<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment #1)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-20421
TELE-COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1260157
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of shares held in treasury) as of April 30, 1996, was:
Tele-Communications, Inc. Series A TCI Group common stock - 583,361,905 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 84,682,729 shares,
Tele-Communications, Inc. Series A Liberty Media Group common stock -
145,815,385 shares, and Tele-Communications, Inc. Series B Liberty
Media Group common stock - 21,192,387 shares.
<PAGE> 2
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 thereunto duly authorized.
TELE-COMMUNICATIONS, INC.
Date: July 3, 1996 By: /s/ Bernard W. Schotters
------------------------------------------
Bernard W. Schotters
Senior Vice President of
TCI Communications, Inc.
(Principal Financial Officer)
July 3, 1996 By: /s/ Stephen M. Brett
------------------------------------------
Executive Vice President
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
Assets amounts in millions
<S> <C> <C>
Cash $ 281 118
Trade and other receivables, net 436 407
Inventories, net 96 104
Prepaid expenses 72 65
Prepaid program rights 55 47
Committed film inventory 123 122
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 2,315 2,372
Investment in Turner Broadcasting System, Inc.
("TBS") (note 6) 989 955
Property and equipment, at cost:
Land 86 88
Distribution systems 9,713 9,162
Support equipment and buildings 1,463 1,429
------- -------
11,262 10,679
Less accumulated depreciation 3,902 3,653
------- -------
7,360 7,026
------- -------
Franchise costs 15,020 14,322
Less accumulated amortization 2,160 2,092
------- -------
12,860 12,230
------- -------
Other assets, at cost, net of amortization 1,916 1,734
------- -------
$26,503 25,180
======= =======
</TABLE>
(continued)
I-1
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- -----------
<S> <C> <C>
Liabilities and Stockholders' Equity amounts in millions
Accounts payable $ 290 243
Accrued interest 179 233
Accrued programming expense 392 318
Other accrued expenses 765 717
Debt (note 7) 13,170 13,211
Deferred income taxes 4,766 4,584
Other liabilities 195 195
-------- --------
Total liabilities 19,757 19,501
-------- --------
Minority interests in equity
of consolidated subsidiaries 919 651
Redeemable preferred stock 655 478
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debt securities of TCI
Communications, Inc. ("TCIC") 508 --
Stockholders' equity (notes 2 and 8):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Tele-Communications, Inc. Series A TCI Group
common stock, $1 par value
Authorized 1,750,000,000 shares;
issued 683,879,066 shares in 1996 and
672,101,009 shares in 1995 684 672
Tele-Communications, Inc. Series B TCI Group
common stock, $1 par value
Authorized 150,000,000 shares;
issued 84,682,729 shares in 1996 and
84,801,554 shares in 1995 85 85
Tele-Communications, Inc. Series A Liberty
Media Group common stock,
$1 par value. Authorized 750,000,000 shares;
issued 145,815,385 shares in 1996 and
142,892,796 shares in 1995 146 143
Tele-Communications, Inc. Series B Liberty
Media Group common stock,
$1 par value, Authorized 75,000,000 shares;
issued 21,192,387 shares in 1996 and
21,200,336 shares in 1995 21 21
Additional paid-in capital 4,316 4,068
Cumulative foreign currency
translation adjustment (16) (9)
Unrealized holding gains for
available-for-sale securities, net of taxes 314 338
Accumulated deficit (572) (454)
-------- --------
4,978 4,864
Treasury stock, at cost (100,524,364 shares
of Series A TCI Group common stock
in 1996 and 1995) (314) (314)
-------- --------
Total stockholders' equity 4,664 4,550
-------- --------
Commitments and contingencies (note 9)
$ 26,503 25,180
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
---- ----
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue:
From cable and programming services $ 1,676 1,281
Net sales from electronic retailing services 283 243
------- -------
1,959 1,524
------- -------
Operating costs and expenses:
Operating 643 466
Cost of sales from electronic retailing services 192 160
Selling, general and administrative 587 434
Adjustment to compensation relating to
stock appreciation rights (9) (3)
Depreciation 252 201
Amortization 118 86
------- -------
1,783 1,344
------- -------
Operating income 176 180
Other income (expense):
Interest expense (261) (240)
Interest and dividend income 10 7
Share of losses of affiliates, net (note 5) (115) (29)
Gain on disposition of assets 10 8
Minority interests in losses of
consolidated subsidiaries, net 2 11
Other, net 6 (1)
------- -------
(348) (244)
------- -------
Loss before income taxes (172) (64)
Income tax benefit 54 19
------- -------
Net loss (118) (45)
Dividend requirements on
preferred stocks (9) (8)
------- -------
Net loss attributable
to common stockholders $ (127) (53)
------- -------
Net earnings (loss) attributable to
common stockholders (note 3):
TCI Class A and Class B common stock $ -- (53)
TCI Group Series A and Series B
common stock (142) --
Liberty Media Group Series A and
Series B common stock 15 --
------- -------
$ (127) (53)
======= =======
Netearnings (loss) attributable to common stockholders
per common share (note 3):
TCI Class A and Class B common stock $ -- (.08)
TCI Group Series A and Series B
common stock $ (.22) --
Liberty Media Group Series A and
Series B common stock $ .09 --
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Class B Common Stock Additional
----------------------------------------------
Preferred TCI Group Liberty Media Group paid-in
-------------------- ---------------------
Stock Series A Series B Series A Series B capital
--------- -------- -------- -------- -------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 672 85 143 21 4,068
Net loss -- -- -- -- -- --
Issuance of common stock for
acquisition -- 11 -- 3 -- 251
Conversion of Series G Preferred Stock -- 1 -- -- -- 14
Accreted dividends on all classes of
preferred stock -- -- -- -- -- (9)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- -- 2
Payment of preferred stock dividends -- -- -- -- -- (10)
Foreign currency translation adjustment -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Balance at March 31, 1996 $ -- 684 85 146 21 4,316
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Unrealized
holding
Cumulative gains for
foreign available-
currency for-sale Total
translation securities, Accumulated Treasury stockholders'
adjustment net of taxes deficit stock equity
----------- ------------ ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (9) 338 (454) (314) 4,550
Net loss -- -- (118) -- (118)
Issuance of common stock for
acquisition -- -- -- -- 265
Conversion of Series G Preferred Stock -- -- -- -- 15
Accreted dividends on all classes of
preferred stock -- -- -- -- (9)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- 2
Payment of preferred stock dividends -- -- -- -- (10)
Foreign currency translation adjustment (7) -- -- -- (7)
Change in unrealized holding gains for
available-for-sale securities -- (24) -- -- (24)
------ ------ ----- ----- ------
Balance at March 31, 1996 (16) 314 (572) (314) 4,664
====== ====== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1996 1995
------- --------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (118) (45)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 370 287
Adjustment to compensation relating to stock
appreciation rights (9) (3)
Share of losses of affiliates 115 29
Deferred income tax benefit (57) (20)
Other noncash credits (13) (20)
Changes in operating assets and liabilities,
net of the effect of
acquisitions:
Change in receivables 25 19
Change in inventories 9 9
Change in prepaids (10) (47)
Change in accrued interest (54) (35)
Change in other accruals and payables 59 (23)
------- -------
Net cash provided by operating activities 317 151
------- -------
Cash flows from investing activities:
Cash received in (paid for) acquisitions 47 (21)
Capital expended for property and equipment (423) (346)
Additional investments in and
loans to affiliates and others (88) (224)
Other investing activities (12) (1)
------- -------
Net cash used in investing activities (476) (592)
------- -------
Cash flows from financing activities:
Borrowings of debt 1,588 1,064
Repayments of debt (1,954) (1,059)
Issuance of company-obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely subordinated debt securities of TCIC 486 --
Issuance of subsidiary preferred stock 223 --
Issuance of common stock -- 430
Preferred stock dividends (21) (12)
------- -------
Net cash provided by financing activities 322 423
------- -------
Net increase (decrease) in cash 163 (18)
Cash at beginning of period 118 74
------- -------
Cash at end of period $ 281 56
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(unaudited)
(1) General
The accompanying consolidated financial statements include the accounts
of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in TCI's Annual Report on Form 10-K, for the year
ended December 31, 1995.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses
to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company periodically reviews
the carrying amount of its long-lived assets, franchise costs and
certain other assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. The Company
considers historical and expected future net operating losses to be its
primary indicators of potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows
of other groups of assets ("Assets"). The Company deems Assets to be
impaired if the Company is unable to recover the carrying value of such
Assets over their expected remaining useful life through a forecast of
undiscounted future operating cash flows directly related to the
Assets. If Assets are deemed to be impaired, the loss is measured as
the amount by which the carrying amount of the Assets exceeds their
fair value. The Company generally measures fair value by considering
sales prices for similar assets or by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates. The Company adopted Statement No.
121 effective January 1, 1996. Such adoption did not have a significant
effect on the financial position or results of operations of the
Company.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In January 1996, TCI Communications Financing I (the "Trust"), an
indirect wholly-owned subsidiary of the Company, issued $16 million in
common securities and issued $500 million of 8.72% Trust Originated
Preferred SecuritiesSM (the "Preferred Securities" and together with
the common securities, the "Trust Securities"). The Trust exists for
the exclusive purposes of issuing Trust Securities and investing the
proceeds thereof into an aggregate principal amount of $516 million of
8.72% Subordinated Deferrable Interest Notes due January 31, 2045 (the
"Subordinated Debt Securities") of TCIC, a subsidiary of the Company.
The Subordinated Debt Securities are unsecured obligations of TCIC and
are subordinate and junior in right of payment to certain other
indebtedness of the Company. Upon redemption of such Subordinated Debt
Securities, the Preferred Securities will be mandatorily redeemable.
TCIC effectively provides a full and unconditional guarantee of the
Trust's obligations under the Preferred Securities. The Preferred
Securities are presented as a separate line item in the accompanying
consolidated balance sheet captioned "Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
subordinated debt securities of TCI Communications, Inc."
(continued)
I-6
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Liberty Group Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). While the Liberty Group
Stock constitutes common stock of TCI, the issuance of the Liberty
Group Stock did not result in any transfer of assets or liabilities of
TCI or any of its subsidiaries or affect the rights of holders of TCI's
or any of its subsidiaries' debt. On August 10, 1995, TCI distributed
one hundred percent of the equity value attributable to the Liberty
Media Group (the "Distribution") to its security holders of record on
August 4, 1995. Additionally, the stockholders of TCI approved the
redesignation of the previously authorized TCI Class A and Class B
common stock into Series A TCI Group and Series B TCI Group common
stock ("TCI Group Stock").
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A and
Series B TCI Group Stock, the TCI Group Stock is intended to reflect
the separate performance of the subsidiaries and assets not attributed
to Liberty Media Group, including (i) TCI's Cable and Communications
unit, (ii) TCI's International Cable and Programming Unit ("TINTA") and
(iii) TCI's Technology/Venture Capital unit. Such subsidiaries and
assets are referred to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group or to Liberty Media Group for
purposes of preparing their combined financial statements, the change
in the capital structure of TCI does not affect the ownership or the
respective legal title to assets or responsibility for liabilities of
TCI or any of its subsidiaries. TCI and its subsidiaries will each
continue to be responsible for their respective liabilities. Holders of
TCI Group Stock or Liberty Group Stock are holders of common stock of
TCI and continue to be subject to risks associated with an investment
in TCI and all of its businesses, assets and liabilities. The issuance
of Liberty Group Stock did not affect the rights of creditors of TCI.
(3) Earnings (Loss) Per Common and Common Equivalent Share
TCI Class A and Class B Common Stock
The loss attributable to common shareholders per common share for the
three months ended March 31, 1995 was computed by dividing net loss
attributable to common shareholders by the weighted average number of
common shares outstanding during the period (634.5 million). Common
stock equivalents were not included in the computation of weighted
average shares outstanding because their inclusion would be
anti-dilutive.
(continued)
I-7
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCI Group Series A and Series B Common Stock
The loss attributable to TCI Group common stockholders per common share
for the three months ended March 31, 1996 was computed by dividing net
loss attributable to TCI Group Series A and Series B common
stockholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (659.3 million). Common stock equivalents were not included in
the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
Liberty Media Group Series A and Series B Common Stock
Earnings attributable to Liberty Media Group common stockholders per
common share for the three months ended March 31, 1996 was computed by
dividing net earnings attributable to Liberty Media Group Series A and
Series B common stockholders by the weighted average number of common
shares outstanding of Liberty Media Group Series A and Series B common
stock during the period (164.8 million). Common stock equivalents were
not included in the computation because their inclusion would be
anti-dilutive to TCI.
4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $315 million and $275 million for the three
months ended March 31, 1996 and 1995, respectively. Also, during these
periods, cash paid for income taxes was not material. Significant
noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1996 1995
------- -------
amounts in millions
<S> <C> <C>
Cash received in (paid for) acquisitions:
Fair value of assets acquired $(1,080) (2,791)
Liabilities assumed 374 279
Deferred tax liability recorded
in acquisitions 240 875
Minority interests in equity of
acquired entities 52 4
Common stock and preferred stock issued
in acquisitions 461 1,612
------- -------
Cash received in (paid for) acquisitions $ 47 $ (21)
======= =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ -- 14
======= =======
Common stock issued to subsidiaries in
Reorganization reflected as treasury stock $ -- 10
======= =======
</TABLE>
(continued)
I-8
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
---- ----
amounts in millions
<S> <C> <C>
Common stock issued in exchange for
cost investment $ -- 73
=========== ==
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 7 25
=========== ==
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities $ 24 34
=========== ==
Accrued preferred stock dividends $ 7 3
=========== ==
</TABLE>
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Three months ended
Combined Operations March 31,
-----------------------
1996 1995
---- ----
amounts in millions
<S> <C> <C>
Revenue $ 1,300 951
Operating expenses (1,150) (784)
Depreciation and amortization (148) (125)
-------- -----
Operating income 2 42
Interest expense (108) (60)
Other, net (30) (66)
-------- ------
Net loss $ (136) (84)
========= ======
</TABLE>
The Company has various investments accounted for under the equity
method. Some of the more significant investments held by the Company at
March 31, 1996 were a partnership ("Sprint Spectrum") formed by
the Company, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $671
million) (see note 9), Teleport Communications Group, Inc. and TCG
Partners (collectively, "TCG") (carrying value of $249 million),
TeleWest plc ("TeleWest") (carrying value of $512 million) and
Discovery Communications, Inc. (carrying value of $123 million).
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(continued)
I-9
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Investment in Turner Broadcasting System, Inc.
The Company owns shares of TBS common stock and shares of a class of
preferred stock of TBS which has voting rights and is convertible into
TBS common stock. The holders of those preferred shares, as a group,
are entitled to elect seven of fifteen members of the board of
directors of TBS, and the Company appoints three such representatives.
However, voting control over TBS continues to be held by its chairman
of the board and chief executive officer. The Company's total holdings
of TBS common and preferred stocks represent an approximate 7.4% voting
interest for those matters for which preferred and common stock vote as
a single class. See note 7.
At March 31, 1996 and December 31, 1995, the Company's investment in
TBS common stock had an aggregate market value of $811 million and $777
million, respectively (including unrealized holding gains of $485
million and $451 million, respectively).
At March 31, 1996 and December 31, 1995, the Company's investment in
TBS preferred stock, carried at cost, had an aggregate market value of
$967 million and $927 million, respectively, based upon the market
value of the common stock into which it is convertible. Such market
value exceeded cost by $789 million and $749 million, respectively, at
such dates.
On September 22, 1995, the boards of directors of Time Warner Inc.
("Time Warner") and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of the
agreement, TBS shareholders will receive 0.75 of a Time Warner common
share for each TBS Class A and B common share. Each holder of TBS Class
C preferred stock will receive 0.80 of a Time Warner common share for
each of the 6 shares of TBS Class B common stock into which each of the
shares of Class C preferred stock may be converted.
Subject to certain conditions, the Company has agreed to vote its TBS
shares for the TBS/Time Warner Merger. The Time Warner shares of common
stock received by the Company will be exchanged for a series of voting
common stock ("Time Warner Series Common Stock") economically
equivalent to the common stock and placed in a voting trust with Time
Warner Chairman, Gerald M. Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth Network, L.P. ("SportSouth"), a regional
sports cable network, to the Company for approximately $60 million; and
Time Warner has agreed to issue 5 million shares of common stock to TCI
in exchange for a 6-year option to purchase Southern Satellite Systems,
Inc. ("Southern"). Time Warner has also agreed to issue additional
shares of Time Warner Series Common Stock to the Company having a
market value of $160 million in the event Time Warner exercises such
option. Any shares of Time Warner common stock issuable in connection
with the Southern option will be exchanged for Time Warner Series
Common Stock. Additionally, Time Warner will grant the Company an
option to purchase Time Warner's interest in Sunshine Network, a
Florida based sports cable network, for $14 million.
(continued)
I-10
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The TBS/Time Warner Merger, which is subject to, among other things,
approval by the Federal Communications Commission ("FCC") and
regulatory review by federal antitrust authorities, and approval by the
shareholders of TBS and Time Warner, is expected to be completed in
1996.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- -----------
amounts in millions
<S> <C> <C>
Notes payable $ 9,362 7,713
Bank credit facilities 3,110 3,854
Commercial paper 494 1,469
Convertible notes (a) 45 45
Other debt 159 130
------- -------
$13,170 13,211
======= =======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $185 million at March 31, 1996 and $186 million at
December 31, 1995, respectively, mature on December 18, 2021.
The notes require, so long as conversion of the notes has not
occurred, an annual interest payment through 2003 equal to
1.85% of the face amount of the notes. During the three months
ended March 31, 1996, certain of these notes were converted
into 26,600 shares of Series A TCI Group Stock and 6,650
shares of Series A Liberty Group Stock. At March 31, 1996, the
notes were convertible, at the option of the holders, into an
aggregate of 36,680,974 shares of Series A TCI Group Stock and
9,670,244 shares of Series A Liberty Group Stock. See note 2.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of the Company. Also, as security for
borrowings under another of the Company's credit facilities, the
Company pledged a portion of its TBS common stock (with a quoted market
value of $793 million at March 31, 1996). Additionally, as security for
one of the Company's notes payable (with a balance of $52 million at
March 31, 1996), the Company has pledged the stock of one of its
majority-owned subsidiaries.
(continued)
I-11
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 6.1% to 9.9% on notional
amounts of $602 million at March 31, 1996 and (ii) variable interest
rates (the "Variable Rate Agreements") on notional amounts of $2,670
million at March 31, 1996. During the three months ended March 31, 1996
and 1995, the Company's net receipts pursuant to the Fixed Rate
Agreements were $5 million and $5 million, respectively; and the
Company's net receipts pursuant to the Variable Rate Agreements were $8
million and $1 million, respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
---------- ------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.4% 450
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
------ February 2000 5.8%-6.6% 650
$ 602 March 2000 5.8%-6.0% 675
====== September 2000 5.1% 75
-------
$ 2,670
=======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that the Company would pay or receive to terminate the
agreements at March 31, 1996, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
The Company would be required to pay $29 million at March 31, 1996 to
terminate the agreements.
The fair value of the debt of the Company's subsidiaries is estimated
based on the current market prices for the same or similar issues or on
the current rates offered to the subsidiaries of the Company for debt
of the same remaining maturities. The fair value of debt, which has a
carrying value of $13,170 million, was $13,801 million at March 31,
1996.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, certain of TCI's subsidiaries pay fees ranging
from 1/4% to 1/2% per annum on the average unborrowed portion of the
total amount available for borrowings under bank credit facilities.
(continued)
I-12
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Stockholders' Equity
Stock Options
Estimated compensation relating to restricted stock awards, stock
appreciation rights ("SARs") and options with tandem SARs awarded by
the Company has been recorded through March 31, 1996, but is subject to
future adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised or the
restricted stock awards are vested.
Other
At March 31, 1996, there were 90,809,696 shares of Series A TCI Group
Stock and 20,884,587 shares of Series A Liberty Group Stock reserved
for issuance under exercise privileges related to options, convertible
debt securities and convertible preferred stock. Also, one share of
Series A TCI Group Stock is reserved for each share of Series B TCI
Group Stock, and one share of Series A Liberty Group Stock is reserved
for each share of Series B Liberty Group Stock. Additionally,
subsidiaries of TCI own an aggregate of 277,719 shares of TCI
Convertible Redeemable Participating Preferred Stock, Series F ("Series
F Preferred Stock"). Each share of Series F Preferred Stock is
convertible into 1,287.51 shares of Series A TCI Group Stock.
(9) Commitments and Contingencies
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in
Sprint Spectrum which was formed to engage in the business of
providing wireless communications services on a nationwide basis. The
Company owns an indirect 30% interest in Sprint Spectrum. Sprint
Spectrum was the successful bidder for personal communications services
("PCS") licenses for 29 markets in the auction conducted by the FCC
that ended in March 1995. The aggregate license cost for these licenses
was approximately $2.1 billion, all of which has been paid. Sprint
Spectrum may elect to bid in subsequent auctions of PCS licenses and/or
acquire PCS licenses from other holders, has invested in an entity
("APC") which holds the PCS license for the Washington-Baltimore
market, has agreed to invest in the entity that will hold the PCS
license for the Los Angeles-San Diego market, and may invest in other
entities that hold PCS licenses. Subsidiaries of Cox, Sprint and the
Company are also partners in a partnership ("PhillieCo") that holds a
PCS license for the Philadelphia market which was acquired at a license
cost of $85 million. The Company has an indirect 35.3% interest in
PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments
described above, will be substantial. Pursuant to the business plan
adopted by the partners in Sprint Spectrum for the build out of Sprint
Spectrum's nationwide network, the partners are obligated to make
additional cash capital contributions to Sprint Spectrum in the
aggregate amount of approximately $1.9 billion during the two-year
period that commenced January 1, 1996. The business plan contemplates
that Sprint Spectrum will require additional equity thereafter.
In July 1995, TCIC and TCI entered into certain agreements with Viacom
Inc. ("Viacom") and certain subsidiaries of Viacom regarding the
purchase by TCIC of all of the common stock of a subsidiary of Viacom
("Cable Sub") which, at the time of purchase, will own Viacom's cable
systems and related assets.
(continued)
I-13
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The transaction has been structured as a tax-free reorganization in
which Cable Sub 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"). Cable Sub will also transfer
to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion
loan facility (the "Loan Facility") to be arranged by TCIC, TCI and
Cable Sub. Following these transfers, Cable Sub will retain cable
assets with an estimated value at closing of approximately $2.2 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 Cable Sub ("Cable Sub 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 Cable Sub Class
A Stock issued pursuant to the Exchange Offer to equal the total number
of shares of Cable Sub Class A Stock issuable in the Exchange Offer.
(continued)
I-14
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B common stock for
$350 million (which will be used to reduce Cable Sub's obligations
under the Loan Facility). At the time of such acquisition, the Cable
Sub 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 Cable Sub 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 Stock. The Exchangeable Preferred Stock
will also be redeemable, at the option of Cable Sub, 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 Cable Sub, in shares of Series A
TCI Group 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 changes to the 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 been
consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction and the satisfaction or waiver of all of the conditions of
the Exchange Offer. A request for a letter ruling from the Internal
Revenue Service has been filed by Viacom. The Company believes that,
based upon the unique and complex structure of the transaction, there
exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of the Company has
concluded that consummation of the transaction is not yet probable. No
assurance can be given that the transaction will be consummated.
(continued)
I-15
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On November 27, 1995, the Company announced that it had agreed to
exchange its controlling interest in Home Shopping Network, Inc.
("HSN") for shares of Silver King Communications, Inc. ("Silver King").
The Company will receive approximately 11 million newly issued shares
of Silver King in exchange for it 37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995 pursuant
to which an option owned by Liberty Media Group to purchase 2 million
shares of Silver King Class B common stock (the "Option") (which shares
would constitute voting control of Silver King) would be transferred to
Silver Management Company ("Silver Company"), an entity in which
Liberty Media Group would own all of the non-voting equity interests
(which would constitute substantially all of the equity of such entity)
and Mr. Diller would own all of the voting equity interests. Silver
Company would thereafter exercise the Option and hold the shares of
Silver King Class B Common Stock purchased thereunder. In an amendment
to such agreement entered into in November 1995, Liberty Media Group
agreed to contribute all of its shares of HSN (which shares constitute
approximately 41% of the equity of HSN and approximately 80% of the
voting power of HSN) to Silver Company in return for additional
non-voting equity interests in Silver Company. Following such
contribution Silver Company would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing Silver Company's controlling interest
in Silver King to in excess of 80% of the voting power of Silver King).
Each such transaction is subject to the satisfaction of certain
conditions, including the receipt of all necessary regulatory consents
and approvals. If consummated, HSN would cease to be a subsidiary of
the Company and therefore, the financial results of HSN would not be
consolidated with the financial results of Liberty Media Group.
Although the Company would cease to possess voting control over HSN, it
would continue to have an indirect equity interest in HSN through its
ownership of the equity securities of Silver Company. No assurance can
be given that the transaction will be consummated.
(continued)
I-16
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film
Licensing Obligations"). Based on subscriber levels at March 31, 1996,
these agreements require minimum payments aggregating approximately
$473 million. The aggregate amount of the Film Licensing Obligations
under other license agreements is not currently estimable because such
amount is dependent upon certain variable factors. Nevertheless, the
Company's aggregate payments under the Film Licensing Obligations could
prove to be significant. Additionally, the Company has guaranteed up to
$67 million of similar license fee obligations of an affiliate.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $250 million at March 31, 1996. Although there can be no
assurance, management of the Company believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
The Company has also committed to provide additional debt or equity
funding to certain of its affiliates. At March 31, 1996, such
commitments aggregated $77 million.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statements, but are subject to
future adjustment based upon the market value of the respective common
stock and, ultimately, on the final market value when the rights are
exercised or the restricted stock awards are vested.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(10) Subsequent Events
As of April 29, 1996 Liberty Media Group, the News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures, one of
which will operate in the United States and Canada, and the other of
which will operate elsewhere. In the United States, Liberty Media Group
and News Corp. formed a partnership (the "Fox-Liberty Venture") into
which Liberty Media Group contributed interests in its national and
regional sports networks and into which News Corp. contributed its fx
cable network and certain other assets. Liberty Media Group received a
50% interest in the Fox-Liberty Venture and $350 million in cash. The
fx network will be transformed into a nationally distributed, general
entertainment and sports network. The regional sports networks
currently operated under the Prime Sports name will be relaunched under
the Fox sports banner.
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly-owned
subsidiary of Liberty Media Group, and TINTA formed a venture to
operate currently existing sports services in Latin America and
Australia and a variety of new sports services throughout the world
except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. The
Liberty-TINTA LLC owns 50% of the international venture with News Corp.
owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a spanish language sports service
distributed in Latin America and in hispanic markets in the United
States, an interest in Torneos y Competencias S.A., an Argentinean
sports programming and production business, various international
sports and satellite transponder rights and cash. The Liberty-TINTA LLC
also contributed their 50% interest in Premiere Sports and All-Star
Sports. Both are Australian 24-hour sports services available via MMDS
or cable television.
As part of the formation of the international venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the
outstanding stock of Star Television Limited. Upon delivery of such
stock to the Liberty-TINTA LLC, News Corp. is entitled to receive from
the Liberty-TINTA LLC $20 million and rights under various Asian sports
programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
At March 31, 1996, the Company was obligated for certain sports program
rights contracts in the aggregate amount of $426 million. Upon the
formation of the Fox-Liberty Venture, such commitments were transferred
to the Fox-Liberty Venture.
I-17
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. The following discussion focuses on
material changes in the trends, risks and uncertainties affecting the Company's
results of operations and financial condition.
(1) Material changes in financial condition:
The Company is organized based upon four lines of business: Domestic
Cable and Communications; Programming; TINTA; and Technology/Venture Capital.
Such organization provides for financial and operational independence in the
four operating units, each under the direction of its own chief executive
officer, while maintaining the synergies and scale economies provided by a
common corporate parent. While neither TINTA nor the Technology/Venture Capital
unit is currently significant to the Company as a whole, the Company believes
each unit has growth potential and each unit is unique enough in nature to
warrant separate focus.
On August 10, 1995, TCI distributed to its security holders of record
one hundred percent of the equity value of TCI attributable to Liberty Media
Group. The Liberty Group Stock is intended to reflect the separate performance
of Liberty Media Group. While the Liberty Group Stock constitutes common stock
of TCI, the issuance of the Liberty Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect the rights
of holders of TCI's or any of its subsidiaries' debt. The TCI Group Stock is
intended to reflect the performance of the businesses of the Company not
attributable to Liberty Media Group.
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in
Sprint Spectrum formed to engage in the business of providing wireless
communications services on a nationwide basis. The Company owns an indirect 30%
interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for PCS
licenses for 29 markets in the auction conducted by the FCC that ended in March
1995. The aggregate license cost for these licenses was approximately $2.1
billion, all of which has been paid. Sprint Spectrum may elect to bid in
subsequent auctions of PCS licenses and/or acquire PCS licenses from other
holders, has invested in APC which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that will hold
the PCS license for the Los Angeles-San Diego market, and may invest in other
entities that hold PCS licenses. Subsidiaries of Cox, Sprint and the Company are
also partners in PhillieCo which holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. The Company has an indirect
35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The business
plan contemplates that Sprint Spectrum will require additional equity
thereafter.
(continued)
I-18
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In July 1995, TCIC and TCI, entered into certain agreements with Viacom
and certain subsidiaries of Viacom regarding the purchase by TCIC of all of the
common stock of a subsidiary of Viacom which, at the time of purchase, will own
Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub. Cable
Sub will also transfer to New Viacom Sub the proceeds of the Loan Facility.
Following these transfers, Cable Sub will retain cable assets with an estimated
value at closing of approximately $2.2 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 Viacom Common Stock the opportunity
to exchange a portion of their shares of Viacom Common Stock for shares of Cable
Sub Class A Stock. The Exchange Offer will be subject to a number of conditions,
including meeting the Minimum Condition.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B common stock for $350 million
(which will be used to reduce Cable Sub's obligations under the Loan Facility).
At the time of such acquisition, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer will automatically convert into
Exchangeable Preferred Stock. In the event the Minimum Condition is not met
either through the tenders received in the Exchange Offer or upon any extension
of the Exchange Offer, 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 been consummated by July
24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue Service
that the transaction qualifies as a tax-free transaction and the satisfaction or
waiver of all of the conditions of the Exchange Offer. A request for a letter
ruling from the Internal Revenue Service has been filed by Viacom. The Company
believes that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of the Company has concluded
that consummation of the transaction is not yet probable. Accordingly, no
assurance can be given that the transaction will be consummated. For additional
discussion of the Viacom transaction, see note 9 to the accompanying
consolidated financial statements.
(continued)
I-19
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenue of $442 million and net earnings
of $34 million. It is expected that if the transaction is consummated, the
Company would account for such acquisition under the purchase method of
accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and the
estimated aggregate Stated Value of the Exchangeable Preferred Stock of $500
million) would be allocated to the assets and liabilities acquired according to
their respective fair values, with any excess being treated as intangible
assets. As such, the Company will, if such transaction is consummated, reflect
additional interest expense, depreciation, amortization and minority share of
losses of consolidated subsidiaries. On a pro forma basis, if the transaction
had been consummated under its current terms on or before January 1, 1995, Cable
Sub would have reflected loss before taxes of approximately $51 million for the
year ended December 31, 1995. On a pro forma basis, Cable Sub would reflect an
approximate $21 million of preferred stock dividend requirements on an annual
basis assuming, solely for the purpose of this presentation, a dividend rate of
4.25% per annum on the Exchangeable Preferred Stock. On a pro forma basis, the
Company would reflect the foregoing financial impacts of Cable Sub in its
consolidated results of operations except that the preferred stock dividend
requirement of Cable Sub would be reflected as minority interest in the
Company's statement of operations and the Company would incur an additional
approximate $28 million of interest expense per year arising from the assumed
borrowing by the Company for its $350 million capital contribution to Cable Sub.
The Company does not anticipate that the pro forma effect of the transaction for
the three months ended March 31, 1996 will vary significantly from the pro forma
effect, on a pro rata basis, reflected for the year ended December 31, 1995.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $10 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
During the three months ended March 31, 1996, the Company, through
certain subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable
Preferred Stock for net cash proceeds of $223 million, (ii) 20 million preferred
securities of 8.72% Trust Originated Preferred Securities for net cash proceeds
of $486 million (through a special purpose entity formed as a Delaware business
trust) and (iii) $1 billion of publicly-placed fixed rate senior and medium term
notes with interest rates ranging from 6.9% to 7.9% and maturity dates ranging
through 2026. The Company used the proceeds from the aforementioned debt and
equity securities to retire commercial paper and to repay variable rate
indebtedness.
Subsequent to March 31, 1996, TCIC was notified by two of the rating
agencies that the rating of its senior debt by such agencies had been downgraded
by one level to the first level below investment grade status. Two other rating
agencies reaffirmed TCIC's investment grade status; however, one such agency
changed its outlook on TCIC from stable to negative. Such actions may adversely
affect TCIC's access to the public debt market and its overall cost of
borrowings.
The Company has a credit facility which matures in September of 1996.
The outstanding balance of such facility was $487 million at March 31, 1996.
The Company currently anticipates that it will refinance such borrowings but
there can be no assurance that it can do so on terms acceptable to the Company.
(continued)
I-20
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Subsidiaries of the Company had $3.7 billion in unused lines of credit
at March 31, 1996, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although such subsidiaries of the
Company were in compliance with the restrictive covenants contained in their
credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with the
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings.
See note 7 to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($537 million and $464 million for the three
months ended March 31, 1996 and 1995, respectively) to interest expense ($261
million and $240 million for the three months ended March 31, 1996 and 1995,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 206% and 193% for the
three months ended March 31, 1996 and 1995, respectively. Management of the
Company believes that the foregoing interest coverage ratio is adequate in light
of the consistent and nonseasonal nature of its cable television operations and
the relative predictability of the Company's interest expense, over half of
which results from fixed rate indebtedness. Operating Cash Flow is a measure of
value and borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flows provided by operating activities, a
measure of performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($317 million and $151 million
for the three months ended March 31, 1996 and 1995, respectively) reflects net
cash from the operations of the Company available for the Company's liquidity
needs after taking into consideration the aforementioned additional substantial
costs of doing business not reflected in Operating Cash Flow. Amounts expended
by the Company for its investing activities exceed net cash provided by
operating activities. However, management believes that net cash provided by
operating activities, the ability of the Company and its subsidiaries to obtain
additional financing (including the subsidiaries available lines of credit and
access to public debt markets), issuances and sales of the Company's equity or
equity of its subsidiaries, and proceeds from disposition of assets will provide
adequate sources of short-term and long-term liquidity in the future. See the
Company's consolidated statements of cash flows included in the accompanying
consolidated financial statements.
(continued)
I-21
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company pays
(i) fixed interest rates ranging from 6.1% to 9.9% on notional amounts of $602
million at March 31, 1996 and (ii) variable interest rates on notional amounts
of $2,670 million at March 31, 1996. During the three months ended March 31,
1996 and 1995, the Company's net receipts pursuant to the Fixed Rate Agreements
were $5 million and $5 million, respectively; and the Company's net receipts
pursuant to the Variable Rate Agreements were $8 million and $1 million,
respectively. The Company is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $250
million at March 31, 1996. Although there can be no assurance, management of the
Company believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they will
not be material to the Company.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009. Based on subscriber
levels at March 31, 1996, these agreements require minimum payments aggregating
approximately $473 million. The aggregate amount of the Film Licensing
Obligations under other license agreements is not currently estimable because
such amount is dependent upon certain variable factors. Nevertheless, the
Company's aggregate payments under the Film Licensing Obligations could prove to
be significant. Additionally, the Company has guaranteed up to $67 million of
similar license fee obligations of an affiliate.
The Company has committed to provide additional debt or equity funding
to certain of its affiliates. At March 31, 1996, such commitments aggregated $77
million.
At March 31, 1996, the Company was obligated for certain sports
program rights contracts in the aggregate amount of $426 million. Upon the
formation of the Fox-Liberty Venture, such commitments were transferred to the
Fox-Liberty Venture.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
(continued)
I-22
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions, the
Company's basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. The regulations established benchmark rates
in 1993 which were further reduced in 1994, to which the rates charged by cable
operators for Regulated Services were required to conform.
The Company reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 and 1996 in response to FCC regulations. The Company believes
that it has complied in all material respects with the provisions of the 1992
Cable Act, including its rate setting provisions. However, the Company's rates
for Regulated Services are subject to review by the FCC, if a complaint has been
filed, or by the appropriate franchise authority, if such authority has been
certified. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Telecom Act") was signed into law. Because the 1996 Telecom Act does not
deregulate cable programming services tier rates until 1999 (and basic service
tier rates will remain regulated thereafter), the Company believes that the 1993
and 1994 rate regulations have had and will continue to have a material adverse
effect on its results of operations.
Revenue from cable and programming services increased 31% for the three
months ended March 31, 1996, as compared to the corresponding period of 1995.
Such increase is due to the effect of certain acquisitions (12%), growth in
subscriber levels within the Company's cable television systems (4%), growth in
the Company's satellite subscribers (7%), growth in rates charged to the
Company's subscribers from inflation increases, the provision of new channels
and increases in equipment charges (4%) and increases in the Company's domestic
and international programming revenue (4%).
Included in the Company's cable revenue of $1,395 million for the three
months ended March 31, 1996, is $1,377 million attributable to TCIC, and $18
million attributable to other cable operations.
During the three months ended March 31, 1996, advertising sales
accounted for $89 million or 5%, of the Company's total revenue. Such amount
represents an increase of 32% (including increases due to acquisitions) over the
comparable period in 1995.
(continued)
I-23
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Revenue of TCI's consolidated entertainment and information programming
services represented $165 million and $114 million of total consolidated revenue
for the three months ended March 31, 1996 and 1995, respectively. This revenue
was attributable to subscription and advertising revenue at TCI's consolidated
sports programming businesses, revenue from Netlink USA, a marketer and
distributor of programming to the United States home satellite dish subscriber
market and subscription revenue generated by Southern and Encore Media
Corporation.
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed
two sports programming ventures, one of which will operate in the United States
and Canada, and the other of which will operate elsewhere. In the United States,
Liberty Media Group and News Corp. formed the Fox-Liberty Venture into which
Liberty Media Group contributed interests in its national and regional sports
networks and into which News Corp. contributed its fx cable network and certain
other assets. Liberty Media Group received a 50% interest in The Fox-Liberty
Venture and $350 million in cash. The fx Network will be transformed into a
nationally distributed, general entertainment and sports network. The regional
sports networks currently operated under the Prime Sports name will be
relaunched under The Fox Sports Banner.
Internationally, News Corp. and the Liberty-TINTA LLC formed a venture
to operate currently existing sports services in Latin American and Australia
and a variety of new sports services throughout the world except in Asia and in
the United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. The Liberty-TINTA LLC owns 50% of the international
venture with News Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a Spanish language sports service distributed in
Latin America and in hispanic markets in the United States, an interest in
Torneos y Competencias S.A., an Argentinean sports programming and production
business, various international sports and satellite transponder rights and
cash. The Liberty-TINTA LLC also contributed their 50% interest in Premiere
Sports and All-Star Sports. Both are Australian 24-hour sports services
available via MMDS or cable television.
As part of the formation of the international venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the outstanding
stock of Star Television Limited. Upon delivery of such stock to the
Liberty-TINTA LLC, News Corp. is entitled to receive from the Liberty-TINTA LLC
$20 million and rights under various Asian sports programming agreements. Star
Television Limited operates a satellite-delivered television platform in Asia.
HSN's net sales from electronic retailing services increase 16% for the
three months ended March 31, 1996, as compared to the corresponding period in
1995. Such increase is due to a 10% increase in the number of packages shipped
and a 12% increase in average price per unit sold.
For the quarter ended March 31, 1996, cost of sales increased $32
million, or 20%, to $192 million from $160 million compared with the same period
in 1995. As a percentage of net sales, cost of sales increased to 68% from 66%
for the quarter ended March 31, 1996, compared to the same period in 1995. Such
increase relates primarily to an increase in sales volume.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
(continued)
I-24
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
On November 27, 1995, the Company announced that it had agreed to
exchange its controlling interest in HSN for shares of Silver King. The Company
will receive approximately 11 million newly issued shares of Silver King in
exchange for its 37.5 million shares of HSN. If consummated, HSN would cease to
be a subsidiary of the Company and therefore, the financial results of HSN would
not be consolidated with the financial results of Liberty Media Group. Although
the Company would cease to possess voting control over HSN, it would continue to
have an indirect equity interest in HSN through its ownership of the equity
securities of Silver Company. No assurance can be given that the transaction
will be consummated. For additional discussion of the foregoing transaction, see
note 9 to the accompanying consolidated financial statements.
Operating expenses increased 38% for the three months ended March 31,
1996. Exclusive of the effects of acquisitions (14%) and Primestar (5%) (see
discussion below), such expenses increased 19%. Programming and salary expenses
accounted for the majority of such increase. In this regard, programming
expenses represented $379 million (59%) and $291 million (62%) of operating
expenses for the three months ended March 31, 1996 and 1995, respectively. The
Company cannot determine whether and to what extent increases in the cost of
programming will affect its future operating costs. However, such programming
costs have increased at a greater percentage than increases in revenue of
Regulated Services. The Company experienced an increase in programming costs in
the first quarter of 1996 without increasing its rates charged to its customers.
In the Company's regulated cable systems, the Company has made the appropriate
filings to effectuate rate increases for its Regulated Services which will be
effective in June 1996. As allowed by FCC regulations, such rate increases
include amounts intended to recover increased programming costs incurred during
the first five months of 1996 and not previously recovered, as well as interest
on said amounts. The Company anticipates that such increases will result in
additional revenue of approximately $20 million per month.
Selling general and administrative expenses ("SG&A") increased 35% for
the three months ended March 31, 1996. Exclusive of the effects of acquisitions
(9%) and Primestar (12%), SG&A increased 14%. Such increase is due primarily to
salaries and related payroll expenses.
During 1995, the Company changed its approach to how it ordered and
stored excess cable distribution equipment. The Company created material support
centers and consolidated all of its excess inventory. During the three months
ended March 31, 1996, the Company incurred $2 million of costs related to such
material support centers. Additionally, during 1996, the Company incurred
approximately $6 million in expenses related to initiatives to improve its
customer service and to continue the redesign of its computer and accounting
systems.
(continued)
I-25
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
The Company has an interest in an entity, Primestar Partners
("Primestar"), which provides programming and marketing support to its partners
who distribute a multi-channel programming service via a medium power
communications satellite to home satellite dish owners. During the three months
ended March 31, 1996, the Company's revenue and expenses related to its
Primestar satellite service increased significantly over the corresponding
period in 1995 as the number of the Company's Primestar subscribers increased
from approximately 150,000 subscribers at March 31, 1995 to approximately
570,000 subscribers at March 31, 1996. During the three months ended March 31,
1996, revenue increased from $24 million to $98 million and operating, selling,
general and administrative expenses increased from $16 million to $95 million,
as compared to the three months ended March 31, 1995. The Company incurs
significant sales commissions and installation costs when customers initially
subscribe. Therefore, as long as the Company continues to launch this new
service and increase its Primestar subscriber base at such a rapid pace,
management expects operating costs and expenses will increase as well.
The increase in the Company's depreciation expense in 1996 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems. The
systems, which facilitate digital transmission of voice, video and data signals,
will have optical fiber to neighborhood nodes with coaxial cable distribution
downstream from that point. The increase in amortization expense in 1996 is due
to acquisitions.
The Company records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
At March 31, 1996, the Company had an effective ownership interest of
approximately 27% in TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). TeleWest, which is accounted for under the equity method, had a carrying
value at March 31, 1996 of $512 million and comprised $31 million of the
Company's share of its affiliates' losses during the three months ended March
31, 1996. In addition, the Company has other less significant equity method
investments in video distribution and programming businesses located in the UK,
other parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying value of
$350 million at March 31, 1996 and accounted for $18 million of the Company's
share of its affiliates' losses in 1996. Additionally included in share of
losses for the three months ended March 31, 1996 is $53 million attributable to
Sprint Spectrum. Such amount includes $34 million associated with prior periods.
The Company's net loss (before preferred stock dividend requirements)
of $118 million for the three months ended March 31, 1996 represents an increase
of $73 million, as compared to the Company's net loss (before preferred stock
dividend requirements) of $45 million for the three months ended March 31, 1995.
Such increase is primarily the result of an increase in interest expense due to
higher debt balances and interest rates and an increase in share of losses of
affiliates, including the aforementioned share of losses from Sprint Spectrum.
(continued)
I-26
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
In March of 1995, the Financial Accounting Standards Board issued
Statement No. 121, effective for fiscal years beginning after December 15, 1995.
Statement No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 effective January 1, 1996. Such adoption did not have a
significant effect on the financial position or results of operations of the
Company.
I-27
<PAGE> 30
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ------------
Assets amounts in thousands
<S> <C> <C>
Cash $ 32,176 41,225
Trade and other receivables, net 136,395 107,180
Inventories, net 95,690 103,968
Prepaid expenses 16,064 14,176
Prepaid program rights 32,808 28,395
Committed film inventory 29,241 29,931
Investments in affiliates, accounted for under the
equity method, and related receivables (note 4) 307,460 299,331
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 978,509 945,282
Other investments, at cost, and related
receivables (note 6) 105,602 110,791
Property and equipment, at cost:
Land 21,075 21,254
Support equipment and buildings 183,242 180,051
Computer and broadcast equipment 45,043 44,962
---------- ----------
249,360 246,267
Less accumulated depreciation 47,068 42,233
---------- ----------
202,292 204,034
---------- ----------
Intangibles:
Excess cost over acquired net assets 364,846 364,995
Other intangibles 284,062 283,242
Cable distribution fees 128,087 115,746
---------- ----------
776,995 763,983
Less accumulated amortization 155,902 142,741
---------- ----------
621,093 621,242
---------- ----------
Other assets, at cost, net of amortization 12,544 12,081
---------- ----------
$2,569,874 2,517,636
========== ==========
</TABLE>
(continued)
I-28
<PAGE> 31
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
<S> <C> <C>
Liabilities and Combined Equity amounts in thousands
Accounts payable $ 96,681 95,313
Accrued liabilities 169,116 168,107
Film licenses payable 36,190 34,864
Deferred revenue 63,949 50,803
Debt (note 7) 230,454 250,990
Deferred tax liability 219,383 201,909
Other liabilities 15,504 14,261
---------- ----------
Total liabilities 831,277 816,247
---------- ----------
Minority interests in equity of consolidated
subsidiaries 91,871 87,960
Combined equity (note 8):
Combined equity 1,350,966 1,336,125
Due to Tele-Communications, Inc. ("TCI") 9,906 7,496
Unrealized gains on available-for-sale
securities, net of taxes 285,854 269,808
---------- ----------
1,646,726 1,613,429
---------- ----------
Commitments and contingencies (note 9)
$2,569,874 2,517,636
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
I-29
<PAGE> 32
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
--------- ---------
amounts in thousands
<S> <C> <C>
Revenue:
Net sales from electronic retailing services $ 282,689 243,697
Programming services:
From TCI (note 8) 26,738 19,319
From others 138,278 94,941
--------- ---------
447,705 357,957
--------- ---------
Cost of sales, operating costs and expenses:
Cost of sales 191,888 160,007
Operating 117,697 105,583
Selling, general and administrative 92,772 95,556
Charges by TCI (note 8) 5,771 5,905
Adjustment to compensation relating to stock
appreciation rights (note 8) (1,408) (2,096)
Restructuring charges -- 2,041
Depreciation 5,095 6,214
Amortization 13,446 9,706
--------- ---------
425,261 382,916
--------- ---------
Operating income (loss) 22,444 (24,959)
Other income (expense):
Interest expense (6,479) (2,723)
Interest expense to TCI (note 8) -- (743)
Dividend and interest income,
primarily from affiliates 2,165 2,112
Share of earnings (losses) of affiliates, net (note 4) 8,299 (935)
Minority interests in losses (earnings) of
consolidated subsidiaries (3,484) 5,941
Gain on disposition of assets 1,735 --
Litigation settlements -- (2,620)
Other, net 2,172 2,794
--------- ---------
4,408 3,826
--------- ---------
Earnings (loss) before income taxes 26,852 (21,133)
Income tax benefit (expense) (12,011) 10,983
--------- ---------
Net earnings (loss) $ 14,841 (10,150)
========= =========
Earnings per common share (note 2) $ .09
=========
</TABLE>
See accompanying notes to combined financial statements.
I-30
<PAGE> 33
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Three months ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding gains
on available-for- Total
Combined Due to sale securities, combined
equity TCI net of taxes equity
---------- --------- ----------------- ---------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $1,336,125 7,496 269,808 1,613,429
Net earnings 14,841 -- -- 14,841
Sale of programming to TCI -- (26,738) -- (26,738)
Cost allocations from TCI -- 5,771 -- 5,771
Cable distribution fees -- 2,260 -- 2,260
Adjustment to allocation of
compensation relating to stock
appreciation rights -- (1,408) -- (1,408)
Intergroup tax allocation -- 4,791 -- 4,791
Net cash transfers from TCI -- 17,734 -- 17,734
Change in unrealized holding gains
for available-for-sale securities -- -- 16,046 16,046
--------- --------- ------- ---------
Balance at March 31, 1996 1,350,966 9,906 285,854 1,646,726
========= ========= ======= =========
</TABLE>
See accompanying notes to combined financial statements.
I-31
<PAGE> 34
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
--------- ---------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 14,841 (10,150)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 18,541 15,920
Adjustment to compensation relating to stock
appreciation rights (1,408) (2,096)
Share of losses (earnings) of affiliates, net (8,299) 935
Deferred income tax expense 6,977 592
Intergroup tax allocation 4,791 --
Minority interests in earnings (losses) 3,484 (5,941)
Gain on disposition of assets (1,735) --
Litigation settlements -- 2,620
Payments of litigation settlements -- (22,600)
Noncash restructuring charges -- 2,041
Changes in operating assets and liabilities, net of
acquisitions:
Change in receivables (27,288) (8,171)
Change in inventories 8,968 7,499
Change in prepaid expenses (6,357) (10,892)
Change in payables, accruals and
deferred revenue 15,973 (4,228)
--------- ---------
Net cash provided (used) by operating
activities 28,488 (34,471)
--------- ---------
Cash flows from investing activities:
Cash paid for acquisitions -- (33,739)
Capital expended for property and equipment (3,967) (8,152)
Additional investments in and loans to
affiliates and others (2,803) (13,000)
Return of capital from affiliates 1,000 7,720
Collections on loans to affiliates and others 478 1,109
Cash paid for cable distribution fees (12,341) (13,720)
Other investing activities 1,178 1,509
--------- ---------
Net cash used in investing
activities (16,455) (58,273)
--------- ---------
Cash flows from financing activities:
Borrowings of debt 114,008 47,300
Repayments of debt (134,544) (1,982)
Change in cash transfers from (to) TCI (973) 7,920
Contributions by minority shareholders of subsidiaries 492 --
Distributions to minority shareholders of subsidiaries (65) (593)
--------- ---------
Net cash provided (used) by financing
activities (21,082) 52,645
--------- ---------
Net decrease in cash (9,049) (40,099)
Cash at beginning of period 41,225 62,963
--------- ---------
Cash at end of period $ 32,176 22,864
========= =========
</TABLE>
See accompanying notes to combined financial statements.
I-32
<PAGE> 35
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1996
(unaudited)
(1) Basis of Presentation
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). However, Liberty Group
Stock constitutes common stock of TCI. The issuance of Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of holders of TCI's or any
of its subsidiaries' debt. On August 10, 1995, TCI distributed to its
security holders of record on August 4, 1995, Liberty Group Stock
representing one hundred percent of the equity value attributable to
Liberty Media Group (the "Distribution"). Additionally, the
stockholders of TCI approved the redesignation of the previously
authorized TCI Class A and Class B common stock into Series A TCI Group
and Series B TCI Group common stock ("TCI Group Stock").
TCI Group Stock is intended to reflect the separate performance of the
subsidiaries and assets not attributed to Liberty Media Group,
including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's
International Cable and Programming unit and (iii) TCI's
Technology/Venture Capital unit. Such subsidiaries and assets are
collectively referred to as "TCI Group". Intercompany balances
resulting from transactions with such units are reflected as borrowings
from or loans to TCI. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of
preparing its combined financial statements, the change in the capital
structure of TCI does not affect the ownership or the respective legal
title to assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries will each continue to be
responsible for their respective liabilities. Holders of Liberty Group
Stock are holders of common stock of TCI and continue to be subject to
risks associated with an investment in TCI and all of its businesses,
assets and liabilities. The issuance of Liberty Group Stock did not
affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
Liberty Media Group and the market price of shares of Liberty Group
Stock. In addition, net losses of any portion of TCI, dividends and
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce
funds of TCI legally available for dividends on all series of common
stock. Accordingly, Liberty Media Group financial information should be
read in conjunction with the TCI consolidated financial information.
(continued)
I-33
<PAGE> 36
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of Liberty Media Group for
the year ended December 31, 1995. Certain amounts have been
reclassified for comparability with the 1996 presentation.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses
to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. Liberty Media Group periodically
reviews the carrying amount of its long-lived assets and certain other
assets to determine whether current events or circumstances warrant
adjustments to such carrying amounts. Liberty Media Group considers
historical and expected future net operating losses to be its primary
indicators of potential impairment. Assets are grouped and evaluated
for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of the cash flows of other
groups of assets ("Assets"). Liberty Media Group deems Assets to be
impaired if Liberty Media Group is unable to recover the carrying value
of such Assets over their expected remaining useful life through a
forecast of undiscounted future operating cash flows directly related
to the Assets. If Assets are deemed to be impaired, the loss is
measured as the amount by which the carrying amount of the Assets
exceeds its fair value. Liberty Media Group generally measures fair
value by considering sales prices for similar assets or by discounting
estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual
results could vary significantly from such estimates. Liberty Media
Group adopted statement No. 121 effective January 1, 1996. Such
adoption did not have a significant effect on the financial position or
results of operations of Liberty Media Group.
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 at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Earnings Per Common Share
Earnings attributable to Liberty Media Group common stockholders per
common share for the three months ended March 31, 1996 was computed by
dividing net earnings attributable to Liberty Media Group Series A and
Series B common stockholders by the weighted average number of common
shares of Liberty Media Group Series A and Series B common stock
outstanding during the period (164.8 million). Common stock equivalents
were not included in the computation because their inclusion would be
anti-dilutive to TCI.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $8,009,000 and $1,609,000 for the three
months ended March 31, 1996 and 1995, respectively. Cash paid for
income taxes during the three months ended March 31, 1996 and 1995 was
$50,000 and $348,000, respectively. Liberty Media Group received an
income tax refund of $649,000 during the three months ended March 31,
1996.
(continued)
I-34
<PAGE> 37
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1996 1995
-------------- -------
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ -- 25,928
Net liabilities assumed -- (926)
Contribution to combined equity from
TCI for acquisition -- (11,500)
Minority interests in equity of
acquired entities -- 20,237
-------------- -------
$ -- 33,739
============== =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ -- 14,215
============== =======
</TABLE>
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
--------- ---------
amounts in thousands
<S> <C> <C>
Combined Operations
Revenue $ 748,305 579,850
Operating expenses (649,518) (489,523)
Depreciation and amortization (32,391) (38,650)
--------- ---------
Operating income 66,396 51,677
Interest expense (24,561) (17,021)
Other, net (35,412) (47,926)
--------- ---------
Net earnings (loss) $ 6,423 (13,270)
========= =========
</TABLE>
(continued)
I-35
<PAGE> 38
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the carrying value of Liberty Media
Group's investments, accounted for under the equity method, including related
receivables:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc.
("Discovery") $122,823 117,373
QVC, Inc. ("QVC") 85,647 81,160
Sunshine Network ("Sunshine") 7,084 8,221
SportsChannel Chicago ("Chicago") 30,921 29,722
Home Team Sports Limited Partnership
("HTS") 3,788 3,514
International Cable Channels
Partnership, Ltd. ("ICCP") 11,094 11,563
Premier Sports ("Australia") 3,080 4,212
Bet Holdings, Inc. ("BET") 16,524 15,353
Courtroom Television Network ("Court") 7,273 7,711
Other 19,226 20,502
-------- -------
$307,460 299,331
======== =======
</TABLE>
The following table reflects Liberty Media Group's share of earnings (losses) of
each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1996 1995
-------- --------
amounts in thousands
<S> <C> <C>
Discovery $ 5,450 5,206
QVC 4,511 (2,848)
Sunshine 349 202
Chicago 1,699 1,486
HTS 274 (4)
ICCP (472) (809)
Australia (1,770) (2,772)
BET 1,171 916
Court (438) --
Other (2,475) (2,312)
-------- --------
$ 8,299 (935)
======== ========
</TABLE>
Liberty Media Group has a 49.9% partnership interest in QE+ Ltd.
("QE+"), a limited partnership which distributes STARZ!, a first-run
movie premium programming service launched in 1994. Entities attributed
to TCI Group hold the remaining 50.1% partnership interest.
(continued)
I-36
<PAGE> 39
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through July 1,
2005, up to a maximum amount of $350 million, approximately $107
million of which was paid through March 31, 1996. QE+ is obligated to
pay TCI Group a preferred return of 10% per annum on the first $200
million of its special capital contributions beginning five years from
the date of the contribution or five years from January 1, 1996,
whichever is later. Any TCI Group special capital contributions in
excess of $200 million will be entitled to a preferred return of 10%
per annum from the date of the contribution. QE+ is required to apply
75% of its available cash flow, as defined, to repay the TCI Group
special capital contributions and any preferred return payable thereon.
To the extent such special capital contributions are insufficient to
fund the cash requirements of QE+, TCI Group and Liberty Media Group
will each have the option to fund such cash requirements in proportion
to their respective ownership percentages.
TCI Group has also entered into a long-term affiliation agreement with
QE+ with respect to the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for the three
months ended March 31, 1996 and 1995 aggregated $13 million and $6
million, respectively. The affiliation agreement also provides that QE+
will not grant materially more favorable terms and conditions to other
major cable system operators unless such more favorable terms and
conditions are made available to TCI Group. The affiliation agreement
also requires TCI Group to make payments to QE+ with respect to a
guaranteed minimum number of subscribers totaling approximately $339
million for the years 1996, 1997 and 1998.
In connection with the launch of the STARZ! service, TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may
be due pursuant to certain film output, distribution, and license
agreements. As of March 31, 1996, the minimum amount of such
obligations or guarantees was approximately $293 million. The future
obligations of TCI Group with respect to these agreements is not
currently determinable because such amount is dependent upon certain
variable factors, principally the number of films released by the
motion picture companies with which the agreements have been made and
the performance of the theatrical distribution of the films.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of such interest. Such right is exercisable
for a period of ten years beginning January 1, 1999 after QE+ has had
positive cash flow for two consecutive calendar quarters. The right is
exercisable only after all special capital contributions from TCI Group
have been repaid, including any preferred return as discussed above.
Encore Media Corporation ("Encore") (90% owned by Liberty Media Group)
earns management fees from QE+ equal to 20% of managed costs, as
defined. In addition, effective July 1, 1995, Liberty Media Group
started earning a "Content Fee" for certain services provided to QE+
equal to 4% of the gross revenue of QE+. Such Content Fees aggregated
$782,000 for the three months ended March 31, 1996. The Content Fee
agreement expires on June 30, 2001, subject to renewal on an annual
basis thereafter. Payment of the Content Fee will be subordinated to
the repayment of the contributions made by TCI Group and the preferred
return thereon.
(continued)
I-37
<PAGE> 40
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain of Liberty Media Group's affiliates are general partnerships
and any subsidiary of Liberty Media Group that is a general partner in
a general partnership is, as such, liable as a matter of partnership
law for all debts (other than non-recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its assets.
(5) Investment in Turner Broadcasting System, Inc.
Liberty Media Group owns shares of TBS common stock and shares of a
class of preferred stock of TBS which have voting rights and are
convertible into shares of TBS common stock. The holders of those
preferred shares, as a group, are entitled to elect seven of fifteen
members of the board of directors of TBS, and Liberty Media Group
appoints three such representatives. However, voting control over TBS
continues to be held by its chairman of the board and chief executive
officer. Liberty Media Group's total holdings of TBS common and
preferred stocks represent an approximate 7.5% voting interest for
those matters for which preferred and common stock vote as a single
class.
At March 31, 1996 and December 31, 1995, Liberty Media Group's
investment in TBS common stock had an aggregate market value of $800
million and $767 million, respectively (including unrealized holding
gains of $480 million and $447 million, respectively).
At March 31, 1996 and December 31, 1995, Liberty Media Group's
investment in TBS preferred stock, carried at cost, had an aggregate
market value of $967 million and $927 million, respectively, based upon
the market value of the common stock into which it is convertible. Such
market value exceeded cost by $789 million and $749 million,
respectively, at such dates.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TBS common stock (with a
quoted market value of approximately $793 million at March 31, 1996).
See note 7.
On September 22, 1995, the boards of directors of Time Warner, Inc.
("Time Warner") and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of the
agreement, TBS shareholders will receive 0.75 of a Time Warner common
share for each TBS Class A and Class B common share. Each holder of TBS
Class C preferred stock will receive 0.80 of a Time Warner common share
for each of the 6 shares of TBS Class B common stock into which each of
the shares of Class C preferred stock may be converted.
Subject to certain conditions, Liberty Media Group has agreed to vote
its TBS shares for the TBS/Time Warner Merger. The Time Warner shares
of common stock received by Liberty Media Group will be exchanged
immediately for a series of voting common stock ("Time Warner Series
Common Stock") economically equivalent to the common stock and placed
in a voting trust with Time Warner Chairman, Gerald M. Levin, as the
trustee.
(continued)
I-38
<PAGE> 41
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth Network, L.P. ("SportSouth"), a regional
sports cable network, to Liberty Media Group for approximately $60
million; and Time Warner has agreed to issue shares of Time Warner
Series Common Stock economically equivalent to 5 million shares of Time
Warner common stock to Liberty Media Group in exchange for a 6-year
option to purchase Southern Satellite Systems, Inc. ("Southern"). Time
Warner has also agreed to issue additional shares of Time Warner Series
Common Stock to Liberty Media Group having a market value of $160
million in the event Time Warner exercises such option. Any shares of
Time Warner common stock issuable in connection with the Southern
option will be exchanged for Time Warner Series Common Stock.
Additionally, Time Warner will grant Liberty Media Group an option to
purchase Time Warner's interest in Sunshine, a Florida based sports
cable network, for $14 million.
The transaction is subject to, among other things, approval by the
Federal Communications Commission ("FCC") and regulatory review by
federal antitrust authorities, and approval by the shareholders of TBS
and Time Warner.
(6) Other Investments
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- -----------
amounts in thousands
<S> <C> <C>
Marketable equity securities $ 11,518 16,681
Convertible debt, accrued interest
and preferred stock investments 23,000 23,000
Other investments and related receivables 71,084 71,110
-------- --------
$105,602 110,791
======== =======
</TABLE>
Management of Liberty Media Group estimates that the market value,
calculated utilizing a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's other investments aggregated $184 million and $192 million at
March 31, 1996 and December 31, 1995, respectively. No independent
external appraisals were conducted for those assets.
(continued)
I-39
<PAGE> 42
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
amounts in thousands
<S> <C> <C>
Notes payable to bank (a) $ 25,000 135,000
Convertible subordinated debentures, net
of unamortized discount of $2,783,000 (b) 97,217 --
Note payable to bank (c) 25,000 20,000
Note payable to bank (d) 57,700 51,600
Note payable to partnership (e) 4,400 5,654
Bank credit facility (f) 14,000 30,000
Other debt, with varying rates and
maturities 7,137 8,736
---------- -------
$ 230,454 250,990
========== =======
</TABLE>
(a) Payable by Home Shopping Network, Inc. ("HSN")
This revolving credit facility, as amended on February 13,
1996 (the "Credit Facility"), provides for borrowings up to
$120 million. The Credit Facility expires on April 1, 1997 and
is secured by the capital stock of Home Shopping Club, Inc.
and HSN Realty, Inc., wholly-owned subsidiaries of HSN.
Borrowings under the Credit Facility may be used for general
corporate purposes. The interest rate on borrowings under the
Credit Facility is tied to the London Interbank Offered Rate
("LIBOR"), Federal Funds Rate or Prime Rate, at HSN's option,
plus an applicable margin.
Restrictions contained in the Credit Facility include, but are
not limited to, limitations on the encumbrance and disposition
of HSN's assets, certain restrictions on repurchases of HSN's
common stock and the maintenance of various financial
covenants and ratios.
(b) Payable by HSN
On March 1, 1996, HSN completed an offering of $100 million of
unsecured Convertible Subordinated Debentures (the
"Debentures"), due March 1, 2006, which bear interest at 5
7/8% and are convertible into shares of HSN's common stock any
time after May 1, 1996, at a conversion price of $12 per
share. The Debentures are redeemable by HSN for cash at any
time on or after March 1, 1998 at specified redemption prices,
plus accrued interest, except that prior to March 1, 1999 the
Debentures may not be redeemed unless the closing price of the
common stock equals or exceeds 140% of the conversion price
per share for a specified period of time. The Debentures are
subordinated to all existing and future senior debt of HSN.
(continued)
I-40
<PAGE> 43
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) Payable by ARC Holding, Ltd. ("ARCH")
ARC Holding, Ltd., a wholly-owned subsidiary of Affiliated
Regional Communications, Ltd. ("ARC"), is a party to a credit
agreement, as amended, that provides for up to $39,267,000 of
borrowings at March 31, 1996. Borrowings bear interest at the
agent bank's base rate, LIBOR, a certificate of deposit rate
or a combination thereof, as selected by ARCH, plus a margin
depending on ARCH's ratio of total debt to cash flow (as
defined). The commitment is reduced in escalating quarterly
installments through 2000. Liberty Media Group must pay an
annual commitment fee of .375% of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured
by the assets of ARCH, including joint venture interests, and
the stock and assets of its existing and future subsidiaries.
The credit agreement contains certain provisions which limit
ARCH as to additional indebtedness, sale of assets, liens,
guarantees and distributions. Additionally, ARCH must maintain
certain specified financial ratios.
(d) Payable by Prime Ticket Networks, L.P. ("Prime Sports-West")
The Prime Sports-West credit agreement, as amended (the
"Agreement"), provides for borrowings in the form of revolving
term loans aggregating up to $80 million. Prime Sports-West
may specify the interest rate on the loans under various prime
and Eurodollar rate options plus an applicable margin, as
defined. Prime Sports-West must pay an annual commitment fee
of .375% of the unfunded portion of the commitment. Borrowings
under the credit agreement are secured by the assets of Prime
Sports-West.
The Agreement contains, among other things, requirements as to
indebtedness obligations, restrictions on distributions and
capital expenditures, as well as maintenance of certain
specified financial ratios.
(e) Payable by Encore ICCP, Inc.
Encore ICCP, Inc. acquired a 50% general partnership interest
in ICCP in exchange for a note payable to the partnership with
an initial principal amount of $15 million. The note payable
accrues interest at 10% per annum and is guaranteed by Encore.
(f) Payable by Communications Capital Corp. ("CCC")
This revolving credit agreement, as amended, provides for
borrowings up to $325 million through August of 1997.
Borrowings under such agreement bear interest at optional
measures which approximate the prime rate. As security for
this indebtedness, Liberty Media Group has pledged
substantially all of its TBS Class B common stock. CCC must
pay an annual commitment fee of .3125% of the unfunded portion
of the commitment.
(continued)
I-41
<PAGE> 44
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain of Liberty Media Group's subsidiaries are subject to loan
agreements that prohibit or limit the transfer of funds of such
subsidiaries to the parent company in the form of loans, advances or
cash dividends.
The fair value of Liberty Media Group's debt is estimated based on the
quoted market prices for the same or similar issues or on the current
rates offered to Liberty Media Group for debt of the same remaining
maturities. The fair market value of such debt approximated its
carrying value at March 31, 1996.
(8) Combined Equity
Stock Options and Stock Appreciation Rights
Estimates of the compensation relating to the options and/or stock
appreciation rights granted to employees of Liberty Media Group have
been recorded in the accompanying combined financial statements, but
are subject to future adjustment based upon the market value of Series
A TCI Group Stock and the Series A Liberty Group Stock (see note 1)
and, ultimately, on the final determination of market value when the
rights are exercised. Prior to the Distribution, the payable or
receivable arising from the compensation related to the options and/or
stock appreciation rights was reflected as an increase or decrease in
combined equity. Subsequent to the Distribution, such amounts are
included in the amount due to TCI.
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are
set at levels that management believes to be reasonable and that
approximate the costs Liberty Media Group would incur for comparable
services on a stand alone basis. During the three months ended March
31, 1996 and 1995, Liberty Media Group was allocated $596,000 and
$767,000, respectively, in corporate general and administrative costs
by TCI.
Prior to the determination by the Board to seek approval of
stockholders to distribute the Liberty Group Stock, TCI did not have
formalized intercompany allocation methodologies. In connection with
such determination, management of TCI determined that TCI general
corporate expenses should be allocated to Liberty Media Group based on
the amount of time TCI corporate employees (e.g. legal, corporate,
payroll, etc.) expend on Liberty Media Group matters. TCI management
evaluated several alternative allocation methods including assets,
revenue, operating income, and employees. Management did not believe
that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating
subsidiaries, and the way in which corporate resources are utilized.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Group. Charges by TCI Group for such arrangements
for the three months ended March 31, 1996 and 1995, aggregated
$3,406,000 and $3,210,000, respectively.
(continued)
I-42
<PAGE> 45
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers
who are subscribers of TCI Group's cable systems. Aggregate commissions
and charges by TCI Group were $1,769,000 and $1,928,000 for the three
months ended March 31, 1996 and 1995, respectively.
TCI Group manages certain treasury activities for Liberty Media Group
on a centralized basis. Cash receipts of certain businesses attributed
to Liberty Media Group are remitted to TCI Group and certain cash
disbursements of Liberty Media Group are funded by TCI Group on a daily
basis. Such cash activities are included in borrowings from or loans to
TCI Group or, if determined by the Board, as an equity contribution to
be reflected as an Inter-Group Interest to Liberty Media Group.
The Board could determine from time to time that debt of TCI not
incurred by entities attributed to Liberty Media Group or preferred
stock and the proceeds thereof should be specifically attributed to and
reflected in the combined financial statements of Liberty Media Group
to the extent that the debt is incurred or the preferred stock is
issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of
equity offerings are attributed entirely to TCI. After the
Distribution, all financial impacts of issuances of additional shares
of TCI Group Stock will be attributed entirely to TCI Group, and all
financial impacts of issuances of additional shares of Liberty Group
Stock, the proceeds of which are attributed to Liberty Media Group,
will to such extent be reflected entirely in the combined financial
statements of Liberty Media Group. Financial impacts of dividends or
other distributions on, and purchases of, TCI Group Stock will be
attributed entirely to TCI Group, and financial impacts of dividends or
other distributions of Liberty Group stock will be attributed entirely
to Liberty Media Group. Financial impacts of repurchases of Liberty
Group Stock the consideration for which is charged to Liberty Media
Group will be reflected entirely in the combined financial statements
of Liberty Media Group, and financial impacts of repurchases of Liberty
Group Stock the consideration for which is charged to TCI Group will be
attributed entirely to TCI Group.
Subsequent to the Distribution, borrowings from or loans to TCI bear
interest at such rates and have repayment schedules and other terms as
are established by the Board. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative
financing sources.
(continued)
I-43
<PAGE> 46
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A tax sharing agreement (the "Tax Sharing Agreement") among Liberty
Media Group, TCI and certain subsidiaries of TCI was implemented
effective July 1, 1995. The Tax Sharing Agreement formalizes certain of
the elements of a pre-existing tax sharing arrangement and contains
additional provisions regarding the allocation of certain consolidated
income tax attributes and the settlement procedures with respect to the
intercompany allocation of current tax attributes. The Tax Sharing
Agreement encompasses U.S. federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as
amended, and any applicable state, local and foreign tax law and
related regulations. Beginning on the July 1, 1995 effective date,
Liberty Media Group is responsible to TCI for its share of current
consolidated income tax liabilities. TCI is responsible to Liberty
Media Group to the extent that Liberty Media Group's income tax
attributes generated after the effective date are utilized by TCI to
reduce its consolidated income tax liabilities. Accordingly, all tax
attributes generated by Liberty Media Group's operations after the
effective date including, but not limited to, net operating losses, tax
credits, deferred intercompany gains, and the tax basis of assets are
inventoried and tracked for the entities comprising Liberty Media
Group.
(9) Commitments and Contingencies
Liberty Media Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2009 (the
"Film Licensing Obligations"). Based on subscriber levels at March 31,
1996, these agreements require minimum payments aggregating
approximately $180 million. The aggregate amount of the Film Licensing
Obligations under these agreements is not currently estimable because
such amount is dependent upon certain variable factors. Nevertheless,
required aggregate payments under the Film Licensing Obligations could
prove to be significant.
Liberty Media Group leases business offices, has entered into
transponder lease agreements, and uses certain equipment under lease
arrangements. In addition, as of March 31, 1996, Liberty Media Group
has long-term sports program rights contracts which require future
payments aggregating approximately $426 million.
(continued)
I-44
<PAGE> 47
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On November 27, 1995, Liberty Media Group announced that it had agreed
to exchange its controlling interest in HSN for shares of Silver King
Communications, Inc. ("Silver King"). Liberty Media Group will receive
approximately 11 million newly issued shares of Silver King in exchange
for its 37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995 pursuant
to which an option owned by Liberty Media Group to purchase 2 million
shares of Silver King Class B common stock (the "Option")(which shares
would constitute voting control of Silver King) would be transferred to
Silver Management Company ("Silver Company"), an entity in which
Liberty Media Group would own all of the non-voting equity interests
(which would constitute substantially all of the equity of such entity)
and Mr. Diller would own all of the voting equity interests. Silver
Company would thereafter exercise the Option and hold the shares of the
Silver King Class B Common Stock purchased thereunder. In an amendment
to such agreement entered into in November 1995, Liberty Media Group
agreed to contribute all of its shares of HSN (which shares constitute
approximately 41% of the equity of HSN and approximately 80% of the
voting power of HSN) to Silver Company in return for additional
non-voting equity interests in Silver Company. Following such
contribution Silver Company would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing Silver Company's controlling interest
in Silver King to in excess of 80% of the voting power of Silver King).
Each such transaction is subject to the satisfaction of certain
conditions, including the receipt of all necessary regulatory consents
and approvals. If consummated, HSN would cease to be a subsidiary of
Liberty Media Group and therefore, the financial results of HSN would
not be consolidated with the financial results of Liberty Media Group.
Although Liberty Media Group would cease to possess voting control over
HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of Silver Company. No
assurance can be given that the transaction will be consummated.
(10) Subsequent Events
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and Tele-Communications International, Inc. ("TINTA")
formed two sports programming ventures, one of which will operate in
the United States and Canada, and the other of which will operate
elsewhere. In the United States, Liberty Media Group and News Corp.
formed a partnership (the "Fox-Liberty Venture") into which Liberty
Media Group contributed interests in its national and regional sports
networks and into which News Corp. contributed its fx cable network and
certain other assets. Liberty Media Group received a 50% interest in
the Fox-Liberty Venture and $350 million in cash. The fx network will
be transformed into a nationally distributed, general entertainment and
sports network. The regional sports networks currently operated under
the Prime Sports name will be relaunched under the Fox Sports banner.
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly-owned
subsidiary of Liberty Media Group, and TINTA formed a venture to
operate currently existing sports services in Latin American and
Australia and a variety of new sports services throughout the world
except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. The
Liberty-TINTA LLC owns 50% of the international venture with News Corp.
owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a spanish language sports service
distributed in Latin America and in hispanic markets in the United
States, an interest in Torneos y Competencias S.A., an Argentinean
sports programming and production business, various international
sports and satellite transponder rights and cash. The Liberty-TINTA
partnership also contributed their 50% interest in Australia and
All-Star Sports. Both are Australian 24-hour sports services available
via multi-channel, multi-point distribution systems ("MMDS") or cable
television.
As part of the formation of the international venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the
outstanding stock of Star Television Limited. Upon delivery of such
stock to the Liberty-TINTA LLC, News Corp. is entitled to receive from
the Liberty-TINTA LLC $20 million and rights under various Asian sports
programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
I-45
<PAGE> 48
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with Liberty Media Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1995. The following
discussion focuses on material changes in trends, risks and uncertainties
affecting Liberty Media Group's results of operations and financial condition.
Reference should also be made to the Liberty Media Group combined financial
statements included herein.
(1) Material changes in financial condition:
On August 3, 1995, the stockholders of TCI authorized the Board to
issue a new class of stock which is intended to reflect the separate performance
of the Liberty Media Group. However, the Liberty Group Stock constitutes common
stock of TCI. The issuance of Liberty Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect the rights
of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed to its security holders of record on August 4, 1995, Liberty Group
Stock representing one hundred percent of the equity value attributable to
Liberty Media Group.
Following the Distribution, the TCI Group Stock is intended to reflect
the separate performance of TCI Group, which is generally comprised of the
subsidiaries and assets not attributed to Liberty Media Group, including (i)
TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and
Programming unit and (iii) TCI's Technology/Venture Capital unit. Intercompany
balances resulting from transactions with such units are reflected as borrowings
from or loans to TCI and, prior to the Distribution, are included in combined
equity in the accompanying combined financial statements. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI does
not affect the ownership or the respective legal title to assets or
responsibility for liabilities of TCI or any of its subsidiaries. TCI and its
subsidiaries will each continue to be responsible for their respective
liabilities. Holders of Liberty Group Stock will be holders of common stock of
TCI and will continue to be subject to risks associated with an investment in
TCI and all of its businesses, assets and liabilities. The issuance of the
Liberty Group Stock does not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of Liberty Media Group
and the market price of shares of Liberty Group Stock. In addition, net losses
of any portion of TCI, dividends and distributions on, or repurchases of, any
series of common stock, and dividends on, or certain repurchases of preferred
stock would reduce funds of TCI legally available for dividends on all series of
common stock. Accordingly, Liberty Media Group financial information should be
read in conjunction with the TCI consolidated financial information.
(continued)
I-46
<PAGE> 49
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
TCI Group manages certain treasury activities for Liberty Media Group
on a centralized basis. Cash receipts of certain businesses attributed to
Liberty Media Group are remitted to TCI Group and certain cash disbursements of
Liberty Media Group are funded by TCI Group on a daily basis. Such cash
activities are included in borrowings from or loans to TCI Group or, if
determined by the Board, as an equity contribution to Liberty Media Group.
The Board could determine from time to time that debt of TCI not
incurred by entities attributed to Liberty Media Group or preferred stock and
the proceeds thereof should be specifically attributed to and reflected on the
combined financial statements of Liberty Media Group to the extent that the debt
is incurred or the preferred stock is issued for the benefit of Liberty Media
Group.
Borrowings from or loans to TCI bear interest at such rates and have
repayment schedules and other terms as are established by the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of proceeds
by and creditworthiness of the recipient Group, the capital expenditure plans
and investment opportunities available to each Group and the availability, cost
and time associated with alternative financing sources.
On September 22, 1995, the boards of directors of Time Warner and TBS
approved plans to merge their respective companies. Subject to certain
conditions, Liberty Media Group has agreed to vote its TBS shares for the
TBS/Time Warner Merger. The Time Warner shares of common stock received by
Liberty Media Group will be exchanged immediately for Time Warner Series Common
Stock economically equivalent to the common stock and placed in a voting trust
with Time Warner Chairman, Gerald M. Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth, to Liberty Media Group for approximately $60
million; and Time Warner has agreed to issue shares of Time Warner Series Common
Stock economically equivalent to 5 million shares of Time Warner common stock to
Liberty Media Group in exchange for a 6-year option to purchase Southern. Time
Warner has also agreed to issue additional shares of Time Warner Series Common
Stock to Liberty Media Group with a market value of $160 million at such time as
it exercises such option. Any shares of Time Warner common stock issuable in
connection with the Southern option will be exchanged for Time Warner Series
Common Stock. Additionally, Time Warner will grant Liberty Media Group an option
to purchase Time Warner's interest in Sunshine for $14 million.
The TBS/Time Warner Merger is subject to, among other things, approval
by the FCC and regulatory review by federal antitrust authorities, and approval
by the shareholders of TBS and Time Warner. It is expected to be completed in
1996. For additional discussion of the TBS/Time Warner Merger, see note 5 to the
accompanying combined financial statements.
(continued)
I-47
<PAGE> 50
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed
two sports programming ventures, one of which will operate in the United States
and Canada, and the other of which will operate elsewhere. In the United States,
Liberty Media Group and News Corp. formed the Fox-Liberty Venture into which
Liberty Media Group contributed interests in its national and regional sports
networks and into which News Corp. contributed its fx cable network and certain
other assets. Upon consummation, Liberty Media Group will receive a 50% interest
in the Fox-Liberty Venture and $350 million in cash. The fx network will be
transformed into a nationally distributed, general entertainment and sports
network. The regional sports networks currently operated under the Prime Sports
name will be relaunched under the Fox Sports banner.
Internationally, News Corp. and the Liberty-TINTA LLC formed a venture
to operate currently existing sports services in Latin America and Australia and
a variety of new sports services throughout the world except in Asia and in the
United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. The Liberty-TINTA LLC owns 50% of the international
venture with News Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a Spanish language sports service distributed in
Latin America and in Hispanic markets in the United States, An interest in
Torneos Y Competencias S.A., an Argentinean sports programming and production
business, various international sports and satellite transponder rights and
cash. The Liberty-TINTA LLC also contributed their 50% interest in Australia and
All-Star Sports. Both are Australian 24-hour sports services available via MMDS
or cable television.
As part of the formation of the international venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the outstanding
stock of Star Television Limited. Upon delivery of such stock to the
Liberty-TINTA LLC, News Corp. is entitled to receive from the Liberty-TINTA LLC
$20 million and rights under various Asian sports programming agreements. Star
Television Limited operates a satellite-delivered television platform in Asia.
On November 27, 1995, Liberty Media Group announced that it had agreed
to exchange its controlling interest in HSN for shares of Silver King. Liberty
Media Group will receive approximately 11 million newly issued shares of Silver
King in exchange for its 37.5 million shares of HSN. If consummated, HSN would
cease to be a subsidiary of Liberty Media Group and therefore, the financial
results of HSN would not be consolidated with the financial results of Liberty
Media Group. Although Liberty Media Group would cease to possess voting control
over HSN, it would continue to have an indirect equity interest in HSN through
its ownership of the equity securities of Silver Company. No assurance can be
given that the transaction will be consummated. For additional discussion of the
foregoing transaction, see note 9 to the accompanying combined financial
statements.
On March 12, 1996, United Video Satellite Group, Inc. ("UVSG") and
Liberty Media Group agreed to form a venture to combine their Superstar
Satellite Entertainment and Netlink USA ("Netlink") businesses (the
"Netlink/Superstar Venture"). Liberty Media Group and UVSG will each own
approximately 50% of the Netlink/Superstar Venture. Upon consummation of the
Netlink/Superstar Venture, Netlink would cease to be consolidated with the
financial results of Liberty Media Group.
The consummation of the above described transactions would materially
effect the results of operations of Liberty Media Group due to a substantial
part of Liberty Media Group's operations no longer being consolidated. At the
same time Liberty Media Group's share of earnings or losses of affiliates could
be materially impacted by certain of these transactions.
(continued)
I-48
<PAGE> 51
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Liberty Media Group's sources of funds include its available cash
balances, cash generated from operating activities, cash distributions from
affiliates, dividend and interest payments, asset sales, availability under
certain credit facilities, and loans and/or equity contributions from TCI. To
the extent cash needs of Liberty Media Group exceed cash provided by Liberty
Media Group, TCI may transfer funds to Liberty Media Group. Conversely, to the
extent cash provided by Liberty Media Group exceeds cash needs of Liberty Media
Group, Liberty Media Group may transfer funds to TCI.
Many of Liberty Media Group's subsidiaries' loan agreements contain
restrictions regarding transfers of funds to other members of Liberty Media
Group in the form of loans, advances or cash dividends. However, other
subsidiaries, principally Southern (which is the satellite carrier for the
signal of WTBS, a 24-hour independent UHF television station originated by TBS),
Netlink and certain of the regional sports businesses are not restricted from
making transfers of funds to other members of the group. The cash provided by
operating activities of Southern, is a primary source of cash available for
distribution to Liberty Media Group. However, Southern does not have an
agreement with WTBS with respect to the retransmission of its signal and there
are no specific statutory restrictions per se which would prevent any other
satellite carriers from retransmitting such signal to cable operators and
others. If the business of Southern is adversely affected by competitive or
other factors, it may have an adverse effect on the ability of Liberty Media
Group to generate adequate cash to meet its obligations. Additionally, while
Liberty Media Group expects to receive distributions from the Netlink/Superstar
Venture, they may be lower than the cash currently generated and received from
Netlink's operations. In connection with the TBS/Time Warner Merger, Time Warner
has agreed to issue common stock to Liberty Media Group in exchange for Liberty
Media Group's holdings of TBS common and preferred stock. In addition, Time
Warner has agreed to issue common stock to Liberty Media Group in exchange for a
6-year option to purchase Southern. If Time Warner acquires and exercises an
option to purchase Southern, Southern will no longer be a primary source of cash
available for distribution to Liberty Media Group. However, it is anticipated
that Time Warner will continue to pay dividends on its common stock, and
consequently Liberty Media Group would receive dividends on the common stock
received in connection with the TBS/Time Warner merger in an amount that would
approximate the cash generated by Southern's operations. There can be no
assurance the dividends on the Time Warner Series Common Stock will continue to
be paid, in which case the sale of Southern may have an adverse effect on the
ability of Liberty Media Group to generate adequate cash to meet its
obligations.
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $325 million, $14 million of which was outstanding at March
31, 1996. Several subsidiaries of Liberty Media Group have credit facilities.
HSN has a revolving credit facility for $120 million, $25 million of which was
outstanding on March 31, 1996. ARCH has a $39 million revolving credit facility
with a group of banks, $25 million of which was outstanding at March 31, 1996.
Prime Sports-West has an $80 million credit facility with a bank, $58 million of
which was outstanding at March 31, 1996. The HSN, ARCH and Prime Sports-West
facilities restrict the transfer of funds to affiliated companies, and include
various financial covenants, including maintenance of certain financial ratios.
(continued)
I-49
<PAGE> 52
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
On March 1, 1996, HSN completed an offering of $100 million of the
Debentures due March 1, 2006, which are convertible in to HSN's common stock.
HSN used the net proceeds of $97.2 million from the Debentures to repay
borrowings under its revolving credit facility, which when combined with other
repayments, results in the $25 million outstanding at March 31, 1996.
Liberty Media Group intends to continue to develop its entertainment
and information programming services and has made certain financial commitments
related to the acquisition of programming. As of March 31, 1996, Liberty Media
Group's future minimum obligation related to certain film licensing agreements
was $180 million. The amount of the total obligation is not currently estimable
because such amount is dependent upon certain variable factors. Liberty Media
Group's obligations for certain sports program rights contracts as of March 31,
1996 was $426 million. Upon the formation of the Fox-Liberty Venture, such
commitments were transferred to the Fox-Liberty Venture. Continued development
may require additional financing and it cannot be predicted whether Liberty
Media Group will obtain such financing. If additional financing cannot be
obtained, Liberty Media Group could attempt to sell assets but there can be no
assurance that asset sales, if any, can be consummated at a price and on terms
acceptable to Liberty Media Group. Further, Liberty Media Group and/or TCI could
attempt to sell equity securities but, again, there can be no certainty that
such a sale could be accomplished on acceptable terms.
HSN has significant working capital needs for inventory and accounts
receivable. However, HSN expects to meet its recurring working capital needs
primarily through internally generated funds and its existing credit facilities.
The FCC has initiated a number of rulemakings to implement various
provision of the Telecommunications Act of 1996 (the "1996 Telecom Act") as
outlined in Tele-Communications, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995. Recent regulatory developments which may affect Liberty
Media Group's programming interests include two additional proceedings. Section
612 of the Communications Act of 1934, as amended, requires a cable operator,
depending upon the number of activated channels in its cable system, to set
aside up to 15 percent of activated channels for leased access. On March 21,
1996, the FCC adopted a Further Notice of Proposed Rulemaking in which it
proposed an alternative maximum rate formula that it believes may better promote
the goals of leased access. Depending upon any revised formula ultimately
adopted by the FCC, the use of leased access may increase, thereby further
restricting the channel capacity available for carriage of Liberty Media Group's
programming services.
Additionally, Section 305 of the 1996 Telecom Act added Section 713
regarding "Video Programming Accessibility." Under that Section, the FCC, within
18 months of enactment of the 1996 Telecom Act, must establish regulations and
implementation schedules to ensure that video programming is fully accessible
through closed captioning. Depending upon the regulations and schedule adopted
by the FCC, Liberty Media Group's programming interests may incur significant
additional costs.
I-50
<PAGE> 53
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations:
Liberty Media Group is engaged in two principal lines of business: (i)
production, acquisition and distribution through all available formats and media
of branded entertainment, educational and informational programming and
software, including multimedia products, ("Entertainment and Information
Programming Services") and (ii) electronic retailing, direct marketing,
advertising sales relating to programming services, infomercials and transaction
processing ("Electronic Retailing Services"). To enhance the reader's
understanding, separate financial data have been provided below for Electronic
Retailing Services, which include a retail function, and other Entertainment and
Information Programming Services. The table below sets forth, for the periods
indicated, certain financial information and the percentage relationship that
certain items bear to revenue. This summary provides trend data related to the
normal recurring operations of the Liberty Media Group. Corporate expenses have
not been reflected in the following table but are included in the following
discussion. Liberty Media Group holds significant equity investments the results
of which are not a component of operating income, but are discussed below under
"Other Income and Expense". Other items of significance are discussed separately
under their own captions below.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------------------
1996 1995
------------------------- --------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 165,016 100% $ 114,260
Operating, selling, general &
administrative 83% 137,214 100% 114,537
Depreciation and amortization 6% 9,258 5% 5,993
--------- --------- --------- ---------
Operating income (loss) 11% $ 18,544 (5%) $ (6,270)
========= ========= ========= =========
Electronic Retailing Services
Revenue 100% $ 282,689 100% $ 243,697
Cost of sales 68% 191,888 66% 160,007
Operating, selling, general and
administrative 27% 77,618 38% 92,141
Depreciation and amortization 3% 9,258 4% 9,929
--------- --------- --------- ---------
Operating income (loss) 2% $ 3,925 (8%) $ (18,380)
========= ========= ========= =========
</TABLE>
(continued)
I-51
<PAGE> 54
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Entertainment and Information Programming Services
Revenue from Entertainment and Information Programming Services
increased by 44% or $51 million in the three month period ended March 31, 1996,
over the corresponding period of 1995. Liberty Media Group's regional sports
programming businesses had increased revenue of $28 million. Advertising and
infomercial revenue for the regional sports programming businesses was
responsible for $5.4 million of such increase. Increases in direct broadcast
satellite ("DBS") revenue accounts for $7.2 million. Affiliate revenue growth of
$8.2 million for the regional sports programming businesses was due to a
combination of subscriber growth and across the board rate increases. The
remainder of the increase in revenue from the regional sports programming
businesses is primarily attributable to increased international revenue,
increased fees related to college programming and higher merchandising revenue.
Revenue from Encore increased approximately $12 million for the quarter ended
March 31, 1996 compared to the quarter ended March 31, 1995. Encore's thematic
multiplex services tripled the number of multiplex units during the first
quarter of 1996 compared to the first quarter of 1995 accounting for $5.7
million of Encore's increase in revenue. Encore's subscribers increased 40%
resulting in an increase in revenue of approximately $5.1 million. Netlink had
$9.3 million higher revenue for the three months ended March 31, 1996 than for
the three months ended March 31, 1995 primarily due to rate increases effective
April 1, 1995 and January 1, 1996. The remaining increase in revenue for Liberty
Media Group is related to revenue increases from Southern, TV Network
Corporation ("Intro") and the "Content Fee" from STARZ! (see note 4 to the
accompanying combined financial statements).
Operating expenses, exclusive of depreciation and amortization,
increased by 20% or $22.7 million in the three month period ended March 31,
1996. Operating expenses, exclusive of depreciation and amortization, for
Liberty Media Group's regional sports programming businesses was responsible for
$19 million of the increase. Rights fees increased $10.9 million for the quarter
ended March 31, 1996 compared to the same quarter of 1995 due to higher
professional programming contractual increases and new programming acquired
subsequent to March 31, 1995, as well as increases related to growth in the DBS
market. General and administrative expenses for the regional sports programming
businesses increased $1.3 million primarily due to increased legal expenses
related to the new joint ventures as previously discussed. Production and
distribution increased $5 million for the 1996 quarter due to new programming
acquired and the launch of a new transponder subsequent to the first quarter of
1995 and the launch of two new transponders during 1996. Liberty Media Group's
regional sports programming businesses experienced an increase in sales and
marketing of $1.6 million for the quarter ended March 31, 1996 compared to the
same quarter of 1995 primarily due to DBS growth. Encore's programming costs
increased approximately $1 million. Netlink experienced increased programming
costs of $4.2 million during the first quarter of 1996 due to restructuring of
the core packages to include new services. These increases in Liberty Media
Group's operating expenses were offset by decreases in operating expenses at
Southern and Intro.
(continued)
I-52
<PAGE> 55
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating income for Entertainment and Information Programming Services
was $20 million for the quarter ended March 31, 1996. This compared with
operating loss of $6 million in the first quarter of 1995. Increased subscribers
for Encore, Netlink, Intro, Southern and Liberty Media Group's regional sports
programming businesses, as discussed above, contributed significantly to Liberty
Media Group's increase in operating income. Liberty Media Group's regional
sports programming businesses were responsible for $5.8 million of the increase
in operating income for the three months ended March 31, 1996 compared to the
three months ended March 31, 1995. Encore and Netlink accounted for a combined
increase of $16.5 million.
Electronic Retailing Services
This information reflects the results of HSN, which became a
consolidated subsidiary of Liberty Media Group in February 1993. HSN's primary
business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"),
a wholly-owned subsidiary of HSN.
For the quarter ended March 31, 1996, revenue for HSN increased $39
million, or 16%, to $283 million from $244 million compared to the same period
in 1995. Net sales of HSC increased $45 million or 22%, for the quarter ended
March 31, 1996. HSC's sales reflect increases of 10% in the number of packages
shipped while the average price per unit sold increased 12% for the quarter
ended March 31, 1996, compared to the same period in 1995. In addition, sales by
wholly-owned subsidiaries, Internet Shopping Network, Inc. ("ISN") and Vela
Research, Inc. ("Vela") increased $4 million and $3 million, respectively, for
the quarter ended March 31, 1996. These increases were offset by a decrease of
$12 million by HSN's infomercial joint venture, HSN Direct Joint Venture
("HSND").
For the quarter ended March 31, 1996, cost of sales increased $32
million, or 20%, to $192 million from $160 million compared with the same period
in 1995. As a percentage of net sales, cost of sales increased to 68% from 66%
for the quarter ended March 31, 1996, compared to the same period in 1995.
Cost of sales of HSC, ISN and Vela increased $31 million, $4 million
and $1.5 million, respectively, for the quarter March 31, 1996. These increases
were partially offset by decreases related to HSND of $5 million. As a
percentage of HSC's net sales, cost of sales decreased slightly to 69.5% from
69.7% for the quarter ended March 31, 1996, compared to the same period in 1995.
The dollar increases in consolidated and HSC's cost of sales relate to
the higher sales volume. The comparative increase in cost of sales percentages
primarily relates to HSND.
(continued)
I-53
<PAGE> 56
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating expenses, exclusive of depreciation and amortization,
decreased by $14.5 million, to 27% of sales in the 1996 first quarter, compared
with 38% of sales in the 1995 first quarter. In late 1995 and the first quarter
of 1996, management of HSN instituted measures aimed at streamlining operations
primarily by reducing its work force and taking other actions to reduce
operating expenses. These changes resulted in some reduction of operating
expenses in the first quarter of 1996 compared with the same period in 1995 and
are expected to result in future reductions to operating expenses when compared
to 1995. Much of the decrease in expenses was a result of selling, marketing,
engineering and programming expenses related to HSND. In addition, HSN incurred
$2 million in restructuring charges during the three months ended March 31,
1995.
In November 1995, HSN appointed a new chairman of the board and a new
president and chief executive officer, both with significant experience in the
electronic retailing and programming areas. HSN believes that the improved sales
in the quarter ended March 31, 1996 compared to 1995 were primarily the result
of immediate changes made by new management to HSN's merchandising and
programming strategies. HSN's management expects to take additional steps
designed to attract both first-time and active customers include improving
inventory mix with respect to product assortment and average price per unit,
improving inventory management and better planning of programmed shows. HSN
believes that its negative performance in the first quarter of 1995 was due, in
part, to the adverse effects of certain merchandising and programming strategies
which had been implemented in late 1994 and 1995. While management of HSN is
optimistic that results will continue to improve and HSN will remain profitable,
there can be no assurance that proposed changes to HSN's merchandising and
programming strategies will achieve HSN's management's intended results.
HSN believes that seasonality does impact the business but not to the
same extent it impacts the retail industry in general.
Corporate Expenses
Corporate expenses are not reflected in the preceeding table. For the
three months ended March 31, 1996, corporate expenses, excluding the impact of
the stock appreciation rights, remained relatively comparable to the same period
of 1995. The amount of expense associated with stock appreciation rights is
based on the market price of the underlying common stock as of the date of the
financial statements. The expense is subject to future adjustment based on
market price fluctuations and, ultimately, on the final determination of market
value when the rights are exercised.
Upon the Distribution, certain corporate general and administrative
costs will be charged to Liberty Media Group at rates set at the beginning of
each year based on projected utilization for that year. The utilization-based
charges will be set at levels that management believes to be reasonable and that
would approximate the costs Liberty Media Group would incur for comparable
services on a stand alone basis. During the three months ended March 31, 1996,
Liberty Media Group was allocated $596,000 in corporate general and
administrative costs by TCI.
(continued)
I-54
<PAGE> 57
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Prior to the determination by the Board to seek approval by
shareholders to distribute the Liberty Group Stock, TCI did not have formalized
intercompany allocation methodologies. In connection with such determination,
management of TCI has determined that TCI general corporate expenses should be
allocated to Liberty Media Group based on the amount of time TCI corporate
employees (e.g. legal, corporate, payroll, etc.) expend on Liberty Media Group
matters. TCI management evaluated several alternative allocation methods
including assets, revenue, operating income, and employees. Management did not
believe that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating subsidiaries, the
relative maturity of certain of the operating subsidiaries, and the way in which
corporate resources are utilized.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Group. Charges by TCI Group for such arrangements for the
three months ended March 31, 1996 and 1995, aggregated $3,406,000 and
$3,210,000, respectively.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators (including
TCI Group) and others. Charges to TCI Group are based upon customary rates
charged to others.
HSN paid a commission to TCI Group for merchandise sales to customers
who are subscribers of TCI Group's cable systems. Aggregate commissions and
charges by TCI Group were $1,769,000 and $1,928,000 for the three months ended
March 31, 1996 and 1995, respectively.
Other Income and Expense
Liberty Media Group's share of earnings from affiliates was $8.3
million for the first quarter of 1996 compared to a $1 million loss for the
first quarter of 1995. The increase in earnings is primarily due to the increase
in earnings of QVC. Liberty Media Group's share of earnings in affiliates
attributable to its interest in QVC increased from a loss of $3 million during
the three months ended March 31, 1995 to earnings of $5 million for the same
period of 1996. This is primarily the result of compensation resulting from
stock option redemptions in the first quarter of 1995.
In March of 1995, the Financial Accounting Standards Board issued
Statement No. 121, effective for fiscal years beginning after December 15, 1995.
Statement No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Liberty Media Group
adopted Statement No. 121 effective January 1, 1996. Such adoption did not have
a significant effect on the financial position or results of operations of
Liberty Media Group.
I-55
<PAGE> 58
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- -----------
Assets amounts in millions
<S> <C> <C>
Cash $ 249 77
Trade and other receivables, net 300 300
Prepaid expenses 56 51
Prepaid program rights 22 19
Committed film inventory 94 92
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 2,008 2,073
Property and equipment, at cost:
Land 65 67
Distribution systems 9,705 9,153
Support equipment and buildings 1,243 1,213
------- ------
11,013 10,433
Less accumulated depreciation 3,855 3,611
------- ------
7,158 6,822
------- ------
Franchise costs 15,020 14,322
Less accumulated amortization 2,160 2,092
------- ------
12,860 12,230
------- ------
Other assets, at cost, net of amortization 1,200 1,012
------- ------
$23,947 22,676
======= ======
</TABLE>
(continued)
I-56
<PAGE> 59
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ------------
Liabilities and Combined Equity amounts in millions
<S> <C> <C>
Accounts payable $ 193 148
Accrued interest 175 228
Accrued programming expense 343 272
Other accrued expenses 564 528
Debt (note 6) 12,940 12,960
Deferred income taxes 4,547 4,382
Other liabilities 179 181
-------- ------
Total liabilities 18,941 18,699
-------- ------
Minority interests in equity
of consolidated subsidiaries 827 563
Redeemable preferred stock 655 478
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debt securities of TCI
Communications, Inc. ("TCIC") 508 --
Combined equity (note 7):
Combined equity, including preferred
stocks 3,014 2,884
Cumulative foreign currency
translation adjustment (16) (9)
Unrealized holding gains for available-for-sale
securities, net of taxes 28 68
Due from Liberty Media Group (10) (7)
-------- ------
Combined equity 3,016 2,936
-------- ------
Commitments and contingencies (note 9)
$ 23,947 22,676
======== ======
</TABLE>
See accompanying notes to combined financial statements.
I-57
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1996 1995
---------- ---------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 1,538 1,185
Operating costs and expenses:
Operating 525 362
Programming charges from Liberty
Media Group (note 8) 27 19
Selling, general and administrative 494 335
Charges to Liberty Media Group (note 8) (6) (6)
Adjustment to compensation relating to
stock appreciation rights (8) (1)
Depreciation 247 195
Amortization 105 76
------- -----
1,384 980
------- -----
Operating income 154 205
Other income (expense):
Interest expense (255) (237)
Interest and dividend income 8 5
Interest income from Liberty Media
Group (note 8) -- 1
Share of losses of affiliates, net (note 5) (123) (27)
Gain on sale of assets 8 8
Minority interests in losses of
consolidated subsidiaries, net 5 5
Other, net 4 (2)
------- -----
(353) (247)
------- -----
Loss before income taxes (199) (42)
Income tax benefit 66 8
------- -----
Loss before loss of Liberty Media Group
through the date of Distribution
(note 2) (133) (34)
Loss of Liberty Media Group through
the date of Distribution (note 2) -- (11)
------- -----
Net loss (133) (45)
Dividend requirements on
preferred stocks (9) (8)
------- -----
Net loss attributable to
common stockholders $ (142) (53)
------- -----
Loss attributable to common stockholders
per common share (note 3) $ (.22) --
======= =====
</TABLE>
See accompanying notes to combined financial statements.
I-58
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Combined Statement of Equity
Three months ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding
Combined Cumulative gains for Due
equity, foreign available- from
including currency for-sale Liberty
preferred translation securities, Media Combined
stocks adjustment net of taxes Group equity
------ ---------- ------------ ----- ------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,884 (9) 68 (7) 2,936
Net loss (133) -- -- -- (133)
Purchase of programming from
Liberty Media Group -- -- -- 27 27
Cost allocations to Liberty
Media Group -- -- -- (6) (6)
Cable distribution fees -- -- -- (2) (2)
Adjustment to allocation of
compensation relating to stock
appreciation rights -- -- -- 1 1
Intergroup tax allocation
to Liberty Media Group -- -- -- (5) (5)
Net cash transfers to Liberty
Media Group -- -- -- (18) (18)
Change in unrealized gains
for available-for-sale
securities -- -- (40) -- (40)
Foreign currency translation
adjustment -- (7) -- -- (7)
Accreted dividends on TCI
preferred stock subject to
mandatory redemption
requirements (7) -- -- -- (7)
Payment of TCI preferred stock
dividends (10) -- -- -- (10)
Issuance of TCI common
stock for acquisition 265 -- -- -- 265
Conversion of Series G
Preferred Stock 15 -- -- -- 15
------- --- -- --- -----
Balance at March 31, 1996 $ 3,014 (16) 28 (10) 3,016
======= === == === =====
</TABLE>
See accompanying notes to combined financial statements.
I-59
<PAGE> 62
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1996 1995
------- ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss before loss of Liberty Media Group* $ (133) (34)
Adjustments to reconcile net loss before
loss of Liberty Media Group to
net cash provided by operating activities:
Depreciation and amortization 352 271
Adjustment to compensation relating to stock
appreciation rights (8) (1)
Share of losses of affiliates 123 27
Deferred income tax benefit (64) (20)
Minority interests in losses (5) (5)
Other noncash credits (14) (9)
Changes in operating assets and liabilities,
net of the effect of
acquisitions:
Change in receivables 52 27
Change in prepaids (4) (35)
Change in accruals and payables 42 (35)
Change in accrued interest (53) --
------- ------
Net cash provided by operating activities 288 186
------- ------
Cash flows from investing activities:
Cash received in acquisitions 47 13
Capital expended for property and equipment (418) (338)
Additional investments in and
loans to affiliates and others (87) (211)
Change in due from Liberty Media Group 1 --
Change in interest in Liberty Media Group -- (8)
Other investing activities (2) 2
------- ------
Net cash used in investing activities (459) (542)
------- ------
Cash flows from financing activities:
Borrowings of debt 1,474 1,017
Repayments of debt (1,819) (1,057)
Issuance of common stock -- 430
Issuance of company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
subordinated debt securities of TCIC 486 --
Issuance of subsidiary preferred stock 223 --
Preferred stock dividends (21) (12)
------- ------
Net cash provided by financing activities 343 378
------- ------
Net increase in cash 172 22
Cash at beginning of period 77 11
------- ------
Cash at end of period $ 249 33
======= ======
</TABLE>
* Loss of Liberty Media Group does not use funds.
See accompanying notes to combined financial statements.
I-60
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
March 31, 1996
(unaudited)
(1) General
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of TCI Group for the year
ended December 31, 1995.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses
to be recorded on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. TCI Group periodically reviews the
carrying amount of its long-lived assets, franchise costs and certain
other assets to determine whether current events or circumstances
warrant adjustments to such carrying amounts. TCI Group considers
historical and expected future net operating losses to be its primary
indicators of potential impairment. Assets are grouped and evaluated
for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of the cash flows of other
groups of assets ("Assets"). TCI Group deems Assets to be impaired if
TCI Group is unable to recover the carrying value of such Assets over
their expected remaining useful life through a forecast of undiscounted
future operating cash flows directly related to the Assets. If Assets
are deemed to be impaired, the loss is measured as the amount by which
the carrying amount of the Assets exceeds their fair value. TCI Group
generally measures fair value by considering sales prices for similar
assets or by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such
estimates. TCI Group adopted Statement No. 121 effective January 1,
1996. Such adoption did not have a significant effect on the financial
position or results of operations of TCI Group.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In January 1996, TCI Communications Financing I (the "Trust"), an
indirect wholly-owned subsidiary of TCI Group, issued $16 million in
common securities and issued $500 million of 8.72% Trust Originated
Preferred SecuritiesSM (the "Preferred Securities" and together with
the common securities, the "Trust Securities"). The Trust exists for
the exclusive purposes of issuing Trust Securities and investing the
proceeds thereof into an aggregate principal amount of $516 million of
8.72% Subordinated Deferrable Interest Notes due January 31, 2045 (the
"Subordinated Debt Securities") of TCIC, a subsidiary of TCI Group. The
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other
indebtedness of TCIC. Upon redemption of such Subordinated Debt
Securities, the Preferred Securities will be mandatorily redeemable.
TCIC effectively provides a full and unconditional guarantee of the
Trust's obligations under the Preferred Securities. The Preferred
Securities are presented as a separate line item in the accompanying
combined balance sheet captioned "Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
subordinated debt securities of TCI Communications, Inc."
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 at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(continued)
I-61
<PAGE> 64
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
(2) Liberty Group Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). While the Liberty Group
Stock constitutes common stock of TCI, issuance of the Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI or
any of its subsidiaries or affect the rights of holders of TCI's or any
of its subsidiaries' debt. On August 10, 1995, TCI distributed one
hundred percent of the equity value attributable to the Liberty Media
Group (the "Distribution") to its security holders of record on August
4, 1995. Additionally, the stockholders, of TCI approved the
redesignation of the previously authorized Class A and Class B common
stock into Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock").
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A and
Series B TCI Group Stock, the TCI Group Stock is intended to reflect
the separate performance of the subsidiaries and assets not attributed
to Liberty Media Group, including (i) TCI's Domestic Cable and
Communications unit, (ii) TCI's International Cable and Programming
unit and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries
and assets are collectively referred to as "TCI Group". Intercompany
balances resulting from transactions with such units are reflected as
borrowings from or loans to TCI and, prior to the Distribution, are
included in combined equity in the accompanying combined financial
statements. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its
combined financial statements, the change in the capital structure of
TCI does not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries each continue to be responsible
for their respective liabilities. Holders of TCI Group Stock are
holders of common stock of TCI and continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities. The issuance of Liberty Group Stock did not affect the
rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of TCI
Group and the market price of shares of the TCI Group Stock. In
addition, net losses of any portion of TCI, dividends or distributions
on, or repurchases of, any series of common stock, and dividends on, or
certain repurchases of preferred stock would reduce the funds of TCI
legally available for dividends on all series of common stock.
Accordingly, TCI Group financial information should be read in
conjunction with the TCI and Liberty Media Group financial information.
(continued)
I-62
<PAGE> 65
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Prior to the Distribution, TCI Group had a 100% Inter-Group Interest in
Liberty Media Group. Following the Distribution, TCI Group has no
Inter-Group Interest in Liberty Media Group. For periods in which an
Inter-Group Interest exists, TCI Group would account for its
Inter-Group Interest in a manner similar to the equity method of
accounting. For periods after the Distribution and before the creation
of an Inter-Group Interest, TCI Group would not reflect any interest in
Liberty Media Group. An Inter-Group Interest would be created only if a
subsequent transfer of cash or other property from TCI Group to Liberty
Media Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to TCI Group.
However, Liberty Media Group is under the sole control of TCI.
Management of TCI believes that generally accepted accounting
principles require that Liberty Media Group be consolidated with TCI
Group. If Liberty Media Group were consolidated with TCI Group, the
combined financial position, combined results of operations, and
combined cash flows of TCI Group would equal the consolidated financial
position, consolidated results of operations and consolidated cash
flows of TCI and subsidiaries, which financial statements are included
separately herein. Management of TCI has elected to present the
accompanying combined financial statements in a manner that does not
comply with generally accepted accounting principles.
(3) Loss Per Common Share
The loss attributable to TCI Group common stockholders per common share
for the three months ended March 31, 1996 was computed by dividing net
loss attributable to TCI Group Series A and Series B common
stockholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (659.3 million). Common stock equivalents were not included in
the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $308 million and $274 million for the three
months ended March 31, 1996 and 1995, respectively. Also, during these
periods, cash paid for income taxes was not material.
(continued)
I-63
<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1996 1995
------- ------
amounts in millions
<S> <C> <C>
Cash received in acquisitions:
Fair value of assets acquired $(1,080) (2,777)
Liabilities assumed 374 278
Deferred tax liability recorded
in acquisitions 240 875
Minority interests in equity of
acquired entities 52 25
Common stock and preferred stock
issued in acquisitions 461 1,612
------- ------
Cash received in acquisitions $ 47 13
------- ------
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 7 25
======= ======
</TABLE>
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Three months ended
Combined Operations March 31,
-----------------------
1996 1995
-------- ----
amounts in millions
<S> <C> <C>
Revenue $ 577 378
Operating expenses (543) (320)
Depreciation and amortization (116) (86)
-------- ----
Operating loss (82) (28)
Interest expense (83) (43)
Other, net 5 (19)
-------- ----
Net loss $ (160) (90)
======== ====
</TABLE>
TCI Group has various investments accounted for under the equity
method. Some of the more significant investments held by TCI Group at
March 31, 1996 were a partnership ("Sprint Spectrum") formed by TCI
Group, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $671
million) (see note 9), Teleport Communications Group, Inc. and TCG
Partners (collectively, "TCG") (carrying value of $249 million) and
TeleWest plc ("TeleWest") (carrying value of $512 million).
(continued)
I-64
<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- -----------
amounts in millions
<S> <C> <C>
Notes payable $ 9,262 7,713
Bank credit facilities 2,988 3,617
Commercial paper 494 1,469
Convertible notes (a) 45 45
Other debt 151 116
-------- ------
$ 12,940 12,960
======== ======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $185 million and $186 million at March 31, 1996
and December 31, 1995, respectively, mature on December 18,
2021. The notes require (so long as conversion of the notes
has not occurred) an annual interest payment through 2003
equal to 1.85% of the face amount of the notes. At March 31,
1996, the notes were convertible, at the option of the
holders, into an aggregate of 38,680,974 shares of Series A
TCI Group Stock and 9,670,244 shares of Series A Liberty Group
Stock. See note 2.
The bank credit facilities and various other debt instruments
attributable to the TCI Group generally contain restrictive covenants
which require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of TCI Group's bank credit
facilities, TCI Group as pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of TCI Group. As security for one of
TCI Group's notes payable (with a balance of $52 million at March 31,
1996), TCI Group has pledged the stock of one of its majority-owned
subsidiaries.
(continued)
I-65
<PAGE> 68
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the
"Fixed Rate Agreements") ranging from 6.1% to 9.9% on notional amounts
of $602 million at March 31, 1996 and (ii) variable interest rates (the
"Variable Rate Agreements") on notional amounts of $2,670 million at
March 31, 1996. During the three months ended March 31, 1996 and 1995,
the TCI Group's net receipts pursuant to the Fixed Rate Agreements were
$5 million and $5 million, respectively; and TCI Group's net receipts
pursuant to the Variable Rate Agreements were $8 million and $1
million, respectively.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
---- ---------- ------ ---- -------------- ------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.4% 450
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
------ February 2000 5.8%-6.6% 650
$ 602 March 2000 5.8%-6.0% 675
====== September 2000 5.1% 75
-------
$ 2,670
=======
</TABLE>
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However, TCI
Group does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that TCI Group would pay or receive to terminate the
agreements at March 31, 1996, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
TCI Group would be required to pay $29 million at March 31, 1996 to
terminate the agreements.
The fair value of the debt attributable to TCI Group is estimated based
on the current market prices for the same or similar issues or on the
current rates offered to TCI Group for debt of the same remaining
maturities. The fair value of debt, which has a carrying value of
$12,940 million, was $13,571 million at March 31, 1996.
(continued)
I-66
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Certain subsidiaries attributed to TCI Group are required to maintain
unused availability under bank credit facilities to the extent of
outstanding commercial paper. Also, certain of TCI Group's subsidiaries
pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed
portion of the total amount available for borrowings under bank credit
facilities.
(7) Combined Equity
General
The rights of holders of the TCI Group Stock upon liquidation of TCI
are based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock and the Liberty Group Stock.
Stock Options and Stock Appreciation Rights
Estimates of compensation relating to options and/or stock appreciation
rights granted to certain key employees of the TCI Group have been
recorded in the accompanying combined financial statements, but are
subject to future adjustment based upon the market value of Series A
TCI Group Stock and Series A Liberty Group Stock (see note 2) and,
ultimately, on the final determination of market value when the rights
are exercised or the restricted shares are vested.
(8) Transactions with Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are
set at levels that management believes to be reasonable and that
approximate the costs Liberty Media Group would incur for comparable
services on a stand alone basis. During each of the three month periods
ended March 31, 1996 and 1995, Liberty Media Group was allocated less
than $1 million in corporate general and administrative costs by TCI
Group.
Prior to the determination by the Board to seek approval of
stockholders to distribute the Liberty Group Stock, TCI did not have
formalized intercompany allocation methodologies. In connection with
such determination, management of TCI determined that TCI general
corporate expenses should be allocated to Liberty Media Group based on
the amount of time TCI corporate employees (e.g. legal, corporate,
payroll, etc.) expend on Liberty Media Group matters. TCI management
evaluated several alternative allocation methods including assets,
revenue, operating income, and employees. Management did not believe
that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating
subsidiaries, and the way in which corporate resources are utilized.
TCI Group has a 50.1% partnership interest in QE+Ltd. ("QE+"), which
distributes STARZ!, a first-run movie premium programming service
launched in 1994. Entities attributed to Liberty Media Group hold the
remaining 49.9% partnership interest.
(continued)
I-67
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through July 1,
2005, up to a maximum amount of $350 million, approximately $107
million of which was paid through March 31, 1996. QE+ is obligated to
pay TCI Group a preferred return of 10% per annum on the first $200
million of its special capital contributions beginning five years from
the date of the contribution or five years from January 1, 1996,
whichever is later. Any TCI Group special capital contributions in
excess of $200 million will be entitled to a preferred return of 10%
per annum from the date of the contribution. QE+ is required to apply
75% of its available cash flow, as defined, to repay the TCI Group
special capital contributions and any preferred return payable thereon.
To the extent such special capital contributions are insufficient to
fund the cash requirements of QE+, TCI Group and Liberty Media Group
will each have the option to fund such cash requirements in proportion
to their respective ownership percentages.
TCI Group has also entered into a long-term affiliation agreement with
QE+ with respect to the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for the three
months ended March 31, 1996 and 1995 aggregated $13 million and $6
million, respectively. The affiliation agreement also provides that QE+
will not grant materially more favorable terms and conditions to other
major cable system operators unless such more favorable terms and
conditions are made available to TCI Group. The affiliation agreement
also requires TCI Group to make payments to QE+ with respect to a
guaranteed minimum number of subscribers totaling approximately $339
million for the years 1996, 1997 and 1998.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of such interest. Such right is exercisable
for a period of ten years beginning January 1, 1999 after QE+ has had
positive cash flow for two consecutive calendar quarters. The right is
exercisable only after all special capital contributions from TCI Group
have been repaid, including any preferred return as discussed above.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. In
addition, effective July 1, 1995, Liberty Media Group started earning a
"Content Fee" for certain services provided to QE+ equal to 4% of the
gross revenue of QE+. Such Content Fees aggregated $1 million for the
three months ended March 31, 1996. The Content Fee agreement expires on
June 30, 2001, subject to renewal on an annual basis thereafter.
Payment of the Content Fee will be subordinated to the repayment of the
contributions made by TCI Group and the preferred return thereon.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Group. Charges by TCI Group for such arrangements
for each of the three month periods ended March 31, 1996 and 1995,
aggregated $3 million.
(continued)
I-68
<PAGE> 71
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers
who are subscribers of TCI Group's cable systems. Aggregate commissions
and charges to TCI Group were $2 million for each of the three month
periods ended March 31, 1996 and 1995.
TCI Group manages certain treasury activities for Liberty Media Group
on a centralized basis. Cash receipts of certain businesses attributed
to Liberty Media Group are remitted to TCI Group and certain cash
disbursements of Liberty Media Group are funded by TCI Group on a daily
basis. Such cash activities are included in borrowings from or loans to
TCI Group or, if determined by the Board, as an equity contribution to
be reflected as an Inter-Group Interest to Liberty Media Group.
The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to Liberty Media Group or preferred
stock and the proceeds thereof should be specifically attributed to and
reflected on the combined financial statements of Liberty Media Group
to the extent that the debt is incurred or the preferred stock is
issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of
equity offerings are attributed entirely to TCI Group. After the
Distribution, all financial impacts of issuances of additional shares
of TCI Group Stock will be attributed entirely to TCI Group, all
financial impacts of issuances of additional shares of Liberty Group
Stock the proceeds of which are attributed to Liberty Media Group will
be reflected entirely in the combined financial statements of Liberty
Media Group. Financial impacts of dividends or other distributions on,
and purchases of, TCI Group Stock will be attributed entirely to TCI
Group, and financial impacts of dividends or other distributions on
Liberty Group Stock will be attributed entirely to Liberty Media Group.
Financial impacts of repurchases of Liberty Group Stock, the
consideration for which is charged to Liberty Media Group, will be
reflected entirely in the combined financial statements of Liberty
Media Group, and the financial impacts of repurchases of Liberty Group
Stock the consideration for which is charged to TCI Group, will be
attributed entirely to TCI Group.
Subsequent to the Distribution, borrowings from or loans to TCI Group
bear interest at such rates and have repayment schedules and other
terms as are established by the Board. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative
(continued)
I-69
<PAGE> 72
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
A tax sharing agreement (the "Tax Sharing Agreement") among TCI Group
and certain other subsidiaries of TCI was implemented effective July 1,
1995. The Tax Sharing Agreement formalizes certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes
and the settlement procedures with respect to the intercompany
allocation of current tax attributes. The Tax Sharing Agreement
encompasses U.S. federal, state, local and foreign tax consequences and
relies upon the U.S. Internal Revenue Code of 1986 as amended, and any
applicable state, local and foreign tax law and related regulations.
Beginning on the July 1, 1995 effective date, TCI Group will be
responsible to TCI for its share of current consolidated income tax
liabilities. TCI will be responsible to TCI Group to the extent that
TCI Group's income tax attributes generated after the effective date
are utilized by TCI to reduce its consolidated income tax liabilities.
Accordingly, all tax attributes generated by TCI Group's operations
after the effective date including, but not limited to, net operating
losses, tax credits, deferred intercompany gains, and the tax basis of
assets are inventoried and tracked for the entities comprising TCI
Group.
(9) Commitments and Contingencies
Subsidiaries of TCI Group, Comcast, Cox and Sprint are partners in
Sprint Spectrum which was formed to engage in the business of providing
wireless communications services on a nationwide basis. TCI Group owns
an indirect 30% interest in Sprint Spectrum. Sprint Spectrum was the
successful bidder for personal communications services ("PCS") licenses
for 29 markets in the auction conducted by the FCC that ended in March
1995. The aggregate license cost for these licenses was approximately
$2.1 billion, all of which has been paid. Sprint Spectrum may elect to
bid in subsequent auctions of PCS licenses and/or acquire PCS licenses
from other holders, has invested in an entity ("APC") which holds the
PCS license for the Washington-Baltimore market, has agreed to invest
in the entity that will hold the PCS license for the Los Angeles-San
Diego market, and may invest in other entities that hold PCS licenses.
Subsidiaries of Cox, Sprint and TCI Group are also partners in a
partnership ("PhillieCo") that holds a PCS license for the Philadelphia
market which was acquired at a license cost of $85 million. TCI Group
has an indirect 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments
described above, will be substantial. Pursuant to the business plan
adopted by the partners in Sprint Spectrum for the build out of Sprint
Spectrum's nationwide network, the partners are obligated to make
additional cash capital contributions to Sprint Spectrum in the
aggregate amount of approximately $1.9 billion during the two-year
period that commenced January 1, 1996. The business plan contemplates
that Sprint Spectrum will require additional equity thereafter.
In July, 1995, TCI Group entered into certain agreements with Viacom
Inc. ("Viacom") and certain subsidiaries of Viacom regarding the
purchase by TCI Group of all of the common stock of a subsidiary of
Viacom ("Cable Sub") which, at the time of purchase, will own Viacom's
cable systems and related assets.
(continued)
I-70
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
The transaction has been structured as a tax-free reorganization in
which Cable Sub 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"). Cable Sub will also transfer
to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion
loan facility (the "Loan Facility") to be arranged by TCI Group and
Cable Sub. Following these transfers, Cable Sub will retain cable
assets with an estimated value at closing of approximately $2.2 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 Cable Sub ("Cable Sub 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 Cable Sub Class
A Stock issued pursuant to the Exchange Offer to equal the total number
of shares of Cable Sub Class A Stock issuable in the Exchange Offer.
(continued)
I-71
<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
Immediately following the completion of the Exchange Offer, TCI Group
will acquire from Cable Sub shares of Cable Sub Class B common stock
for $350 million (which will be used to reduce Cable Sub's obligations
under the Loan Facility). At the time of such acquisition, the Cable
Sub 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 Cable Sub 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 Stock. The Exchangeable Preferred Stock
will also be redeemable, at the option of Cable Sub, 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 Cable Sub, in shares of Series A
TCI Group 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 Group and Viacom are to negotiate in good faith to
determine mutually acceptable changes to the 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
been consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction and the satisfaction or waiver of all of the conditions of
the Exchange Offer. A request for a letter ruling from the Internal
Revenue Service has been filed by Viacom. TCI Group believes that,
based upon the unique and complex structure of the transaction, there
exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of TCI Group has
concluded that consummation of the transaction is not yet probable. No
assurance can be given that the transaction will be consummated.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $241 million at March 31, 1996. Although there can be no
assurance, management of TCI Group believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to TCI Group.
(continued)
I-72
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Notes to Combined Financial Statements
TCI Group is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through December 31, 2005
(the "Film Licensing Obligations"). Based on subscriber levels at March
31, 1996, these agreements require minimum payments aggregating $293
million. The aggregate amount of the Film Licensing Obligations is not
currently estimable because such amount is dependent upon certain
variable factors. Nevertheless, TCI Group's required aggregate payments
under the Film Licensing Obligations could prove to be significant.
Additionally, TCI Group has guaranteed up to $67 million of similar
license fee obligations of another affiliate.
TCI Group has also committed to provide additional debt or equity
funding to certain of its affiliates. At March 31, 1996, such
commitments aggregated $77 million.
Certain key employees of TCI Group hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statement, but are subject to
future adjustment based upon the market value of the respective common
stock and, ultimately, on the final market value when the rights are
exercised.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying combined financial statements.
I-73
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with TCI Group's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Tele-Communications, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1995. The following discussion focuses
on material changes in trends, risks and uncertainties affecting TCI Group's
results of operations and financial condition.
(1) Material changes in financial condition:
On August 3, 1995, the stockholders of TCI authorized the Board to
issue a new class of stock which is intended to reflect the separate performance
of Liberty Media Group. While the Liberty Group Stock constitutes common stock
of TCI, the issuance of the Liberty Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect the rights
of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to Liberty
Media Group to its security holders of record on August 4, 1995. Additionally,
stockholders of TCI approved the redesignation of the previously authorized
Class A and Class B common stock of TCI into Series A and Series B TCI Group
Stock.
Following the Distribution, the TCI Group Stock is intended to reflect
the separate performance of TCI Group, which is generally comprised of the
subsidiaries and assets not attributed to Liberty Media Group, including (i)
TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and
Programming unit and (iii) TCI's Technology/Venture Capital unit. Intercompany
balances resulting from transactions with such units are reflected as borrowings
from or loans to TCI and, prior to the Distribution, are included in combined
equity in the accompanying combined financial statements. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI does not affect
the ownership or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each
continue to be responsible for their respective liabilities. Holders of TCI
Group Stock are holders of common stock of TCI and continue to be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities. The issuance of Liberty Group Stock did not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition and TCI could affect
the combined results of operations or financial condition of TCI Group and the
market price of shares of the TCI Group common stock. In addition, net losses of
any portion of TCI, dividends or distributions on, or repurchases of, any series
of common stock, and dividends on, or certain repurchases of preferred stock
would reduce the funds of TCI legally available for dividends on all series of
common stock. Accordingly, TCI Group financial information should be read in
conjunction with the TCI and Liberty Media Group financial information.
(continued)
I-74
<PAGE> 77
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
Prior to the Distribution of Liberty Group Stock, TCI Group had a 100%
Inter-Group Interest in Liberty Media Group. Following the Distribution of
Liberty Group Stock, TCI Group has no Inter-Group Interest in Liberty Media
Group. For periods in which an Inter-Group Interest exists, TCI Group would
account for its Inter-Group Interest in a manner similar to the equity method of
accounting. For periods after the Distribution and before the creation of an
Inter-Group Interest, TCI Group would not reflect any interest in Liberty Media
Group. An Inter-Group Interest would be created only if a subsequent transfer of
cash or other property from TCI Group to Liberty Media Group is specifically
designated by the Board as being made to create an Inter-Group Interest or if
outstanding shares of Liberty Group Stock are purchased with funds attributable
to TCI Group. However, Liberty Media Group is under the sole control of TCI.
Management of TCI believes that generally accepted accounting principles require
that Liberty Media Group be consolidated with TCI Group. If Liberty Media Group
were consolidated with TCI Group, the financial position, results of operations,
and cash flows of TCI Group would equal the financial position, results of
operations and cash flows of TCI and subsidiaries, which financial statements
are included separately herein. Management of TCI has elected to present the
accompanying combined financial statements in a manner that does not comply with
generally accepted accounting principles.
TCI Group manages certain treasury activities for Liberty Media Group
on a centralized basis. Cash receipts of certain businesses attributed to
Liberty Media Group are remitted to TCI Group and certain cash disbursements of
Liberty Media Group are funded by TCI Group on a daily basis. Such cash
activities are included in borrowings from or loans to TCI Group or, if
determined by the Board, as an equity contribution to be reflected as an
Inter-Group Interest to Liberty Media Group.
The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to the Liberty Media Group or preferred stock
and the proceeds thereof should be specifically attributed to and reflected on
the combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of Liberty
Media Group.
Subsequent to the Distribution, borrowings from or loans to TCI Group
bear interest at such rates and have repayment schedules and other terms as are
established by the Board. The Board expects to make such determinations, either
in specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans and investment opportunities available to
each Group and the availability, cost and time associated with alternative
financing sources.
(continued)
I-75
<PAGE> 78
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
Subsidiaries of TCI Group, Comcast, Cox and Sprint are partners in
Sprint Spectrum formed to engage in the business of providing wireless
communications services on a nationwide basis. TCI Group owns an indirect 30%
interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for PCS
licenses for 29 markets in the auction conducted by the FCC that ended in March
1995. The aggregate license cost for these licenses was approximately $2.1
billion, all of which has been paid. Sprint Spectrum may elect to bid in
subsequent auctions of PCS licenses and/or acquire PCS licenses from other
holders, has invested in APC which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that will hold
the PCS license for the Los Angeles-San Diego market, and may invest in other
entities that hold PCS licenses. Subsidiaries of Cox, Sprint and TCI Group are
also partners in PhillieCo which holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. TCI Group has an indirect
35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The business
plan contemplates that Sprint Spectrum will require additional equity
thereafter.
In July 1995, TCI Group entered into certain agreements with Viacom and
certain subsidiaries of Viacom regarding the purchase by TCI Group of all of the
common stock of Cable Sub which, at the time of purchase, will own Viacom's
cable systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub. Cable
Sub will also transfer to New Viacom Sub the Loan Proceeds of a $1.7 billion
loan facility. Following these transfers, Cable Sub will retain cable assets
with an estimated value at closing of approximately $2.2 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 Cable Sub Class A Stock. The Exchange Offer will be subject to a number
of conditions, including meeting the Minimum Condition.
(continued)
I-76
<PAGE> 79
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
Immediately following the completion of the Exchange Offer, TCI Group
will acquire from Cable Sub shares of Cable Sub Class B common stock for $350
million (which will be used to reduce Cable Sub's obligations under the Loan
Facility). At the time of such acquisition, the Cable Sub Class A Stock received
by Viacom stockholders pursuant to the Exchange Offer will automatically convert
into the Exchangeable Preferred Stock. In the event the Minimum Condition is not
met either through the tenders received in the Exchange Offer or upon any
extension of the Exchange Offer, 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 been
consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue Service
that the transaction qualifies as a tax-free transaction and the satisfaction or
waiver of all of the conditions of the Exchange Offer. A request for a letter
ruling from the Internal Revenue Service has been filed by Viacom. TCI Group
believes that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of TCI Group has concluded that
consummation of the transaction is not yet probable. Accordingly, no assurance
can be given that the transaction will be consummated. For additional discussion
of the Viacom transaction, see note 9 to the accompanying TCI Group combined
financial statements.
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenue of $442 million and net earnings
of $34 million. It is expected that if the transaction is consummated, TCI Group
would account for such acquisition under the purchase method of accounting.
Accordingly, the cost to acquire Cable Sub estimated at approximately $2.2
billion (reflecting the Loan Proceeds of $1.7 billion and the estimated
aggregate Stated Value of the Exchangeable Preferred Stock of $500 million)
would be allocated to the assets and liabilities acquired according to their
respective fair values, with any excess being treated as intangible assets. As
such, TCI Group will, if such transaction is consummated, reflect additional
interest expense, depreciation, amortization and minority share of losses of
consolidated subsidiaries. On a pro forma basis, if the transaction had been
consummated under its current terms on or before January 1, 1995, Cable Sub
would have reflected loss before taxes of approximately $51 million for the year
ended December 31, 1995. On a pro forma basis, Cable Sub would reflect an
approximate $21 million of preferred stock dividend requirements on an annual
basis assuming, solely for the purpose of this presentation, a dividend rate of
4.25% per annum on the Exchangeable Preferred Stock. On a pro forma basis, TCI
Group would reflect the foregoing financial impacts of Cable Sub in its combined
results of operations except that the preferred stock dividend requirement of
Cable Sub would be reflected as minority interest in TCI Group's statement of
operations and TCI Group would incur an additional approximate $28 million of
interest expense per year arising from the assumed borrowing by TCI Group for
its $350 million capital contribution to Cable Sub. TCI Group does not
anticipate that the pro forma effect of the transaction for the three months
ended March 31, 1996 will vary significantly from the pro forma effect, on a pro
rata basis, reflected for the year ended December 31, 1995.
(continued)
I-77
<PAGE> 80
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
In February 1996, TINTA issued $345 million (before deducting offering
costs of $10 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
During the three months ended March 31, 1996, TCIC issued (i) 4.6
million shares of Cumulative Exchangeable Preferred Stock for net cash proceeds
of $223 million, (ii) 20 million preferred securities of 8.72% Trust Originated
Preferred Securities for net cash proceeds of $486 million (through a special
purpose entity formed as a Delaware business trust) and (iii) $1.0 billion of
publicly-placed fixed rate senior and medium term notes with interest rates
ranging from 6.9% and 7.9% and maturity dates ranging through 2026. TCIC used
the proceeds from the aforementioned debt and equity securities to retire
overnight commercial paper and to repay variable rate indebtedness.
Subsequent to March 31, 1996, TCIC was notified by two of the rating
agencies that the rating of its senior debt by such agencies had been downgraded
by one level to the first level below investment grade status. Two other rating
agencies reaffirmed TCIC's investment grade status; however one such agency
changed its outlook on TCIC from stable to negative. Such actions may adversely
affect TCIC's access to the public debt market and its overall cost of
borrowings.
TCI Group has a credit facility which matures in September of 1996. The
outstanding balance of such facility was $487 million at March 31, 1996. TCI
Group currently anticipates that it will refinance such borrowings but there can
be no assurance that it can do so on terms acceptable to TCI Group.
TCI Group had approximately $3.3 billion in unused lines of credit at
March 31, 1996, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although TCI Group was in compliance
with the restrictive covenants contained in its credit facilities at said date,
additional borrowings under the credit facilities are subject to the
subsidiaries' continuing compliance with the restrictive covenants (which relate
primarily to the maintenance of certain ratios of cash flow to total debt and
cash flow to debt service, as defined in the credit facilities) after giving
effect to such additional borrowings. See note 6 to the accompanying combined
financial statements for additional information regarding the material terms of
the lines of credit.
(continued)
I-78
<PAGE> 81
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) $498 million and $475 million for the three months
ended March 31, 1996 and 1995, respectively) to interest expense ($255 million
and $237 million for the three months ended March 31, 1996 and 1995,
respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 195% and 200% for the three
months ended March 31, 1996 and 1995, respectively. The decrease in TCI Group's
interest coverage in 1996 is due to an increase in interest expense due to
higher debt balances and interest rates. Management of TCI Group believes that
the foregoing interest coverage ratio is adequate in light of the consistency
and nonseasonal nature of its cable television operations and the relative
predictability of TCI Group's interest expense, over half of which results from
fixed rate indebtedness. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be a
substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($288 million and $186 million for the
three months ended March 31, 1996 and 1995, respectively) reflects net cash from
the operations of the TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by TCI
Group for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of TCI Group to obtain additional financing (including
the available lines of credit and access to public debt markets), issuances and
sales of TCI's equity or equity of its subsidiaries, proceeds from disposition
of assets will provide adequate sources of short-term and long-term liquidity in
the future. See TCI Group's combined statements of cash flows included in the
accompanying combined financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, TCI Group pays
(i) fixed interest rates ranging from 6.1% to 9.9% on notional amounts of $602
million at March 31, 1996 and (ii) variable interest rates on notional amounts
of $2,670 million at March 31, 1996. During the three months ended March 31,
1996 and 1995, TCI Group's net receipts pursuant to the Fixed Rate Agreements
were $5 million and $5 million, respectively; and TCI Group's net receipts
pursuant to the Variable Rate Agreements were $8 million and $1 million,
respectively. TCI Group is exposed to credit losses for the periodic settlements
of amounts due under the interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCI Group does
not anticipate that it will incur any material credit losses because it does not
anticipate nonperformance by the counterparties.
(continued)
I-79
<PAGE> 82
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(1) Material changes in financial condition (continued):
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $241
million at March 31, 1996. Although there can be no assurance, management of TCI
Group believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they
will not be material to TCI Group.
TCI Group is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through December 31, 2005. Based on
subscriber levels at March 31, 1996, these agreements require minimum payments
aggregating approximately $293 million. The aggregate amount of the Film
Licensing Obligations is not currently estimable because such amount is
dependent upon certain variable factors. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant. Additionally, TCI Group has guaranteed up to $67 million of similar
fee obligations of another affiliate.
TCI Group has committed to provide additional debt or equity funding to
certain of its affiliates. At March 31, 1996, such commitments aggregated $77
million.
TCI Group's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by TCI Group)
and through net cash provided by their own operating activities.
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions, TCI
Group's basic and tier service rates and its equipment and installation charges
(the "Regulated Services") are subject to the jurisdiction of local franchising
authorities and the FCC. The regulations established benchmark rates in 1993
which were further reduced in 1994, to which the rates charged by cable
operators for Regulated Services were required to conform.
TCI Group reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 and 1996 in response to FCC regulations. TCI Group believes
that it has complied, in all material respects, with the provisions of the 1992
Cable Act, including its rate setting provisions. However, TCI Group's rates for
Regulated Services are subject to adjustment upon review, as described above.
If, as a result of the review process, a system cannot substantiate its rates,
it could be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated Service
rates would be retroactive to one year prior to the implementation of the rate
reductions.
(continued)
I-80
<PAGE> 83
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(2) Material changes in results of operations (continued):
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Telecom Act") was signed into law. Because the 1996 Telecom Act does not
deregulate cable programming services tier rates until 1999 (and basic service
tier rates will remain regulated thereafter), TCI Group believes that the 1993
and 1994 rate regulations have had and will continue to have a material adverse
effect on its results of operations.
Revenue increased 30% for the three months ended March 31, 1996, as
compared to the corresponding period of 1995. Such increase is the result of the
effect of certain acquisitions (13%), an increase in TCI Group's Primestar
subscribers (6%), growth in subscriber levels within TCI Group's cable
television systems (4%), increases in the rates charged for TCI Group's cable
television service due to inflation, programming increases and channel additions
(4%) and increases in advertising sales, international programming and other
revenue (3%).
Operating expenses increased 45% for the three months ended March 31,
1996. Exclusive of the effects of acquisitions (19%) and Primestar (7%) (see
discussion below), such expenses increased 19%. Programming and salary expenses
accounted for the majority of such increase. TCI Group cannot determine whether
and to what extent increases in the cost of programming will affect its future
operating costs. However, such programming costs have increased at a greater
percentage than increases in revenue from Regulated Services. TCI Group
experienced an increase in programming costs in the first quarter of 1996
without increasing its rates charged to its customers. In TCI Group's regulated
cable systems, TCI Group has made the appropriate filings to effectuate rate
increases for its Regulated Services which will be effective in June 1996. As
allowed by FCC regulations, such rate increases include amounts intended to
recover increased programming costs incurred during the first five months of
1996 and not previously recovered, as well as interest on said amounts. TCI
Group anticipates that such increases will result in additional revenue of
approximately $20 million per month.
Selling general and administrative expenses ("SG&A") increased 47% for
the three months ended March 31, 1996. Exclusive of the effects of acquisitions
(12%) and Primestar (16%), SG&A increased 19%. Such increase is due primarily to
salaries and related payroll expenses.
During 1995, TCI Group changed its approach to how it ordered and
stored excess cable distribution equipment. TCI Group created material support
centers and consolidated all of its excess inventory. During the three months
ended March 31, 1996, TCI Group incurred $2 million of costs related to such
material support centers. Additionally, during 1996, TCI Group incurred
approximately $6 million in expenses related to initiatives to improve its
customer service and to continue the redesign of its computer and accounting
systems.
(continued)
I-81
<PAGE> 84
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(2) Material changes in results of operations (continued):
TCI Group has an interest in an entity, Primestar Partners
("Primestar"), which provides programming and marketing support to its partners
who distribute a multi-channel programming service via a medium power
communications satellite to home satellite dish owners During the three months
ended March 31, 1996, TCI Group's revenue and expenses related to its Primestar
satellite service increased significantly over the corresponding period in 1995
as the number of TCI Group's Primestar subscribers increased from approximately
150,000 subscribers at March 31, 1995 to approximately 570,000 subscribers at
March 31, 1996. During the three months ended March 31, 1996, revenue increased
from $24 million to $98 million and operating, selling, general and
administrative expenses increased from $16 million to $95 million, as compared
to the three months ended March 31, 1995. TCI Group incurs significant sales
commission and installation costs when customers initially subscribe. Therefore,
as long as TCI Group continues to launch this new service and increase its
Primestar subscriber base at such a rapid pace, management expects that
operating costs and expenses will increase as well.
The increase in TCI Group's depreciation expense in 1996 is due to
acquisitions as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in TCI Group's cable systems. The
systems, which facilitate digital transmission of voice, video and data signals,
will have optical fiber to neighborhood nodes with coaxial cable distribution
downstream from that point. The increase in TCI Group's amortization expense in
1996 is due to acquisitions.
Certain corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
During each of the three month periods ended March 31, 1996 and 1995, Liberty
Media was allocated less than $1 million in corporate general and administrative
costs by TCI Group.
Prior to the determination of the Board to seek approval of
stockholders to distribute the Liberty Group Stock, TCI did not have formalized
intercompany allocation methodologies. In connection with such determination,
management of TCI has determined that TCI general corporate expenses should be
allocated to Liberty Media Group based on the amount of time TCI corporate
employees (e.g. legal, corporate, payroll, etc.) expend on Liberty Media Group
matters. TCI management evaluated several alternative allocation methods
including assets, revenue, operating income, and employees. Management did not
believe that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating subsidiaries, the
relative maturity of certain of the operating subsidiaries, and the way in which
corporate resources are utilized.
TCI Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
(continued)
I-82
<PAGE> 85
"TCI GROUP"
(a combination of certain assets, as defined in note 2)
(2) Material changes in results of operations (continued):
At March 31, 1996, TCI Group had an effective ownership interest of
approximately 27% in TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). TeleWest, which is accounted for under the equity method, had a carrying
value at March 31, 1996 of $512 million and comprised $31 million of TCI Group's
share of its affiliates' losses during the three months ended March 31, 1996. In
addition, TCI Group has other less significant equity method investments in
video distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $350
million at March 31, 1996 and accounted for $18 million of TCI Group's share of
its affiliates' losses in 1996. Additionally included in share of losses for
the three months ended March 31, 1996 is $53 million attributable to Sprint
Spectrum. Such amount inlcudes $34 million associated with prior periods.
TCI Group's net loss (before preferred stock dividend requirements) of
$133 million for the three months ended March 31, 1996 represents an increase of
$88 million, as compared to TCI Group's net loss (before preferred stock
dividend requirements) of $45 million for the three months ended March 31, 1995.
Such increase is primarily the result of a decrease in operating income and
increases in interest expense and share of losses of affiliates, including the
aforementioned share of losses from Sprint Spectrum, offset by an increase in
income tax benefit.
In March of 1995, the Financial Accounting Standards Board issued
Statement No. 121, effective for fiscal years beginning after December 15, 1995.
Statement No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. TCI Group adopted
Statement No. 121 effective January 1, 1996. Such adoption did not have a
significant effect on the financial position or results of operations of TCI
Group.
I-83
<PAGE> 86
TELE-COMMUNICATIONS, INC.
Part II. Other Information
Item 6. Exhibit and Report on Form 8-K.
(a) Exhibit -
(27) Tele-Communications, Inc. Financial Data Schedule
(b) Report on form 8-K filed during the quarter ended
March 31, 1996 -
<TABLE>
<CAPTION>
Date of Item
Report Reported Financial Statements Filed
- ------- -------- ---------------------------
<S> <C> <C>
February 9, 1996 Item 5 None.
</TABLE>
II-1
<PAGE> 87
EXHIBIT INDEX
The following exhibit is filed herewith (according to the number assigned to it
in Item 601 of Regulation S-K) as noted:
(27) Tele-Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. PRIMARY AND DILUTED EARNINGS PER SHARE
REPRESENT EARNINGS PER SHARE OF THE COMPANY'S TCI GROUP STOCK. SEE THE
COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 281
<SECURITIES> 0
<RECEIVABLES> 469
<ALLOWANCES> 33
<INVENTORY> 96
<CURRENT-ASSETS> 0
<PP&E> 11,262
<DEPRECIATION> 3,902
<TOTAL-ASSETS> 26,503
<CURRENT-LIABILITIES> 0
<BONDS> 13,170
<COMMON> 936
655
0
<OTHER-SE> 3,728
<TOTAL-LIABILITY-AND-EQUITY> 26,503
<SALES> 283
<TOTAL-REVENUES> 1,959
<CGS> 192
<TOTAL-COSTS> 1,783
<OTHER-EXPENSES> 348
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 261
<INCOME-PRETAX> (172)
<INCOME-TAX> 54
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
