<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: June 19, 1996
Date of Earliest Event Reported: July 24, 1995
TELE-COMMUNICATIONS, INC.
---------------------------------------------------------------
(Exact name of Registrant as specified in its charters)
State of Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
0-20421 84-1260157
- ---------------------------- ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
5619 DTC Parkway
Englewood, Colorado 80111
- -------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
<PAGE>
Item 5. Other Events.
- ------ ------------
(a) As of July 24, 1995, TCI Communications, Inc. ("TCIC") and Tele-
Communications, Inc. ("TCI") entered into certain agreements with Viacom
Inc. ("Viacom") and certain subsidiaries of Viacom pursuant to which TCIC
would acquire all of the then outstanding shares of common stock of a
subsidiary of Viacom ("VII Cable") which, at the time of such acquisition
will own Viacom's cable systems and related assets (the "VII Cable
Acquisition").
The transaction has been structured as a tax-free reorganization in which
VII Cable will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to a new subsidiary
of Viacom ("New Viacom Sub"). VII Cable will also transfer to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the
"Loan Facility") arranged by TCIC, TCI and VII Cable. Following these
transfers, VII Cable will retain cable assets with an estimated value at
closing of approximately $2.3 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common Stock
and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the
opportunity to exchange (the "Exchange Offer") a portion of their shares of
Viacom Common Stock for shares of Class A Common Stock, par value $100 per
share, of VII Cable ("VII Cable Class A Stock"). The Exchange Offer will
be subject to a number of conditions, including a condition (the "Minimum
Condition") that sufficient tenders are made of Viacom Common Stock that
permit the number of shares of VII Cable Class A Stock issued pursuant to
the Exchange Offer to equal the total number of shares of VII Cable Class A
Stock issuable in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from VII Cable shares of VII Cable Class B Common Stock in exchange
for $350 million (which will be used to reduce VII Cable's obligations
under the Loan Facility). At the time of such acquisition, the VII Cable
Class A Stock received by Viacom stockholders pursuant to the Exchange
Offer will automatically convert into a series of senior cumulative
exchangeable preferred stock (the "Exchangeable Preferred Stock") of VII
Cable with a stated value of $100 per share (the "Stated Value"). The
terms of the Exchangeable Preferred Stock, including its dividend,
redemption and exchange features, will be designed to cause the
Exchangeable Preferred Stock, in the opinion of two investment banks, to
initially trade at the Stated Value. The Exchangeable Preferred Stock will
be exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Series A TCI Group
common stock ("Parent Common Stock"). The Exchangeable Preferred Stock
will also be redeemable, at the option of VII Cable, after the fifth
anniversary of the date of issuance, and will be subject to mandatory
redemption on the tenth anniversary of the date of issuance at a price
equal to the Stated Value per share plus accrued and unpaid dividends,
payable in cash or, at the election of VII Cable, in shares of Parent
Common Stock, or in any combination of the foregoing. If insufficient
tenders are made by Viacom stockholders in the Exchange Offer to permit the
Minimum Condition to be satisfied, Viacom will extend the Exchange Offer
for up to 15 business days and, during such extension, TCI and Viacom are
to negotiate in good faith to determine mutually acceptable terms and
conditions for the Exchangeable Preferred Stock and the Exchange Offer that
each believes in good faith will cause the Minimum Condition to be
fulfilled and that would cause the Exchangeable Preferred Stock to trade at
a price equal to the Stated Value immediately following the expiration of
the Exchange Offer. In the event the Minimum Condition is not thereafter
met, TCI and Viacom will each have the right to terminate the transaction.
In addition, either party may terminate the transaction if the Exchange
Offer has not commenced by June 24, 1996 or expired by July 24, 1996.
<PAGE>
Item 5. Other Events, continued.
- ------ -----------------------
Consummation of the transaction is subject to a number of conditions,
including the satisfaction or waiver of all of the conditions of the
Exchange Offer. Accordingly, no assurance can be given that the transaction
will be consummated.
(b) On June 19, 1996, TCI announced the proposed distribution (the
"Distribution") by TCI to the holders of shares of the TCI Group Common
Stock of all of the issued and outstanding common stock of TCI Satellite
Entertainment, Inc. ("Satellite"). At the time of the Distribution,
Satellite will be a Delaware corporation and a direct wholly owned
subsidiary of TCI. The Distribution will be effected as a tax-free dividend
to, and will not involve the payment of any consideration by, the holders
of TCI Group Common Stock. Prior to the Distribution, TCI will cause to be
transferred to Satellite, or one or more of Satellite's subsidiaries,
certain assets and businesses (and the related liabilities) of the TCI
Group constituting all of TCI's interests in the business of distributing
multichannel programming services in the United States direct to the home
via medium power or high power broadcast satellite, including the rental
and sale of customer premises equipment relating thereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------- -------------------------------------------------------------------
(a) Financial Statements
--------------------
VII Cable:
Unaudited Interim Combined Financial Statements:
Combined Statements of Operations for the three months
ended March 31, 1995 and 1996
Combined Balance Sheets as of December 31, 1995 and
March 31, 1996
Combined Statements of Cash Flows for the three months ended
March 31, 1995 and 1996
Notes to Combined Financial Statements
Audited Combined Financial Statements:
Report of Independent Accountants
Combined Statements of Operations for the years ended
December 31, 1993, 1994 and 1995
Combined Balance Sheets as of December 31, 1994 and 1995
Combined Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995
Notes to Combined Financial Statements
(b) Pro Forma Financial Information
-------------------------------
TCI Communications, Inc. and Subsidiaries:
Condensed Pro Forma Combined Balance Sheet,
March 31, 1996 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Three months ended March 31, 1996 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Year ended December 31, 1995 (unaudited)
Notes to Condensed Pro Forma Combined Financial Statements,
March 31, 1996 (unaudited)
<PAGE>
(c) Exhibits
--------
(2) Parents Agreement, dated as of July 24, 1995, among Viacom, Inc.,
Tele-Communications, Inc. and TCI Communications, Inc.
Subscription Agreement, dated as of July 24, 1995, among Viacom
International, Inc., Tele-Communications, Inc. and TCI
Communications, Inc.
Implementation Agreement, dated as of July 24, 1995, between Viacom
International, Inc. and Viacom International Services, Inc.
Incorporated herein by reference to the Registrants' Current
Report on Form 8-K dated July 26, 1995
(23) Consent of Price Waterhouse LLP
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 19, 1996
TELE-COMMUNICATIONS, INC.
(Registrant)
By:/s/ Stephen M. Brett
---------------------------------------
Stephen M. Brett
Executive Vice President
<PAGE>
VII CABLE
COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
AT MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND MARCH 31, 1995
<PAGE>
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Revenues........................................ $116,599 $105,872
Expenses:
Operating (Note 4)............................ 51,730 46,379
Selling, general and administrative (Note 4).. 24,236 21,339
Depreciation and amortization................. 21,807 19,913
------- -------
Total expenses.............................. 97,773 87,631
------- -------
Operating income................................ 18,826 18,241
Other income (expense):
Interest expense (Note 4)..................... (11,958) (12,057)
Other items, net (Note 6)..................... 1,829 28,801
------- -------
Earnings before income taxes.................... 8,697 34,985
Provision for income taxes.................... (5,154) (15,284)
Equity in loss of affiliated companies,
net of tax.................................. (153) (67)
------- -------
Net earnings.................................... $ 3,390 $19,634
======= =======
</TABLE>
See notes to combined financial statements.
-1-
<PAGE>
VII CABLE
COMBINED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 3,540 $ 2,294
Receivables, less allowances of $1,659 (1996) and
$1,689 (1995) (Note 4)...................................... 11,444 14,333
Other current assets.......................................... 2,986 3,342
--------- ---------
Total current assets...................................... 17,970 19,969
--------- ---------
Property and equipment:
Land.......................................................... 5,909 5,470
Buildings..................................................... 20,505 20,347
Distribution systems.......................................... 566,676 549,553
Equipment and other........................................... 169,656 171,958
--------- ---------
762,746 747,328
Less accumulated depreciation................................. (340,436) (327,684)
--------- ---------
Net property and equipment................................ 422,310 419,644
--------- ---------
Intangibles, at amortized cost.................................. 556,659 561,229
Other assets.................................................... 67,912 65,971
--------- ---------
$1,064,851 $1,066,813
========= =========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable (Note 4)..................................... $ 28,211 $ 28,380
Accrued expenses (Note 4)..................................... 31,129 30,613
Accrued compensation.......................................... 6,514 8,152
Deferred taxes................................................ 13,173 12,501
Other current liabilities..................................... 1,263 1,477
--------- ---------
Total current liabilities................................. 80,290 81,123
--------- ---------
Deferred taxes.................................................. 61,698 60,452
Long-term debt (Note 3)......................................... 57,000 57,000
Other liabilities............................................... 11,044 11,131
Commitments and contingencies (Note 5)
Viacom equity investment (Note 2)............................... 854,819 857,107
--------- ---------
$1,064,851 $1,066,813
========= =========
</TABLE>
See notes to combined financial statements.
-2-
<PAGE>
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net earnings........................................................ $ 3,390 $ 19,634
Adjustments to reconcile net earnings to net cash flow
from operating activities:
Depreciation and amortization...................................... 21,807 19,913
Gain on sale of marketable securities.............................. -- (26,902)
Decrease in receivables............................................ 2,889 5,643
Increase (decrease) in accounts payable and
accrued expenses................................................ (1,505) 2,286
Other, net......................................................... 2,274 660
-------- --------
Net cash flow from operating activities......................... 28,855 21,234
-------- --------
Investing activities:
Capital expenditures............................................... (19,866) (22,087)
Proceeds from sale of marketable securities........................ -- 27,001
Investments in and advances to affiliated companies................ (2,045) (1,719)
Other, net......................................................... (20) 11
-------- --------
Net cash flow from investing activities........................ (21,931) 3,206
-------- --------
Financing activities:
Distributions to Viacom............................................ (125,312) (145,468)
Distributions from Viacom.......................................... 97,319 89,970
Allocated charges from Viacom...................................... 22,315 31,212
-------- --------
Net cash flow from financing activities........................ (5,678) (24,286)
-------- --------
Net increase in cash.................................................. 1,246 154
Cash at beginning of period........................................... 2,294 3,011
-------- --------
Cash at end of period................................................. $ 3,540 $ 3,165
======== ========
</TABLE>
See notes to combined financial statements.
-3-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED; DOLLARS IN THOUSANDS)
NOTE 1 - BASIS OF PRESENTATION
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution as defined below, "VII Cable"), a wholly
owned subsidiary of Viacom, and Viacom International Services Inc. ("New VII"),
a wholly owned subsidiary of VII Cable, entered into certain agreements (the
"Transaction Agreements") with Tele-Communications, Inc. ("TCI") and a
subsidiary of TCI ("TCI Sub"), providing for, among other things, the conveyance
of Viacom International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom (the "First
Distribution"), the Exchange Offer (as defined below) and the issuance to TCI
Sub of all of the Class B Common Stock of VII Cable. Viacom will commence an
exchange offer (the "Exchange Offer") pursuant to which Viacom shareholders may
exchange shares of Viacom Class A or Class B Common Stock for shares of VII
Cable Class A Common Stock. The First Distribution will not occur until the
date of consummation of the Exchange Offer.
Prior to the consummation of the Exchange Offer, Viacom International Inc. will
enter into a $1.7 billion credit agreement. Proceeds from such credit agreement
will be transferred by Viacom International Inc. to New VII as part of the First
Distribution. Viacom also entered into a definitive agreement with TCI under
which TCI Sub, through a capital contribution of $350 million in cash, will
purchase all of the shares of Class B Common Stock of VII Cable immediately
following the consummation of the Exchange Offer. At that time, the shares of
Class A Common Stock of VII Cable will convert into shares of cumulative
redeemable exchangeable preferred stock (the "Preferred Stock"). The Preferred
Stock will be exchangeable after the fifth anniversary of issuance at the
holders' option for TCI Class A Common Stock.
National Amusements, Inc. ("NAI"), which owns approximately 25% of Viacom Class
A and Class B Common Stock on a combined basis as of March 31, 1996, will not
participate in the Exchange Offer. The Exchange Offer and related transactions
are subject to several conditions, including regulatory approvals, receipt of a
tax ruling and consummation of the Exchange Offer.
On October 13, 1995, TCI Sub (as buyer) and Prime Cable of Fort Bend, L.P. and
Prime Cable Income Partners, LP (as sellers) executed asset and stock purchase
and sale agreements providing for the sale of certain cable television systems
serving the greater Houston Metropolitan Area for a total base purchase price of
$301 million, subject to adjustments. On December 18, 1995, TCI Sub assigned
all of its rights, remedies, title and interest in, to and under such agreements
to a majority-owned investee of InterMedia Partners Southeast ("IMP"). On May
8, 1996, IMP consummated the transactionunder the Houston purchase agreements.
After consummation of the VII Cable transaction, IMP intends to swap its Houston
cable system for VII Cable's Nashville cable system. The swap is intended to
qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code.
As of March 31, 1996, the net book value of VII Cable's Nashville cable system
was $106,828.
-4-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS)
The accompanying unaudited combined financial statements and related notes
reflect the carve-out historical results of operations and financial position of
the cable television business of Viacom and have been prepared pursuant to the
rules of the Securities and Exchange Commission. The unaudited combined
financial statements reflect, in the opinion of management, all normal recurring
adjustments necessary for a fair statement of financial position and results of
operations of VII Cable. These unaudited combined financial statements should
be read in conjunction with the audited combined financial statements of VII
Cable for the three years ended December 31, 1995. These combined financial
statements are not necessarily indicative of results that would have occurred if
VII Cable had been a separate stand-alone entity during the periods presented or
of future results of VII Cable.
NOTE 2 - VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
Balance as of December 31, 1995............... $857,107
Net earnings.................................. 3,390
Cash distributions to Viacom.................. (125,312)
Cash distributions from Viacom................ 97,319
Allocated charges from Viacom................. 22,315
--------
Balance as of March 31, 1996.................. $854,819
========
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to/from Viacom
resulting from cash transfers and other intercompany activities.
NOTE 3 - LONG-TERM DEBT
During 1994, Viacom International Inc. and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom Cablevision
of Dayton Inc. ("Dayton"), which is included in the combined financial
statements for VII Cable. In the event that Dayton ceases to be a wholly owned
subsidiary of Viacom or VII Cable, the $57 million of borrowings shall be due
and payable on the date on which Dayton ceases to be such a wholly owned
subsidiary. As a result of the transactions described in Note 1, New VII will
assume Dayton's obligation under the credit agreement, and such amount will be
repaid.
NOTE 4 - RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including insurance,
legal, financial and other corporate functions. Charges for these services have
been primarily made based on the
-5-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS)
average of certain specified ratios of revenues, operating income and net
assets. Management believes that the methodologies used to allocate these
charges are reasonable. The charges for such services for the three months ended
March 31, 1996 and March 31, 1995 were $3,017 and $2,055, respectively. These
charges are included in selling, general and administrative expenses.
In addition to the interest expense recorded by VII Cable on borrowings under
the credit agreement described in Note 3, Viacom has allocated interest expense
for the three months ended March 31, 1996 and March 31, 1995 of $11,421 and
$11,651, respectively, related to Viacom corporate debt to VII Cable on the
basis of a percentage of VII Cable's average net assets to Viacom's average net
assets. Management believes that the methodology used to allocate these charges
is reasonable.
VII Cable, through the normal course of business, is involved in transactions
with companies owned by or affiliated with Viacom. VII Cable has agreements to
distribute television programs of such companies, including Showtime Networks
Inc., MTV Networks, Comedy Central and USA Networks. The agreements require VII
Cable to pay license fees based upon the number of customers receiving the
service. Program license fees incurred under these agreements for the three
months ended March 31, 1996 and March 31, 1995 were $8,639 and $6,877,
respectively. These amounts are included in operating expenses. In addition,
cooperative advertising expenses charged to affiliated companies for the three
months ended March 31, 1996 and March 31, 1995 were $106 and $195, respectively.
Related party receivables, included in receivables, were $291 and $572 at March
31, 1996 and December 31, 1995, respectively. Related party liabilities,
included in accounts payable, were $2,655 and $1,176 at March 31, 1996 and
December 31, 1995, respectively. Related party liabilities, included in accrued
expenses, were $2,918 and $2,645 at March 31, 1996 and December 31, 1995,
respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and 1995 the
Federal Communication Commission (the "FCC") issued and subsequently clarified
regulations implementing the rate regulation provisions of the Cable Act. As a
result of the Cable Act, VII Cable's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are set utilizing either FCC benchmarks and increase formulas, or
cost of service methodologies; equipment and installation charges are based on
actual costs.
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local franchise authorities or, if a
complaint is filed, the FCC. If as a result of such review a cable television
system can not substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund a portion of the excess
rates received.
-6-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS)
Management believes the amount of refund, if any, would not have a material
effect on VII Cable's combined financial position, results of operations or cash
flows.
On February 8, 1996, the Telecommunications Act of 1996 (the "Act") was signed
into law. The Act eases regulation of the cable and telephone businesses while
opening each of them to increased competition. The Act deregulates expanded
basic tiers of cable programming, such as VII Cable's Satellite Value Package,
after March 31, 1999. It expands the existing definition of "effective
competition" which, when it occurs with respect to a particular cable system,
results in the deregulation of that cable system's rates. The Act repeals the
statutory ban against telephone companies and certain utility companies from
providing video programming in their own service areas as either cable systems,
common carriers or newly created "open video systems". Additionally, the Act
substantially preempts state and local regulations barring cable operators and
others from providing local telephone services and requires telephone companies
to negotiate with new telephone service providers with respect to the
interoperationality of each of their systems.
During July 1991, VII Cable received reassessments from ten California counties
of its real and personal property, related to the June 1987 acquisition by NAI,
which could result in substantially higher California property tax liabilities.
VII Cable is appealing the reassessments. At March 31, 1996 and December 31,
1995, VII Cable had paid $43,389 and $43,245, respectively, related to real and
personal property taxes which have been recorded as an excess property tax
receivable included in other assets.
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position, results of operations
or cash flows.
In the ordinary course of business, VII Cable enters into long-term affiliation
agreements with programming services which require that VII Cable continues to
carry and pay for programming and meet certain performance requirements.
NOTE 6 - OTHER ITEMS, NET
For 1995 other items, net, principally reflects a pre-tax gain of $26.9 million
from the sale of marketable securities.
-7-
<PAGE>
VII CABLE
COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1995 AND 1994 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<PAGE>
[LETTERHEAD OF PRICE WATERHOUSE LLP APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
February 14, 1996
To the Board of Directors and
Stockholders of Viacom International Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of VII Cable (as defined in Note 1 to
the financial statements) at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
The financial statements are the responsibility of Viacom International Inc.'s
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in the notes to the combined financial statements, effective
January 1, 1993, VII Cable adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Effective January 1, 1994, VII Cable
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
/s/ PRICE WATERHOUSE LLP
<PAGE>
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues............................................................... $442,170 $404,499 $414,786
Expenses:
Operating (Note 6)................................................... 191,082 170,779 156,270
Selling, general and administrative (Note 6)......................... 88,488 99,935 101,347
Depreciation and amortization........................................ 81,774 76,343 73,354
-------- -------- --------
Total expenses.................................................... 361,344 347,057 330,971
-------- -------- --------
Operating income....................................................... 80,826 57,442 83,815
Other income (expense):
Interest expense (Note 6)............................................ (48,524) (38,050) (33,417)
Other items, net (Note 10)........................................... 34,305 6,982 77,736
-------- -------- --------
Earnings before income taxes and cumulative effect of
change in accounting principle....................................... 66,607 26,374 128,134
Provision for income taxes (Note 7).................................. (32,849) (17,680) (45,276)
Equity in earnings (loss) of affiliated companies,
net of tax (Note 3)................................................ (44) 452 997
-------- -------- --------
Net earnings before cumulative effect of change in accounting
principle............................................................ 33,714 9,146 83,855
Cumulative effect of change in accounting principle (Note 7)......... -- -- 13,536
-------- -------- --------
Net earnings........................................................... $ 33,714 $ 9,146 $ 97,391
======== ======== ========
</TABLE>
See notes to combined financial statements.
-2-
<PAGE>
VII CABLE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................ $ 2,294 $ 3,011
Receivables, less allowances of $1,689 (1995) and $1,251 (1994)
(Note 6)..................................................................... 14,333 12,655
Marketable securities available-for-sale........................................ -- 24,730
Other current assets............................................................ 3,342 3,065
---------- ----------
Total current assets.......................................................... 19,969 43,461
---------- ----------
Property and equipment:
Land............................................................................ 5,470 5,447
Buildings....................................................................... 20,347 19,479
Distribution systems............................................................ 549,553 472,938
Equipment and other............................................................. 171,958 147,680
---------- ----------
747,328 645,544
Less accumulated depreciation................................................... 327,684 280,511
---------- ----------
Net property and equipment.................................................... 419,644 365,033
---------- ----------
Intangibles, at amortized cost.................................................... 561,229 578,072
Other assets...................................................................... 65,971 53,868
---------- ----------
$1,066,813 $1,040,434
========== ==========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable (Note 6)....................................................... $ 28,380 $ 24,975
Accrued expenses (Note 6)....................................................... 30,613 32,623
Accrued compensation............................................................ 8,152 10,154
Deferred taxes (Note 7)......................................................... 12,501 19,904
Other current liabilities....................................................... 1,477 1,112
---------- ----------
Total current liabilities..................................................... 81,123 88,768
---------- ----------
Deferred taxes (Note 7)........................................................... 60,452 59,750
Long-term debt (Note 4)........................................................... 57,000 57,000
Other liabilities................................................................. 11,131 10,976
Commitments and contingencies (Note 8)
Viacom equity investment (Note 5)................................................. 857,107 823,940
---------- ----------
$1,066,813 $1,040,434
========== ==========
</TABLE>
See notes to combined financial statements.
-3-
<PAGE>
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net earnings...................................................... $ 33,714 $ 9,146 $ 97,391
Adjustments to reconcile net earnings to net cash flow
from operating activities:
Depreciation and amortization................................... 81,774 76,343 73,354
Gain on sale of marketable securities........................... (26,902) -- (17,437)
Gain on sale of Viacom Cablevision of Wisconsin, Inc............ -- -- (55,007)
Cumulative effect of change in accounting principle............. -- -- (13,536)
Increase in receivables......................................... (1,678) (4,315) (3,005)
Increase (decrease) in accounts payable and
accrued expenses.............................................. (242) (1,085) 14,895
Other, net...................................................... (2,070) (2,197) 2,134
------- ------- -------
Net cash flow from operating activities............................. 84,596 77,892 98,789
------- ------- -------
Investing activities:
Capital expenditures.............................................. (117,966) (99,198) (79,341)
Proceeds from sale of marketable securities....................... 27,001 -- 18,140
Proceeds from dispositions........................................ -- 1,430 94,429
Investments in and advances to affiliated companies............... (7,336) (12,765) --
Other, net........................................................ (1,613) (315) 158
------- ------- -------
Net cash flow from investing activities............................. (99,914) (110,848) 33,386
------- ------- -------
Financing activities:
Distributions to Viacom........................................... (505,265) (434,002) (508,257)
Distributions from Viacom......................................... 409,264 392,896 317,078
Allocated charges from Viacom..................................... 110,602 75,221 105,390
Principal repayment of long-term debt............................. -- -- (49,018)
------- ------- -------
Net cash flow from financing activities............................. 14,601 34,115 (134,807)
------- ------- -------
Net increase (decrease) in cash..................................... (717) 1,159 (2,632)
Cash at beginning of year........................................... 3,011 1,852 4,484
------- ------- -------
Cash at end of year................................................. $ 2,294 $ 3,011 $ 1,852
======= ======= =======
</TABLE>
See notes to combined financial statements.
-4-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - BASIS OF PRESENTATION
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution as defined below, "VII Cable"), a wholly
owned subsidiary of Viacom, and Viacom International Services Inc. ("New VII"),
a wholly owned subsidiary of VII Cable, entered into certain agreements (the
"Transaction Agreements") with Tele-Communications, Inc. ("TCI") and a
subsidiary of TCI ("TCI Sub"), providing for, among other things, the conveyance
of Viacom International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom (the "First
Distribution"), the Exchange Offer (as defined below) and the issuance to TCI
Sub of all of the Class B Common Stock of VII Cable. Viacom will commence an
exchange offer (the "Exchange Offer") pursuant to which Viacom shareholders may
exchange shares of Viacom Class A or Class B Common Stock for shares of VII
Cable Class A Common Stock. The First Distribution will not occur until the
date of consummation of the Exchange Offer.
Prior to the consummation of the Exchange Offer, Viacom International will enter
into a $1.7 billion credit agreement. Proceeds from such credit agreement will
be transferred by Viacom International Inc. to New VII as part of the First
Distribution. Viacom also entered into a definitive agreement with TCI under
which TCI Sub, through a capital contribution of $350 million in cash, will
purchase all of the shares of Class B Common Stock of VII Cable immediately
following the consummation of the Exchange Offer. At that time, the shares of
Class A Common Stock of VII Cable will convert into shares of cumulative
redeemable exchangeable preferred stock (the "Preferred Stock"). The Preferred
Stock will be exchangeable after the fifth anniversary of issuance at the
holders' option for TCI Class A Common Stock.
National Amusements, Inc. ("NAI"), which owns approximately 25% of Viacom Class
A and Class B Common Stock on a combined basis, will not participate in the
Exchange Offer. The Exchange Offer and related transactions are subject to
several conditions, including regulatory approvals, receipt of a tax ruling and
consummation of the Exchange Offer.
VII Cable owns and operates cable television systems in five geographic regions,
including the San Francisco and Northern California area, Salem, Oregon,
Seattle, Washington and the Greater Puget Sound area, Nashville, Tennessee and
Dayton, Ohio. Substantially all of VII Cable's revenues are earned from
subscriber fees for primary and premium subscription services, the rental of
converters and remote control devices, and installation fees. Additional
revenues are derived from the sale of advertising, pay-per-view programming
fees, payments received from revenue-sharing arrangements in respect of products
sold through home shopping services, and the leasing of fiber optic capacity in
three of VII Cable's franchise areas to partnerships (in which VII Cable has an
equity interest) engaged in the provision of competitive access telephone
services.
On October 13, 1995, TCI Sub (as buyer) and Prime Cable of Fort Bend, L.P. and
Prime Cable Income Partners, LP (as sellers) executed asset and stock purchase
and sale agreements
-5-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
providing for the sale of certain cable television systems serving the greater
Houston Metropolitan Area for a total base purchase price of $301 million,
subject to adjustments. On December 18, 1995, TCI Sub assigned all of its
rights, remedies, title and interest in, to and under such agreements to a
majority-owned investee of InterMedia Partners Southeast ("IMP"). After
consummation of the VII Cable transaction, IMP's majority-owned investee intends
to swap its Houston cable system for VII Cable's Nashville cable system. The
swap is intended to qualify as a like-kind exchange under Section 1031 of the
Internal Revenue Code.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could subsequently differ from those estimates.
The accompanying financial statements and related notes reflect the carve-out
historical results of operations and financial position of the cable television
business of Viacom. These financial statements are not necessarily indicative
of results that would have occurred if VII Cable had been a separate stand-alone
entity during the periods presented or of future results of VII Cable.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of VII Cable and all
investments of more than 50% in subsidiaries. All significant intercompany
transactions with combined entities have been eliminated. Investments in
affiliated companies over which VII Cable has significant control or ownership
of more than 20% but less than or equal to 50% are accounted for under the
equity method. Investments of 20% or less are accounted for under the cost
method. Investments in affiliates are included in Other assets.
Property and Equipment
Property and equipment, including construction in progress, is stated at cost.
Inventory, which consists primarily of construction material, is recorded at the
lower of weighted average cost or market. Construction in progress and
inventory are included in equipment and other. VII Cable capitalizes interest
costs associated with certain qualifying assets. The total amount of interest
costs capitalized was $1,884 (1995), $839 (1994) and $372 (1993). Repairs and
maintenance are charged to operations, and renewals and additions are
capitalized. Upon the normal retirement of distribution system components, the
cost is charged to accumulated depreciation with no effect on net earnings. For
all other retirements, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized.
Depreciation expense is computed principally on a straight-line method over
estimated useful lives of 9-15 years for distribution systems, 4-10 years for
machinery and equipment and 28-30 years for buildings. Depreciation expense was
$63,092 (1995), $57,826 (1994) and $54,754 (1993).
-6-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Intangibles
Intangible assets primarily consist of the cost of acquired businesses in excess
of the fair value of tangible assets and liabilities acquired attributable to
the NAI leveraged buyout of Viacom International Inc. in June 1987. Such assets
are amortized on a straight-line basis over estimated useful lives of up to 40
years. In addition, VII Cable has franchise rights to operate cable television
systems in various towns and political subdivisions within its service areas.
The cost of successful franchise applications are capitalized and amortized over
the life of the related franchise agreement. Franchise lives generally range
from 10 to 25 years with various dates of expiration. VII Cable evaluates the
realizability of intangibles on an ongoing basis in light of changes in business
conditions, events or circumstances that may indicate the potential impairment
of intangible assets. Accumulated amortization of intangible assets was $157,407
and $138,739 at December 31, 1995 and 1994, respectively.
Revenue Recognition
Subscriber fees are recognized in the period the service is provided.
Provision for Doubtful Accounts
The provision for doubtful accounts charged to expense was $7,362 (1995),
$6,178, (1994) and $7,250 (1993).
Financial Instruments
VII Cable's carrying value of financial instruments approximates fair value.
The most significant financial instruments are debt and marketable securities
available-for-sale.
During the first quarter of 1994, VII Cable adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Under SFAS 115, investments classified as
available-for-sale are carried at fair value and unrealized holding gains and
losses during the period are recorded as a component of equity. The cumulative
effect of the change in accounting principle is recorded, net of tax, as a
component of equity. Prior to the adoption of SFAS 115, marketable equity
securities held by VII Cable were reported at the lower of cost or market.
During February 1995, VII Cable sold its marketable securities available-for-
sale, resulting in a pre-tax gain of $26,902 which is in Other items, net.
Recent Accounting Pronouncements
During 1995, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which VII Cable
will be required to adopt in 1996. SFAS 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. VII Cable has evaluated
the impact of SFAS 121 and it will not have a significant effect on VII Cable's
combined financial position or results of operations.
-7-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
During 1995, the FASB issued Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," which establishes a fair value
based method of accounting for compensation costs related to stock option plans
and other forms of stock based compensation plans as an alternative to the
intrinsic value based method of accounting defined under Accounting Principles
Board Opinion No. 25. Companies who do not elect the new method of accounting
for 1996 will be required to provide pro forma disclosures as if the fair value
based method had been applied. VII Cable has not determined which method they
will elect.
NOTE 3 - EQUITY IN EARNINGS OF AFFILIATED COMPANIES
Equity in earnings of affiliated companies is primarily comprised of VII Cable's
general partnership interests in Northwest Cable Advertising (50% owned), Bay
Cable Advertising (33 1/3% owned), TCG San Francisco ("TCGSF") (23% owned), TCG
Seattle ("TCGS") (22% owned) and Prime Sports Northwest Network ("Prime Sports")
(40% owned).
The principal business of Northwest Cable Advertising and Bay Cable Advertising
(the "Advertising Affiliates") is the sale of advertising on cable television
systems owned by VII Cable, its general partners and other cable television
operators. In exchange for providing advertising airtime, the Advertising
Affiliates pay VII Cable affiliate fees, calculated in accordance with
affiliation agreements. Revenues from Advertising Affiliates were $7,264
(1995), $6,302 (1994) and $5,225 (1993). Affiliate fees receivable were $2,069
and $1,293 at December 31, 1995 and 1994, respectively.
TCGSF and TCGS were formed on January 1, 1994 for the purpose of investing in
and operating communication facilities. These partnerships lease communication
network facilities from VII Cable, which are financed and constructed by VII
Cable. TCI through certain of its affiliates is a general partner in these two
partnerships. VII Cable's lease revenues were $1,299 (1995) and $484 (1994).
Receivables were $1,046 and $2,944 at December 31, 1995 and 1994, respectively.
The principal business of Prime Sports is to provide a television sports
programming service in the northwest United States. In exchange for
programming, Prime Sports receives program license revenue from cable television
operators including its general partners. VII Cable incurred program license
fees under this agreement of $3,347 (1995), $1,962 (1994) and $1,849 (1993).
Accounts payable were $280 at December 31, 1995, accrued expenses were $282 and
$169 at December 31, 1995 and 1994, respectively. During January 1995, VII
Cable entered into an agreement to sell its 40% partnership interest in Prime
Sports to a subsidiary of Liberty Media Corporation ("Liberty"), an affiliate of
TCI, for sales proceeds of approximately $9 million. Prime Sports is a
partnership between VII Cable and Liberty. Net assets of Prime Sports were
approximately $4.6 million at December 31, 1995.
-8-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Summarized aggregated financial information for the affiliated companies
discussed above is as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
Results of operations:
Revenues .............................. $60,235 $49,142 $36,499
Operating income (loss) ............... (3,912) 117 4,729
Net earnings (loss) ................... (3,894) (57) 4,842
DECEMBER 31,
-----------------
1995 1994
---- ----
Financial position:
Current assets ........................ $21,840 $32,828
Noncurrent assets ..................... 87,267 54,118
Current liabilities ................... 14,555 12,262
Noncurrent liabilities ................ 11,705 13,219
Partners' equity ...................... 82,847 61,465
NOTE 4 - LONG-TERM DEBT
During 1994, Viacom International Inc., and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom Cablevision
of Dayton Inc. ("Dayton"), which is included in the combined financial
statements for VII Cable.
The Credit Agreement is an 8-year term loan maturing on July 1, 2002. Dayton is
required to pay interest on the borrowings based upon Citibank, N.A.'s base rate
or the London Interbank Offered Rate ("LIBOR") and is affected by Viacom's
credit rating. At December 31, 1995 and 1994, LIBOR (upon which the subsidiary
borrowing rate was based) was 6.0% and 6.25% respectively. Viacom guarantees
obligations under the Credit Agreement.
The Credit Agreement contains certain covenants which, among other things,
require that the Subsidiary Borrowers maintain certain financial ratios and
impose on the Subsidiary Borrowers certain limitations on substantial asset
sales and mergers with any other company in which an affiliate of Viacom is not
the surviving entity. The Credit Agreement contains certain customary events of
default and provides that it is an event of default if NAI fails to own at least
51% of the outstanding voting stock of Viacom. The Company is in compliance
with all debt covenants.
In the event that Dayton ceases to be a wholly owned subsidiary of Viacom or VII
Cable, the $57 million of borrowings shall be due and payable on the date on
which Dayton ceases to be such a wholly owned subsidiary. As a result of the
transactions described in Note 1, New VII will assume Dayton's obligation under
the Credit Agreement, and such amount will be repaid.
-9-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Under a prior credit agreement with Viacom, $49 million of debt was entered into
by Viacom Cablevision of Wisconsin, Inc. This amount was repaid in connection
with the sale of this cable system on January 1, 1993.
NOTE 5 - VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance as of the beginning of the year .................... $823,940 $765,531 $753,929
Net earnings ............................................... 33,714 9,146 97,391
Cash distributions to Viacom ............................... (505,265) (434,002) (508,257)
Cash distributions from Viacom ............................. 409,264 392,896 317,078
Allocated charges from Viacom .............................. 110,602 75,221 105,390
Unrealized holding gains on marketable
securities available-for-sale, net of tax ............... (15,148) 15,148 --
-------- -------- --------
Balance as of the end of the year .......................... $857,107 $823,940 $765,531
======== ======== ========
</TABLE>
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to/from Viacom
resulting from cash transfers and other intercompany activity. The following is
a summary of the allocated charges from Viacom that are reflected in the
foregoing analysis of Viacom equity investment activity:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest allocation ........................................ $46,363 $35,681 $31,191
Overhead allocation ........................................ 13,492 16,849 20,260
Income tax allocation ...................................... 30,035 9,188 37,020
Salaries and benefits payments ............................. 11,293 11,625 10,103
Other ...................................................... 9,419 1,878 6,816
-------- ------- --------
Allocated charges from Viacom .............................. $110,602 $75,221 $105,390
======== ======= ========
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including insurance,
legal, financial and other corporate functions. Charges for these services have
been primarily made based on the average of certain specified ratios of
revenues, operating income and net assets. Management believes that the
methodologies used to allocate these charges are reasonable. The charges for
such services were $13,492 (1995), $16,849 (1994) and $20,260 (1993) and are
included in selling, general and administrative expenses.
-10-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANACIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
In addition to the interest expense recorded by VII Cable on the borrowings
under the credit agreements described in Note 4, Viacom allocated interest
expense of $46,363 (1995), $35,681 (1994) and $31,191 (1993) related to the
Viacom corporate debt. The additional interest is allocated based on a
percentage of VII Cable's average net assets to Viacom's average net assets.
Management believes that the methodology used to allocate these charges is
reasonable.
VII Cable, through the normal course of business, is involved in transactions
with companies owned by or affiliated with Viacom. VII Cable has agreements to
distribute television programs of such companies, including Showtime Networks
Inc., MTV Networks, Comedy Central, USA Networks and Lifetime (prior to its sale
by Viacom on April 1, 1994). The agreements require VII Cable to pay license
fees based upon the number of customers receiving the service. Program license
fees incurred under these agreements were $30,694 (1995), $28,582 (1994) and
$23,785 (1993). These amounts are included in operating expenses. In addition,
cooperative advertising expenses charged to affiliated companies were $1,350
(1995), $1,181 (1994) and $597 (1993). Related party accounts receivable,
included in receivables, were $572 and $562 at December 31, 1995 and 1994,
respectively. Related party liabilities, included in accounts payable, were
$1,176 and $1,128 at December 31, 1995 and 1994, respectively. Related party
liabilities, included in accrued expenses, were $2,645 and $2,508 at December
31, 1995 and 1994, respectively.
NOTE 7 - INCOME TAXES
Viacom International Inc. has been included in consolidated federal, state and
local income tax returns filed by Viacom. However, the tax expense reflected
in the Combined Statements of Operations and tax liabilities reflected in the
Combined Balance Sheets have been prepared on a separate return basis as though
VII Cable had filed stand-alone income tax returns. The current income tax
liabilities for the periods presented have been satisfied by Viacom. These
amounts have been reflected in Viacom equity investment in the Combined Balance
Sheets. In connection with the transactions described in Note 1, Viacom has
agreed to indemnify VII Cable against income tax assessments, if any, arising
from federal, state or local tax audits for periods in which VII Cable was a
member of Viacom's consolidated tax group.
During the first quarter of 1993, VII Cable adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") on a
prospective basis and recognized an increase to earnings of $13,536 in 1993 as
the cumulative effect of a change in accounting principle. SFAS 109 mandates
the liability method for computing deferred income taxes.
Earnings accounted for under the equity method of accounting are shown net of
tax on the Combined Statements of Operations.
-11-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
---- ---- ----
Federal:
Current ................................ $ 25,894 $ 6,018 $ 31,381
Deferred ............................... 2,546 8,534 8,366
State and local:
Current ................................ 4,171 2,868 4,975
Deferred ............................... 238 260 554
------- ------- -------
Provision for income taxes on
operating income ....................... 32,849 17,680 45,276
Provision (benefit) for income taxes
on earnings of affiliated companies .... (30) 301 664
------- ------- -------
Total provision for income taxes ...... $ 32,819 $ 17,981 $ 45,940
======= ======= =======
A reconciliation of the U.S. Federal statutory tax rate to VII Cable's effective
tax rate on operating income before income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
Statutory U.S. tax rate ................... 35.0% 35.0% 35.0%
Amortization of goodwill .................. 9.5 23.3 4.8
State and local taxes, net of federal
tax benefit ............................ 4.4 8.1 3.0
Basis differential on assets sold ......... -- -- (8.7)
Effect of change in tax rate .............. -- -- 1.1
Other, net ................................ 0.4 0.6 0.1
---- ---- ----
Effective tax rate ............. 49.3% 67.0% 35.3%
==== ==== ====
-12-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
DECEMBER 31,
------------------
1995 1994
------ ------
Current deferred tax (assets) liabilities:
Property taxes .............................. $13,230 $10,576
Marketable securities available-for-sale .... -- 9,483
Other ....................................... (729) (155)
------- -------
Net current deferred tax liabilities ............ 12,501 19,904
------- -------
Noncurrent deferred tax (assets) liabilities:
Fixed asset basis differences ............... 60,558 59,902
Other ....................................... (106) (152)
------- -------
Net noncurrent deferred tax liabilities ......... 60,452 59,750
------- -------
Deferred tax liabilities ........................ $72,953 $79,654
======= =======
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments at December 31, 1995 under noncancellable
operating leases for office space and equipment are as follows:
1996 .............................. $ 4,161
1997 .............................. 3,272
1998 .............................. 2,931
1999 .............................. 2,361
2000 .............................. 1,628
Thereafter ........................ 1,837
-------
Total minimum lease payments ...... $16,190
=======
Rent expense was $7,704 (1995), $7,670 (1994) and $7,299 (1993).
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and 1995 the
Federal Communication Commission (the "FCC") issued and subsequently clarified
regulations implementing the rate regulation provisions of the Cable Act. As a
result of the Cable Act, VII Cable's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are subject to the
jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are set utilizing either FCC benchmarks and increase formulas, or
cost of service methodologies; equipment and installation charges are based on
actual costs.
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local
-13-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
franchise authorities or, if a complaint is filed, the FCC. If as a result of
such review a cable television system cannot substantiate its rates, it could
be required to retroactively reduce its rates to the appropriate benchmark and
refund a portion of the excess rates received. Management believes the amount of
refund, if any, would not have a material effect on VII Cable's combined
financial position, results of operations or cash flows.
On February 8, 1996, the President signed into law the Telecommunications Act of
1996 (the "Act") which among other things eases regulation of the cable and
telephone businesses while opening each of them to increased competition. The
Act deregulates expanded basic tiers of cable programming, such as VII Cable's
Satellite Value Package, after March 31, 1999. It also deregulates any cable
system that becomes subject to "effective competition" from a telephone company
which provides comparable services by any means (except direct broadcast
satellite). The Act repeals the statutory ban against telephone companies
providing video programming in their own service areas as either cable systems,
common carriers or newly created "open video systems." Additionally, the Act
preempts state and local regulations barring cable operators and others from
providing local telephone services and requires telephone companies to negotiate
with new telephone service providers with respect to the interoperationality of
each of their systems.
During July 1991, VII Cable received reassessments from ten California counties
of its real and personal property, related to the June 1987 acquisition by NAI,
which could result in substantially higher California propery tax liabilities.
VII Cable is appealing the reassessments. At December 31, 1995 and 1994, VII
Cable had paid $43,245 and $36,581, respectively, related to real and personal
property taxes which have been recorded as an excess property tax receivable
included in Other assets.
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position, results of operations
or cash flows.
In the ordinary course of business, VII Cable enters into long-term affiliation
agreements with programming services which require that VII Cable continues to
carry and pay for programming and meet certain performance requirements.
NOTE 9 - PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of VII Cable. Retirement benefits are based
principally on years of service and salary. Viacom has allocated charges for
pension expense of $1,134 (1995), $1,574 (1994) and $1,392 (1993). Information
on the amount of actuarial present value of benefit obligations, fair value of
plan assets and pension costs is not provided as such information is not
maintained separately for employees of VII Cable. Further, the obligation for
pension benefits earned prior to the consummation of the Exchange Offer will be
retained by Viacom. All employees of VII Cable will be fully vested upon the
Exchange Offer.
-14-
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Viacom also provides other employee benefits to VII Cable's employees, including
certain medical and dental insurance costs and contributions to a 401(K) savings
plan, at an allocated cost of $4,177 (1995), $4,364 (1994) and $4,387 (1993). In
addition, certain executives of VII Cable participate in non-compensatory stock
option plans of Viacom. There were no grants of stock options during 1995.
NOTE 10 - OTHER ITEMS, NET
During 1995, Other items, net principally reflects a pre-tax gain of $26,902
from the sale of marketable securities.
As part of the settlement of the antitrust lawsuit filed by Viacom against Time
Warner, Viacom sold all the stock of Viacom Cablevision of Wisconsin, Inc. to
Warner Communications Inc. ("Warner"). This transaction was effective on January
1, 1993. As consideration for the stock, Warner paid the sum of $45,429 plus
repayment of debt under the then current Viacom credit agreement in the amount
of $49,000, resulting in a pre-tax gain of approximately $55,007 reflected in
Other items, net. Also reflected in this line item is the net gain of $17,437
from sales of a portion of an investment held at cost in 1993.
-15-
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Financial Statements
March 31, 1996
(unaudited)
The following unaudited condensed pro forma combined balance sheet of TCI,
dated as of March 31, 1996, assumes that the VII Cable Acquisition (see note 1),
and the Distribution (see note 2) had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI for the three months ended March 31, 1996 assumes that the VII
Cable Acquisition and the Distribution had occurred as of January 1, 1995.
The following unaudited condensed pro forma combined statement of
operations of TCI for the year ended December 31, 1995 assumes that the VII
Cable Acquisition, the Distribution and the acquisition of a 51% ownership
interest in Cablevision S.A. and certain affiliated companies (collectively
"Cablevision") (the "Cablevision Acquisition") (see note 3) had occurred as of
January 1, 1995.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the VII Cable
Acquisition, the Distribution and the Cablevision Acquisition had occurred as of
January 1, 1995. These condensed pro forma combined financial statements of TCI
should be read in conjunction with the historical financial statements and the
related notes thereto of TCI.
1
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------------------------------
TCI VII Cable Pro forma Satellite TCI
Historical Historical(1) adjustments(1) Distribution(2) Pro forma
----------- ------------ ------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Assets amounts in millions
- ------
Cash, receivables and other
current assets $ 1,063 18 1,700 (4) (38) 1,043
(1,700) (5)
Note receivable from Satellite -- -- -- 603 603
Investment in affiliates and Turner
Broadcasting System, Inc., and
related receivables 3,357 -- -- (18) 3,339
Property and equipment, net of
accumulated depreciation 7,812 422 (3) (5) (1,000) 7,231
Franchise costs, intangibles and
other assets, net of amortization 14,776 625 (45) (5) (5) 16,768
1,417 (6)
-------- -------- ------- ------- -------
$27,008 1,065 1,369 (458) 28,984
======== ======== ======= ======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Payables and accruals $ 2,078 80 (26) (5) (548) 1,584
Debt 13,170 57 (57) (5) -- 14,870
1,700 (4)
Deferred income taxes 4,787 62 -- (15) 4,834
Other liabilities 195 11 (12) (5) -- 194
-------- -------- ------- ------- -------
Total liabilities 20,230 210 1,605 (563) 21,482
-------- -------- ------- ------- -------
Minority interests 919 -- 619 (7) -- 1,538
Redeemable preferred stock 655 -- -- -- 655
Company-obligated mandatorily redeem-
able preferred securities of
subsidiary trust holding
solely subordinated debt
securities of TCIC 508 -- -- -- 508
Stockholders' equity:
Preferred Stock -- -- -- -- --
Viacom equity investment -- 855 (855) (8) -- --
TCI Group Series A common stock 684 -- -- -- 684
TCI Group Series B common stock 85 -- -- -- 85
Liberty Media Group Series A
common stock 146 -- -- -- 146
Liberty Media Group Series B
common stock 21 -- -- -- 21
Additional paid-in capital 4,316 -- -- 105 4,421
Cumulative foreign currency
translation adjustment (16) -- -- -- (16)
Unrealized holding gains for
available-for sale securities 314 -- -- -- 314
Accumulated deficit (540) -- -- -- (540)
Treasury stock (314) -- -- -- (314)
-------- -------- ------- ------- -------
4,696 855 (855) 105 4,801
-------- -------- ------- ------- -------
$27,008 1,065 1,369 (458) 28,984
======== ======== ======= ======= =======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
2
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, 1996
--------------------------------------------------------------------------
TCI VII Cable Pro forma Satellite TCI
Historical Historical(1) adjustments(1) Distribution(2) Pro forma
----------- ------------ ------------- --------------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C>
Revenue $1,959 116 -- (100) 1,975
Operating, cost of sales, selling, general
and administrative expenses,
compensation relating to stock
appreciation rights (1,413) (76) -- 103 (1,386)
Depreciation and amortization (370) (22) (9) (9) 26 (375)
------- --- ----- --------- ---------
Operating income 176 18 (9) 29 214
Interest expense (261) (12) (19) (13) -- (292)
Interest and dividend income 10 -- -- -- 10
Share of losses of affiliates, net (62) -- -- -- (62)
Other income, net 18 2 (7) (14) -- 13
------- --- ----- --------- --------
Earnings (loss) before income
taxes (119) 8 (35) 29 (117)
Income tax benefit (expense) 33 (5) 8 (15) (12) 24
------- --- ----- --------- --------
Net earnings (loss) (86) 3 (27) 17 (93)
Dividend requirement on redeemable
preferred stocks (9) -- -- -- (9)
------- --- ----- --------- --------
Net earnings (loss) attributable to
common shareholders $ (95) 3 (27) 17 (102)
======= === ===== ========= ========
Primary earnings (loss) attributable to
common shareholders per common
and common equivalent share:
TCI Group Series A and Series B
common stock $ (.17) (.18) (16)
======= =======
Liberty Media Group Series A and
Series B common stock $ .09 .09 (16)
======= =======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
3
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------------------------------------------------------------
TCI VII Cable Cablevision Pro forma Satellite TCI
Historical Historical (1) Historical (3) adjustments(1)(3) Distribution(2) Pro forma
---------- -------------- -------------- ----------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
amounts in millions
Revenue $ 6,851 442 52 (2) (5) (207) 7,136
Operating, cost of sales,
selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring
charges (4,937) (279) (34) -- 232 (5,018)
Depreciation and amortization (1,372) (82) (2) (44) (9) 59 (1,441)
------- ------- ------ ----- ------ ------
Operating income (loss) 542 81 16 (46) 84 677
Interest expense (1,010) (48) -- (3) (10) -- (1,154)
(4) (11)
(5) (12)
(84) (13)
Interest and dividend income 52 -- -- -- -- 52
Share of earnings (losses) of
affiliates, net (193) -- -- -- 9 (184)
Gains 337 -- -- -- -- 337
Other expense, net (19) 34 -- (26) (14) -- (38)
(27) (5)
------- ------- ------ ----- ------ ------
Earnings (loss) before
income taxes (291) 67 16 (195) 93 (310)
Income tax benefit (expense) 120 (33) (5) 52 (15)(5) (37) 97
------- ------- ------ ----- ------ ------
Net earnings (loss) (171) 34 11 (143) 56 (213)
Dividend requirement on
redeemable preferred stocks (34) -- -- -- -- (34)
------- ------- ------ ----- ------ ------
Net earnings (loss)
attributable to common
shareholders $ (205) 34 11 (143) 56 (247)
======= ======= ====== ===== ====== ======
Loss attributable to common
shareholders per common share:
TCI Class A and Class B
common stock $ (.11) (.15) (17)
======= ======
TCI Group Series A and
Series B common stock $ (.16) (.18) (17)
======= ======
Liberty Media Group Series
A and Series B common
stock $ (.16) (.16) (17)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
4
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
March 31, 1996
(unaudited)
(1) In July, 1995, TCIC and TCI entered into certain agreements with Viacom and
certain subsidiaries of Viacom pursuant to which TCIC would acquire all of
the then outstanding shares of common stock of VII Cable which, at the time
of such acquisition, will own Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in which
VII Cable will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub.
VII Cable will also transfer to New Viacom Sub the Loan Proceeds of the
Loan Facility to be arranged by TCIC, TCI and VII Cable. Following these
transfers, VII Cable will retain cable assets with an estimated value at
closing of approximately $2.3 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Common Stock the
opportunity to exchange a portion of their shares of Viacom Common Stock
for shares of VII Cable Class A Stock. The Exchange Offer will be subject
to a number of conditions, including the Minimum Condition that sufficient
tenders are made of Viacom Common Stock that permit the number of shares of
VII Cable Class A Stock issued pursuant to the Exchange Offer to equal the
total number of shares of VII Cable Class A Stock issuable in the Exchange
Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from VII Cable shares of VII Cable Class B Common Stock in exchange
for $350 million (which will be used to reduce VII Cable's obligations
under the Loan Facility). At the time of such acquisition, the VII Cable
Class A Stock received by Viacom stockholders pursuant to the Exchange
Offer will automatically convert into the Exchangeable Preferred Stock of
VII Cable with a stated value of $100 per share. The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and
exchange features, will be designed to cause the Exchangeable Preferred
Stock, in the opinion of two investment banks, to initially trade at the
Stated Value. If insufficient tenders are made by Viacom stockholders in
the Exchange Offer to permit the Minimum Condition to be satisfied, Viacom
will extend the Exchange Offer for up to 15 business days and, during such
extension, TCI and Viacom are to negotiate in good faith to determine
mutually acceptable terms and conditions for the Exchangeable Preferred
Stock and the Exchange Offer that each believes in good faith will cause
the Minimum Condition to be fulfilled and that would cause the Exchangeable
Preferred Stock to trade at a price equal to the Stated Value immediately
following the expiration of the Exchange Offer. In the event the Minimum
Condition is not thereafter met, TCI and Viacom will each have the right to
terminate the transaction. In addition, either party may terminate the
transaction if the Exchange Offer has not commenced by June 24, 1996 or
expired by July 24, 1996.
(continued)
5
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
The cost to acquire VII Cable following the consummation of the Exchange
Offer has been assumed to be approximately $2.3 billion, consisting of the
Loan Proceeds and the $619 million estimated aggregate par value of the VII
Cable Exchangeable Preferred Stock. Any change in the estimated aggregate
par value of the VII Cable Exchangeable Preferred Stock will result in
corresponding changes in the pro forma amounts of franchise costs, the
related amortization thereof, the aggregate par value of the VII Cable
Exchangeable Preferred Stock and the related dividends thereon. An
increase in the estimated aggregate par value of the VII Cable Exchangeable
Preferred Stock of $10 million will result in an increase in amortization
expense of $250,000 and an increase in annual dividend requirements by VII
Cable of $425,000 based upon an estimated useful life of 40 years and an
annual dividend rate of 4.25%. The accompanying unaudited pro forma
condensed combined statements of operations do not reflect potential cost
savings attributable to (i) economics of scale which may be realized in
connection with purchases of programming and equipment or (ii)
consolidation of certain operating and administrative functions including
the elimination of duplicative facilities and personnel.
(2) On June 19, 1996, TCI announced the Distribution by TCI to the holders of
shares of the TCI Group Common Stock of all of the issued and outstanding
common stock of Satellite. At the time of the Distribution, Satellite will
be a Delaware corporation and a direct wholly owned subsidiary of TCI. The
Distribution will be effected as a tax-free dividend to, and will not
involve the payment of any consideration by, the holders of TCI Group
Common Stock. Prior to the Distribution, TCI will cause to be transferred
to Satellite, or one or more of Satellite's subsidiaries, certain assets
and businesses (and the related liabilities) of the TCI Group constituting
all of TCI's interests in the business of distributing multichannel
programming services in the United States direct to the home via medium
power or high power broadcast satellite, including the rental and sale of
customer premises equipment relating thereto.
In connection with the Distribution, it is anticipated that the
intercompany balance owed by Satellite to TCIC will be converted into a
note payable to TCIC the terms of which have not yet been determined. The
accompanying pro forma financial statements reflect the assumed conversion
of such intercompany balance as well as the elimination of the estimated
assets, liabilities, revenue and expenses of Satellite. The intercompany
balance is based upon historical amounts. However, it is expected that TCIC
will continue to make capital expenditures on behalf of Satellite and, as
such, the intercompany balance can be expected to increase through the date
of the Distribution. The Satellite financial information subject to
adjustment upon the finalization of the historical financial statements of
Satellite.
(3) On April 25, 1995, TCI consummated the Cablevision Acquisition for an
aggregate purchase price of $286 million. The purchase price was paid with
cash consideration of approximately $199 million (including a previously
paid deposit of $20 million) and the Company's issuance of approximately
$87 million in secured negotiable promissory notes payable (the
"Cablevision Notes"). The Company has an option during the two year period
ended April 25, 1997 to increase its ownership interest in Cablevision to
80% at a cost per subscriber similar to the initial purchase price. The
exercise of such option has not been reflected in the accompanying
condensed pro forma combined financial statements.
All amounts presented with respect to Cablevision are stated in U.S.
dollars. During the periods covered by the accompanying condensed pro
forma financial statements, an exchange rate of one U.S. dollar to one
Argentine peso was maintained by the Argentine government.
(4) Reflects the borrowing of the Loan Proceeds ($1.7 billion) under the Loan
Facility. Scheduled maturities of the Loan through December 31, 2000 are
assumed to be $300 million (1996), none (1997), $30 million (1998), $110
million (1999) and $135 million (2000).
(5) Reflects the conveyance to New Viacom Sub of the Loan Proceeds, existing
bank debt of $57 million and certain other nonmaterial assets, liabilities
and related results of operations of VII Cable, including for the year
ended December 31, 1995, a pre-tax gain of $27 million from the sale of
marketable securities and a provision for income taxes of $11 million.
(continued)
6
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
(6) The cost to acquire VII Cable following the consummation of the Exchange
Offer will be allocated to the assets and liabilities acquired according to
their respective fair values, with any excess being treated as franchise
costs. The valuations and other studies which will provide the basis for
the allocation of the cost to acquire VII Cable following consummation of
the Exchange Offer have not yet been performed. Because the valuations and
other studies will not be performed until after the Exchange Offer occurs,
the purchase accounting adjustments made in connection with the development
of the unaudited condensed pro forma combined financial statements are
preliminary. The entire purchase price in excess of the book value of VII
Cable's assets and liabilities has been attributed to franchise costs. The
approximately $1.4 billion pro forma excess of unallocated acquisition
costs as of March 31, 1996 is being amortized over 40 years at a rate of
$35 million per year. To the extent that the excess purchase price over
book value is allocated to property and equipment or other assets,
including identifiable intangibles with lives of less than 40 years,
depreciation and amortization will increase and, on an after-tax basis, net
loss will increase. Although the Company cannot estimate the potential
increase in depreciation nor amortization, it may be significant. The
Company estimates the average useful life of property and equipment to be
approximately 12.5 years. In addition, the Company does not believe that
there are substantial intangible assets which will require amortization
over periods less that 12.5 years. As a result, the Company does not
believe that any allocation of purchase price to other assets should be
expected to result in an amortization period less than 12.5 years. VII
Cable has estimated, that for every $100 million allocated to property and
equipment or to other assets including identifiable intangibles, and
assuming an average life of 12.5 years, depreciation and amortization would
increase by $5.5 million per year over such 12.5 year period.
(7) Reflects the estimated aggregate par value of the VII Cable Exchangeable
Preferred Stock.
(8) Represents the elimination of VII Cable's historical equity.
(9) Represents depreciation and amortization of VII Cable's and Cablevision's
allocated excess purchase prices based upon weighted average lives of 12-
1/2 years for property and equipment for Cablevision and 40 years for
franchise costs for VII Cable and 20 years for franchise costs for
Cablevision.
(10) Represents assumed interest expense on the $87 million principal amount of
the Cablevision Notes, calculated at an assumed interest rate of 10.0% per
annum.
(11) Represents additional interest expense on assumed indebtedness of
Cablevision. Such additional interest expense was not reflected in the
historical financial statements of Cablevision as the related borrowings
were not utilized to support the assets acquired by the Company. The pro
forma adjustment assumes that Cablevision's April 25, 1995 borrowings ($77
million including capital lease obligations) were outstanding since January
1, 1995 and that such borrowings bore interest at 14.5% per annum.
(12) Represents assumed interest expense incurred by the Company on the
borrowings of $179 million to pay the remaining cash portion of the
Cablevision purchase price. Such interest expense was calculated at the
Company's weighted average interest rate of 8.l% for the year ended
December 31, 1995.
(continued)
7
<PAGE>
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Pro Forma Combined Financial Statements
(13) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable
operations) incurred by the Company on the borrowings of the Loan Proceeds.
Solely for the purposes of this presentation, the Company has assumed an
interest rate of 7.41% and 7.78% for the three months ended March 31, 1996
and for the year ended December 31, 1995, respectively, based upon
historical interest rates adjusted for anticipated terms of the Loan
Facility.
(14) Reflects an assumed 4.25% cumulative annual dividend on the $619 million of
VII Cable Exchangeable Preferred Stock included in minority share of losses
of consolidated subsidiaries. Solely for the purposes of this presentation
the shares of the VII Cable Exchangeable Preferred Stock are assumed to pay
dividends at a rate of 4.25% per annum. The assumed dividend rate was
derived from the actual rate for a market comparable preferred security
recently issued by TCIC. A change in the assumed dividend rate of 1/8% will
result in a change in preferred stock dividend requirements and pro forma
net loss of $774,000.
(15) Reflects the estimated income tax effect of the pro forma adjustments. The
effective income tax rate on a pro forma basis is adversely affected by the
amortization of excess acquisition costs, which are assumed not to be
deductible for tax purposes.
(16) Reflects loss per common share based upon 659.3 million weighted average
shares and 164.8 million weighted average shares of TCI Group and Liberty
Media Group, respectively, at March 31, 1996. Such amounts represent the
weighted average shares disclosed in TCI's historical financial statements.
(17) Reflects loss per common share based upon 648.2 million weighted average
shares, 656.4 million weighted average shares and 164.1 million weighted
average shares of Tele-Communications, Inc. from January 1, 1995 through
August 10, 1995, TCI Group from August 11, 1995 through December 31, 1995
and Liberty Media Group from August 11, 1995 through December 31, 1995,
respectively. Such amounts represent TCI's weighted average shares, as
disclosed in its historical financial statements.
8
<PAGE>
"TCI Group"
Condensed Pro Forma Combined Financial Statements
March 31, 1996
(unaudited)
The following unaudited condensed pro forma combined balance sheet of TCI
Group, dated as of March 31, 1996, assumes that the VII Cable Acquisition (see
note 1) and the Distribution (see note 2) had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the three months ended March 31, 1996 assumes that
the VII Cable Acquisition and the Distribution had occurred as of January 1,
1995.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the year ended December 31, 1995 assumes that the
VII Cable Acquisition, the Distribution and the Cablevision Acquisition (see
note 3) had occurred as of January 1, 1995.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the VII Cable Acquisition
and the Cablevision Acquisition had occurred as of January 1, 1995. These
condensed pro forma combined financial statements of TCI Group should be read in
conjunction with the historical financial statements and the related notes
thereto of TCI Group.
9
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------------------------------------
TCI Group VII Cable Pro forma Satellite TCI
Historical Historical(1) Adjustments(1) Distribution(2) Pro forma
---------- ------------ -------------- -------------- ---------
Assets amounts in millions
- ------
<S> <C> <C> <C> <C> <C>
Cash, receivables and other
current assets $ 721 18 1,700 (4) (38) 701
(1,700) (5)
Note receivable from Satellite -- -- -- 603 603
Investment in affiliates and
related receivables 2,061 -- -- (18) 2,043
Property and equipment, net of
accumulated depreciation 7,610 422 (3) (5) (1,000) 7,029
Franchise costs, intangibles and
other assets, net of amortization 14,060 625 (45) (5) (5) 16,052
1,417 (6)
------- ----- ----- ------- ------
$24,452 1,065 1,369 (458) 26,428
======= ===== ===== ======= ======
Liabilities and Stockholders' Equity
- ------------------------------------
Payables and accruals $ 1,727 80 (26) (5) (548) 1,233
Debt 12,940 57 (57) (5) -- 14,640
1,700 (4)
Deferred income taxes 4,568 62 -- (15) 4,615
Other liabilities 179 11 (12) (5) -- 178
------- ----- ----- ------- -------
Total liabilities 19,414 210 1,605 (563) 20,666
------- ----- ----- ------- ------
Minority interests 827 -- 619 (7) -- 1,446
Redeemable preferred stock 655 -- -- -- 655
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely sub-
ordinated debt securities of TCIC 508 -- -- -- 508
Stockholders' equity:
Viacom equity investment -- 855 (855) (8) -- --
Combined equity 3,046 -- -- 105 3,151
Cumulative foreign currency
translation adjustment (16) -- -- -- (16)
Unrealized holding gains for
available-for sale securities 28 -- -- -- 28
Due from Liberty Media Group (10) -- -- -- (10)
------- ----- ------ ------- ------
3,048 855 (855) 105 3,153
------- ----- ------ ------- ------
$24,452 1,065 1,369 (458) 26,428
======= ===== ====== ======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
10
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, 1996
-----------------------------------------------------------------
TCI Group VII Cable Pro forma Satellite TCI
Historical Historical(1) Adjustments(1) Distribution(2) Pro forma
---------- ------------- -------------- --------------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C>
Revenue $ 1,538 116 -- (100) 1,554
Operating, cost of sales, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights (1,032) (76) -- 103 (1,005)
Depreciation and amortization (352) (22) (9) (9) 26 (357)
------- ------ ------- ---- ------
Operating income 154 18 (9) 29 192
Interest expense (255) (12) (19) (13) -- (286)
Interest and dividend income 8 -- -- -- 8
Share of losses of affiliates, net (70) -- -- -- (70)
Gains 8 -- -- -- 8
Other income, net 9 2 (7) (14) -- 4
------- ---- ----- ---- ------
Earnings (loss) before income
taxes (146) 8 (35) 29 (144)
Income tax benefit (expense) 45 (5) 8 (15) (12) 36
------- ---- ----- ---- ------
Net earnings (loss) (101) 3 (27) 17 (108)
Dividend requirement on redeemable
preferred stocks (9) -- -- -- (9)
------- ---- ----- ---- ------
Net earnings (loss) attributable to
common shareholders $ (110) 3 (27) 17 (117)
======= ==== ===== ==== ======
Loss attributable to common
stockholders per common share $ (.17) (.18) (16)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
11
<PAGE>
"TCI GROUP"
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1995
------------------------------------------------------------------------------------------
TCI Group VII Cable Cablevision Pro forma Satellite TCI
Historical Historical (1) Historical (3) adjustments(1)(3) Distribution(2) Pro forma
----------- -------------- -------------- ----------------- --------------- ---------
amount in millions
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 5,384 442 52 (2) (5) (207) 5,669
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights (3,457) (279) (34) -- 232 (3,538)
Depreciation and amortization (1,274) (82) (2) (44) (9) 59 (1,343)
------- ------- ------- ----- ------ ------
Operating income 653 81 16 (46) 84 788
Interest expense (993) (48) -- (3) (10) -- (1,137)
(4) (11)
(5) (12)
(84) (13)
Interest and dividend income 43 -- -- -- -- 43
Share of losses of affiliates, net (178) -- -- -- 9 (169)
Gains 339 -- -- -- -- 339
Other income (expense), net (45) 34 -- (27) (5) -- (64)
(26) (14)
------- ------- ------- ----- ------ -----
Earnings (loss) before income
taxes (181) 67 16 (195) 93 (200)
Income tax benefit (expense) 66 (33) (5) 52 (15)(5) (37) 43
------- ------- ------- ----- ------ -----
Earnings (loss) before losses of Liberty
Media Group (115) 34 11 (143) 56 (157)
Losses of Liberty Media Group (29) -- -- -- -- (29)
------- ------- ------- ----- ------ ------
Net earnings (loss) (144) 34 11 (143) 56 (186)
Dividend requirement on redeemable
preferred stocks (34) -- -- -- -- (34)
------- ------- ------- ----- ------ ------
Net earnings (loss) attributable
to common shareholders $ (178) 34 11 (143) 56 (220)
======= ======= ======= ===== ====== ======
Loss attributable to common
stockholders per common share $ (.16) (.18)(17)
======= =====
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
12
<PAGE>
"TCI GROUP"
Notes to Condensed Pro Forma Combined Financial Statements
March 31, 1996
(unaudited)
(1) In July, 1995, TCIC and TCI entered into certain agreements with Viacom and
certain subsidiaries of Viacom pursuant to which TCIC would acquire all of
the then outstanding shares of common stock of VII Cable which, at the
time of such acquisition will own Viacom's cable systems and related
assets.
The transaction has been structured as a tax-free reorganization in which
VII Cable will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub.
VII Cable will also transfer to New Viacom Sub the Loan Proceeds of the
Loan Facility to be arranged by TCIC, TCI and VII Cable. Following these
transfers, VII Cable will retain cable assets with an estimated value at
closing of approximately $2.3 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Common Stock the
opportunity to exchange a portion of their shares of Viacom Common Stock
for shares of VII Cable Class A Stock. The Exchange Offer will be subject
to a number of conditions, including the Minimum Condition that sufficient
tenders are made of Viacom Common Stock that permit the number of shares of
VII Cable Class A Stock issued pursuant to the Exchange Offer to equal the
total number of shares of VII Cable Class A Stock issuable in the Exchange
Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from VII Cable shares of VII Cable Class B Common Stock in exchange
for $350 million (which will be used to reduce VII Cable's obligations
under the Loan Facility). At the time of such acquisition, the VII Cable
Class A Stock received by Viacom stockholders pursuant to the Exchange
Offer will automatically convert into the Exchangeable Preferred Stock of
VII Cable with a stated value of $100 per share. The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and
exchange features, will be designed to cause the Exchangeable Preferred
Stock, in the opinion of two investment banks, to initially trade at the
Stated Value. If insufficient tenders are made by Viacom stockholders in
the Exchange Offer to permit the Minimum Condition to be satisfied, Viacom
will extend the Exchange Offer for up to 15 business days and, during such
extension, TCI and Viacom are to negotiate in good faith to determine
mutually acceptable terms and conditions for the Exchangeable Preferred
Stock and the Exchange Offer that each believes in good faith will cause
the Minimum Condition to be fulfilled and that would cause the Exchangeable
Preferred Stock to trade at a price equal to the Stated Value immediately
following the expiration of the Exchange Offer. In the event the Minimum
Condition is not thereafter met, TCI and Viacom will each have the right to
terminate the transaction. In addition, either party may terminate the
transaction if the Exchange Offer has not commenced by June 24, 1996 or
expired by July 24, 1996.
(continued)
13
<PAGE>
"TCI GROUP"
Notes to Condensed Pro Forma Combined Financial Statements Exchange
The cost to acquire VII Cable following the consummation of the Exchange
Offer has been assumed to be approximately $2.3 billion, consisting of the
Loan Proceeds and the $619 million estimated aggregate par value of the VII
Cable Exchangeable Preferred Stock. Any change in the estimated aggregate
par value of the VII Cable Exchangeable Preferred Stock will result in
corresponding changes in the pro forma amounts of franchise costs, the
related amortization thereof, the aggregate par value of the VII Cable
Exchangeable Preferred Stock and the related dividends thereon. An
increase in the estimated aggregate par value of the VII Cable Exchangeable
Preferred Stock of $10 million will result in an increase in amortization
expense of $250,000 and an increase in annual dividend requirements by VII
Cable of $425,000 based upon an estimated useful life of 40 years and an
annual dividend rate of 4.25%. The accompanying unaudited pro forma
condensed combined statements of operations do not reflect potential cost
savings attributable to (i) economics of scale which may be realized in
connection with purchases of programming and equipment or (ii)
consolidation of certain operating and administrative functions including
the elimination of duplicative facilities and personnel.
(2) On June 19, 1996, TCI announced the Distribution by TCI to the holders of
shares of the TCI Group Common Stock of all of the issued and outstanding
common stock of Satellite. At the time of the Distribution, Satellite will
be a Delaware corporation and a direct wholly owned subsidiary of TCI. The
Distribution will be effected as a tax-free dividend to, and will not
involve the payment of any consideration by, the holders of TCI Group
Common Stock. Prior to the Distribution, TCI will cause to be transferred
to Satellite, or one or more of Satellite's subsidiaries, certain assets
and businesses (and the related liabilities) of the TCI Group constituting
all of TCI's interests in the business of distributing multichannel
programming services in the United States direct to the home via medium
power or high power broadcast satellite, including the rental and sale of
customer premises equipment relating thereto.
In connection with the Distribution, it is anticipated that the
intercompany balance owed by Satellite to TCIC will be converted into a
note payable to TCIC the terms of which have not yet been determined. The
accompanying pro forma financial statements reflect the assumed conversion
of such intercompany balance as well as the elimination of the estimated
assets, liabilities, revenue and expenses of Satellite. The intercompany
balance is based upon historical amounts. However, it is expected that TCIC
will continue to make capital expenditures on behalf of Satellite and, as
such, the intercompany balance can be expected to increase through the date
of the Distribution. The Satellite financial information is subject to
adjustment upon the finalization of the historical financial statements of
Satellite.
(3) On April 25, 1995, TCI Group consummated the Cablevision Acquisition for an
aggregate purchase price of $286 million. The purchase price was paid with
cash consideration of approximately $199 million (including a previously
paid deposit of $20 million) and TCI Group's issuance of the Cablevision
Notes. TCI Group has an option during the two year period ended April 25,
1997 to increase its ownership interest in Cablevision to 80% at a cost per
subscriber similar to the initial purchase price. The exercise of such
option has not been reflected in the accompanying condensed pro forma
combined financial statements.
All amounts presented with respect to Cablevision are stated in U.S.
dollars. During the periods covered by the accompanying condensed pro
forma financial statements, an exchange rate of one U.S. dollar to one
Argentine peso was maintained by the Argentine government.
(4) Reflects the borrowing of the Loan Proceeds ($1.7 billion) under the Loan
Facility. Scheduled maturities of the Loan through December 31, 2000 are
assumed to be $300 million (1996), none (1997), $30 million (1998), $110
million (1999) and $135 million (2000).
(5) Reflects the conveyance to New Viacom Sub of the Loan Proceeds, existing
bank debt of $57 million and certain other nonmaterial assets, liabilities
and related results of operations of VII Cable, including for the year
ended December 31, 1995, a pre-tax gain of $27 million from the sale of
marketable securities and a provision for income taxes of $11 million.
(continued)
14
<PAGE>
"TCI GROUP"
Notes to Condensed Pro Forma Combined Financial Statements
(6) The cost to acquire VII Cable following the consummation of the Exchange
Offer will be allocated to the assets and liabilities acquired according to
their respective fair values, with any excess being treated as franchise
costs. The valuations and other studies which will provide the basis for
the allocation of the cost to acquire VII Cable following consummation of
the Exchange Offer have not yet been performed. Because the valuations and
other studies will not be performed until after the Exchange Offer occurs,
the purchase accounting adjustments made in connection with the development
of the unaudited condensed pro forma combined financial statements are
preliminary. The entire purchase price in excess of the book value of VII
Cable's assets and liabilities has been attributed to franchise costs. The
approximately $1.4 billion pro forma excess of unallocated acquisition
costs as of March 31, 1996 is being amortized over 40 years at a rate of
$35 million per year. To the extent that the excess purchase price over
book value is allocated to property and equipment or other assets,
including identifiable intangibles with lives of less than 40 years,
depreciation and amortization will increase and, on an after-tax basis, net
loss will increase. Although TCI Group cannot estimate the potential
increase in depreciation nor amortization, it may be significant. TCI
Group estimates the average useful life of property and equipment to be
approximately 12.5 years. In addition, TCI Group does not believe that
there are substantial intangible assets which will require amortization
over periods less that 12.5 years. As a result, TCI Group does not believe
that any allocation of purchase price to other assets should be expected to
result in an amortization period less than 12.5 years. VII Cable has
estimated, that for every $100 million allocated to property and equipment
or to other assets including identifiable intangibles, and assuming an
average life of 12.5 years, depreciation and amortization would increase by
$5.5 million per year over such 12.5 year period.
(7) Reflects the estimated aggregate par value of the VII Cable Exchangeable
Preferred Stock.
(8) Represents the elimination of VII Cable's historical equity.
(9) Represents depreciation and amortization of VII Cable's and Cablevision's
allocated excess purchase prices based upon weighted average lives of 12-
1/2 years for property and equipment for Cablevision and 40 years for
franchise costs for VII Cable and 20 years for franchise costs for
Cablevision.
(10) Represents assumed interest expense on the $87 million principal amount of
the Cablevision Notes, calculated at an assumed interest rate of 10.0% per
annum.
(11) Represents additional interest expense on assumed indebtedness of
Cablevision. Such additional interest expense was not reflected in the
historical financial statements of Cablevision as the related borrowings
were not utilized to support the assets acquired by TCI Group. The pro
forma adjustment assumes that Cablevision's April 25, 1995 borrowings ($77
million including capital lease obligations) were outstanding since January
1, 1995 and that such borrowings bore interest at 14.5% per annum.
(12) Represents assumed interest expense incurred by TCI Group on the borrowings
of $179 million to pay the remaining cash portion of the Cablevision
purchase price. Such interest expense was calculated at TCI Group's
weighted average interest rate of 8.1% for the year ended December 31,
1995.
(continued)
15
<PAGE>
"TCI GROUP"
Notes to Condensed Pro Forma Combined Financial Statements
(13) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable
operations) incurred by TCI Group on the borrowings of the Loan Proceeds.
Solely for the purposes of this presentation, TCI Group has assumed an
interest rate of 7.41% and 7.78% for the three months ended March 31, 1996
and for the year ended December 31, 1995, respectively, based upon
historical interest rates adjusted for anticipated terms of the Loan
Facility.
(14) Reflects an assumed 4.25% cumulative annual dividend on the $619 million of
VII Cable Exchangeable Preferred Stock included in minority share of losses
of consolidated subsidiaries. Solely for the purposes of this presentation
the shares of the VII Cable Exchangeable Preferred Stock are assumed to pay
dividends at a rate of 4.25% per annum. The assumed dividend rate was
derived from the actual rate for a market comparable preferred security
recently issued by TCIC. A change in the assumed dividend rate of 1/8% will
result in a change in preferred stock dividend requirements and pro forma
net loss of $774,000.
(15) Reflects the estimated income tax effect of the pro forma adjustments. The
effective income tax rate on a pro forma basis is adversely affected by the
amortization of excess acquisition costs, which are assumed not to be
deductible for tax purposes.
(16) Reflects loss per common share based upon 659.3 million weighted average
shares. Such amount represents TCI Group's weighted average shares, as
disclosed in its March 31, 1996 historical financial statements.
(17) Reflects loss per common share based upon 656.4 million weighted average
shares from August 11, 1995 through December 31, 1995. Such amount
represents TCI Group's weighted average shares, as disclosed in its
December 31, 1995 historical financial statements.
16
<PAGE>
EXHIBIT INDEX
-------------
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
(2) Parents Agreement, dated as of July 24, 1995, among Viacom, Inc.,
Tele-Communications, Inc. and TCI Communications, Inc.
Subscription Agreement, dated as of July 24, 1995, among Viacom
International, Inc., Tele-Communications, Inc. and TCI
Communications, Inc.
Implementation Agreement, dated as of July 24, 1995, between Viacom
International, Inc. and Viacom International Services, Inc.
Incorporated herein by reference to the Registrants' Current
Report on Form 8-K dated July 26, 1995
(23) Consent of Price Waterhouse LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements (Nos. 33-56271, 33-57177, 33-
57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-
65497, 333-00765 and 333-00835) on Form S-3, the Registration Statement (No. 33-
65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263,
33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485,
33-65487, 333-06177 and 333-06179) on Form S-8 of Tele-Communications, Inc. of
our report dated February 14, 1996, relating to the combined balance sheets of
VII Cable as of December 31, 1995 and 1994, and the related combined statements
of operations and cash flows for each of the years in the three-year period
ended December 31, 1995, which appears in the Current Report on Form 8-K of
Tele-Communications, Inc.
Price Waterhouse LLP
150 Alameda Boulevard
San Jose, California
June 18, 1996
