten shares of Common Stock.
VOTING RIGHTS.
The holders of the Common Stock are empowered to elect two directors of the
Company as a class. The holders of each class of stock are entitled to cast one
vote per share for the election of the remaining directors of the Company.
LIQUIDATION.
Upon the dissolution and liquidation of the Company, the assets remaining
after the payment of all debts and liabilities of the Company shall be
distributed first to the holders of the Series B Convertible Preferred Stock at
$10.00 per share. To the extent available, the holders of Series C Convertible
Preferred Stock will then receive $10.00 per share followed by Series D
Convertible Preferred Stock holders at $15.00 per share. The balance, if any,
will be paid to the holders of the Common Stock share-for-share.
(continued)
IV-202
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS
The following table summarizes shares of Common Stock reserved for
issuance for outstanding stock options and warrants:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
PRICE
JANUARY 31, AT JANUARY 31,
---------------------- -------------------------- EXPIRATION
1994 1993 1994 1993 DATE
---------- ---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Qualified stock options 1,751,800 1,717,462 $30.56 $28.94 11/1996-01/2004
Non-qualified stock options 6,275,500 6,279,600 32.83 32.33 04/2000-07/2003
Warrants issued in connection
with 1987 debt financing 310,000 310,000 10.00 10.00 04/1994
Warrants issued in connection
with Convertible
subordinated debt 1,600,000 1,600,000 17.49 17.49 10/1995
Warrants exchanged for CVN
Series 2 Warrants -- 408,908 -- 15.13 --
Warrants issued with
Common Stock in lieu
of cash interest expense 100,000 100,000 13.35 13.35 04/1996-10/1996
---------- ----------
Total reserved shares 10,037,300 10,415,970
========== ==========
</TABLE>
The Company has Incentive Stock Option Plans ("ISO Plans") under which
options may be granted to key managerial employees to purchase up to 10,300,000
shares of Common Stock. The ISO Plans are administered by the Executive
Compensation Committee appointed by the Company's Board of Directors. The
Committee has the authority to determine optionees, the number of shares to be
covered by each option and certain other terms and conditions of the grant. The
ISO Plans require that the exercise price of options be equal to or greater than
the fair market value of the stock at the time of grant, and the term of any
option cannot exceed ten years. Options issued under the 1990 Non-Qualified
Stock Option Plan and the 1993 Qualified Stock Option Plan vest ratably over
four years, commencing one year from the date of the grant of the option, and
qualified and non-qualified options under all other ISO Plans, except where
noted below, vest ratably over three years, commencing on the date of grant.
In connection with obtaining a portion of the proposed financing for
the cash tender offer for Paramount Communications Inc. (Note 16), the Company
granted BellSouth Corporation, Advance Publications, Inc. and Cox Enterprises,
Inc. options to purchase an aggregate of 14.3 million shares of Common Stock at
$60.00 per share. The options were granted at the termination of the
QVC/Paramount tender offer on February 15, 1994 and are exercisable until the
later of August 15, 1994 or ten business days after stockholders of the Company
vote with respect to such grant of options.
On December 9, 1992, the Company and two of its principal shareholders
(Comcast Corporation and Liberty Media Corporation) announced an agreement
pursuant to which Mr. Barry Diller would become Chairman of the Board and Chief
Executive Officer. In connection with this agreement, the Company granted Mr.
Diller 160,000 shares of Common Stock. The value of the shares on the date of
grant ($4.9 million) was charged to general and administrative expense in fiscal
1992. Also in connection with this agreement, the Company granted to Mr. Diller
stock options covering 6,000,000 shares of Common Stock. All of the options have
a five-year term. One-half of these options ("base options") has an exercise
price of $30.43; the other one-half ("scaled options") has an exercise price
equal to $30.43 per share increased by 13 percent per annum until December 9,
1994 and thereafter by 15 percent per annum compounded annually. The exercise
price on any unexercised scaled options increases annually. One-half of the base
options and one-half of the scaled options became exercisable December 9, 1993
and the balance became exercisable December 9, 1994. The exercise date can be
accelerated upon certain events.
(continued)
IV-203
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS -- (CONTINUED)
In August 1991, the Company granted to Mr. Joseph M. Segel, then
Chairman and Chief Executive Officer, non-qualified stock options covering
600,000 shares of Common Stock at an exercise price of $15.90. One-half of
these options vested on the first anniversary of the date of grant and the
balance was to vest on the second anniversary of the date of grant. On December
9, 1992, the Board of Directors and the Executive Compensation Committee
approved the acceleration of the vesting of the second half of these options to
December 1992, in order to allow Mr. Segel to realize their value in 1992. The
Board and the Executive Compensation Committee also accelerated an additional
50,000 options under ISO Plans for Mr. Segel that were scheduled to vest in 1993
and 1994.
On December 9, 1992, the Board agreed to enter into a consulting and
severance arrangement with Mr. Segel whereby he would serve as a consultant to
the Company for a period of ten years after his retirement in January 1993 at an
annual salary of $240,000 and, as incentive to Mr. Segel to accept employment as
a consultant, granted to Mr. Segel, pursuant to the 1992 Qualified Incentive
Stock Option Plan, 100,000 options to purchase shares of Common Stock,
exercisable at $30.43 per share. These options vest ratably over a period of
five years. The present value of the ten-year consulting and severance
arrangement with Mr. Segel of $2.2 million was expensed in fiscal 1992.
The Board also approved entering into three-year (five-year in the
case of Michael C. Boyd, former President of the Company) employment agreements
for nine senior Company executives, pursuant to which, among other things, the
executives would be entitled to compensation at their current salaries and
eligible for bonus and incentive compensation programs as may be maintained from
time to time during the term of the agreement. As incentive to enter into the
employment agreements, the Board granted to these executives, pursuant to the
1992 Stock Option Plan, an aggregate 1,450,000 options to purchase Common Stock
exercisable at $30.43 per share. Options granted under the 1992 Stock Option
Plan vest ratably over three years (five years in the case of Mr. Boyd). In
February 1994, Mr. Boyd retired from the Company and entered into a consulting
agreement. Accordingly, the present value of his employment agreement of $1.3
million was expensed in fiscal 1993.
(continued)
IV-204
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
A summary of changes in outstanding options under the ISO Plans is as
follows:
<TABLE>
<CAPTION>
QUALIFIED OPTION SHARES NON-QUALIFIED OPTION SHARES
-------------------------- -----------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE PRICE RANGE
------------ ------------ -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1991 590,112 504,737 630,000 85,000 $5.00 -- $17.25
Granted 5,000 1,250 607,500 -- 12.13 -- 15.90
Cancelled (26,500) (19,000) (11,000) (1,375) 5.00 -- 16.00
Became exercisable -- 49,625 -- 144,875 5.00 -- 16.00
Exercised (65,825) (65,825) (26,000) (26,000) 5.00 -- 13.00
--------- -------- --------- ---------
Balance at January 31, 1992 502,787 470,787 1,200,500 202,500 5.00 -- 17.25
Granted 1,582,000 351,167 6,010,000 -- 19.00 -- 38.86
Cancelled (1,750) (1,750) (11,000) (3,500) 5.00 -- 16.00
Became exercisable -- 29,500 -- 796,375 5.00 -- 16.00
Exercised (365,575) (365,575) (919,900) (919,900) 5.00 -- 17.25
Balance at January 31, 1993 1,717,462 484,129 6,279,600 75,475 5.00 -- 38.86
Granted 106,000 1,250 50,000 -- 39.88 -- 70.75
Cancelled (5,575) (5,575) (26,750) (3,000) 5.00 -- 23.25
Became exercisable -- 370,416 -- 3,095,250 5.00 -- 34.39
Exercised (66,087) (66,087) (27,350) (27,350) 5.00 -- 23.25
--------- -------- --------- ---------
Balance at January 31, 1994 1,751,800 784,133 6,275,500 3,140,375 $5.00 -- $70.75
========= ======== ========= ========= ===============
</TABLE>
In December, 1992, the Company offered to exchange warrants into
shares of Common Stock equivalent in value to the difference between the warrant
exercise price and the market price ($37.75) at the time of the offer. Warrants
that would have been exercisable for 7,061,005 shares were extinguished in this
offer and the Company issued 4,367,690 net shares of Common Stock. The warrant
holders were able to effect the exchange several ways. The net effect on the
number of shares of Common Stock outstanding after the exchange was the same. A
total of 3,893,962 warrants was exercised by delivering to the Company 1,424,404
previously issued shares of Common Stock valued at the market price ($37.75). A
total of 2,492,017 warrants was exercised for $37,692,000, the proceeds of which
were used to purchase from the warrant holders 998,457 shares of Common Stock at
market. A total of 675,026 warrants was exchanged for 404,572 shares of Common
Stock with an aggregate value equal to the difference between the market price
and the exercise price. Warrant holders of an aggregate 2,418,908 shares
declined the offer. Since this warrant exchange was treated as a non-cash
financing transaction, it is not reflected on the Consolidated Statements of
Cash Flows.
(continued)
IV-205
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 11 -- INCOME PER SHARE
The Company computes income per share using the modified treasury
stock method. The following table presents the information needed to compute
net income per share for fiscal years 1993, 1992 and 1991 (in thousands, except
per share data):
<TABLE>
<CAPTION>
1993 1992 1991
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Income before extraordinary item and
cumulative effect of a change in
accounting principle..................... $55,311 $55,311 $56,588 $56,588 $21,733 $21,733
Add -- Imputed income from interest
savings, net of tax, on assumed
retirement of debt with remaining
proceeds from assumed exercise of
warrants and options..................... -- -- 1,452 1,239 -- 3,896
------- ------- ------- ------- ------- -------
Adjusted income before extraordinary
item and cumulative effect of a change
in accounting principle.................. 55,311 55,311 58,040 57,827 21,733 25,629
Extraordinary item -- loss on
extinguishment of debt, net of tax
benefit.................................. -- -- (1,496) (1,496) (2,108) (2,108)
Cumulative effect of a change in
accounting for income taxes.............. 3,990 3,990 -- -- -- --
------- ------- ------- ------- ------- -------
Adjusted net income...................... 59,301 59,301 56,544 56,331 19,625 23,521
======= ======= ======= ======= ======= =======
SHARES:
Weighted average number of common
shares outstanding....................... 37,845 37,845 27,885 27,885 19,750 19,750
Add -- Common equivalent shares
assuming conversion of Series B, C
and D Convertible Preferred Stock........ 7,387 7,387 10,340 10,340 12,209 12,209
Add -- Common equivalent shares
assuming conversion of subordinated
note at beginning of fiscal year......... -- -- -- 1,280 -- 1,704
Add -- Common shares assumed to be
outstanding from exercise of warrants
and options.............................. 10,184 10,180 12,812 10,517 -- 11,925
Less -- Assumed purchase of Common
Stock from proceeds of exercise of
warrants and options..................... (5,354) (5,207) (7,147) (4,636) -- (7,275)
------- ------- ------- ------- ------- -------
50,062 50,205 43,890 45,386 31,959 38,313
======= ======= ======= ======= ======= =======
INCOME PER SHARE:
Income before extraordinary item and
cumulative effect of a change in
accounting principle..................... $ 1.10 $ 1.10 $ 1.32 $ 1.27 $ .68 $ .67
Extraordinary item, net of tax benefit... -- -- (.03) (.03) (.07) (.06)
Cumulative effect of a change in
accounting for income taxes.............. .08 .08 -- -- -- --
======= ======= ======= ======= ======= =======
Net income............................... $ 1.18 $ 1.18 $ 1.29 $ 1.24 $ .61 $ .61
======= ======= ======= ======= ======= =======
</TABLE>
(continued)
IV-206
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 11 -- INCOME PER SHARE -- (CONTINUED)
PRO FORMA NET INCOME PER SHARE
On a pro forma basis, net income for fiscal 1991 would have been $22.9
million, or $.64 per share, assuming the Company's October 1991 public offering
of Common Stock and the related retirement of long-term debt as well as the
exchange of Common Stock with Liberty Media Corporation in satisfaction of one-
half of the unsecured note payable occurred as of the beginning of the year.
The pro forma computation assumes adjustments have been made to interest expense
attributable to the reduction of the long-term debt, net of income tax effect.
It also assumes that the shares issued in connection with the public offering
and the exchange were outstanding from the beginning of the period.
NOTE 12 -- RETIREMENT AND SAVINGS PLANS
The Company has a defined contribution Employee Retirement Plan which
covers substantially all of the Company's employees after completion of one year
of service. The Company's contribution under the Plan is equal to 3.0% of
eligible employees' salaries. The costs of this Plan charged to expenses were
$2,202,000, $2,177,000, and $1,664,000 in fiscal years 1993, 1992 and 1991,
respectively.
In addition, the Company sponsors a 401(k) Savings Plan which permits
employees to make contributions to the Savings Plan on a pre-tax salary
reduction basis in accordance with the Internal Revenue Code. Substantially all
full-time employees are eligible to participate after completion of one year of
service. The Company matches a portion of the voluntary employee contributions.
The costs of this Savings Plan charged to expenses were $2,053,000, $1,501,000,
and $812,000 in fiscal years 1993, 1992 and 1991, respectively.
NOTE 13 -- INCOME TAXES
Effective February 1, 1993, the Company changed its method of
accounting for income taxes as required by SFAS 109. The cumulative effect of
this change in accounting was to increase the net income of the first quarter of
fiscal 1993 by approximately $4.0 million, which is reported separately in the
Consolidated Statements of Operations. Prior year's financial statements have
not been restated to reflect the provisions of SFAS 109.
The provision for income taxes consists of the following (in
thousands):
FISCAL YEAR
-----------
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- --------
<S> <C> <C> <C>
Current
Federal..... $ 66,366 $ 49,770 $19,394
State....... 21,710 19,810 11,771
-------- -------- -------
Total....... 88,076 69,580 31,165
======== ======== =======
Deferred
Federal..... (23,159) (17,500) --
State....... (4,942) -- --
-------- -------- -------
Total....... (28,101) (17,500) --
-------- -------- -------
Total provision.. $ 59,975 $ 52,080 $31,165
-------- -------- =======
</TABLE>
(continued)
IV-207
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Total income tax expense differs from the amounts computed by applying
the U.S. federal income tax rate of 35.0% for fiscal 1993 and 34.0% for fiscal
1992 and 1991 to income before income taxes and extraordinary item as follows:
FISCAL YEAR
-----------
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Provision at statutory rate.................................. 35.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit...................................................... 14.5 12.0 14.7
Amortization of intangibles not deductible for tax purposes.. 3.0 3.2 6.7
Net operating loss carryforward.............................. -- -- (1.2)
Other........................................................ (.5) (1.3) 4.7
---- ---- ----
Total income tax expense..................................... 52.0% 47.9% 58.9%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the value of assets and liabilities and their tax bases and the benefit
of existing net operating loss carryforwards. Significant components of the net
deferred tax assets as of January 31, 1994 and 1993 follow (in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1994 1993
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for
doubtful accounts and related reserves for uncollectible
accounts under the Company's revolving credit program............. $ 25,715 $ 15,985
Inventories, principally due to obsolescence reserves and
additional costs of inventories for tax purposes pursuant to the
Tax Reform Act of 1986............................................ 7,497 6,801
Allowance for sales returns........................................ 7,625 3,857
Executive stock award.............................................. -- 1,655
Costs associated with the terminated Paramount tender offer........ 14,964 --
Costs associated with cable television distribution
rights............................................................. 26,619 2,813
Other.............................................................. 7,061 (363)
Total gross deferred tax assets......................................... 89,481 30,748
Less: Valuation allowance......................................... (12,467) --
Less -- amounts not recognized due to SFAS 96 limitations on
carrybacks of future net deductible amounts and carryforwards
of alternative minimum tax credits................................ -- (12,948)
Net deferred tax assets............................................ -------- --------
$ 77,014 $ 17,800
======== ========
</TABLE>
(continued)
IV-208
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Of the total net additional deferred tax asset recorded at the time of
the adoption of SFAS 109, approximately $27.0 million was credited to additional
paid-in capital and approximately $6.5 million was credited to the excess of
cost over acquired net assets. The net increase in the deferred tax asset
during fiscal 1993 differs from the deferred benefit component of the current
year's tax provision primarily due to the recognition of a portion of the net
operating loss carryforwards.
Deferred tax assets were not recorded as of January 31, 1993 for state
income tax purposes since the Company's income is principally allocable to
states that do not permit carrybacks that would give rise to refundable taxes.
In addition, no deferred tax assets were recorded for federal or state tax
purposes in fiscal 1991 since refundable taxes could not be generated from
carrying back future net deductible amounts under the requirements of SFAS 96.
The increase in the deferred tax asset for fiscal 1992 differs from
the deferred benefit component of the current year tax provision because
portions of the deferred tax provision recorded were allocated to additional
paid-in capital or the excess of cost over acquired net assets.
The valuation allowance for deferred tax assets as of February 1, 1993
was $12.2 million. The net change in the valuation allowance for fiscal 1993
was an increase of $255,000. Approximately $6.0 million of the valuation
allowance will result in a credit to additional paid-in capital when it becomes
more likely than not that certain deductions associated with cable television
distribution rights will be realizable.
The following table summarizes the nature of certain tax benefits
realized that reduced taxes payable but were not credited to the tax provision
(in thousands):
<TABLE>
<CAPTION>
EXCESS OF ACQUIRED
ADDITIONAL COST OVER NET SOURCE OF
PAID-IN CAPITAL ASSETS TAX BENEFIT
---------- --------- -------- -----------
1993 1992 1993 1992
---------- --------- -------- -----------
<S> <C> <C> <C> <C>
Exercise of employee stock
options......................... $1,655 $12,366 -- --
Net operating loss
carryforward and other
deductions arising from equity
transactions.................... -- 6,967 -- --
Realization of tax benefits
associated with temporary
differences in CVN
acquisition..................... -- -- 6,510 5,086
Alternative minimum tax
credit carryforward generated
from equity related
deductions....................... -- 2,979 -- --
------ ------- ------ ------
$1,655 $22,312 $6,510 $5,086
====== ======= ====== ======
</TABLE>
In 1993, the tax benefits realized from net operating loss
carryforwards of $6.6 million reduced taxes payable and were credited to
deferred tax assets.
As of January 31, 1994, the Company has a net operating loss
carryforward of $634,000 available to reduce future federal taxable income.
There are no other credits or loss carryforwards available as of the end of
fiscal 1993.
(continued)
IV-209
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 14 -- LITIGATION
In July 1993, Shop Television Network, Inc. ("STN"), J.C. Penney Company,
Inc. ("JCP"), JCPenney Television Shopping Channel Inc. ("JCPTV"), Michael Rosen
and the Company settled the litigation that STN had brought in the Superior
Court of the State of California for the County of Los Angeles in 1991, in
connection with negotiation and execution of an agreement dated May 16, 1991,
between the Company and JCPTV. The settlement required dismissal of all pending
litigation between the parties, payment of approximately $8.8 million to STN,
and repurchase by STN of all its shares held by JCP for an agreed price. JCPTV
and the Company agreed to divide the settlement payment to STN between them,
with the Company being responsible for the payment of approximately $3.8 million
of such settlement payment. This amount was included as a charge in general and
administrative expenses in the second quarter of fiscal 1993.
In July 1993, the Company was joined as a defendant in actions filed in state
and federal court in Delaware by certain shareholders of Home Shopping Network,
Inc. ("HSN") against HSN, Liberty Media Corporation ("Liberty"), Liberty Program
Investments, Inc., RMS Limited Partnership ("RMS"), and certain individual
directors and officers of HSN. The actions challenge Liberty's purchase of HSN
Class A and Class B Common Stock from RMS, Liberty's tender offer for 15.0
million shares of HSN Common Stock as well as the Company's July 12, 1993 letter
proposal to HSN to combine HSN and the Company in a stock-for-stock transaction
(the "Proposed HSN Merger"). The actions allege that the Company aided and
abetted breaches of fiduciary duties in connection with the Proposed HSN Merger,
as well as violations of certain regulations of the Securities Exchange Act.
Plaintiffs seek class certification, declaratory and injunctive relief,
compensatory damages, counsel fees, interest and costs. Management believes
that the allegations against the Company in these shareholder lawsuits are
unfounded and intends to defend against such actions vigorously. On November 5,
1993, the Company and HSN announced their mutual agreement to terminate
negotiations on the Proposed HSN Merger. The Company's time to respond to the
complaint in the state action was extended indefinitely. In March, 1994, the
Company filed a motion to dismiss the complaint in the federal action. The
parties are currently engaged in settlement discussions.
In September 1993, Viacom International Inc. ("Viacom International"), a
subsidiary of Viacom Inc. ("Viacom"), brought an action against the Company,
Tele-Communications, Inc., Liberty, Satellite Services, Inc., Encore Media
Corp., and Netlink USA, challenging the Company's September 20, 1993 proposal to
Paramount Communications Inc. ("Paramount") to combine Paramount and the Company
in a cash and stock-for-stock exchange. Viacom International amended its
complaint in November, 1993, adding Comcast Corporation ("Comcast") as an
additional defendant. The Company filed an answer to the amended complaint on
November 19, 1993. Comcast was subsequently dismissed as a defendant.
Management believes that the allegations against the Company in Viacom
International's action are unfounded and intends to defend against such action
vigorously. On February 15, 1994, the Company terminated its tender offer for
50.1% of Paramount Common Stock.
In October 1993, the Company commenced legal action in the Delaware Chancery
Court against Viacom, Paramount and certain Paramount directors for breach of
fiduciary duties in failing to give fair treatment to the Company's merger
proposal while granting undue advantages to Viacom's merger proposal. The
Company sought to compel Paramount's board to give the two merger proposals
equal consideration and also sought to invalidate certain "lockup" agreements
and share purchase options given by Paramount to Viacom. Following a hearing,
the Court, on November 24, 1993, granted the Company's motion for a preliminary
injunction against Paramount's poison pill rights plan and certain other anti-
takeover mechanisms being used to preclude the Paramount shareholders from
accepting the Company's cash tender offer for approximately 50.1% of Paramount's
shares. On appeal by Paramount and Viacom, the Delaware Supreme Court affirmed
the injunction granted by the Delaware Chancery Court on December 9, 1993, and
issued a formal opinion in support of its ruling on February 4, 1994. On
December 21, 1993, Viacom filed a motion to dismiss the Company's complaint
against it. On February 15, 1994, the Company terminated its tender offer for
Paramount's Common Stock.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. Although the outcome of these
matters cannot be determined, in the opinion of management, disposition of these
proceedings will not have a material effect on the Company's financial position.
(continued)
IV-210
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 15 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS
An analysis of changes in working capital items follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
1993 1992 1991
---------- ---------- ------------
<S> <C> <C> <C>
Increase in accounts receivable........ $ (86,154) $ (29,029) $ (6,006)
Increase in inventories................ (29,496) (9,784) (8,428)
Increase in deferred taxes............. (24,389) (10,680) --
Increase in prepaid expenses........... (1,820) (450) (732)
Increase in accounts payable -- trade.. 29,972 11,312 7,245
Increase in accrued liabilities........ 75,648 5,074 48,028
------- -------- -------
$ (36,239) $(33,557) $40,107
========= ======== =======
Supplemental cash flow information:
Interest paid....................... $ 1,369 $ 20,512 $30,397
Income taxes paid................... 31,841 37,944 1,351
</TABLE>
In fiscal year 1993, the Company did not enter into any non-cash financing
transactions. In fiscal years 1992 and 1991, the following non-cash financing
transactions were entered into by the Company (dollars in thousands).
<TABLE>
<CAPTION>
1992
----
<S> <C>
Issuance of 1,704,546 shares of Common Stock in prepayment of
Convertible subordinated note, net of $1,260 debt
placement fees................................................ $28,740
Exercise of 3,893,962 warrants through deliverance of
1,424,404 shares of Common Stock at market value.............. 53,771
Exercise of 2,492,017 warrants for $37,692 with simultaneous
repurchase of 998,457 shares of Common Stock at market
value......................................................... 37,692
Issuance of 404,572 shares of Common Stock in exchange for
675,026 warrants, representing the aggregate difference
between the market price and the exercise price............... 15,273
Exercise of stock options through deliverance of 800 shares
of Common Stock at market value............................... 31
<CAPTION>
1991
----
<S> <C>
Issuance of an aggregate of 243,522 shares of Common Stock and
100,000 warrants to Comcast Financial Corporation in lieu of
cash interest expense......................................... $ 3,000
Issuance of 75,075 shares of Common Stock to the Standby
Investors in consideration for signing the Standby Equity
Agreement..................................................... 614
Issuance of 2,269,552 shares of Common Stock to Liberty Media
Corporation in exchange for one-half of the outstanding
balance of an unsecured note payable.......................... 31,445
Adjustment to the number of shares of Common Stock assumed
issued to holders of certain CVN Series 2 Warrants from
3,377,949 to 3,410,843 (at market value)...................... 526
Adjustment to the number of new QVC Warrants assumed exchanged
for certain CVN Series 2 Warrants from 6,822,767 to
6,469,913 (value based on an independent appraisal) (1,438)
</TABLE>
(continued)
IV-211
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 16 -- PARAMOUNT TENDER OFFER
On October 27, 1993, the Company made an $80.00 cash tender offer for
50.1 percent of the outstanding common shares of Paramount. This tender offer
was amended several times during the bidding process against Viacom for
Paramount. On February 1, 1994, the Company amended its cash tender offer to
$104 per share. The Company offered approximately $6.4 billion in cash for 61.7
million Paramount common shares. The proposed cash tender offer would have been
funded through a $3.25 billion bank loan commitment and proposed capital
contributions to the Company of $1.5 billion from BellSouth Corporation and $0.5
billion each from Advance Publications, Cox Enterprises and Comcast Corporation.
On February 15, 1994, Paramount notified the Company that Viacom received the
minimum condition in its tender offer and had delivered to Paramount a
completion certificate pursuant to the bidding procedures. Accordingly, the
Company terminated its tender offer for 50.1 percent of the Common Stock of
Paramount. The costs incurred on the tender offer, comprised principally of bank
fees and legal and advisory fees, totaled $34.8 million which were expensed in
the fourth quarter of 1993. The $3.25 billion bank loan commitment expired on
February 15, 1994 upon the termination of the tender offer.
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT AS TO PER SHARE DAT)
FISCAL 1993
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue.............................................................. $273,232 $262,438 $313,945 $372,489
Gross profit............................................................. 113,773 107,938 128,902 148,316
Income before income taxes and cumulative
effect of a change in accounting principle (1)......................... 34,546 26,137 42,732 11,871
Income tax provision..................................................... (16,925) (12,810) (21,215) (9,025)
Income before cumulative effect of a change
in accounting principle................................................ 17,621 13,327 21,517 2,846
Cumulative effect of a change in accounting principle (2)................ 3,990 -- -- --
Net income............................................................... 21,611 13,327 21,517 2,846
Income per share (3):
Primary
Income before cumulative effect of a change in accounting principle.. .36 .26 .42 .06
Net income........................................................... .44 .26 .42 .06
</TABLE>
FISCAL 1992
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue........................................ $233,168 $221,253 $274,332 $341,834
Gross profit....................................... 100,354 94,259 115,501 138,633
Income before income taxes and extraordinary item.. 22,917 15,905 31,468 38,378
Income tax provision............................... (11,425) (7,190) (15,105) (18,360)
Income before extraordinary item................... 11,492 8,715 16,363 20,018
Extraordinary item, net of tax benefit (4)......... (348) -- -- (1,148)
Net income......................................... 11,144 8,715 16,363 18,870
Income per share (5)(6):
Primary
Income before extraordinary item............... .29 .22 .40 .44
Net income..................................... .28 .22 .40 .42
Fully-diluted
Income before extraordinary item............... .29 .22 .40 .42
Net income..................................... .28 .22 .40 .40
- - - --------------------
</TABLE>
(1) Fourth quarter amount includes a charge of $34.8 million related to the
Paramount tender offer (Note 16).
(2) Amount represents the cumulative effect of adopting SFAS 109.
(continued)
IV-212
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(3) Fully diluted earnings per share for all periods are not presented since
they are the same as the primary earnings per share.
(4) Amounts represent accelerated amortization of debt placement fees, net of
income tax benefits, due to prepayments of the Senior term loan (Note 5).
(5) The sum of the quarterly per share amounts does not equal the annual amount
due to the substantial changes in the number of shares throughout the year.
(6) In the fourth quarter of fiscal 1992, the modified treasury stock method of
computing earnings per share resulted in a fully-diluted computation with a
lower amount than the primary computation. This is due primarily to using
the year-end closing share price for the fully-diluted computation versus
the average share price for the fourth quarter. The year-end closing price
was $40.50 versus a fourth quarter average of $32.92.
IV-213
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
October 31, January 31
1994 1994
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,790 $ 15,873
Accounts receivable, less allowance for doubtful
accounts of $67,671 at October 31, 1994 and
$52,759 at January 31, 1994 193,540 183,162
Inventories 198,012 148,208
Deferred taxes 56,748 59,749
Prepaid expenses 8,238 5,536
---------- --------
Total current assets 537,328 412,528
Property, plant and equipment, at cost,
less accumulated depreciation 89,739 80,579
Cable television distribution rights, net 99,729 99,579
Other assets, net 38,086 33,664
Excess of cost over acquired net assets 244,475 251,810
---------- --------
Total assets $1,009,357 $878,160
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,158 $ 3,114
Accounts payable -- trade 130,801 81,594
Accrued liabilities 264,286 225,989
---------- --------
Total current liabilities 398,245 310,697
Long-term debt, less current maturities 6,599 7,044
---------- --------
Total liabilities 404,844 317,741
---------- --------
Shareholders' equity:
Convertible Preferred Stock, par value $.10 50 56
Common Stock, par value $.01 409 399
Additional paid-in capital 451,659 446,027
Retained earnings 152,193 113,937
Foreign currency translation adjustments 202 --
---------- --------
Total shareholders' equity 604,513 560,419
---------- --------
Total liabilities and shareholders' equity $1,009,357 $878,160
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-214
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, October 31,
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $364,467 $313,945 $964,185 $849,615
Cost of goods sold 223,165 185,043 588,292 499,002
-------- -------- -------- --------
Gross profit 141,302 128,902 375,893 350,613
-------- -------- -------- --------
Operating expenses:
Variable costs 46,869 43,976 126,920 121,277
General and administrative 45,314 31,532 114,523 98,372
Depreciation 4,636 4,175 13,154 12,278
Amortization of intangible assets 8,349 6,453 20,894 19,609
-------- -------- -------- --------
105,168 86,136 275,491 251,536
-------- -------- -------- --------
Operating income 36,134 42,766 100,402 99,077
-------- -------- -------- --------
Other income (expense):
Losses from joint ventures (7,677) (2,118) (27,248) (2,118)
Interest income 4,434 2,430 12,333 7,698
Interest expense (345) (346) (1,046) (1,242)
-------- -------- -------- --------
(3,588) (34) (15,961) 4,338
-------- -------- -------- --------
Income before income taxes and cumulative
effect of a change in accounting principle 32,546 42,732 84,441 103,415
Income tax provision (18,080) (21,215) (46,185) (50,950)
-------- -------- -------- --------
Income before cumulative effect of a change
in accounting principle 14,466 21,517 38,256 52,465
Cumulative effect of a change in accounting
for income taxes -- -- -- 3,990
-------- -------- -------- --------
Net income $ 14,466 $ 21,517 $ 38,256 $ 56,455
======== ======== ======== ========
Income per share:
Income before cumulative effect of a
change in accounting principle $ .29 $ .42 $ .78 $ 1.04
Cumulative effect of a change in
accounting for income taxes -- -- -- .08
-------- -------- -------- --------
Net income $ .29 $ .42 $ .78 $ 1.12
======== ======== ======== ========
Weighted average number of common and
common equivalent shares 48,945 50,680 48,901 50,582
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-215
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
October 31,
-------------------------
1994 1993
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,256 $56,455
Adjustments to reconcile net income
to net cash provided by operating
activities:
(Increase) decrease in deferred taxes (3,005) 4,303
Cumulative effect of a change in
accounting for income taxes -- (3,990)
Depreciation 13,154 12,278
Amortization of intangible assets 20,894 19,609
Losses from joint ventures 27,248 2,118
Losses on sales of equipment 450 --
Deferral of Q2 start-up costs (7,985) (144)
Effects of changes in working capital
items* 27,621 (31,756)
-------- --------
Net cash provided by operating
activities 116,633 58,873
-------- --------
Cash flows from investing activities:
Capital expenditures (26,627) (19,531)
Expenditures for cable television
distribution rights (11,569) --
Changes in other assets (423) (819)
Investments in and advances to joint
ventures (22,196) (13,312)
Proceeds from sales of equipment 3,864 --
-------- --------
Net cash used in investing
activities (56,951) (33,662)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit
facilities -- 20,000
Payments against revolving credit
facilities -- (20,000)
Principal payments under other debt (401) (374)
Payments under Senior term loan -- (21,000)
Proceeds from exercise of stock
options 2,536 983
Proceeds from exercise of warrants 3,100 6,185
-------- -------
Net cash provided by (used in)
financing activities 5,235 (14,206)
-------- --------
Net increase in cash and cash
equivalents 64,917 11,005
Cash and cash equivalents at beginning
of period 15,873 4,279
-------- --------
Cash and cash equivalents at end of
period $ 80,790 $15,284
======== ========
* Analysis of effects of changes in
working capital items:
Increase in accounts receivable $(10,378) $(29,887)
Increase in inventories (49,804) (46,406)
Decrease (increase) in deferred taxes 3,001 (9,812)
Increase in prepaid expenses (2,702) (5,532)
Increase in accounts payable 49,207 29,514
Increase in accrued liabilities 38,297 30,367
-------- --------
$ 27,621 $(31,756)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-216
<PAGE>
QVC, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
CONVERTIBLE COMMON PAID-IN RETAINED CURRENCY
PREFERRED STOCK STOCK CAPITAL EARNINGS TRANSLATION TOTAL
---------------- ------ ---------- -------- ----------- --------
S
-
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1994 $56 $ 399 $446,027 $113,937 $ -- $560,419
Net income for period -- -- -- 38,256 -- 38,256
Proceeds from exercise of
warrants 3 3,097 -- -- 3,100
Proceeds from the exercise of
employee stock options 1 2,535 -- -- 2,536
Conversion of shares (6) 6 -- -- -- --
Foreign currency translation
adjustments -- -- -- -- 202 202
--- ------ -------- -------- ------ --------
Balance October 31, 1994 $50 $ 409 $451,659 $152,193 $ 202 $604,513
=== ====== ======== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
IV-217
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the years ended January 31, 1994 and 1993.
In the opinion of QVC, Inc. (the "Company"), all adjustments necessary for
a fair presentation of such consolidated financial statements have been
included. Such adjustments principally consist of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of the Company
and all subsidiaries. Investments in the Company's joint ventures (50% or less
owned) are accounted for under the equity method. All significant intercompany
accounts and transactions are eliminated in consolidation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements in the QVC, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1994.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of following:
<TABLE>
<CAPTION>
October 31, January 31
1994 1994
------------ -----------
(in thousands)
<S> <C> <C>
Land $ 7,818 $ 3,977
Buildings and improvements 57,317 50,627
Furniture and other equipment 34,384 33,866
Broadcast equipment 10,163 8,942
Computer equipment and software 19,288 20,005
Construction in progress 295 1,684
-------- --------
129,265 119,101
Less -- accumulated depreciation (39,526) (38,522)
-------- --------
Net property, plant and equipment $ 89,739 $ 80,579
======== ========
</TABLE>
In October 1994, the Company purchased a 600,000 square foot office and
warehouse facility in West Chester, Pennsylvania for a total cost of
approximately $9.6 million. It is anticipated that some of the operations
located in other facilities will be transferred to this building.
(continued)
IV-218
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 4 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
October 31, January 31,
1994 1994
--------- ---------
<S> <C> <C>
Deferred taxes (Note 6) $20,271 $17,265
Investments in and advances to joint
ventures, net of accumulated losses 6,345 11,194
Start-up costs 11,444 3,459
Satellite transponder rights 1,000 1,000
Other 1,496 1,234
------- -------
40,556 34,152
Less -- accumulated amortization (2,470) (488)
------- -------
Net other assets $38,086 $33,664
======= =======
</TABLE>
During fiscal 1993, the Company established electronic retailing program
service in the United Kingdom ("QVC -- The Shopping Channel") and Mexico ("CVC")
through joint venture agreements with British Sky Broadcasting Limited and Grupo
Televisa, S.A. de C.V., respectively. The joint venture in the United Kingdom
began broadcasting on October 1, 1993, and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in the United
Kingdom requires, among other things, that the Company provide all funding to
the joint venture until it is profitable. The Company will then recover all
prior funding before any profits are shared. Accordingly, the Company has
included 100% of the loss on operations of this venture in the Consolidated
Statements of Operations. The operating results of the joint venture in Mexico
are shared equally by the partners. Summarized financial information for
"QVC -- The Shopping Channel" and "CVC" on a 100% basis follows (in thousands):
<TABLE>
<CAPTION>
October 31, 1994 January 31, 1994
------------------------------ -------------------------------
QVC -- The QVC -- The
Shopping Channel CVC Shopping Channel CVC
----------------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
Current assets $10,912 $14,512 $ 5,608 $ 9,687
Property, plant and
equipment, net 2,599 2,282 1,645 1,665
Unamortized start-up
costs 865 630 2,205 1,650
Current liabilities 9,053 17,085 4,181 9,507
Three months ended Nine months ended
October 31, 1994 January 31, 1994
------------------------------ -------------------------------
QVC -- The QVC -- The
Shopping Channel CVC Shopping Channel CVC
----------------- ----------- ------------------- -----------
Net revenue $ 8,082 $ 9,467 $ 15,699 $21,116
Gross profit 3,222 3,198 5,406 5,979
Loss (5,720) (2,290) (20,015) (8,537)
</TABLE>
During the month of October 1993, "QVC -- The Shopping Channel" experienced
net sales of $487,000, gross profit of $87,000 and a net loss of $2.1 million.
In fiscal 1993, the Company also entered a joint venture with Tribune
Entertainment Company and Regal Communications to form QRT Enterprises ("QRT").
QRT produced and syndicated "Can We Shop" with Joan Rivers, which commenced
broadcasting January 17, 1994. On June 15, 1994, QRT announced plans to cease
the venture with the last show broadcasted on July 15, 1994. "Can We Shop" was
a one-hour, Monday through Friday television show through which merchandise was
sold.
(continued)
IV-219
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The Company has made a $4.4 million investment in Friday Holdings, L.P., a
limited partnership ("Friday Holdings"). The limited partnership's purpose was
to establish or acquire businesses in the communications field and to develop
information products. This partnership is currently being liquidated.
The Company's share of gains (losses) from joint ventures during the three
and nine months ended October 31, 1994 follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
------------ -----------
<S> <C> <C>
QVC -- The Shopping Channel $(5,720) $(20,015)
CVC (1,145) (4,268)
QRT 138 (1,115)
Friday Holdings (900) (1,800)
Other (50) (50)
------- --------
$(7,677) $(27,248)
======= ========
</TABLE>
The Company capitalized $11.4 million of costs relating to the start-up of
Q2, a new televised shopping/programming service, which fully launched on August
1, 1994 in the United States. The capitalized start-up costs are being
amortized over eighteen months. Total amortization for the quarter ended
October 31, 1994 was $1.9 million.
NOTE 5 -- CAPITAL STOCK
The Company has 175,000,000 shares of Common Stock authorized. There were
40,906,497 shares outstanding at October 31, 1994 and 39,895,447 shares
outstanding at January 31, 1994. The increase in the number of shares of Common
Stock outstanding is the result of the exercise of warrants (310,000), the
exercise of employee stock options (105,000) and the conversion of Convertible
Preferred Stock (596,050).
The following table summarizes the number of Convertible Preferred shares
at October 31, 1994 and January 31, 1994 (in thousands):
<TABLE>
<CAPTION>
October 31,1994 January 31, 1994
Shares ---------------------------- ----------------------------
Authorized Outstanding Par Value Outstanding Par Value
---------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Series A 10 -- $-- -- $--
Series B 1,000 18 2 28 3
Series C 1,000 481 48 531 53
Series D 300 -- -- 1 --
--- ---
$50 $56
=== ===
</TABLE>
NOTE 6 -- INCOME TAXES
The Company adopted the principles of Statement of Financial Accounting
Standards No. 109 ("SFAS 109") to account for income taxes in the first quarter
of fiscal 1993. The cumulative effect of adopting SFAS 109 was to increase net
income by approximately $4.0 million in the first quarter of fiscal 1993. The
provisions for income taxes for the three months and nine months ended October
31, 1994 and 1993 are based on the estimated annual effective tax rate after
considering the federal and state statutory rates, amortization of intangibles
arising from the CVN acquisition, which is not deductible for tax purposes, and
the fact that the losses from joint ventures provide no state income tax
benefit.
In 1994, the Company received notice that the Internal Revenue Service
("IRS") has completed its examinations of the Company's federal income tax
returns through fiscal 1991. As a result of the examination, the IRS has
proposed adjustments that relate primarily to the amortization of cable
television distribution rights, that would result in a potential tax liability
for those years in excess of $56.0 million. The Company intends to vigorously
contest these proposed adjustments. While it is not possible at this time to
predict the outcome of these actions, it is the opinion of management, after
reviewing the matter with outside counsel, that this matter will be resolved
without having a material effect on the Company's financial position.
(continued)
IV-220
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
NOTE 7 -- INCOME PER SHARE
The Company computes income per share using the modified treasury stock
method. The following table presents the computation of net income per share
for the three and nine months ended October 31, 1994 and 1993 (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31 October 31
-------------------- -------------------
1994 1993 1994 1993
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Income:
Income before cumulative effect of a change in
accounting for income taxes $14,466 $21,517 $38,256 $52,465
Cumulative effect of a change in accounting for
income taxes -- -- -- 3,990
------- ------- ------- -------
Net income $14,466 $21,517 $38,256 $56,455
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding 40,713 38,855 40,320 37,235
Add -- Common equivalent shares assuming
conversion of Series B, Series C and Series D
Convertible Preferred Stock 5,145 6,508 5,414 7,922
Add -- Common shares assumed to be outstanding
from exercise of warrants and options 9,665 10,093 9,746 10,282
Less -- Assumed purchase of Common Stock from
proceeds of exercise of warrants and
options (6,578) (4,776) (6,579) (4,857)
------- ------- ------- -------
48,945 50,680 48,901 50,582
======= ======= ======= =======
Income per share:
Income before cumulative effect of a change in
accounting principle $ .29 $ .42 $ .78 $ 1.04
Cumulative effect of a change in accounting for
income taxes -- -- -- .08
------- ------- ------- -------
Net income $ .29 $ .42 $ .78 $ 1.12
======= ======= ======= =======
</TABLE>
NOTE 8 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months
ended
October 31
-------------------
1994 1993
---- ----
Supplemental cash flow information:
Interest paid $ 855 $ 1,099
Income taxes paid 207 32,414
(continued)
IV-221
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
During the nine months ended October 31, 1993, the only non-cash
investing and financing activity was the $202,000 foreign currency translation
adjustments related to investments in foreign joint ventures.
NOTE 9 -- ACQUISITION BY COMCAST CORPORATION AND LIBERTY MEDIA CORPORATION
On August 4, 1994, the Company, Comcast Corporation ("Comcast"),
Liberty Media Corporation ("Liberty") and a company wholly owned by Comcast and
Liberty ("Holdings") entered into a definitive merger agreement pursuant to
which Holdings will acquire QVC and thereafter QVC will merge with a subsidiary
of Holdings. On August 11, 1994, Holdings commenced a tender offer for all
shares of stock of QVC at a cash price of $46 per share of QVC Common Stock and
$460 per share of QVC Convertible Preferred Stock. The total cost of the
acquisition for the QVC Stock not owned by Comcast or Liberty will be in excess
of $1.4 billion. Comcast and Liberty have agreed to fund a total of
approximately $303 million of the acquisition with the balance to be provided
through debt financing which, after the merger, will be an obligation of QVC.
Following the acquisition, Comcast and Liberty will own approximately 57% of
43%, respectively, of Holdings, which will own 100% of QVC.
NOTE 10 -- LITIGATION
As previously reported to the Securities and Exchange Commission, the
Company has been named as a defendant in certain actions filed in state and
federal courts in Delaware arising out of Liberty's prior acquisitions of shares
of Home Shopping Network, Inc. ("HSN") and the Company's July 1993 letter
proposal to HSN to combine HSN and the Company in a stock-for-stock transaction
(the "HSN Actions"). The plaintiffs and defendants to the HSN Actions have
executed a Memorandum of Understanding (the "MOU") setting forth an agreement in
principle for the settlement of the HSN Actions for a total consideration of $13
million (plus $200,000 to cover administrative expenses), all of which is to be
funded by Liberty. In May 1994, the Company became a party to a revised MOU.
Under the revised MOU, the Company is not required to pay any portion of the
proposed settlement fund or the administrative expenses of the settlement.
On August 19, 1994, plaintiffs and defendants in the HSN Actions
entered into a stipulation in connection with the contemplated settlement of
such actions (the "Delaware Settlement"), which was then filed with the Delaware
courts. On November 18, 1994, the parties entered into a revised Stipulation
(the "Revised Stipulation"), which was then filed with the Delaware courts. The
Revised Stipulation continues to provide for the Delaware Settlement, but also
provides for the settlement of a separate related action (the "Related Action")
brought in Delaware Chancery Court against Liberty and certain other defendants
in the HSN Actions (but not the Company). The Revised Stipulation provides that
settlement of the Related Action and the Delaware Settlement are not dependent
on each other.
Pursuant to the Delaware Settlement, three subclasses of plaintiffs
would be certified for settlement purposes. Members of two of the three
subclasses will have the right to opt out of the Delaware Settlement pursuant to
procedures set forth in the Revised Stipulation. The Delaware Settlement
contemplates that Liberty will create a settlement fund of $13.2 million (plus
interest from December 31, 1993) and that the net proceeds of the settlement
fund will be distributed to the eligible members of the two subclasses who do
not opt out of the settlement in accordance with a proposed plan of
distribution. QVC is not required to pay any portion of the settlement fund.
Consummation of the proposed Delaware Settlement is subject to a number
of conditions, including (i) obtaining final approval from the Delaware courts,
(ii) the number of shares opting out of the settlement not exceeding a
confidential, predetermined ceiling, and (iii) the dismissal of the HSN Actions
by the Delaware courts with prejudice and the release of claims in the HSN
Actions. If approved by the Delaware courts, the Delaware Settlement would
result in the dismissal with prejudice of the HSN Actions and the release of all
claims in the HSN Actions. The Delaware courts have scheduled hearings on the
proposed Delaware Settlement to be held on January 24, 1995.
In October 1993, the Company brought an action in Delaware Chancery
Court against Viacom Inc. ("Viacom"), Paramount Communications Inc.
("Paramount") and certain Paramount directors for breach of fiduciary duty in
failing to give fair treatment to the Company's merger proposal while granting
undue advantages to Viacom's merger proposal. In November 1993, the court
granted the Company's motion for a preliminary injunction against certain anti-
takeover mechanisms being used to preclude the Paramount shareholders from
accepting the Company's cash tender offer for Paramount shares. This injunction
was affirmed by the Delaware Supreme Court in December 1993. Viacom
subsequently filed a motion to dismiss the Company's complaint. Paramount's
time to respond to the complaint has been extended to January 26, 1995.
(continued)
IV-222
<PAGE>
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In July 1994, after the announcement that Comcast and Liberty would
make a joint offer to purchase all of the outstanding shares of stock of the
Company, eight putative class action lawsuits (the "Consolidated Action") were
filed by certain shareholders of the Company in Delaware Chancery Court on
behalf of a purported class consisting of all public shareholders of the
Company. The defendants in the Consolidated Action include the Company and
directors of the Company. Plaintiffs alleged, among other things, that the
defendants breached their fiduciary duties when considering the Comcast offer in
that they failed to take all possible steps to seek out and encourage the best
offer for the Company. Plaintiffs sought, among other things, an injunction
ordering the defendants to auction the Company and an award of unspecified
compensatory damages to the members of the plaintiff class.
In early August 1994, Comcast and Liberty were joined as defendants in
the Consolidated Action. On August 5, 1994, the parties reached an agreement in
principle providing for the settlement and dismissal with prejudice of the
Consolidated Action. The agreement in principle provides, among other things,
that an affiliate of Comcast and Liberty will commence a tender offer to
purchase all of the outstanding shares of QVC Common Stock for $46 per share in
cash, to be followed by a merger in which the remaining holders of QVC Common
Stock will receive $46 per share in cash. The agreement in principle also
provides that all defendants deny that any of them have committed or threatened
to commit any violations of law or breaches of duty; that plaintiffs' counsel
will apply to the court for an award of fees (to be paid by the Company in the
event that the offer and merger are consummated) in an amount to be agreed among
plaintiffs and defendants; and that the terms of the settlement are subject to
court approval in all respects. In the event of court approval, all claims
against defendants (and certain others) that were or could have been asserted in
the settled Consolidated Action will be dismissed with prejudice and released,
and shareholders of the Company who may have had such claims at any time from
June 29, 1994 through the effective date of the merger, will be barred from
asserting them in the future. Prior to the time that court approval for the
settlement described above is sought, shareholders of the Company who are
members of the class on behalf of whom the action is brought will receive
written notice of the terms of the settlement and the claims to be settled,
released, dismissed and barred.
The Company has also been named as a defendant in various legal
proceedings arising in the ordinary course of business. Although the outcome of
these matters cannot be determined, in the opinion of management, disposition of
these proceedings will not have a material effect on the Company's financial
position.
IV-223
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Bob Magness and John C. Malone as Proxies,
with full power to act without the other and each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as designated
on the reverse side hereof, all shares of common stock of Tele-Communications,
Inc. held of record by the undersigned on [date], at the Special Meeting of
stockholders to be held on [date] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to authorize ____ shares of a new
class of Liberty Media Group Common Stock, par value $1.00 per share, of
which ____ shares will be designated as Series A Liberty Media Group Common
Stock and ____ shares will be designated as Series B Liberty Media Group
Common Stock, and to provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of each of the new series.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- - - ------------------------------ Address Change and/or
Class A Common Comments Mark Here [_]
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney, as
executor, administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full corporate
name by President or other authorized officer.
If a partnership, please sign in partnership
name by authorized person.
Dated: , 1995
-------------------------
---------------------------------------------
Signature
---------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Bob Magness and John C. Malone as Proxies,
with full power to act without the other and each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as designated
on the reverse side hereof, all shares of common stock of Tele-Communications,
Inc. held of record by the undersigned on [date], at the Special Meeting of
stockholders to be held on [date] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to authorize ____ shares of a new
class of Liberty Media Group Common Stock, par value $1.00 per share, of
which ____ shares will be designated as Series A Liberty Media Group Common
Stock and ____ shares will be designated as Series B Liberty Media Group
Common Stock, and to provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of each of the new series.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- - - ------------------------------ Address Change and/or
Class B Common Comments Mark Here [_]
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney, as
executor, administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full corporate
name by President or other authorized officer.
If a partnership, please sign in partnership
name by authorized person.
Dated: , 1995
-------------------------
---------------------------------------------
Signature
---------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
-2-
<PAGE>
Preliminary Copy, dated March 8, 1995
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Bob Magness and John C. Malone as Proxies,
with full power to act without the other and each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as designated
on the reverse side hereof, all shares of Convertible Preferred Stock, Series C
of Tele-Communications, Inc. held of record by the undersigned on [date], at the
Special Meeting of stockholders to be held on [date] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to authorize ____ shares of a new
class of Liberty Media Group Common Stock, par value $1.00 per share, of
which ____ shares will be designated as Series A Liberty Media Group Common
Stock and ____ shares will be designated as Series B Liberty Media Group
Common Stock, and to provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of each of the new series.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
- - - ------------------------------------- Address Change and/or
Series C Convertible Preferred Stock Comments Mark Here [_]
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney, as
executor, administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full corporate
name by President or other authorized officer.
If a partnership, please sign in partnership
name by authorized person.
Dated: , 1995
-------------------------
---------------------------------------------
Signature
---------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
-3-
