<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1996, was:
Tele-Communications, Inc. Series A TCI Group common stock - 579,395,742 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 84,663,501 shares,
Tele-Communications, Inc. Series A Liberty Media Group common stock -
144,815,842 shares,
and
Tele-Communications, Inc. Series B Liberty Media Group common stock -
21,191,669 shares.
<PAGE> 2
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 465 118
Trade and other receivables, net 430 407
Inventories, net 91 104
Prepaid expenses 95 65
Prepaid program rights 47 47
Committed film inventory 136 122
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 2,714 2,372
Investment in Turner Broadcasting System, Inc. ("TBS") (note 6) 1,022 955
Property and equipment, at cost:
Land 94 88
Distribution systems 11,286 9,545
Support equipment and buildings 1,753 1,429
--------- ------
13,133 11,062
Less accumulated depreciation 4,366 3,653
--------- ------
8,767 7,409
--------- ------
Franchise costs 17,486 14,322
Less accumulated amortization 2,349 2,092
--------- ------
15,137 12,230
--------- ------
Other assets, at cost, net of amortization 1,671 1,748
--------- ------
$ 30,575 25,577
========= ======
</TABLE>
(continued)
I-1
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Liabilities and Stockholders' Equity amounts in millions
------------------------------------
<S> <C> <C>
Accounts payable $ 200 243
Accrued interest 170 233
Accrued programming expense 394 318
Other accrued expenses 1,178 1,114
Debt (note 8) 15,118 13,211
Deferred income taxes 5,731 4,584
Other liabilities 183 195
------------ -------
Total liabilities 22,974 19,898
------------ -------
Minority interests in equity of consolidated subsidiaries 1,585 651
Redeemable preferred stock 654 478
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts ("Trust Securities") holding solely
subordinated debt securities of TCI Communications, Inc.
("TCIC")(note 9) 1,000 --
Stockholders' equity (notes 2 and 9):
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
684,974,998 shares in 1996 and 672,211,009 shares in 1995 685 672
Tele-Communications, Inc. Series B TCI Group common stock, $1
par value. Authorized 150,000,000 shares; issued 84,663,501
shares in 1996 and 84,691,554 shares in 1995 85 85
Tele-Communications, Inc. Series A Liberty Media Group common
stock, $1 par value. Authorized 750,000,000 shares; issued
146,078,965 shares in 1996 and 142,896,264 shares in 1995 146 143
Tele-Communications, Inc. Series B Liberty Media Group common
stock, $1 par value. Authorized 75,000,000 shares; issued
21,192,269 shares in 1996 and 21,196,868 shares in 1995 21 21
Additional paid-in capital 4,308 4,068
Cumulative foreign currency translation adjustment (12) (9)
Unrealized holding gains for available-for-sale securities, net
of taxes 335 338
Accumulated deficit (892) (454)
------------ -------
4,676 4,864
Treasury stock, at cost (100,524,365 shares and 100,524,364
shares of Series A TCI Group common stock in 1996 and 1995) (314) (314)
------------ -------
Total stockholders' equity 4,362 4,550
------------ -------
Commitments and contingencies (note 12)
$ 30,575 25,577
============ =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- --------------------------
1996 1995 1996 1995
------- ------ ------- ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 7):
Communications and programming services $ 1,901 1,521 5,355 4,229
Net sales from electronic retailing services 234 217 734 659
------- ------ ------- ------
2,135 1,738 6,089 4,888
------- ------ ------- ------
Operating costs and expenses:
Operating 723 544 2,056 1,524
Cost of sales from electronic retailing services 137 140 453 420
Selling, general and administrative 669 521 1,874 1,434
Compensation relating to stock appreciation rights -- 8 -- 26
Adjustment to compensation relating to stock
appreciation rights (11) -- (16) --
Restructuring charges -- 6 -- 8
Depreciation 258 228 769 660
Amortization 136 115 381 325
------- ------ ------- ------
1,912 1,562 5,517 4,397
------- ------ ------- ------
Operating income 223 176 572 491
Other income (expense):
Interest expense (277) (262) (803) (746)
Interest and dividend income 18 18 42 36
Share of losses of affiliates, net (note 5) (97) (63) (308) (134)
Loss on early extinguishment of debt (note 8) (7) -- (73) --
Minority interests in losses (earnings) of consolidated
subsidiaries, net (28) 19 (32) 40
Gain on sale of subsidiary stock (note 11) -- 123 -- 123
Gain on sale of stock by equity investee (note 5) 12 -- 12 --
Other, net (13) (17) (8) (27)
------- ------ ------- ------
(392) (182) (1,170) (708)
------- ------ ------- ------
Loss before income taxes (169) (6) (598) (217)
Income tax benefit 33 38 160 110
------- ------ ------- ------
Net earnings (loss) (note 7) (136) 32 (438) (107)
Dividend requirements on preferred stocks (9) (9) (27) (26)
------- ------ ------- ------
Net earnings (loss) attributable to common
stockholders $ (145) 23 (465) (133)
======= ====== ======= ======
Net earnings (loss) attributable to common stockholders:
TCI Class A and Class B common stock $ -- 85 -- (71)
TCI Group Series A and Series B common stock (162) (57) (501) (57)
Liberty Media Group Series A and Series B common
stock 17 (5) 36 (5)
------- ------ ------- ------
$ (145) 23 (465) (133)
======= ====== ======= ======
Net earnings (loss) attributable to common stockholders
per common share (notes 3 and 7):
TCI Class A and Class B common stock $ -- .12 -- (.11)
TCI Group Series A and Series B common stock $ (.24) (.09) (.75) (.09)
Liberty Media Group Series A and Series B common
stock $ .10 (.03) .22 (.03)
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------
Class B TCI Group Liberty Media Group Additional
Preferred ------------------ --------------------- 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 -- 255
Issuance of common stock upon conversion of notes -- 1 -- -- -- --
Issuance of common stock upon conversion of
preferred stock -- 1 -- -- -- 15
Accreted dividends on all classes of preferred
stock -- -- -- -- -- (27)
Accreted dividends on all classes of preferred
stock not subject to mandatory redemption
requirements -- -- -- -- -- 7
Payment of preferred stock dividends -- -- -- -- -- (10)
Foreign currency translation adjustment -- -- -- -- -- --
Change in unrealized holding gains for available-
for-sale securities -- -- -- -- -- --
---- ---- ---- ---- ---- ------
Balance at September 30, 1996 $ -- 685 85 146 21 4,308
==== ==== ==== ==== ==== ======
<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 -- -- (438) -- (438)
Issuance of common stock for acquisition -- -- -- -- 269
Issuance of common stock upon conversion of notes -- -- -- -- 1
Issuance of common stock upon conversion of
preferred stock -- -- -- -- 16
Accreted dividends on all classes of preferred
stock -- -- -- -- (27)
Accreted dividends on all classes of preferred
stock not subject to mandatory redemption
requirements -- -- -- -- 7
Payment of preferred stock dividends -- -- -- -- (10)
Foreign currency translation adjustment (3) -- -- -- (3)
Change in unrealized holding gains for available-
for-sale securities -- (3) -- -- (3)
----- ---- ----- ---- ------
Balance at September 30, 1996 (12) 335 (892) (314) 4,362
===== ==== ===== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1996 1995
------ ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (438) (107)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,150 985
Compensation relating to appreciation rights -- 26
Adjustment to compensation relating to stock appreciation rights (16) --
Share of losses of affiliates 308 134
Loss on early extinguishment of debt 73 --
Minority interests in earnings (losses) 32 (40)
Gain on sale of subsidiary stock -- (123)
Gain on sale of stock by equity investee (12) --
Deferred income tax benefit (178) (152)
Other noncash charges 3 2
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (20) 14
Change in inventories 11 (18)
Change in prepaids (32) (86)
Change in accrued interest (64) (18)
Change in other accruals and payables 27 53
------- ------
Net cash provided by operating activities 844 670
------- ------
Cash flows from investing activities:
Cash paid for acquisitions (62) (251)
Capital expended for property and equipment (1,526) (1,205)
Additional investments in and loans to affiliates and others (677) (958)
Repayments of loans to affiliates 329 20
Proceeds from disposition of assets 255 29
Other investing activities (148) (209)
------- ------
Net cash used in investing activities (1,829) (2,574)
------- ------
Cash flows from financing activities:
Borrowings of debt 7,449 7,088
Repayments of debt (7,476) (5,970)
Prepayment penalties (60) --
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Contributions by minority shareholders of subsidiaries 315 --
Issuance of common stock -- 431
Proceeds from sale of subsidiary stock -- 445
Payment of preferred stock dividends (34) (22)
Payment of dividends on subsidiary preferred stock and Trust Securities (56) --
------- ------
Net cash provided by financing activities 1,332 1,972
------- ------
Net increase in cash 347 68
Cash at beginning of period 118 74
------- ------
Cash at end of period $ 465 142
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 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.
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.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off (the "Satellite Spin-Off") of its direct broadcast satellite
subsidiary, TCI Satellite Entertainment, Inc. ("SatCo"), to the holders
of TCI Group Stock. At the time of the Satellite Spin-Off, SatCo's
assets and operations will include the Company's interest in PRIMESTAR
Partners, L.P. ("Primestar") and the Company's business of distributing
Primestar programming. Although there is no assurance, the Satellite
Spin-Off is anticipated to be completed in the fourth quarter of 1996.
Upon completion of the Satellite Spin-Off, SatCo's operations will no
longer be consolidated with the Company's.
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 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.
(continued)
I-6
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to Statement No. 121, 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.
(2) Liberty Group Stock
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (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 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 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.
(continued)
I-7
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Earnings (Loss) Per Common and Common Equivalent Share
TCI Class A and Class B Common Stock
Primary earnings per common and common equivalent share attributable
to common stockholders for the period from July 1, 1995 through the
Distribution was computed by dividing net earnings attributable to
common stockholders by the weighted average number of common and
common equivalent shares outstanding (703.9 million).
Fully diluted earnings per common and common equivalent share
attributable to common stockholders for the period from July 1, 1995
through the Distribution was computed by dividing earnings
attributable to common stockholders by the weighted average number of
common and common equivalent shares outstanding (704.0 million).
The loss attributable to common stockholders per common share for the
period from January 1, 1995 through the Distribution was computed by
dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding during the period (648.2
million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti- dilutive.
TCI Group Series A and Series B Common Stock
The loss attributable to TCI Group stockholders per common share for
the three months and nine months ended September 30, 1996 and for the
period from the Distribution through September 30, 1995 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 (669.1 million, 665.0 million and 656.4 million, respectively).
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 stockholders per common
share for the three months and nine months ended September 30, 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 (167.3 million
and 166.2 million, respectively). Common stock equivalents were not
included in the computation because their inclusion would be
anti-dilutive to TCI.
The loss attributable to Liberty Media Group stockholders per common
share for the period from the Distribution through September 30, 1995
was computed by dividing net loss 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 (164.1 million). Common
stock equivalents were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-
dilutive.
(continued)
I-8
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $867 million and $763 million for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for
income taxes was $8 million and $62 million for the nine months ended
September 30, 1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1996 1995
---- ----
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 4,661 3,394
Liabilities assumed, net of current assets (2,095) (495)
Deferred tax liability recorded in acquisitions (1,310) (1,095)
Minority interests in equity of acquired entities (733) 62
Common stock and preferred stock issued in acquisitions (461) (1,615)
-------- -------
Cash paid for acquisitions $ 62 251
======== =======
Exchange of consolidated subsidiaries for note receivable and
equity investments $ 560 --
======== =======
Effect of foreign currency translation adjustment on book
value of foreign equity investments $ 3 1
======== =======
Change in unrealized gains, net of deferred income taxes, on
available-for-sale securities $ 3 294
======== =======
Accrued preferred stock dividends $ 20 4
======== =======
Exchange of common stock held by subsidiaries for Series F
Preferred Stock $ -- 632
======== =======
Distribution of Series A and Series B Liberty Group Stock to
TCI common stockholders $ -- 164
======== =======
Redesignation of TCI common stock into Series A and Series B
TCI Group Stock $ -- 656
======== =======
Conversion of Series F Preferred Stock by subsidiary of TCI
into Series A TCI Group Stock $ -- 314
======== =======
Conversion of debt into additional minority interest in
consolidated subsidiary $ -- 14
======== =======
Common stock issued to subsidiaries in Reorganization
reflected as treasury stock $ -- 6
======== =======
Common stock issued in exchange for cost investment $ -- 73
======== =======
Retirement of Class A common stock previously held by
subsidiary $ -- 29
======== =======
Issuance of subsidiary stock for equity investment $ -- 11
======== =======
</TABLE>
(continued)
I-9
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- -----------------------
1996 1995
----------- -------
amounts in millions
<S> <C> <C>
Revenue $ 3,989 3,123
Operating expenses (3,570) (2,664)
Depreciation and amortization (501) (375)
----------- -------
Operating income (loss) (82) 84
Interest expense (359) (230)
Other, net (202) (94)
----------- -------
Net loss $ (643) (240)
=========== =======
</TABLE>
The Company has various investments accounted for under the equity
method. Some of the more significant investments held by the Company
at September 30, 1996 were a partnership ("Sprint Spectrum") formed by
the Company, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $783
million) (see note 12), Teleport Communications Group, Inc.
("TCG")(carrying value of $277 million), TeleWest Communications plc
("TeleWest") (carrying value of $459 million), various other foreign
equity investments (cumulative carrying value of $407 million),
Intermedia Capital Partners IV L.P. (carrying value of $287 million)
and Discovery Communications, Inc. (carrying value of $119 million).
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410,000,000. As a result of
the TCG IPO, the Company's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, the Company
recognized a gain amounting to $12 million (before deducting deferred
income tax expense of approximately $5 million).
As of April 29, 1996, Liberty Media Group, The News Corporation
Limited ("News Corp.") and TINTA formed two sports programming
ventures. 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.
(continued)
I-10
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 (the
"International Venture") to operate previously 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 American 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 multichannel, multipoint
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.
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.
(6) Investment in Turner Broadcasting System, Inc.
At September 30, 1996, the Company owned shares of TBS common stock
with an aggregate market value of $844 million (including unrealized
holding gains of $520 million) and shares of a class of TBS preferred
stock that were convertible into TBS common stock with an aggregate
market value of $1,007 million (which exceeded cost by $829 million).
The Company's total holdings represented an approximate 7.5% voting
interest for those matters which preferred and common stock voted as a
single class.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and TBS
consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS
Class A and Class B common share, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each
of the 6 shares of TBS Class B common stock into which each share of
Class C preferred stock could have been converted. The Company
received approximately 50.6 million shares of Time Warner common stock
in exchange for its TBS holdings. As a result of this like-kind
exchange, the Company will recognize a pre-tax gain of approximately
$1.5 billion in the fourth quarter of 1996.
(continued)
I-11
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 16, 1996, Time Warner, TBS, TCI, Liberty Media Group and the
Federal Trade Commission ("FTC") entered into an agreement in
principle, pursuant to which, among other things, Liberty Media Group
agreed to receive Time Warner securities with limited voting rights
(the "TW Exchange Stock") in exchange for its TBS common and preferred
stock. In addition, subject to a number of conditions, including
receipt of a ruling from the Internal Revenue Service that such
dividend would be tax free to the Liberty Media Group stockholders,
TCI agreed that it would distribute in the form of a stock dividend
(the "Spin-Off") to the Liberty Media Group stockholders the stock of
a new company ("Spinco") which would hold the TW Exchange Stock and
the business of Southern Satellite Systems, Inc. ("Southern"), a
wholly owned subsidiary of Liberty Media Group which distributes the
TBS SuperStation ("WTBS") signal in the United States and Canada. The
level of Liberty Media Group's ownership interest in Time Warner would
be restricted until the Spin-Off occurs, at which time, such
restriction would be eased for Spinco.
If the Spin-Off occurs, certain control stockholders of TCI, Bob
Magness, John C. Malone and Kearns-Tribune Corporation, would exchange
the Spinco common stock they receive for a Spinco convertible
preferred security which would only be entitled to vote on major
corporate transactions involving Spinco.
(7) Acquisition
On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"),
TCIC acquired all of the common stock of a subsidiary of Viacom
("Cable Sub") which owned Viacom's cable systems and related assets
(the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred 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 also transferred to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
(the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following
these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom
nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
(continued)
I-12
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the consummation of the Viacom Acquisition, Viacom offered 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"). Immediately
following the completion of the Exchange Offer, TCIC acquired from
Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share
Issuance, the Cable Sub Class A Stock received by Viacom stockholders
pursuant to the Exchange Offer automatically converted into 5% Class A
Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock") of Cable Sub with a stated value of $100 per share
(the "Stated Value"). The Exchangeable Preferred Stock is
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 at an initial exchange rate of 4.81 shares of Series A TCI Group
Stock for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option
of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 per share and thereafter at
prices declining ratably annually to $100 per share on and after the
eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock
is also 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. Amounts payable by Cable Sub in
satisfaction of its optional or mandatory redemption obligations with
respect to the Exchangeable Preferred Stock may be made in cash or, at
the election of Cable Sub, in shares of Series A TCI Group Stock, or
in any combination of the foregoing.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of Cable Sub have been
consolidated with those of the Company since the date of acquisition.
On a pro forma basis, the Company's revenue, net loss, and net loss
per share of TCI Group Stock would have been increased by $276
million, $57 million and $.09, respectively, for the nine months ended
September 30, 1996; and revenue, net loss, net loss per share of TCI
Group Stock and net loss per share of TCI Class A Common Stock would
have been increased by $327 million, $90 million, $.03 and $.11,
respectively, for the nine months ended September 30, 1995 had Cable
Sub been consolidated with the Company on January 1, 1995. The
foregoing unaudited pro forma financial information is based upon
historical results of operations adjusted for acquisition costs and,
in the opinion of management, is not necessarily indicative of the
results had the Company operated Cable Sub since January 1, 1995.
(continued)
I-13
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- -------
amounts in millions
<S> <C> <C>
Notes payable $ 9,405 7,713
Bank credit facilities 4,338 3,854
Commercial paper 1,179 1,469
Convertible notes (a) 43 45
Other debt 153 130
-------- -------
$ 15,118 13,211
======== =======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $181 million at September 30, 1996 and $186
million at December 31, 1995, 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 nine months
ended September 30, 1996, certain of these notes were
converted into 1,063,800 shares of Series A TCI Group Stock
and 265,950 shares of Series A Liberty Group Stock. At
September 30, 1996, the notes were convertible, at the option
of the holders, into an aggregate of 37,643,774 shares of
Series A TCI Group Stock and 9,410,937 shares of Series A
Liberty Group Stock.
During the nine months ended September 30, 1996, the Company redeemed
certain notes payable which had an aggregate principle balance of $809
million and fixed interest rates ranging from 8.67% to 10.44% (the
"Redemption"). In connection with the Redemption, the Company
recognized a loss on early extinguishment of debt of $62 million.
Such loss related to prepayment penalties amounting to $60 million and
the retirement of deferred loan costs.
During the nine months ended September 30, 1996, certain subsidiaries
of the Company terminated, at such subsidiaries' option, certain
revolving bank credit facilities with aggregate commitments of
approximately $2 billion and refinanced certain other bank credit
facilities. In connection with such termination and refinancings, the
Company recognized a loss on early extinguishment of debt of $11
million related to the retirement of deferred loan costs.
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 has pledged a portion of the Time Warner common stock received
in the TBS/Time Warner Merger. Additionally, as security for one of
the Company's notes payable (with a balance of $26 million at
September 30, 1996), the Company has pledged the stock of one of its
majority-owned subsidiaries.
(continued)
I-14
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $15,118 million, was $15,452 million at
September 30, 1996.
In order to achieve the desired balance between variable and fixed
rate indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 7.2% to 9.3% on notional
amounts of $460 million at September 30, 1996 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, the Company's net payments pursuant to
the Fixed Rate Agreements were $3 million and $1 million,
respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were $11 million and less than $1 million,
respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements
expire as follows (dollar amounts in millions):
<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>
November 1996 8.9% $ 150 April 1997 7.0% $ 200
October 1997 7.2%-9.3% 80 September 1998 4.8%-5.4% 450
December 1997 8.7% 230 April 1999 7.4% 100
------ September 1999 7.2%-7.4% 300
$ 460 February 2000 5.8%-6.6% 650
====== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
--------
$ 2,450
========
</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 September 30, 1996, taking into consideration
current interest rates and the current creditworthiness of the
counterparties. The Company would be required to pay $33 million at
September 30, 1996 to terminate the agreements.
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-15
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of
TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an
indirect wholly-owned subsidiary of the Company, issued $16 million in
common securities to TCIC, a subsidiary of the Company, and issued
$500 million of 8.72% Trust Originated Preferred Securities(SM) (the
"Trust I Preferred Securities" and together with the common
securities, the "Trust I Securities") to the public. Trust I exists
for the exclusive purposes of issuing Trust I 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 "8.72% Subordinated Debt Securities") of TCIC. The
8.72% 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 the 8.72%
Subordinated Debt Securities, the Trust I Preferred Securities will be
mandatorily redeemable. TCIC effectively provides a full and
unconditional guarantee of Trust I's obligations under the Trust I
Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common
securities to TCIC, and issued $500 million of 10% Trust Preferred
Securities (the "Trust II Preferred Securities" and together with the
common securities, the "Trust II Securities") to the public. Trust II
exists for the exclusive purposes of issuing Trust II Securities and
investing the proceeds thereof into an aggregate principal amount of
$516 million of 10% Subordinated Deferrable Interest Notes due May 31,
2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
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 the 10% Subordinated
Debt Securities, the Trust II Preferred Securities will be mandatorily
redeemable. TCIC effectively provides a full and unconditional
guarantee of Trust II's obligations under the Trust II Preferred
Securities.
The Trust I and Trust II Preferred Securities are presented together
in a separate line item in the accompanying consolidated balance sheet
captioned "Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely subordinated debt
securities of TCI Communications, Inc." Dividends accrued on the Trust
I and Trust II Preferred Securities are included in minority interests
in losses (earnings) of consolidated subsidiaries in the accompanying
consolidated financial statements.
(10) 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 September 30, 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.
(continued)
I-16
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
At September 30, 1996, there were 119,821,579 shares of Series A TCI
Group Stock and 20,967,181 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 278,307 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.
Subsequent to September 30, 1996, a subsidiary of the Company issued
2,000 shares of exchangeable preferred stock, which shares are
exchangeable into 957,341 shares of Series A TCI Group Stock.
(11) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which it sold 20 million shares of TINTA Series A
common stock to the public for consideration of $16.00 per share
aggregating $320 million, before deducting related expenses
(approximately $19 million). The shares sold to the public
represented 17% of TINTA's total issued and outstanding common stock
and 9% of the aggregate voting interest represented by such issued and
outstanding common stock. Also in July 1995, TINTA issued 687,500
shares of TINTA Series A common stock as partial consideration for a
35% ownership interest in Torneos Y Competencias S.A., an Argentine
sports programming company (the "TYC Acquisition"). As a result of
the TINTA IPO and the TYC Acquisition, the Company recognized a gain
amounting to $123 million.
(12) 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 an 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.
(continued)
I-17
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Company has agreed to
contribute approximately $0.6 billion of such aggregate amount, $0.2
billion of which was contributed during the nine months ended
September 30, 1996. The business plan contemplates that Sprint
Spectrum will require additional equity thereafter.
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 would 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 BDTV, Inc. ("BDTV") (formerly referred to as "Silver
Management 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 and have the right to control
such entity (subject to certain exceptions relating to fundamental
corporate actions). BDTV 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 BDTV in
return for additional non-voting equity interests in BDTV. Following
such contribution, BDTV would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing BDTV's controlling interest in Silver
King to in excess of 80% of the voting power of Silver King). In June
1996, the FCC granted its approval to the change in control of Silver
King resulting from such exercise of the Option. Thereafter, in
August 1996, the Option was exercised and BDTV became the controlling
stockholder of Silver King. The FCC approval, received in connection
with the exercise of the Option, however, included a condition that
any increase in TCI's equity interest in Silver King (which would
result from the proposed transfer of HSN shares to Silver King), as
well as any material amendment to the August 1995 agreement with Mr.
Diller, would require the prior approval of the FCC.
(continued)
I-18
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In light of these restrictions, Liberty Media Group and Mr. Diller
began to discuss a restructuring of the November transaction, as well
as certain other alternative structures. On August 25, 1996, Silver
King, HSN and Liberty Media Group entered into a merger agreement and
related transaction agreements pursuant to which (i) Liberty Media
Group agreed to exchange all of its shares of HSN common stock and
approximately 739,000 shares of its HSN Class B Common Stock with the
wholly owned subsidiary of Silver King which was to be merged into HSN
("SK Sub") for shares of stock of SK Sub, (ii) SK Sub would be merged
into HSN (the "HSN Merger"), with HSN being the surviving corporation
owned 80.1% by Silver King and 19.9% by Liberty Media Group, (iii)
Liberty Media Group would receive in the HSN Merger, in exchange for
its remaining 19.3 million shares of HSN Class B Common Stock,
approximately 7.8 million shares of Silver King Class B Common Stock
and the contingent right to receive from time to time approximately
2.6 million additional shares of Silver King Class B Common Stock as
permitted under applicable FCC regulations, and (iv) Liberty Media
Group and Silver King would enter into an exchange agreement providing
for the terms upon which Liberty Media Group's remaining shares of
HSN, as the surviving corporation in the HSN Merger, would be
exchanged from time to time for stock of Silver King as permitted
under applicable FCC regulations. All of the shares of Silver King
Class B Common Stock actually received by Liberty Media Group at the
time of the HSN Merger would be immediately contributed to an entity
("BDTV II") in which Mr. Diller owns all of the voting equity
interests and Liberty Media Group owns a non-voting equity interest
(which non-voting interest constitutes substantially all the equity of
BDTV II) and which (other than with respect to certain fundamental
corporate actions) is controlled by Mr. Diller.
The HSN Merger is subject to the satisfaction of certain conditions,
including the receipt of all necessary regulatory consents and
approvals, consummation of the merger of Savoy Pictures Entertainment,
Inc. and a subsidiary of Silver King, and approval of such
transactions by the stockholders of Silver King and HSN. Liberty
Media Group has entered into agreements with both Silver King and HSN
pursuant to which Liberty Media Group has agreed to vote or cause to
be voted shares of Silver King and HSN owned by it in favor of the HSN
Merger and the other related transactions to be voted upon by the
stockholders of HSN and Silver King. In addition, such voting
agreements prohibit Liberty Media Group from disposing of shares of
HSN or Silver King except pursuant to the HSN Merger or following a
termination of the HSN merger agreement. 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 Company's financial
results. 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 BDTV, as well as a
direct interest in HSN. No assurance can be given that the HSN Merger
and related transactions will be consummated or if such transactions
are consummated, when such additional shares may be received by
Liberty media Group or that any or all such shares are ultimately
issued to Liberty Media Group.
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 September 30,
1996, these agreements require minimum payments aggregating
approximately $624 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.
(continued)
I-19
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $307 million at September 30, 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 made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30,
1996, such commitments aggregated $228 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.
I-20
<PAGE> 22
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 operational 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 TCI Group.
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 PCS licenses for 29 markets in an 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 Company
has agreed to contribute approximately $0.6 billion of such aggregate amount,
$0.2 billion of which was contributed during the nine months ended September
30, 1996. The business plan contemplates that Sprint Spectrum will require
additional equity thereafter.
(continued)
I-21
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC
acquired all of the common stock of Cable Sub which owned Viacom's cable
systems and related assets.
The transaction was structured as a tax-free reorganization in which
Cable Sub initially transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to New Viacom Sub. Cable Sub
also transferred to New Viacom Sub the proceeds of the Loan Facility.
Following these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub
has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered 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.
Immediately following the completion of the Exchange Offer, TCIC acquired from
Cable Sub shares of Cable Sub Class B common stock for $350 million. At the
time of the Share Issuance, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer automatically converted into
Exchangeable Preferred Stock. For additional discussion of the Viacom
Acquisition, see note 7 to the accompanying consolidated financial statements.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $9 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.
Additionally, during the nine months ended September 30, 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(SM) for net cash proceeds of $486 million (through a special purpose
entity formed as a Delaware business trust) (iii) 20 million preferred
securities of 10% Trust Preferred Securities for net cash proceeds of $485
million (through a special purpose entity formed as a Delaware business trust)
and (iv) $2.06 billion of publicly-placed senior and medium term notes with
interest rates ranging from 6.2% to 7.9% and maturity dates ranging through
2026. The Company used the proceeds from the aforementioned debt and equity
issuances to retire commercial paper and to repay certain variable and
fixed-rate indebtedness. In connection with the prepayment of certain
fixed-rate indebtedness, the Company recognized a loss on early extinguishment
of debt of $62 million. Such loss related to prepayment penalties amounting to
$60 million and the retirement of deferred loan costs.
The Company has a credit facility which matures in September of 1997.
The outstanding balance of such facility was $387 million at September 30,
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-22
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
During the second quarter of 1996, certain subsidiaries of the Company
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. The Company
does not believe that such terminations will adversely affect its future
liquidity. At September 30, 1996, subsidiaries of the Company had
approximately $2.2 billion of availability under lines of credit, 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 8 to the accompanying
consolidated financial statements for additional information regarding the
material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,706 million and $1,510 million for the nine
months ended September 30, 1996 and 1995, respectively) to interest expense
($803 million and $746 million for the nine months ended September 30, 1996 and
1995, respectively), is determined by reference to the consolidated statements
of operations. The Company's interest coverage ratio was 212% and 202% for the
nine months ended September 30, 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,
almost half of which results from fixed rate indebtedness. Operating Cash Flow
is a measure of value and borrowing capacity within the cable television
industry and is not intended to be a substitute for cash flows provided by
operating activities, a measure of performance prepared in accordance with
generally accepted accounting principles, and should not be relied upon as
such. Operating Cash Flow, as defined, does not take into consideration
substantial costs of doing business, such as interest expense, and should not
be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($844 million and $670
million for the nine months ended September 30, 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-23
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In late April, 1996, TCIC was notified by Moody's Investors Service,
Inc. and Duff & Phelps Credit Rating Co. that those rating agencies had
downgraded by one level their respective ratings of TCIC's senior debt to the
first level below investment grade. Fitch Investors Service, L.P. reaffirmed
its rating for TCIC's senior debt at the last level of investment grade. On
October 18, 1996, Standard and Poor's Securities, Inc. ("Standard & Poor's)
issued a press release stating that TCIC's senior debt would be placed on
CreditWatch with negative implications. TCIC's senior debt is currently rated
BBB- by Standard & Poor's (the last level of investment grade). A downgrade by
Standard & Poor's of TCIC's senior debt would lower such debt to the first
level below investment grade. These actions are expected to marginally
increase TCIC's cost of borrowings under certain bank credit facilities, and
may adversely affect TCIC's access to the public debt market and its overall
cost of future borrowings.
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 7.2% to 9.3% on notional amounts of
$460 million at September 30, 1996 and (ii) variable interest rates on notional
amounts of $2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, the Company's net payments pursuant to the Fixed
Rate Agreements were $3 million and $1 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $11 million and less
than $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 $307
million at September 30, 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 September 30, 1996, these agreements require minimum payments
aggregating approximately $624 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.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
(continued)
I-24
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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.
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:
Communications and Programming Services Revenue
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 service 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 communications and programming services increased 25% and
27% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. In the
Company's regulated cable systems, the Company implemented rate increases for
its Regulated Services 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.
(continued)
I-25
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
The increase in revenue for the three months ended September 30, 1996
is due to the net effect of certain acquisitions (including the Viacom
Acquisition) (14%), increases in rates charged to the Company's subscribers due
to inflation, programming cost increases as previously discussed and channel
additions (5%), growth in the Company's satellite subscribers (3%), growth in
subscriber levels within the Company's cable television systems (3%) and
increases in the Company's domestic and international programming and other
revenue (4%) offset by a 4% decrease due to the deconsolidation of the
Company's sports programming businesses (see discussion below). The increase
in revenue for the nine months ended September 30, 1996 is due to the effect of
certain acquisitions (including the Viacom Acquisition) (12%), growth in the
Company's satellite subscribers (5%), increases in rates charged to the
Company's subscribers as noted above (5%), growth in subscriber levels within
the Company's cable television systems (2%) and increases in the Company's
domestic and international programming and other revenue (4%) offset by a 1%
decrease due to the deconsolidation of the Company's sports programming
businesses (see discussion below).
TCI's domestic programming services contributed $298 million and $371
million of revenue for the nine months ended September 30, 1996 and 1995,
respectively. This revenue was attributable to subscription and advertising
revenue at TCI's sports programming businesses through April 29, 1996 (see
related discussion below), 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. 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.
Internationally, News Corp. and the Liberty-TINTA LLC formed the
International 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.
(continued)
I-26
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Net Sales From Electronic Retailing Services
HSN's net sales from electronic retailing services increased 8% and
11% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods in 1995. Such increases
are due primarily to 22% and 13% increases in the number of packages shipped
and a decrease of 14% and an increase of 1% in the average price per unit sold.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
In August 1996, the Company entered into a series of agreements which
involved exchanging its controlling interest in HSN for shares of BDTV. 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 the Company. 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 BDTV, as well as a direct
interest in HSN which would be exchangeable into shares of Silver King. No
assurance can be given that the transaction will be consummated. For
additional discussion of the foregoing transaction, see note 12 to the
accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses increased 33% and 35% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (10% and 13%) and
Primestar (2% and 3%) (see discussion below), such expenses increased 21% and
19%. Programming and salary expenses accounted for the majority of such
increases. 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.
For the three months and nine months ended September 30, 1996, cost of
sales decreased $3 million or 2% and increased $33 million or 8%, respectively,
as compared to the same periods in 1995. As a percentage of net sales, cost of
sales decreased from 65% to 59% and from 64% to 62% for the three months and
nine months ended September 30, 1996, as compared to the corresponding periods
in 1995. Such decrease are due to promotional events in 1995 which had the
effect of lowering revenue but not cost of sales and to a change in product
sales mix in 1996.
Selling general and administrative expenses ("SG&A") increased 27% and
30% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. Exclusive of
the effects of acquisitions (6% and 7%) and Primestar (7% and 9%) (see
discussion below), SG&A increased 14% and 14%. Such increases are due
primarily to salaries, related payroll expenses and those expenses that vary
with revenue and/or subscribers. Additionally, during the nine months ended
September 30, 1996 and 1995, the Company incurred $34 million and $14 million,
respectively, of costs related to newly created material support centers,
initiatives to improve its customer service and the continued redesign of its
computer and accounting systems.
(continued)
I-27
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
The Company has an interest in 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 and nine months ended September
30, 1996, the Company's revenue and expenses related to its Primestar satellite
service increased significantly over the corresponding periods in 1995 as the
number of the Company's Primestar subscribers increased from approximately
370,000 subscribers at September 30, 1995 to approximately 735,000 subscribers
at September 30, 1996. During the three months ended September 30, 1996,
revenue increased from $59 million to $110 million and operating, selling,
general and administrative expenses increased from $54 million to $108 million,
as compared to the three months ended September 30, 1995. During the nine
months ended September 30, 1996, revenue increased from $120 million to $304
million and operating, selling, general and administrative expenses increased
from $111 million to $295 million, as compared to the nine months ended
September 30, 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.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off of SatCo to the holders of TCI Group Stock. At the time of the
Satellite Spin-Off, SatCo's assets and operations will include the Company's
interest in Primestar and the Company's business of distributing Primestar
programming. Although there is no assurance, the Satellite Spin-Off is
anticipated to be completed in the fourth quarter of 1996. Upon completion of
the Satellite Spin-Off, SatCo's operations will no longer be consolidated with
the Company's.
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 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.
(continued)
I-28
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Other Income (Expense) and Net Loss
At September 30, 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 September 30, 1996 of $459 million and comprised $99 million
and $43 million of the Company's share of its affiliates' losses during the
nine months ended September 30, 1996 and 1995, respectively. The increase in
the Company's share of losses of TeleWest is due, in part, to an increase in
TeleWest's interest expense and foreign currency translation losses related to
the issuance of dollar denominated debentures by TeleWest. In addition, the
Company has other less significant investments accounted for under the equity
method 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
$407 million at September 30, 1996 and accounted for $55 million and $38
million of the Company's share of its affiliates' losses for the nine months
ended September 30, 1996 and 1995, respectively. Additionally, included in
share of losses of affiliates for the nine months ended September 30, 1996 is
$112 million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.
The Company is reflecting minority interests in earnings of
consolidated subsidiaries of $28 million and $32 million for the three months
and nine months ended September 30, 1996, respectively, as compared to minority
interests in losses of consolidated subsidiaries for the corresponding periods
in 1995. Such changes are due primarily to the accrual of dividends on the
Trust Securities in 1996. See note 9 to the accompanying consolidated
financial statements.
As a result of the TCG IPO, the Company recognized a gain of $12
million during the third quarter of 1996. As a result of the TINTA IPO and the
TYC Acquisition, the Company recognized a gain of $123 million during the third
quarter of 1995. There is no assurance that the Company will realize similar
gains in future periods. See notes 5 and 11 to the accompanying consolidated
financial statements.
As a result of the consummation of the TBS/Time Warner Merger, the
Company will recognize a gain of approximately $1.5 billion in the fourth
quarter of 1996. See note 6 to the accompanying consolidated financial
statements.
The Company's net loss (before preferred stock dividend requirements)
of $136 million for the three months ended September 30, 1996 represents a
change of $168 million, as compared to the Company's net earnings (before
preferred stock dividend requirements) of $32 million for the three months
ended September 30, 1995. The Company's net loss (before preferred stock
dividend requirements) of $438 million for the nine months ended September 30,
1996 represents an increase of $331 million, as compared to the Company's net
loss (before preferred stock dividend requirements) of $107 million for the
nine months ended September 30, 1995. Such changes are primarily the result of
the gain recognized in 1995 related to the TINTA IPO, an increase in share of
losses of affiliates, including the aforementioned share of losses from
TeleWest and Sprint Spectrum, loss on early extinguishment of debt resulting
primarily from the prepayment of certain fixed-rate indebtedness and the change
in minority interests in losses (earnings) of consolidated subsidiaries
discussed above.
I-29
<PAGE> 31
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash $ 351,645 41,225
Trade and other receivables, net 50,479 107,180
Inventories, net 90,728 103,968
Prepaid expenses 6,305 14,176
Prepaid program rights 26,590 28,395
Committed film inventory 18,394 29,931
Investments in affiliates, accounted for under the
equity method, and related receivables (note 4) 236,125 299,331
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 1,011,763 945,282
Other investments, at cost, and related receivables
(note 6) 95,857 110,791
Property and equipment, at cost:
Land 19,542 21,254
Support equipment and buildings 120,385 180,051
Computer and broadcast equipment 44,898 44,962
---------- ---------
184,825 246,267
Less accumulated depreciation 38,664 42,233
---------- ---------
146,161 204,034
---------- ---------
Intangibles:
Excess cost over acquired net assets 273,796 364,995
Other intangibles 6,263 283,242
Cable distribution fees 138,729 115,746
---------- ---------
418,788 763,983
Less accumulated amortization 65,457 142,741
---------- ---------
353,331 621,242
---------- ---------
Other assets, at cost, net of amortization 7,040 12,081
---------- ---------
$2,394,418 2,517,636
========== =========
</TABLE>
(continued)
I-30
<PAGE> 32
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Liabilities and Combined Equity amounts in thousands
- -------------------------------
<S> <C> <C>
Accounts payable $ 79,875 95,313
Accrued liabilities 111,655 168,107
Film licenses payable 33,827 34,864
Deferred revenue 4,847 50,803
Debt (note 7) 103,510 250,990
Deferred tax liability 243,512 201,909
Other liabilities 18,901 14,261
---------- ---------
Total liabilities 596,127 816,247
---------- ---------
Minority interests in equity of consolidated
subsidiaries 97,816 87,960
Combined equity (note 8):
Combined equity 1,372,620 1,336,125
Due to TCI Group 18,629 7,496
Unrealized gains on available-for-sale securities,
net of taxes 309,226 269,808
---------- ---------
1,700,475 1,613,429
---------- ---------
Commitments and contingencies (note 9) $2,394,418 2,517,636
========== =========
</TABLE>
See accompanying notes to combined financial statements.
I-31
<PAGE> 33
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
Net sales from electronic retailing services $234,321 217,567 733,922 658,841
Programming services:
From TCI Group (note 8) 16,532 18,457 63,262 53,090
From others 38,956 116,569 234,974 317,959
-------- -------- --------- ---------
289,809 352,593 1,032,158 1,029,890
-------- -------- --------- ---------
Cost of sales, operating costs and expenses:
Cost of sales 136,992 139,984 453,483 419,080
Operating 43,816 98,411 220,455 297,859
Selling, general and administrative 61,342 85,394 221,938 278,209
Charges by TCI Group (note 8) 5,328 5,795 16,649 18,343
Compensation relating to phantom rights and stock
appreciation rights (note 8) 8,988 2,277 14,699 4,238
Restructuring charges -- 6,267 -- 8,308
Depreciation 3,411 6,066 12,468 17,981
Amortization 7,278 17,625 30,148 58,397
-------- -------- -------- - -------
267,155 361,819 969,840 1,102,415
-------- -------- -------- ---------
Operating income (loss) 22,654 (9,226) 62,318 (72,525)
Other income (expense):
Interest expense (2,326) (4,149) (14,827) (10,045)
Interest expense to TCI Group (note 8) -- (270) -- (1,796)
Dividend and interest income, primarily from
affiliates 7,743 3,854 12,114 7,793
Share of earnings (losses) of affiliates, net
(note 4) 5,460 (16,074) 18,215 (12,712)
Minority interests in losses (earnings) of
consolidated subsidiaries (3,944) 9,167 (10,301) 20,485
Loss on disposition of assets (886) -- (7,186) --
Litigation settlements -- (3,200) -- (5,820)
Other, net 1,021 1,238 4,803 5,545
-------- -------- -------- ---------
7,068 (9,434) 2,818 3,450
-------- -------- -------- ---------
Earnings (loss) before income taxes 29,722 (18,660) 65,136 (69,075)
Income tax benefit (expense) (12,057) 6,779 (28,641) 34,922
-------- -------- -------- ---------
Net earnings (loss) $ 17,665 (11,881) 36,495 (34,153)
======== ======== ======== =========
Earnings (loss) per common share (note 2) $ .10 (.03) .21 (.03)
======== ======== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
I-32
<PAGE> 34
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding gains
on available-for- Total
Combined Due to sale securities, combined
equity TCI Group 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 36,495 -- -- 36,495
Sale of programming to TCI Group -- (63,262) -- (63,262)
Cost allocations from TCI Group -- 16,649 -- 16,649
Cable distribution fees -- 2,620 -- 2,620
Adjustment to allocation of compensation
relating to stock appreciation rights -- (3,045) -- (3,045)
Intergroup tax allocation -- 17,206 -- 17,206
Net cash transfers from TCI Group -- 40,965 -- 40,965
Change in unrealized holding gains on
available-for-sale securities -- -- 39,418 39,418
---------- ------- ------- ---------
Balance at September 30, 1996 $1,372,620 18,629 309,226 1,700,475
========== ======= ======= =========
</TABLE>
See accompanying notes to combined financial statements.
I-33
<PAGE> 35
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1996 1995
--------- -------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 36,495 (34,153)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 42,616 76,378
Compensation relating to phantom rights and stock
appreciation rights 14,699 4,238
Share of losses (earnings) of affiliates (18,215) 12,712
Deferred income tax expense (benefit) 15,814 (36,510)
Intergroup tax allocation 17,206 5,698
Minority interests in earnings (losses) 10,301 (20,485)
Loss on disposition of assets 7,186 --
Litigation settlements -- 5,820
Payments of litigation settlements (5,135) (22,600)
Noncash restructuring charges -- 3,344
Payments for restructuring charges (590) (1,258)
Noncash interest expense 4,050 1,796
Changes in operating assets and liabilities, net of acquisitions:
Change in receivables (26,031) (13,584)
Change in inventories 22,206 (25,044)
Change in prepaid expenses (2,640) (18,558)
Change in payables, accruals and deferred revenue 748 70,210
--------- --------
Net cash provided by operating activities 118,710 8,004
--------- --------
Cash flows from investing activities:
Cash proceeds from dispositions 47,822 373
Cash paid for acquisitions (55,000) (36,446)
Capital expended for property and equipment (8,221) (35,132)
Additional investments in and loans to affiliates and others (21,389) (70,381)
Return of capital from affiliates 1,500 11,820
Collections on loans to affiliates and others 1,566 1,798
Cash paid for cable distribution fees (22,983) (35,679)
Other investing activities (13,144) 195
--------- --------
Net cash used in investing activities (69,849) (163,452)
--------- --------
Cash flows from financing activities:
Borrowings of debt 238,989 162,513
Repayments of debt (290,236) (18,141)
Change in cash transfers to TCI (1,872) (34,409)
Contributions by minority shareholders of subsidiaries 314,743 1,264
Distributions to minority shareholders of subsidiaries (65) (1,157)
--------- --------
Net cash provided by financing activities 261,559 110,070
--------- --------
Net increase (decrease) in cash 310,420 (45,378)
Cash at beginning of period 41,225 62,963
--------- --------
Cash at end of period $ 351,645 17,585
========= ========
</TABLE>
See accompanying notes to combined financial statements.
I-34
<PAGE> 36
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1996
(unaudited)
(1) Basis of Presentation
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (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 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-35
<PAGE> 37
"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.
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.
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 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.
Pursuant to Statement No. 121, 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 their 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.
(2) Earnings Per Common Share
Earnings attributable to Liberty Media Group stockholders per common
share for the three months and nine months ended September 30, 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 (167.3 million and
166.2 million, respectively). Common stock equivalents were not
included in the computation because their inclusion would be
anti-dilutive to TCI.
(continued)
I-36
<PAGE> 38
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The loss attributable to Liberty Media Group stockholders per common
share for the period from the Distribution through September 30, 1995
was computed by dividing net loss 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 (164.1 million). Common
stock equivalents were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-
dilutive.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $15,598,000 and $9,070,000 for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for
income taxes during the nine months ended September 30, 1996 and 1995
was $641,000 and $385,000, respectively. In addition, Liberty Media
Group received an income tax refund of $14,000,000 and $11,006,000
during the nine months ended September 30, 1996 and 1995,
respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1996 1995
--------- --------
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 55,000 36,274
Net liabilities assumed -- (934)
Contribution to combined equity from TCI
for acquisition -- (19,120)
Deferred tax liability recorded in acquisition -- (11)
Minority interests in equity of acquired entities -- 20,237
-------- -------
$ 55,000 36,446
======== =======
Exchange of consolidated subsidiaries for note
receivable and equity investments $239,034 --
======== =======
Change in unrealized gains, net of deferred income
taxes, on available-for-sale securities $ 39,418 218,310
======== =======
Conversion of debt into additional minority interest
in consolidated subsidiary $ -- 14,215
======== =======
Assets contributed for interest in limited liability
company $ -- 2,633
======== =======
</TABLE>
(continued)
I-37
<PAGE> 39
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------
1996 1995
----------- -----------
amounts in thousands
<S> <C> <C>
Combined Operations
-------------------
Revenue $ 2,389,221 1,797,371
Operating expenses (2,144,087) (1,593,843)
Depreciation and amortization (120,824) (85,968)
----------- ----------
Operating income 124,310 117,560
Interest expense (73,710) (70,945)
Other, net (98,993) (70,746)
----------- ----------
Net loss $ (48,393) (24,131)
=========== ==========
</TABLE>
The following table reflects the carrying value of Liberty Media
Group's investments, accounted for under the equity method, including
related receivables:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc.
("Discovery") $ 119,429 117,373
QVC, Inc. ("QVC") 95,351 81,160
Sunshine Network ("Sunshine") (a) -- 8,221
SportsChannel Chicago ("Chicago") (a) -- 29,722
Home Team Sports Limited Partnership
("HTS") (a) -- 3,514
International Cable Channels Partnership
Ltd. ("ICCP") 11,585 11,563
Premier Sports ("Australia") (a) -- 4,212
Bet Holdings, Inc. ("BET") 18,823 15,353
Courtroom Television Network ("Court") 2,804 7,711
Liberty/Fox U.S. Sports LLC ("LFS") (a) (6,118) --
Liberty/TINTA LLC ("Liberty/TINTA") (a) 4,031 --
Superstar/Netlink Group LLC
("Superstar/Netlink") (b) (32,657) --
DMX Inc. ("DMX") 2,597 --
Other 20,280 20,502
---------- --------
$ 236,125 299,331
========== ========
</TABLE>
(continued)
I-38
<PAGE> 40
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) 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. In the United States, Liberty Media Group and News
Corp. formed LFS 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 LFS 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 Liberty/TINTA formed a venture
(the "International Venture") to operate previously 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.
Liberty/TINTA owns 50% of the International Venture with News
Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights.
Liberty/TINTA contributed Prime Deportiva, a Spanish language
sports service distributed in Latin American 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. Liberty/TINTA also
contributed its 50% interest in Australia and All-Star Sports.
Both are Australian 24-hour sports services available via
multi-channel, multipoint distribution systems ("MMDS") or
cable television.
As part of the formation of the International Venture,
Liberty/TINTA is entitled to receive from News Corp. 7.5% of
the outstanding stock of Star Television Limited. Upon
delivery of such stock to Liberty/TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights
under various Asian sports programming agreements. Star
Television Limited operates a satellite-delivered television
platform in Asia.
(b) On April 1, 1996, United Video Satellite Group, Inc. ("UVSG")
and Liberty Media Group formed Superstar/Netlink, a limited
liability company of UVSG's Superstar Satellite Entertainment
combined with Netlink USA's ("Netlink") retail business.
Liberty Media Group and UVSG each own 50% of
Superstar/Netlink. As of April 1, 1996, Netlink's retail
business no longer consolidates with the financial results of
Liberty Media Group.
(continued)
I-39
<PAGE> 41
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1996 1995
-------- -------
amounts in thousands
<S> <C> <C>
Discovery $ 2,056 8,922
QVC 14,216 (1,416)
Sunshine 634 1,803
Chicago 3,065 5,020
HTS 397 366
ICCP (1,837) (1,016)
Australia (3,199) (8,367)
BET 3,470 2,895
Court (1,899) (18,989)
LFS 14,048 --
Liberty/TINTA (3,432) --
Superstar/Netlink 6,560 --
DMX (13,352) --
Other (a) (2,512) (1,930)
-------- -------
$ 18,215 (12,712)
======== =======
</TABLE>
(a) Included in other assets is Liberty Media Group's 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.
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 $153 million of which was paid through September
30, 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.
(continued)
I-40
<PAGE> 42
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 $2,644,000 for
the nine months ended September 30, 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.
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.
At September 30, 1996, Liberty Media Group owned shares of TBS common
stock with an aggregate market value of $834 million (including
unrealized holding gains of $514 million) and shares of a class of TBS
preferred stock that were convertible into TBS common stock with an
aggregate market value of $1,007 million (which exceeded cost by $829
million). Liberty Media Group's total holdings represented an
approximate 7.5% voting interest for those matters which preferred and
common stock voted as a single class.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and TBS
consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS
Class A and Class B common share, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each
of the 6 shares of TBS Class B common stock into which each share of
Class C preferred stock could have been converted. Liberty Media
Group received approximately 50.6 million shares of Time Warner common
stock in exchange for its TBS holdings. As a result of this like-kind
exchange, Liberty Media Group will recognize a pre-tax gain of
approximately $1.5 billion in the fourth quarter of 1996.
As security for borrowings under one of its credit facilities, Liberty
Media Group pledged a portion of its TBS common stock (with a quoted
market value of approximately $826 million at September 30, 1996).
Upon consummation of the TBS/Time Warner Merger, the revolving credit
agreement was amended and provides as security for this indebtedness
the Time Warner common stock received for the previously pledged TBS
Class B Common Stock. See note 7.
(continued)
I-41
<PAGE> 43
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On July 16, 1996, Time Warner, TBS, TCI, Liberty Media Corporation
("Liberty") and the Federal Trade Commission ("FTC") entered into an
agreement in principle, pursuant to which, among other things, Liberty
agreed to receive Time Warner securities with limited voting rights
(the "TW Exchange Stock") in exchange for its TBS common and preferred
stock. In addition, subject to a number of conditions, including
receipt of a ruling from the Internal Revenue Service that such
dividend would be tax free to the Liberty Media Group stockholders,
TCI agreed that it would distribute in the form of a stock dividend
(the "Spin-Off") to the Liberty Media Group stockholders the stock of
a new company ("Spinco") which would hold the TW Exchange Stock and
the business of Southern Satellite Systems, Inc. ("Southern"), a
wholly owned subsidiary of Liberty which distributes the TBS
SuperStation ("WTBS") signal in the United States and Canada. The
level of Liberty Media Group's ownership interest in Time Warner would
be restricted until the Spin-Off occurs, at which time, such
restriction would be eased for Spinco.
If the Spin-Off occurs, certain control stockholders of TCI, Bob
Magness, John C. Malone and Kearns-Tribune Corporation, would exchange
the Spinco common stock they receive for a Spinco convertible
preferred security which would only be entitled to vote on major
corporate transactions involving Spinco.
(6) Other Investments
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
amounts in thousands
<S> <C> <C>
Marketable equity securities $ 979 16,681
Convertible debt 23,000 23,000
Other investments and related receivables 71,878 71,110
------- -------
$95,857 110,791
======= =======
</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 $181 million and $192
million at September 30, 1996 and December 31, 1995, respectively. No
independent external appraisals were conducted for those assets.
(continued)
I-42
<PAGE> 44
"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>
September 30, December 31,
1996 1995
------------- ------------
amounts in thousands
<S> <C> <C>
Notes payable to bank (a) $ -- 135,000
Convertible subordinated debentures, net of unamortized
discount of $2,679,000 (b) 97,321 --
Note payable to bank (c) 5,150 --
Note payable to partnership (d) -- 5,654
Bank credit facility (e) -- 30,000
Notes payable to bank (f) -- 71,600
Other debt, with varying rates and maturities 1,039 8,736
-------- -------
$103,510 250,990
======== =======
</TABLE>
(a) Payable by Home Shopping Network, Inc. ("HSN")
This revolving credit facility (the "Credit Facility"), which
was entered into in August 1996 and replaced a $120 million
credit facility, provides for borrowings up to $150 million
and includes a $25 million sub-limit for import letters of
credit. The Credit Facility is secured by the capital stock
of Home Shopping Club, Inc. and HSN Realty, Inc., wholly-owned
subsidiaries of HSN. Under the Credit Facility, the interest
rate on borrowings is tied to the London Interbank Offered
Rate ("LIBOR"), plus an applicable margin.
(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.
(c) Payable by Encore
This note payable provides for borrowings up to $50 million
through September 30, 1999, at which time the commitment is
required to be reduced in eight equal, quarterly amounts
through June 30, 2001. Interest on borrowings under the note
is tied to, at Encore's option, the bank's prime rate plus an
applicable margin or the LIBOR rate plus an applicable margin.
Encore is required to pay a commitment fee which varies based
on Encore's leverage ratio. The note is secured by
substantially all of Encore's assets.
(continued)
I-43
<PAGE> 45
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(d) 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. Simultaneously
with the closing of Encore's credit facility, Encore advanced
the outstanding balance on this note payable to Encore ICCP
Inc., who in turn repaid the note payable in full.
(e) 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. Upon
consummation of the TBS/Time Warner Merger, the revolving
credit agreement was amended and provides as security for this
indebtedness the Time Warner common stock received for the
previously pledged TBS Class B Common Stock. CCC must pay an
annual commitment fee of .3125% of the unfunded portion of the
commitment.
(f) Notes payable were included in net assets contributed to LFS.
See note 4.
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 September 30, 1996.
(8) Combined Equity
Stock Options and Stock Appreciation Rights
Estimates of the compensation relating to 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 Series A Liberty Group Stock (see note 1) and,
ultimately, on the final determination of market value when the rights
are exercised. The payable or receivable arising from the
compensation related to the options and/or stock appreciation rights
is included in the amount due to TCI.
(continued)
I-44
<PAGE> 46
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with TCI and Other Related Parties
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 nine months ended
September 30, 1996 and 1995, Liberty Media Group was allocated
$1,924,000 and $2,300,000, 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
and other related operating expenses for the nine months ended
September 30, 1996 and 1995, aggregated $9,082,000 and $11,489,000,
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 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 $5,253,000 and $4,554,000
for the nine months ended September 30, 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.
(continued)
I-45
<PAGE> 47
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to 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.
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.
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
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
September 30, 1996, these agreements require minimum payments
aggregating approximately $187 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.
(continued)
I-46
<PAGE> 48
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Estimates of compensation relating to phantom rights granted to
employees of a subsidiary of Liberty Media Group have been recorded in
the accompanying combined financial statements, but is subject to
future adjustment based upon a valuation model derived from such
subsidiary's cash flow, working capital and debt. The liability
arising from the compensation related to the phantom rights is included
in other liabilities.
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 would
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 (the "Option") owned by Liberty Media
Group to purchase 2 million shares of Silver King Class B common stock
(which shares would constitute voting control of Silver King) would be
transferred to BDTV, Inc. ("BDTV") (formerly referred to as "Silver
Management 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 and have the right to control
such entity (subject to certain exceptions relating to fundamental
corporate actions). BDTV 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 BDTV in
return for additional non-voting equity interests in BDTV. Following
such contribution, BDTV would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing BDTV's controlling interest in Silver
King to in excess of 80% of the voting power of Silver King). In June
1996, the FCC granted its approval to the change in control of Silver
King resulting from such exercise of the Option. Thereafter, in
August 1996, the Option was exercised and BDTV became the controlling
stockholder of Silver King. The FCC approval received in connection
with the exercise of the Option, however, included a condition that
any increase in Liberty Media Group's equity interest in Silver King
(which would result from the proposed transfer of HSN shares to Silver
King) as well as any material amendment to the August 1995 agreement
with Mr. Diller, would require the prior approval of the FCC.
(continued)
I-47
<PAGE> 49
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In light of these restrictions, Liberty Media Group and Mr. Diller
began to discuss a restructuring of the November transaction, as well
as certain other alternative structures. On August 25, 1996, Silver
King, HSN and Liberty Media Group entered into a merger agreement and
related transaction agreements pursuant to which (i) Liberty Media
Group agreed to exchange all of its shares of HSN common stock and
approximately 739,000 shares of its HSN Class B Common Stock with the
wholly owned subsidiary of Silver King which was to be merged into HSN
("SK Sub") for shares of stock of SK Sub, (ii) SK Sub would be merged
into HSN (the "HSN Merger"), with HSN being the surviving corporation
owned 80.1% by Silver King and 19.9% by Liberty Media Group, (iii)
Liberty Media Group would receive in the HSN Merger, in exchange for
its remaining 19.3 million shares of HSN Class B Common Stock,
approximately 7.8 million shares of Silver King Class B Common Stock
and the contingent right to receive from time to time approximately
2.6 million additional shares of Silver King Class B Common Stock as
permitted under applicable FCC regulations, and (iv) Liberty Media
Group and Silver King would enter into an exchange agreement providing
for the terms upon which Liberty Media Group's remaining shares of
HSN, as the surviving corporation in the HSN Merger, would be
exchanged from time to time for stock of Silver King as permitted
under applicable FCC regulations. All of the shares of Silver King
Class B Common Stock actually received by Liberty Media Group at the
time of the HSN Merger would be immediately contributed to an entity
("BDTV II") in which Mr. Diller owns all of the voting equity
interests and Liberty Media Group owns a non-voting equity interest
(which non-voting interest constitutes substantially all the equity of
BDTV II) and which (other than with respect to certain fundamental
corporate actions) is controlled by Mr. Diller.
The HSN Merger is subject to the satisfaction of certain conditions,
including the receipt of all necessary regulatory consents and
approvals, consummation of the merger of Savoy Pictures Entertainment,
Inc. and a subsidiary of Silver King, and approval of such
transactions by the stockholders of Silver King and HSN. Liberty
Media Group has entered into agreements with both Silver King and HSN
pursuant to which Liberty Media Group has agreed to vote or cause to
be voted shares of Silver King and HSN owned by it in favor of the HSN
Merger and the other related transactions to be voted upon by the
stockholders of HSN and Silver King. In addition, such voting
agreements prohibit Liberty Media Group from disposing of shares of
HSN or Silver King except pursuant to the HSN Merger or following a
termination of the HSN merger agreement. 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 BDTV as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. No assurance can be given
that the HSN Merger and related transactions will be consummated or if
such transactions are consummated, when such additional shares may be
received by Liberty Media Group or that any or all such shares are
ultimately issued to Liberty Media Group.
I-48
<PAGE> 50
"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 TCI stockholders 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, 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. See note 8 to the accompanying combined
financial statements.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of preparing
its combined financial statements, the change in the capital structure of TCI
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-49
<PAGE> 51
"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 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.
On September 22, 1995, the boards of directors of Time Warner and TBS
approved plans to merge their respective companies. On July 16, 1996, Time
Warner, TBS, TCI, Liberty and the FTC entered into an agreement in principle,
pursuant to which, among other things, Liberty agreed to receive TW Exchange
Stock in exchange for its TBS common and preferred stock. In addition, subject
to a number of conditions, including receipt of a ruling from the Internal
Revenue Service that such dividend would be tax free to the Liberty Media Group
stockholders, TCI agreed that it would distribute in the form of a stock
dividend to the Liberty Media Group stockholders the stock of Spinco. The
level of Liberty Media Group's ownership interest in Time Warner would be
restricted until the Spin-Off occurs, at which time, such restriction would be
eased for Spinco.
The TBS/Time Warner Merger was consummated on October 10, 1996
whereupon Liberty Media Group received approximately 50.6 million shares of
Time Warner common stock in exchange for its TBS holdings. See note 5 to the
accompanying combined financial statements.
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed
two sports programming ventures. In the United States, Liberty Media Group and
News Corp. formed LFS 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 LFS 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.
(continued)
I-50
<PAGE> 52
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Internationally, News Corp. and Liberty/TINTA formed the International
Venture to operate previously 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. Liberty/TINTA owns 50% of the
International Venture with News Corp. owning the other 50%. News Corp.
contributed various international sports rights and certain trademark rights.
Liberty/TINTA 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. Liberty/TINTA 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, Liberty/TINTA
is entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp.
is entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Effective April 29, 1996, Liberty Media Group's domestic and
international sports businesses no longer consolidate with the financial
results of Liberty Media Group. Both newly formed sports programming ventures
are recorded under the equity method of accounting.
On April 1, 1996, UVSG and Liberty Media Group formed
Superstar/Netlink, a limited liability company of UVSG's Superstar Satellite
Entertainment combined with Netlink's retail business. Liberty Media Group and
UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail
business no longer consolidates with the financial results of Liberty Media
Group. Superstar/Netlink is recorded under the equity method of accounting.
In August 1996, Liberty Media Group entered into a series of
agreements which involved exchanging its controlling interest in HSN for shares
of BDTV. 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 BDTV as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. No assurance can be given that the
transaction will be consummated. See note 9 to the accompanying combined
financial statements.
Liberty Media Group's sources of funds include its available cash
balances, net cash provided by 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
Group. To the extent cash needs of Liberty Media Group exceed cash provided by
Liberty Media Group, TCI Group 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
Group.
(continued)
I-51
<PAGE> 53
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 and Netlink's wholesale business are not
restricted from making transfers of funds to other members of the group. The
cash provided by operating activities of Southern is a significant source of
cash available for distribution to Liberty Media Group. Upon consummation of
the Spin-Off, cash provided by operating activities of Southern will no longer
be available as a source of cash for Liberty Media Group. Upon consummation of
the TBS/Time Warner Merger on October 10, 1996, Time Warner issued common stock
to Liberty Media Group in exchange for Liberty Media Group's holdings in TBS
common and preferred stock. It is anticipated that Time Warner will continue
to pay dividends on its common stock and consequently Liberty Media Group will
receive dividends on the common stock received in connection with the TBS/Time
Warner Merger. However, there can be no assurance that such dividends will
continue to be paid. Upon consummation of the Spin-Off such cash dividends
would not be available as a source of cash for Liberty Media Group. While the
consummation of the Spin-Off could have a significant effect on Liberty Media
Group's cash provided by operating activities, cash generated by Liberty Media
Group's remaining operating activities, distributions from affiliates, dividend
and interest payments and available cash balances should provide adequate cash
to meet its obligations.
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $325 million. No borrowings were outstanding at September
30, 1996. Liberty Media Group has pledged substantially all of its TBS Class B
common stock as security for the indebtedness under this revolving line of
credit. See note 7. Consequently, upon consummation of the Spin-Off, this
revolving line of credit will no longer be available to Liberty Media Group.
Other credit facilities may be obtained by Liberty Media Group in the future
should the need arise. However, there is no assurance that Liberty Media Group
would be able to secure such credit facilities on terms acceptable to Liberty
Media Group.
HSN's sources of cash include borrowings by HSN under the Credit
Facility and the Debentures. On March 1, 1996, HSN completed an offering of
$100 million of the Debentures. Net proceeds of $97.2 million from the
Debentures were used to repay existing indebtedness. At September 30, 1996,
HSN had $139 million of unused availability under the Credit Facility, after
taking into account outstanding letters of credit. The HSN credit facilities
restrict the transfer of funds to affiliated companies, and include various
financial covenants, including maintenance of certain financial ratios.
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 September 30, 1996, Liberty
Media Group's future minimum obligation related to certain film licensing
agreements was $187 million. The amount of the total obligation is not
currently estimable because such amount is dependent upon certain variable
factors. 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.
(continued)
I-52
<PAGE> 54
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 the Credit Facility.
The FCC has initiated a number of rulemakings to implement various
provisions 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.
(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 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.
(continued)
I-53
<PAGE> 55
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
<TABLE>
<CAPTION>
Three months ended September 30,
------------------------------------------------------
1996 1995
----------------------- -------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
- -----------------------------
Programming Services
- --------------------
Revenue 100% $ 55,488 100% $135,026
Operating costs and expenses 76% 42,280 80% 108,186
Depreciation and amortization 2% 1,128 8% 11,069
--- -------- --- --------
Operating income 22% $ 12,080 12% $ 15,771
=== ======== == ========
Electronic Retailing Services
- -----------------------------
Revenue 100% $234,321 100% $217,567
Cost of sales 58% 136,992 64% 139,984
Operating costs and expenses 33% 77,093 40% 86,217
Depreciation and amortization 4% 9,536 6% 12,599
--- -------- --- --------
Operating income (loss) 5% $ 10,700 (10%) $(21,233)
=== ======== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------------------
1996 1995
----------------------- ------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
- -----------------------------
Programming Services
- --------------------
Revenue 100% $298,236 100% $371,049
Operating costs and expenses 80% 240,563 90% 336,406
Depreciation and amortization 5% 14,393 12% 43,861
--- -------- --- --------
Operating income (loss) 15% $ 43,280 (2%) $ (9,218)
=== ======== === ========
Electronic Retailing Services
- -----------------------------
Revenue 100% $733,922 100% $658,841
Cost of sales 62% 453,483 64% 419,080
Operating costs and expenses 31% 231,133 40% 262,997
Depreciation and amortization 4% 28,146 5% 32,470
--- -------- --- --------
Operating income (loss) 3% $ 21,160 (9%) $(55,706)
=== ======== === ========
</TABLE>
(continued)
I-54
<PAGE> 56
"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
As of April 1, 1996, upon formation of Superstar/Netlink, Netlink's
retail operations no longer consolidate with the financial results of Liberty
Media Group. Similarly, effective April 29, 1996, Liberty Media Group's
regional sports programming businesses no longer consolidate with the financial
results of Liberty Media Group. Consequently, revenue from Entertainment and
Information Programming Services decreased 58% or $79 million for the three
months ended September 30, 1996 compared to the three months ended September
30, 1995. Included in this decrease is an increase in revenue from Encore of
approximately $13 million for the three months ended September 30, 1996.
Encore's thematic multiplex services increased the number of multiplex units
128% during the third quarter of 1996 accounting for $7 million of Encore's
increase in revenue. Encore's subscribers increased 53% resulting in an
increase in revenue of approximately $5 million. 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).
Revenue from Entertainment and Information Programming Services
decreased 20% or $73 million for the nine months ended September 30, 1996, as
compared to the corresponding period of 1995. Revenue from Encore increased
$38 million for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. This increase is almost exclusively due to
increases in Encore's subscribers and increases in Encore's thematic multiplex
units. Increases due to rates for the period were nominal. Because the
operations of the regional sports programming businesses and the operations of
Netlink's retail business were no longer included in Liberty Media Group's
consolidated financial results during the second and third quarters of 1996,
these businesses were responsible for a $116 million decrease in revenue from
Entertainment and Information Programming Services for the nine months ended
September 30, 1996 compared to the corresponding period in 1995. Increased
revenue for Southern and Intro and the Content Fee were responsible for the
remaining increase in revenue from Entertainment and Information Programming
Services for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. Revenue from Intro accounted for 6% of total
revenue from Entertainment and Information Programming Services for the nine
months ended September 30, 1996. Effective January 1, 1997, Liberty Media
Group has elected to eliminate the operations of Intro. Consequently, revenue
from such operations will not be realized in future periods.
Operating costs and expenses decreased 61% or $66 million and 28% or
$96 million for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding period of 1995. Because the
operations of the regional sports programming businesses and the operations of
Netlink's retail business were no longer included in Liberty Media Group's
consolidated financial results during the second and third quarters of 1996,
these businesses were responsible for $86 million and $124 million of the
decrease in operating costs and expenses for the three months and nine months
ended September 30, 1996, respectively, compared to the corresponding periods
in 1995. Operating expenses, excluding compensation relating to phantom
rights, for Encore remained relatively constant for the three months ended
September 30, 1996 and increased $13 million for the nine months ended
September 30, 1996, compared to the corresponding period in 1995 primarily due
to increased programming costs. Operating expenses for Southern and Intro also
increased during 1996 relating directly to the corresponding increases in
revenue. Operating costs and expenses are expected to decrease in future
periods due to the elimination of Intro's operations.
(continued)
I-55
<PAGE> 57
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Electronic Retailing Services
This information reflects the results of HSN. HSN's primary business
is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a
wholly-owned subsidiary of HSN.
For the three months and nine months ended September 30, 1996, revenue
for HSN increased $17 million, or 8% and $75 million or 11%, respectively, as
compared to the same periods in 1995. Net sales of HSC increased $21 million
or 12% and $85 million or 15%, for the three months and nine months ended
September 30, 1996, respectively. HSC's sales reflect increases of 22% and 13%
in the number of packages shipped and a decrease of 14% and an increase of 1%
in the average price per unit sold for the three months and nine months ended
September 30, 1996, respectively, compared to the same periods in 1995. The
remaining increases in revenue are due to increases in sales by other HSN
wholly-owned subsidiaries, Internet Shopping Network, Inc. ("ISN") and Vela
Research, Inc. ("Vela") which were offset by decreases related to the sale of
assets of Ortho-Vent, Inc., a subsidiary of HSN Mail Order, Inc., and decreases
by HSN's infomercial joint venture, HSN Direct Joint Venture ("HSND"). During
April 1996, HSN sold a majority of its interest in HSND for $5.9 million to
TINTA.
For the three months and nine months ended September 30, 1996, HSN's
gross profit increased $20 million, or 26%, and $41 million, or 17%,
respectively, compared to the same periods in 1995. As a percentage of net
sales, gross profit increased to 42% from 36% and to 38% from 36% for the three
months and nine months ended September 30, 1996, respectively, compared to the
same periods in 1995.
Gross profit of HSC increased $23 million and $53 million for the
three months and nine months ended September 30, 1996, respectively. These
increases were partially offset by combined decreases related to HSND and
Ortho-Vent, Inc. of $2 million and $16 million, respectively, for the three
months and nine months ended September 30, 1996 compared to 1995. As a
percentage of HSC's net sales, gross profit increased to 41% from 33% and to
37% from 34% for the three months and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995.
The dollar increases in HSN's and HSC's gross profit relate to the
higher sales volume. The comparative increases in HSN's gross profit
percentage in the three months and nine months ended September 30, 1996, relate
to warehouse sales and other promotional events held during 1995 which reduced
gross profit in these periods and a 1996 product sales mix which was composed
of higher gross profit merchandise. In future periods, HSN's management
expects a slight decrease in HSN's gross profit percentage from the third
quarter of 1996.
Operating costs and expenses decreased $9 million, to 33% of sales in
the 1996 third quarter, compared with 40% of sales in the 1995 third 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 reductions in operating expenses in the third quarter and first nine months
of 1996 compared with the same periods in 1995 and are expected to result in
future reductions to operating expenses when compared to 1995.
(continued)
I-56
<PAGE> 58
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
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 and nine months ended September 30, 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 is taking
additional steps designed to attract both first-time and active customers which
include reformatting the Spree! network to America's Jewelry Store, a
twenty-four hour jewelry shopping network, changes in the merchandising area
designed to broaden product assortment, changing the sales mix, optimizing
product level, improving inventory management and better planning of programmed
shows. HSN believes that its negative performance in the third quarter and
first nine months 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. There can be no assurance that 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 preceding table. For the
three months and nine months ended September 30, 1996, corporate expense,
excluding the impact of the stock appreciation rights, remained relatively
comparable to the same periods 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.
Certain TCI Group corporate general and administrative costs are
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 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 nine months ended September 30, 1996 and 1995, Liberty Media
Group was allocated $1,924,000 and $2,300,000, respectively, 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 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.
(continued)
I-57
<PAGE> 59
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Other Income and Expense
Liberty Media Group's share of earnings from affiliates was $5 million
and $18 million for the three months and nine months ended September 30, 1996,
respectively, compared to losses of $16 million and $13 million for the
corresponding periods of 1995. Liberty Media Group's share of earnings of
affiliates attributable to its interest in QVC increased from a loss of $1
million during the nine months ended September 30, 1995 to earnings of $14
million for the same period of 1996. This is primarily the result of
compensation resulting from stock option redemptions in the second quarter of
1995. Due to a $29 million additional investment in Court made in August 1995,
Liberty Media Group's share of losses of affiliates attributable to its
investment in Court for the third quarter and nine months ended September 30,
1995, which amounted to $19 million, included an adjustment to reflect Liberty
Media Group's share of previously unrecognized losses of Court aggregating $18
million. Liberty Media Group's share of losses of affiliates attributable to
its interest in Court was $2 million for the nine months ended September 30,
1996. Other increases in share of earnings of affiliates are due to share of
earnings of LFS and Superstar/Netlink in 1996 of $21 million with no
corresponding amounts in 1995. These increases are offset by a decrease
resulting from Liberty Media Group's share of losses of affiliates attributable
to its interest in DMX.
I-58
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 93 77
Trade and other receivables, net 375 300
Prepaid expenses 89 51
Prepaid program rights 20 19
Committed film inventory 118 92
Investments in affiliates, accounted for under the equity method,
and related receivables (note 4) 2,481 2,073
Property and equipment, at cost:
Land 74 67
Distribution systems 11,277 9,536
Support equipment and buildings 1,597 1,213
--------- --------
12,948 10,816
Less accumulated depreciation 4,327 3,611
--------- --------
8,621 7,205
--------- --------
Franchise costs 17,486 14,322
Less accumulated amortization 2,349 2,092
--------- --------
15,137 12,230
--------- --------
Other assets, at cost, net of amortization 1,226 1,012
--------- --------
$ 28,160 23,059
========= ========
</TABLE>
(continued)
I-59
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 120 148
Accrued interest 170 228
Accrued programming expense 360 272
Other accrued expenses 1,070 911
Debt (note 6) 15,014 12,960
Deferred income taxes 5,488 4,382
Other liabilities 176 181
--------- --------
Total liabilities 22,398 19,082
--------- --------
Minority interests in equity of consolidated subsidiaries 1,447 563
Redeemable preferred stock 654 478
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts ("Trust Securities") holding solely
subordinated debt securities of TCI Communications, Inc.
("TCIC") (note 7) 1,000 --
Combined equity (note 8):
Combined equity, including preferred stocks of Tele-
Communications, Inc. ("TCI") 2,666 2,884
Cumulative foreign currency translation adjustment (12) (9)
Unrealized holding gains for available-for-sale securities, net
of taxes 26 68
Due from Liberty Media Group (19) (7)
--------- --------
Combined equity 2,661 2,936
--------- --------
Commitments and contingencies (note 11) $ 28,160 23,059
========= ========
</TABLE>
See accompanying notes to combined financial statements.
I-60
<PAGE> 62
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ---------------------------
1996 1995 * 1996 1995 *
------- ------ ------ ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $1,862 1,404 5,120 3,911
Operating costs and expenses:
Operating 679 446 1,835 1,226
Programming charges from Liberty Media Group (note
10) 16 18 63 53
Selling, general and administrative 609 436 1,653 1,157
Charges to Liberty Media Group (note 10) (6) (6) (17) (18)
Compensation relating to stock appreciation rights
(notes 8 and 11) -- 6 -- 22
Adjustment to compensation relating to stock
appreciation rights (20) -- (31) --
Depreciation 254 222 756 642
Amortization 129 97 351 267
------- ------ ------ ------
1,661 1,219 4,610 3,349
------- ------ ------ ------
Operating income 201 185 510 562
Other income (expense):
Interest expense (275) (258) (788) (736)
Interest and dividend income 10 15 30 28
Interest income from Liberty Media Group (note 10) -- -- -- 2
Share of losses of affiliates, net (note 4) (98) (47) (319) (120)
Loss on early extinguishment of debt (note 6) (7) -- (73) --
Minority interests in losses (earnings) of
consolidated subsidiaries, net (28) 10 (29) 20
Gain on sale of subsidiary stock (note 9) -- 123 -- 123
Gain on sale of stock by equity investee (note 4) 12 -- 12 --
Other, net (13) (16) (6) (27)
------- ------ ------ ------
(399) (173) (1,173) (710)
------- ------ ------ ------
Earnings (loss) before income taxes (198) 12 (663) (148)
Income tax benefit 45 32 189 75
------- ------ ------ ------
Earnings (loss) before loss of Liberty Media
Group through the date of Distribution
(note 1) (153) 44 (474) (73)
Loss of Liberty Media Group through the date of
Distribution (note 1) -- (7) -- (29)
------- ------ ------ ------
Net earnings (loss) (153) 37 (474) (102)
Dividend requirements on preferred stocks (9) (9) (27) (26)
------- ------ ------ ------
Net earnings (loss) attributable to common
stockholders $ (162) 28 (501) (128)
======= ====== ====== ======
Loss attributable to common stockholders per common
share (note 2) $ (.24) (.09) (.75) (.09)
======= ====== ====== ======
</TABLE>
* Restated - see note 1.
See accompanying notes to combined financial statements.
I-61
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Combined holding
equity, Cumulative gains for Due
including foreign available- from
preferred currency for-sale Liberty
stocks of translation securities, Media Combined
TCI 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 (474) -- -- -- (474)
Purchase of programming from Liberty Media Group -- -- -- 63 63
Cost allocations to Liberty Media Group -- -- -- (17) (17)
Cable distribution fees -- -- -- (3) (3)
Adjustment to allocation of compensation relating
to stock appreciation rights -- -- -- 3 3
Intergroup tax allocation to Liberty Media Group -- -- -- (17) (17)
Net cash transfers to Liberty Media Group -- -- -- (41) (41)
Change in unrealized gains for available-for-sale
securities -- -- (42) -- (42)
Foreign currency translation adjustment -- (3) -- -- (3)
Accreted dividends on TCI preferred stock subject
to mandatory redemption requirements (20) -- -- -- (20)
Payment of TCI preferred stock dividends (10) -- -- -- (10)
Issuance of TCI common stock for acquisition 269 -- -- -- 269
Issuance of TCI common stock upon conversion of
notes 1 -- -- -- 1
Issuance of TCI common stock upon conversion of
preferred stock 16 -- -- -- 16
--------- ----- ----- ------ ------
Balance at September 30, 1996 $ 2,666 (12) 26 (19) 2,661
========= ===== ===== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
I-62
<PAGE> 64
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1996 1995 *
------ -----
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss before loss of Liberty Media Group** $ (474) (73)
Adjustments to reconcile net loss before loss of Liberty Media Group to net
cash provided by operating activities:
Depreciation and amortization 1,107 909
Compensation relating to stock appreciation rights -- 22
Adjustment to compensation relating to stock appreciation rights (31) --
Share of losses of affiliates 319 120
Loss on early extinguishment of debt 73 --
Minority interests in earnings (losses) 29 (20)
Gain on sale of subsidiary stock -- (123)
Gain on sale of stock by equity investee (12) --
Intergroup tax allocation (17) (6)
Deferred income tax benefit (194) (115)
Other noncash credits (4) (1)
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables 6 28
Change in prepaids (40) (60)
Change in accruals and payables 29 14
Change in accrued interest (59) (22)
------ -----
Net cash provided by operating activities 732 673
------ -----
Cash flows from investing activities:
Cash paid for acquisitions (7) (213)
Capital expended for property and equipment (1,518) (1,170)
Additional investments in and loans to affiliates and others (698) (900)
Repayment of loans to affiliates 328 18
Proceeds from dispositions of assets 207 29
Change in due from Liberty Media Group 2 27
Change in interest in Liberty Media Group -- 16
Other investing activities (98) (195)
------ -----
Net cash used in investing activities (1,784) (2,388)
------ -----
Cash flows from financing activities:
Borrowings of debt 7,210 6,926
Repayments of debt (7,186) (5,952)
Prepayment penalties (60) --
Issuance of common stock -- 431
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Proceeds from sale of subsidiary stock -- 445
Payment of preferred stock dividends (34) (22)
Payment of dividends on subsidiary preferred stock and Trust Securities (56) --
------ -----
Net cash provided by financing activities 1,068 1,828
------ -----
Net increase in cash 16 113
Cash at beginning of period 77 11
------ -----
Cash at end of period $ 93 124
====== =====
</TABLE>
* Restated - see note 1.
** Loss of Liberty Media Group does not use funds.
See accompanying notes to combined financial statements.
I-63
<PAGE> 65
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1996
(unaudited)
(1) Basis of Presentation
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (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 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 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 ("TINTA") and (iii) TCI's
Technology/Venture Capital unit. Such subsidiaries and assets are
collectively referred to as "TCI Group".
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-64
<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
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.
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.
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.
Through the third quarter of 1995, TCI Group included certain of its
foreign subsidiaries (Cablevision S.A. ("Cablevision")) in its
financial statements on a one-month time delay. TCI Group eliminated
such time delay from its December 31, 1995 financial statements. In
connection with the elimination of such reporting delay, TCI Group has
restated its results of operations for the three months and nine
months ended September 30, 1995 to include Cablevision's results of
operations for the period from April 25, 1995 (the date Cablevision
was acquired) through September 30, 1995. Such restatement reduced
TCI Group's net earnings by $1 million for the three months ended
September 30, 1996 and increased TCI Group's net loss by $1 million
for the nine months ended September 30, 1995.
Certain amounts have been reclassified for comparability with the 1996
presentation.
(continued)
I-65
<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In June 1996, TCI Group announced its intention to pursue a tax-free
spin-off (the "Spin-Off") of its direct broadcast satellite subsidiary,
TCI Satellite Entertainment, Inc. ("SatCo"), to the holders of TCI
Group Stock. At the time of the Spin-Off, SatCo's assets and
operations will include TCI Group's interest in PRIMESTAR Partners,
L.P., ("Primestar") and TCI Group's business of distributing Primestar
programming. Although there is no assurance, the Spin-Off is
anticipated to be completed in the fourth quarter of 1996. Upon
completion of the Spin-Off, SatCo's operations will no longer be
consolidated with TCI Group's.
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 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.
Pursuant to Statement No. 121, 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.
(2) Loss Per Common Share
The loss attributable to TCI Group Stock stockholders per common share
for the three months and nine months ended September 30, 1996 and for
the period from the Distribution through September 30, 1995 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 (669.1 million, 665.0 million and 656.4 million,
respectively). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
(continued)
I-66
<PAGE> 68
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $847 million and $757 million for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for
income taxes was $7 million and $62 million for the nine months ended
September 30, 1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1996 1995
-------- -------
amounts in millions
<S> <C>
Cash paid for acquisitions:
Fair value of assets acquired 4,606 3,365
Liabilities assumed, net of current assets (2,095) (494)
Deferred tax liability recorded in acquisitions (1,310) (1,095)
Minority interests in equity of acquired entities (733) 42
Common stock and preferred stock issued in acquisitions (461) (1,605)
-------- -------
Cash paid for acquisitions $ 7 213
======== =======
Exchange of consolidated subsidiaries
for equity investment $ 274 --
======== =======
Change in unrealized gains, net of deferred income taxes, on
available-for-sale securities $ 42 192
======== =======
Effect of foreign currency translation adjustment on book
value of foreign equity investments $ 3 1
======== =======
Accrued preferred stock dividends $ 20 4
======== =======
Turner Broadcasting System, Inc. stock received in acquisition
transferred to Liberty Media Group $ -- 7
======== =======
Retirement of Class A common stock previously held by
subsidiary $ -- 29
======== =======
Common stock issued in exchange for cost investment $ -- 73
======== =======
Issuance of TCI Class A common stock for acquisition by
Liberty Media Group $ -- 10
======== =======
Distribution of TCI Series A and Series B Liberty Group Stock
to TCI common stockholders $ -- 1,618
======== =======
Issuance of subsidiary stock for equity investment $ -- 11
======== =======
</TABLE>
(continued)
I-67
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- --------------------
1996 1995
------- -------
amounts in millions
<S> <C> <C>
Revenue $ 1,838 1,353
Operating expenses (1,753) (1,152)
Depreciation and amortization (383) (290)
------- -------
Operating loss (298) (89)
Interest expense (285) (159)
Other, net (116) (23)
------- -------
Net loss $ (699) (271)
======= =======
</TABLE>
TCI Group has various investments accounted for under the equity
method. Some of the more significant investments held by TCI Group at
September 30, 1996 were a partnership ("Sprint Spectrum") formed by
TCI Group, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $783
million) (see note 11), Teleport Communications Group, Inc.
("TCG")(carrying value of $277 million), TeleWest Communications plc
("TeleWest") (carrying value of $459 million), various other foreign
equity investments (cumulative carrying value of $407 million) and
Intermedia Capital Partners IV L.P. (carrying value of $287 million).
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410,000,000. As a result of
the TCG IPO, TCI Group's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, TCI Group
recognized a gain amounting to $12 million (before deducting deferred
income tax expense of approximately $5 million).
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(5) Acquisition
On July 31, 1996, pursuant to certain agreements entered into between
TCI Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI
Group acquired all of the common stock of a subsidiary of Viacom
("Cable Sub") which owned Viacom's cable systems and related assets
(the "Viacom Acquisition").
(continued)
I-68
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred 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 also transferred to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
(the "Loan Facility") arranged by TCI Group and Cable Sub. Following
these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom
nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered 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"). Immediately
following the completion of the Exchange Offer, TCI Group acquired
from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share
Issuance, the Cable Sub Class A Stock received by Viacom stockholders
pursuant to the Exchange Offer automatically converted into 5% Class A
Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock") of Cable Sub with a stated value of $100 per share
(the "Stated Value"). The Exchangeable Preferred Stock is
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 at an initial exchange rate of 4.81 shares of Series A TCI Group
Stock for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option
of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 per share and thereafter at
prices declining ratably annually to $100 per share on and after the
eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock
is also 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. Amounts payable by Cable Sub in
satisfaction of its optional or mandatory redemption obligations with
respect to the Exchangeable Preferred Stock may be made in cash or, at
the election of Cable Sub, in shares of Series A TCI Group Stock, or
in any combination of the foregoing.
(continued)
I-69
<PAGE> 71
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of Cable Sub have been
consolidated with those of TCI Group since the date of acquisition.
On a pro forma basis, TCI Group's revenue, net loss, and net loss per
share of TCI Group Stock would have been increased by $276 million,
$57 million, and $.09, respectively, for the nine months ended
September 30, 1996; and revenue, net loss, and net loss per share of
TCI Group Stock would have been increased by $327 million, $90
million, and $.03, respectively, for the nine months ended September
30, 1995 had Cable Sub been consolidated with TCI Group on January 1,
1995. The foregoing unaudited pro forma financial information is
based upon historical results of operations adjusted for acquisition
costs and, in the opinion of management, is not necessarily indicative
of the results had TCI Group operated Cable Sub since January 1, 1995.
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
amounts in millions
<S> <C> <C>
Notes payable $ 9,307 7,713
Bank credit facilities 4,333 3,617
Commercial paper 1,179 1,469
Convertible notes (a) 43 45
Other debt 152 116
---------- -------
$ 15,014 12,960
========== =======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $181 million and $186 million at September 30,
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
September 30, 1996, the notes were convertible, at the option
of the holders, into an aggregate of 37,643,774 shares of
Series A TCI Group Stock and 9,410,937 shares of Series A
Liberty Group Stock.
During the nine months ended September 30, 1996, TCI Group redeemed
certain notes payable which had an aggregate principle balance of $809
million and fixed interest rates ranging from 8.67% to 10.44% (the
"Redemption"). In connection with the Redemption, TCI Group
recognized a loss on early extinguishment of debt of $62 million.
Such loss related to prepayment penalties amounting to $60 million and
the retirement of deferred loan costs.
During the nine months ended September 30, 1996, certain subsidiaries
of TCI Group terminated, at such subsidiaries' option, certain
revolving bank credit facilities with aggregate commitments of
approximately $2 billion and refinanced certain other bank credit
facilities. In connection with such termination and refinancings, TCI
Group recognized a loss on early extinguishment of debt of $11 million
related to the retirement of deferred loan costs.
(continued)
I-70
<PAGE> 72
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The bank credit facilities and various other debt instruments
attributable to 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 has 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 $26 million at September
30, 1996), TCI Group has pledged the stock of one of its
majority-owned subsidiaries.
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 $15,014 million, was $15,346 million at September 30, 1996.
In order to achieve the desired balance between variable and fixed
rate indebtedness, TCI Group has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 7.2% to 9.3% on notional
amounts of $460 million at September 30, 1996 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, TCI Group's net payments pursuant to the
Fixed Rate Agreements were $3 million and $1 million, respectively;
and TCI Group's net receipts pursuant to the Variable Rate Agreements
were $11 million and less than $1 million, respectively.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (dollar amounts in millions):
<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>
November 1996 8.9% $150 April 1997 7.0% $200
October 1997 7.2%-9.3% 80 September 1998 4.8%-5.4% 450
December 1997 8.7% 230 April 1999 7.4% 100
---- September 1999 7.2%-7.4% 300
$460 February 2000 5.8%-6.6% 650
==== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,450
======
</TABLE>
(continued)
I-71
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However,
TCI Group does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that TCI Group would pay or receive to terminate the
agreements at September 30, 1996, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
TCI Group would be required to pay $33 million at September 30, 1996
to terminate the agreements.
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) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of
TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an
indirect wholly-owned subsidiary of TCI Group, issued $16 million in
common securities to TCIC, a subsidiary of TCI Group, and issued $500
million of 8.72% Trust Originated Preferred Securities(SM) (the "Trust
I Preferred Securities" and together with the common securities, the
"Trust I Securities") to the public. Trust I exists for the exclusive
purposes of issuing Trust I 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
"8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated
Debt Securities are unsecured obligations of TCIC and are subordinate
and junior in right of payment to certain other indebtedness of TCI
Group. Upon redemption of the 8.72% Subordinated Debt Securities, the
Trust I Preferred Securities will be mandatorily redeemable. TCIC
effectively provides a full and unconditional guarantee of Trust I's
obligations under the Trust I Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of TCI Group, issued $16 million in common
securities to TCIC, and issued $500 million of 10% Trust Preferred
Securities (the "Trust II Preferred Securities" and together with the
common securities, the "Trust II Securities") to the public. Trust II
exists for the exclusive purposes of issuing Trust II Securities and
investing the proceeds thereof into an aggregate principal amount of
$516 million of 10% Subordinated Deferrable Interest Notes due May 31,
2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other
indebtedness of TCI Group. Upon redemption of the 10% Subordinated
Debt Securities, the Trust II Preferred Securities will be mandatorily
redeemable. TCIC effectively provides a full and unconditional
guarantee of Trust II's obligations under the Trust II Preferred
Securities.
(continued)
I-72
<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Trust I and Trust II Preferred Securities are presented together
in a separate line item in the accompanying combined balance sheet
captioned "Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely subordinated debt
securities of TCI Communications, Inc." Dividends accrued on the
Trust I and Trust II Preferred Securities are included in minority
interests in losses (earnings) of consolidated subsidiaries in the
accompanying combined financial statements.
(8) 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 restricted stock awards, options
and/or stock appreciation rights ("SARs") granted to certain key
employees of 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 1) and, ultimately, on the final determination
of market value when the rights are exercised or the restricted shares
are vested.
(9) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which it sold 20 million shares of TINTA Series A
common stock to the public for consideration of $16.00 per share
aggregating $320 million, before deducting related expenses
(approximately $19 million). The shares sold to the public
represented 17% of TINTA's total issued and outstanding common stock
and 9% of the aggregate voting interest represented by such issued and
outstanding common stock. Also in July 1995, TINTA issued 687,500
shares of TINTA Series A common stock as partial consideration for a
35% ownership interest in Torneos Y Competencias S.A., an Argentine
sports programming company (the "TYC Acquisition"). As a result of
the TINTA IPO and the TYC Acquisition, TCI Group recognized a gain
amounting to $123 million.
(10) 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 nine month
periods ended September 30, 1996 and 1995, Liberty Media Group was
allocated $2 million in corporate general and administrative costs by
TCI Group.
(continued)
I-73
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
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 $153
million of which was paid through September 30, 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 nine
months ended September 30, 1996 and 1995 aggregated $38 million and
$22 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.
(continued)
I-74
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 $3
million for the nine months ended September 30, 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
and other related operating expenses for the nine months ended
September 30, 1996 and 1995, aggregated $9 million and $11 million,
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 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 $5 million for each of the
nine month periods ended September 30, 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.
(continued)
I-75
<PAGE> 77
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For all periods prior to the Distribution, all financial impacts of
equity offerings are attributed entirely to TCI Group. 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 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 financing sources.
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 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.
(continued)
I-76
<PAGE> 78
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) 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 an auction conducted by
the Federal Communications Commission (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. TCI Group has agreed to
contribute approximately $0.6 billion of such aggregate amount, $0.2
billion of which was contributed during the nine months ended
September 30, 1996. The business plan contemplates that Sprint
Spectrum will require additional equity thereafter.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $307 million at September 30, 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
(the "Film Licensing Obligations"). Based on subscriber levels at
September 30, 1996, these agreements require minimum payments
aggregating $437 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.
TCI Group has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30,
1996, such commitments aggregated $228 million.
(continued)
I-77
<PAGE> 79
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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-78
<PAGE> 80
"TCI 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 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 TCI stockholders authorized the Board to issue
the Liberty Group Stock. 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.
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-79
<PAGE> 81
"TCI 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 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.
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.
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 PCS licenses for 29 markets in an 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. TCI Group
has agreed to contribute approximately $0.6 billion of such aggregate amount,
$0.2 billion of which was contributed during the nine months ended September
30, 1996. The business plan contemplates that Sprint Spectrum will require
additional equity thereafter.
On July 31, 1996, TCI Group consummated the Viacom Acquisition whereby
TCI Group acquired all of the common stock of Cable Sub which owned Viacom's
cable systems and related assets.
(continued)
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<PAGE> 82
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
The transaction was structured as a tax-free reorganization in which
Cable Sub initially transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to New Viacom Sub. Cable Sub
also transferred to New Viacom Sub the Loan Proceeds of a $1.7 billion loan
facility. Following these transfers, Cable Sub retained cable assets with a
value at closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New
Viacom Sub has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered 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. Immediately following the completion of the Exchange Offer, TCI Group
acquired from Cable Sub shares of Cable Sub Class B common stock for $350
million (which was used to reduce Cable Sub's obligations under the Loan
Facility). At the time of the Share Issuance, the Cable Sub Class A Stock
received by Viacom stockholders pursuant to the Exchange Offer automatically
converted into Exchangeable Preferred Stock. For additional discussion of the
Viacom Acquisition, see note 5 to the accompanying TCI Group combined financial
statements.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $9 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.
Additionally, during the nine months ended September 30, 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(SM) for net cash proceeds of $486
million (through a special purpose entity formed as a Delaware business trust),
(iii) 20 million preferred securities of 10% Trust Preferred Securities for net
cash proceeds of $485 million (through a special purpose entity formed as a
Delaware business trust) and (iv) $2.06 billion of publicly-placed senior and
medium term notes with interest rates ranging from 6.2% to 7.9% and maturity
dates ranging through 2026. TCIC used the proceeds from the aforementioned
debt and equity issuances to retire commercial paper and to repay certain
variable and fixed-rate indebtedness. In connection with the prepayment of
certain fixed-rate indebtedness, TCI Group recognized a loss on early
extinguishment of debt of $62 million. Such loss related to prepayment
penalties amounting to $60 million and the retirement of deferred loan costs.
TCI Group has a credit facility which matures in September of 1997.
The outstanding balance of such facility was $387 million at September 30,
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.
(continued)
I-81
<PAGE> 83
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
During the second quarter of 1996, certain subsidiaries of TCI Group
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. TCI Group
does not believe that such terminations will adversely affect its future
liquidity. At September 30, 1996, TCI Group had approximately $1.7 billion of
availability under lines of credit, 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.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,586 million and $1,493 million for the nine
months ended September 30, 1996 and 1995, respectively) to interest expense
($788 million and $736 million for the nine months ended September 30, 1996 and
1995, respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 201% and 203% for the nine
months ended September 30, 1996 and 1995, respectively. Management of TCI
Group believes that the foregoing interest coverage ratio is adequate in light
of the consistency and nonseasonal nature of its cable television operations
and the relative predictability of TCI Group's interest expense, almost half of
which results from fixed rate indebtedness. Operating Cash Flow is a measure
of value and borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flows provided by operating activities, a
measure of performance prepared in accordance with generally accepted
accounting principles, and should not be relied upon as such. Operating Cash
Flow, as defined, does not take into consideration substantial costs of doing
business, such as interest expense, and should not be considered in isolation
to other measures of performance.
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 ($732 million and $673 million for
the nine months ended September 30, 1996 and 1995, respectively) reflects net
cash from the operations of TCI Group available for TCI Group's liquidity needs
after taking into consideration the aforementioned additional substantial costs
of doing business not reflected in Operating Cash Flow. Amounts expended by
TCI Group for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of TCI Group to obtain additional financing (including
the available lines of credit and access to public debt markets), issuances and
sales of TCI'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 TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.
(continued)
I-82
<PAGE> 84
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
In late April, 1996, TCIC was notified by Moody's Investors Service,
Inc. and Duff & Phelps Credit Rating Co. that those rating agencies had
downgraded by one level their respective ratings of TCIC's senior debt to the
first level below investment grade. Fitch Investors Service, L.P. reaffirmed
its rating for TCIC's senior debt at the last level of investment grade. On
October 18, 1996, Standard and Poor's Securities, Inc. ("Standard & Poor's)
issued a press release stating that TCIC's senior debt would be placed on
CreditWatch with negative implications. TCIC's senior debt is currently rated
BBB- by Standard & Poor's (the last level of investment grade). A downgrade by
Standard & Poor's of TCIC's senior debt would lower such debt to the first
level below investment grade. These actions are expected to marginally
increase TCIC's cost of borrowings under certain bank credit facilities, and
may adversely affect TCIC's access to the public debt market and its overall
cost of future borrowings.
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 7.2% to 9.3% on notional amounts of $460
million at September 30, 1996 and (ii) variable interest rates on notional
amounts of $2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, TCI Group's net payments pursuant to the Fixed
Rate Agreements were $3 million and $1 million, respectively; and TCI Group's
net receipts pursuant to the Variable Rate Agreements were $11 million and less
than $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.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $307
million at September 30, 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 September 30, 1996, these agreements require minimum
payments aggregating approximately $437 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.
TCI Group has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
(continued)
I-83
<PAGE> 85
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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.
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 service 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 33% and 31% for the three months and nine months
ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. In TCI Group's regulated cable systems, TCI Group implemented
rate increases for its Regulated Services 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.
(continued)
I-84
<PAGE> 86
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
The increase in revenue for the three months ended September 30, 1996
is the result of the effect of certain acquisitions (including the Viacom
Acquisition) (18%), an increase in TCI Group's satellite subscribers (4%),
increases in the rates charged for TCI Group's cable television service due to
inflation, programming cost increases as previously discussed and channel
additions (5%), growth in subscriber levels within TCI Group's cable television
systems (3%), and increases in advertising sales, international programming and
other revenue (3%). The increase in revenue for the nine months ended
September 30, 1996 is the result of the effect of certain acquisitions
(including the Viacom Acquisition) (15%), an increase in TCI Group's satellite
subscribers (5%), increases in the rates charged for TCI Group's cable
television service as noted above (6%), growth in subscriber levels within TCI
Group's cable television systems (2%), and increases in advertising sales,
international programming and other revenue (3%).
Operating expenses increased 52% and 50% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (27% and 25%) and
Primestar (3% and 4%) (see discussion below), such expenses increased 22% and
21%. Programming and salary expenses accounted for the majority of such
increases. 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.
Selling, general and administrative ("SG&A") expenses increased 40%
and 43% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. Exclusive of
the effects of acquisitions (11% and 12%) and Primestar (9% and 12%) (see
discussion below), SG&A expenses increased 20% and 19%. Such increases are due
primarily to salaries, related payroll expenses and those expenses that vary
with revenue and/or subscribers. Additionally, during the nine months ended
September 30, 1996 and 1995, TCI Group incurred $34 million and $14 million,
respectively, of costs related to newly created material support centers,
initiatives to improve its customer service and the continued redesign of its
computer and accounting systems.
(continued)
I-85
<PAGE> 87
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
TCI Group has an interest in 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 and nine months ended September 30, 1996, TCI
Group's revenue and expenses related to its Primestar satellite service
increased significantly over the corresponding periods in 1995 as the number of
TCI Group's Primestar subscribers increased from approximately 370,000
subscribers at September 30, 1995 to approximately 735,000 subscribers at
September 30, 1996. During the three months ended September 30, 1996, revenue
increased from $59 million to $110 million and operating, selling, general and
administrative expenses increased from $54 million to $108 million, as compared
to the three months ended September 30, 1995. During the nine months ended
September 30, 1996, revenue increased from $120 million to $304 million and
operating, selling, general and administrative expenses increased from $111
million to $295 million, as compared to the nine months ended September 30,
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.
In June 1996, TCI Group announced its intention to pursue a tax-free
spin-off of SatCo to the holders of TCI Group Stock. At the time of the
Spin-Off, SatCo's assets and operations will include TCI Group's interest in
Primestar and TCI Group's business of distributing Primestar programming.
Although there is no assurance, the Spin-Off is anticipated to be completed in
the fourth quarter of 1996. Upon completion of the Spin-Off, SatCo's operations
will no longer be consolidated with TCI Group's.
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
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 nine month periods ended September 30, 1996 and
1995, Liberty Media Group was allocated $2 million in corporate general and
administrative costs by TCI Group.
(continued)
I-86
<PAGE> 88
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
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.
At September 30, 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 September 30, 1996 of $459 million and comprised $99 million
and $43 million of TCI Group's share of its affiliates' losses during the nine
months ended September 30, 1996 and 1995, respectively. The increase in TCI
Group's share of losses of TeleWest is due, in part, to an increase in
TeleWest's interest expense and foreign currency translation losses related to
the issuance of dollar denominated debentures by TeleWest. In addition, TCI
Group has other less significant investments accounted for under the equity
method 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
$407 million at September 30, 1996 and accounted for $55 million and $38
million of TCI Group's share of its affiliates' losses for the nine months
ended September 30, 1996 and 1995, respectively. Additionally, included in
share of losses of affiliates for the nine months ended September 30, 1996, is
$112 million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.
TCI Group is reflecting minority interests in earnings of consolidated
subsidiaries of $28 million and $29 million for the three months and nine months
ended September 30, 1996, respectively, as compared to minority interests in
losses of consolidated subsidiaries for the corresponding periods in 1995.
Such changes are due primarily to the accrual of dividends on the Trust
Securities in 1996. See note 7 to the accompanying combined financial
statements.
As a result of the TCG IPO, TCI Group recognized a gain of $12 million
during the third quarter of 1996. As a result of the TINTA IPO and the TYC
Acquisition, TCI Group recognized a gain of $123 million during the third
quarter of 1995. There is no assurance that TCI Group will realize similar
gains in future periods. See notes 4 and 9 to the accompanying combined
financial statements.
(continued)
I-87
<PAGE> 89
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
TCI Group's net loss (before preferred stock dividend requirements) of
$153 million for the three months ended September 30, 1996 represents a change
of $190 million, as compared to TCI Group's net earnings (before preferred
stock dividend requirements) of $37 million for the three months ended
September 30, 1995. TCI Group's net loss (before preferred stock dividend
requirements) of $474 million for the nine months ended September 30, 1996
represents an increase of $372 million, as compared to TCI Group's net loss
(before preferred stock dividend requirements) of $102 million for the nine
months ended September 30, 1995. Such increases are primarily the result of
the gain recognized in 1995 related to the TINTA IPO, an increase in share of
losses of affiliates, including the aforementioned share of losses from
TeleWest and Sprint Spectrum, loss on early extinguishment of debt resulting
primarily from the prepayment of certain fixed-rate indebtedness, and the
change in minority interests in losses (earnings) of consolidated subsidiaries
described above.
I-88
<PAGE> 90
TELE-COMMUNICATIONS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended
September 30, 1996 to which TCI or any of its consolidated
subsidiaries is a party or of which any of its property is the
subject, except as follows:
Cooper, et al. v. UCTC of Baltimore, Inc., et al.
On October 24, 1994, plaintiffs, three current employees of United
Cable Television of Baltimore Limited Partnership and two spouses of
such current employees, filed suit in the Circuit Court for Baltimore
City against UCTC of Baltimore, Inc., United Cable Television of
Baltimore Limited Partnership, TCI East, Inc. and Tele-Communications,
Inc. The suit alleged, inter alia, eight various tort claims,
including assault, false imprisonment, intentional infliction of
emotional distress, invasion of privacy by intrusion, invasion of
privacy by false light, defamation by slander, defamation by libel and
loss of consortium in connection with an incident that occurred
October 26, 1993, at the Baltimore system. Each plaintiff sought
$1,000,000 compensatory damages and $5,000,000 punitive damages per
count. The loss of consortium claim was limited to four of the five
plaintiffs. On November 1, 1994, plaintiffs also filed an action in
United States District Court for the District of Maryland alleging
discrimination on the basis of race in violation of 42 U.S.C. Section
1981 and loss of consortium. Both counts sought $1,000,000 in
compensatory damages and $5,000,000 in punitive damages for each
plaintiff (the loss of consortium claim is limited to four of the five
plaintiffs). The parties have agreed to a settlement in principle.
Such settlement represents the final resolution of this matter, and
accordingly, it will not be reported in future filings.
Miles Whittenburg, Jr., et al., v. Tele-Communications, Inc., et al.
On April 9, 1994, plaintiffs, six current employees of United Cable
Television of Baltimore Limited Partnership and four spouses, filed
suit in the Circuit Court for Baltimore City against
Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc.,
and United Cable Television of Baltimore Limited Partnership. The
suit alleged, inter alia, nine various tort claims, including but not
limited to, false imprisonment, assault, battery, intentional
infliction of emotional distress, invasion of privacy by intrusion,
invasion of privacy by false light, defamation by slander, defamation
by libel, and loss of consortium in connection with an incident that
occurred October 26, 1993, at the Baltimore system. Each of the nine
counts in the complaint sought compensatory damages of $1,000,000 per
plaintiff, and punitive damages of $5,000,000 per plaintiff. On
October 24, 1994, plaintiffs also filed in the United States District
Court for the District of Maryland, a lawsuit containing claims of
discrimination on the basis of race in violation of 42 U.S.C. Section
1981 and loss of consortium. Both counts sought compensatory damages
of $1,000,000 per plaintiff and punitive damages of $5,000,000 per
plaintiff. The loss of consortium claims applied to eight of the
plaintiffs. The parties have agreed to a settlement in principle.
Such settlement represents the final resolution of this matter, and
accordingly, it will not be reported in future filings.
(continued)
II-1
<PAGE> 91
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Elmer Lewis v. Tele-Communications, Inc., et al.
On June 23, 1994, plaintiff filed suit in the United States District
Court for the District of Maryland against Tele-Communications, Inc.,
TCI East, Inc., UCTC of Baltimore, Inc. and United Cable Television of
Baltimore Limited Partnership. On August 2, 1994, the suit was
consolidated for all purposes with Tyrone Belgrave, et al. v.
Tele-Communications, Inc. et al. The suit alleged, inter alia, false
imprisonment, assault, employment defamation, intentional infliction
of emotional distress, unreasonable intrusion upon seclusion, invasion
of privacy by false light, wrongful discharge and discrimination on
the basis of race. The complaint also seeks divestiture of the
Baltimore City cable franchise from the Company. Each of the ten
counts in the complaint sought compensatory damages of $1,000,000 and
punitive damages of $5,000,000. In a decision dated October 3, 1994,
the Court granted defendants' motion to dismiss the intentional
infliction of emotional distress, unreasonable intrusion upon
seclusion, invasion of privacy by false light, wrongful discharge and
violation of cable franchise agreement claims. On February 4, 1995,
the federal court dismissed the federal claims without prejudice and
remanded the remaining state claims to Circuit Court for Baltimore
City. On February 14, 1995, Lewis and his spouse filed an amended
complaint in Circuit Court for Baltimore City against the current
defendants (the amended complaint was consolidated with the Belgrave
and Fannell plaintiffs). Lewis alleged assault, civil conspiracy to
commit assault, battery, civil conspiracy to commit battery, false
imprisonment, civil conspiracy to commit false imprisonment,
intentional infliction of emotional distress, civil conspiracy to
intentionally inflict emotional distress, invasion of privacy by
intrusion, civil conspiracy to commit invasion of privacy by
intrusion, defamation, civil conspiracy to defame, invasion of privacy
by false light, and civil conspiracy to commit invasion of privacy by
false light. Lewis and his spouse also allege loss of consortium.
Each claim sought $1,000,000 in compensatory damages and $5,000,000 in
punitive damages per plaintiff. The parties have agreed to a
settlement in principle. Such settlement represents the final
resolution of this matter, and accordingly, it will not be reported in
future filings.
(continued)
II-2
<PAGE> 92
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Tyrone Belgrave, et al., v. Tele-Communications, Inc., et al.
On February 8, 1994, Tyrone Belgrave and 26 other current or former
employees of United Cable Television of Baltimore Limited Partnership
filed suit in the Circuit Court for Baltimore City against
Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc.,
and United Cable Television of Baltimore Limited Partnership. The
action alleged, inter alia, false imprisonment, assault, employment
defamation, intentional infliction of emotional distress, unreasonable
intrusion upon seclusion, invasion of privacy by false light, wrongful
discharge and discrimination on the basis of race. The complaint also
sought divestiture of the Baltimore City cable franchise from the
Company. Six counts in the complaint each sought compensatory damages
of $1,000,000 per plaintiff, and punitive damages of $5,000,000 per
plaintiff. Three other counts in the complaint each sought
compensatory damages for $1,000,000 per plaintiff and punitive damages
of $5,000,000 per plaintiff. On March 29, 1994, the defendants
removed the case to the United States District Court for the District
of Maryland. In a decision dated October 3, 1994, the Court granted
defendants motion to dismiss the intentional infliction of emotional
distress, unreasonable intrusion upon seclusion, invasion of privacy
by false light, wrongful discharge and violation of cable franchise
agreement claims. On February 9, 1995, the federal court dismissed
the federal claims without prejudice and remanded the remaining state
claims to the Circuit Court for Baltimore City. On February 14, 1995,
37 persons (the 27 original plaintiffs and 10 spouses of plaintiffs)
filed an amended complaint in Circuit Court for Baltimore City against
the current defendants. (The amended complaint was consolidated with
the Lewis and Fannell plaintiffs). The 27 existing plaintiffs alleged
assault, civil conspiracy to commit assault, battery, civil conspiracy
to commit battery, false imprisonment, civil conspiracy to commit
false imprisonment, intentional infliction of emotional distress,
civil conspiracy to intentionally inflict emotional distress, invasion
of privacy by intrusion, civil conspiracy to commit invasion of
privacy by intrusion, defamation, civil conspiracy to defame, invasion
of privacy by false light, and civil conspiracy to commit invasion of
privacy by false light. Ten existing plaintiffs and their spouses
alleged loss on consortium. Ten existing plaintiffs also alleged
wrongful discharge and civil conspiracy to wrongfully terminate. Each
claim sought $1,000,000 in compensatory damages and $5,000,000 in
punitive damages per plaintiff. The parties have agreed to a
settlement in principle. Such settlement represents the final
resolution of this matter, and accordingly, it will not be reported in
future filings.
(continued)
II-3
<PAGE> 93
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Euan Fannell v. Tele-Communications, Inc., et al.
On February 8, 1994, Euan Fannell, the former general manager of UCTC
of Baltimore, Inc. filed suit in the Circuit Court for Baltimore City
against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore,
Inc., and United Cable Television of Baltimore Limited Partnership.
The suit alleged, inter alia, employment defamation, intentional
infliction of emotional distress, unreasonable intrusion upon
seclusion, invasion of privacy by false light, breach of contract, and
discrimination on the basis of race. The complaint also sought
divestiture of the Baltimore City cable franchise of the Company. The
plaintiff sought $10,000,000 in compensatory damages and $50,000,000
in punitive damages with respect to the intentional infliction of
emotional distress claim; and $10,000,000 in compensatory damages and
$50,000,000 in punitive damages with respect to each of five other
counts. On March 29, 1994, the defendants removed the case to the
United States District Court for the District of Maryland and the case
was subsequently consolidated with the Belgrave case. In a decision
dated November 15, 1994, the federal court dismissed plaintiffs'
intentional infliction of emotional distress, unreasonable intrusion
upon seclusion, invasion of privacy by false light, and violation of
cable franchise agreement claims. On February 9, 1995, the federal
court dismissed the federal claims without prejudice and remanded the
remaining state claims to the Circuit Court for Baltimore City. On
February 14, 1995, plaintiff filed an amended complaint in Circuit
Court for Baltimore City against the current defendants. The amended
action alleged intentional infliction of emotional distress, civil
conspiracy to intentionally inflict emotional distress, invasion of
privacy by intrusion, civil conspiracy to commit invasion of privacy
by intrusion, defamation, civil conspiracy to defame, invasion of
privacy by false light, civil conspiracy to commit invasion of privacy
by false light, wrongful discharge, civil conspiracy to wrongfully
terminate, and breach of contract. With respect to all claims other
than breach of contract, plaintiff sought $1,000,000 in compensatory
damages and $5,000,000 in punitive damages. With respect to the
breach of contract claim, plaintiff seeks $100,000 plus prejudgment
interest. The parties have agreed to a settlement in principle. Such
settlement represents the final resolution of this matter, and
accordingly, it will not be reported in future filings.
(continued)
II-4
<PAGE> 94
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Tony Jeffreys, et al v. Tele-Communications, Inc. et al.
On February 7, 1995, Tony Jeffreys and 41 current and former employees
of United Cable Television of Baltimore Limited Partnership filed a
complaint in Circuit Court for Baltimore City against
Tele-Communications, Inc., UCT of Baltimore, Inc., United Cable
Television of Baltimore Limited Partnership, UCTC of Baltimore, Inc.
and TCI East, Inc. With two exceptions, these plaintiffs are also
parties to identical claims asserted in the amended complaints filed
on February 14, 1994 in the previously described Belgrave, Fannell and
Lewis actions. The action alleged, in part, that the defendants
engaged U.S. Corporate Investigations, Inc. and Blackburn Associates
and conspired to illegally terminate the employment of management
personnel and employees of the Baltimore system which culminated in
the October 26, 1993, incident described in earlier reports.
Plaintiffs sought damages in connection with their claims of assault,
civil conspiracy to commit assault, battery, civil conspiracy to
commit battery, false imprisonment, civil conspiracy to commit false
imprisonment, intentional infliction of emotional distress, civil
conspiracy to intentionally inflict emotional distress, invasion of
privacy by intrusion, civil conspiracy to commit invasion of privacy
by intrusion, defamation as to plaintiff Fannell, defamation as to all
plaintiffs except Fannell, civil conspiracy to defame, invasion of
privacy by false light, civil conspiracy to commit invasion of privacy
by false light, wrongful discharge, civil conspiracy to wrongfully
terminate, breach of contract as to plaintiff Fannell, and loss of
consortium. Each count sought $1,000,000 in compensatory damages and
$5,000,000 in punitive damages per plaintiff. The parties have agreed
to a settlement in principle. Such settlement represents the final
resolution of this matter, and accordingly, it will not be reported in
future filings.
(continued)
II-5
<PAGE> 95
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Les Dunnaville v. United Artists Cable, et al.
On February 9, 1994, Les Dunnaville and Jay Sharrieff, former
employees of United Cable Television of Baltimore Limited Partnership,
filed an amended complaint in the Circuit Court for Baltimore City
against United Cable Television of Baltimore Limited Partnership, TCI
Cablevision of Maryland, Tele-Communications, Inc. and three company
employees, Roy Harbert, Tony Peduto, and Richard Bushie (the suit was
initially filed on December 3, 1993, but the parties agreed on
December 30, 1993 that no responsive pleading would be due pending
filing of an amended complaint). The action alleges, inter alia,
intentional interference with contract, tortious interference with
prospective advantage, defamation, false light, invasion of privacy,
intentional infliction of emotional distress, civil conspiracy,
violation of Maryland's Fair Employment Practices Act, and respondeat
superior with respect to the individual defendants. Six counts in the
complaint each seek compensatory damages of $1,000,000 and punitive
damages of $1,000,000; the intentional infliction of emotional
distress count seeks compensatory damages of $1,000,000 and punitive
damages of $2,000,000; and the count which alleges violation of
Maryland's Fair Employment Practices Act seeks damages of $500,000.
By order dated May 18, 1994, the Court dismissed the respondeat
superior claim. Defendants filed Motions for Summary Judgment in
December 1995 and January 1996 on all remaining counts of plaintiffs'
complaint. The Court granted summary judgment in the defendant's
favor on March 15, 1996. The plaintiffs have appealed the Circuit
Court ruling to the Maryland Court of Special Appeals and such appeal
is pending. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of this action,
the ultimate disposition should not have a material adverse effect
upon the financial condition of the Company.
HSN Shareholders Litigation
During August 1996, five putative class action complaints were filed
with the Delaware Court of Chancery in C.A. Nos. 15179, 15187, 15188,
15189 and 15195 by stockholders of Home Shopping Network, Inc.
("HSN"). The complaints were filed following the announcement of a
proposed merger between HSN and Silver King Communications, Inc.
("Silver King") which contemplates that (i) each share of HSN common
stock would be exchanged for .45 share of Silver King common stock;
and (ii) each share of supervoting HSN Class B Stock would receive .54
share of supervoting Silver King Class B stock. The defendants in the
actions include HSN, Silver King, Tele-Communications, Inc. ("TCI"),
Liberty Media Corporation ("Liberty"), the directors of HSN (Barry
Diller, James G. Held, Peter R. Barton, Robert R. Bennett, Leo J.
Hindery, Jr., H. Norman Schwarzkopf and Mr. Eli Segal). Liberty, a
subsidiary of TCI, owns 17.5 million shares (or 41%) of the HSN common
stock and is the beneficial owner of all of the outstanding shares of
HSN Class B stock, which represents approximately 80% of the voting
power of the outstanding HSN stock. Messrs. Barton and Bennett are
executive officers of Liberty. The foregoing actions have been
consolidated for all purposes pursuant to an order by the court which
specifies that the complaint in C.A. No. 15188 is the designated
complaint in the consolidated action.
(continued)
II-6
<PAGE> 96
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
HSN Shareholders Litigation (continued)
The gravamen of the complaint in C.A. No 15188 is that the HSN
directors breached their fiduciary duties by approving the merger
agreement. Plaintiffs also claim that TCI and Liberty, by supporting
the proposed merger, breached their asseted fiduciary duties as
controlling stockholders of HSN. Specifically, plaintiffs allege that
the proposed merger is designed to allow Silver King and, indirectly,
TCI and Liberty to acquire HSN without paying adequate consideration
to the public holders of HSN common stock by timing the transaction at
a time when the price of HSN common stock is low and by ignoring the
anticipated positive prospects of HSN. Plaintiffs further allege that
TCI and Liberty will be unjustly enriched because, under the merger
agreement, they would receive a premium for their shares of HSN Class
B stock while retaining what plaintiffs assert to be a controlling
interest in Silver King through their ownership of Silver King Class B
stock. According to plaintiffs, Silver King has knowingly aided and
abetted these alleged breaches of fiduciary duties. Plaintiffs seek
to enjoin the consummation of the proposed merger or, should the
proposed merger proceed, rescission or rescissory damages. Plaintiffs
also seek unspecified compensatory damages, fees and costs. The
consolidated action remains pending and discovery has not commenced.
Based upon the facts available, management believes that, although no
assurance can be given as to the outcome of this action, the ultimate
disposition should not have a material adverse effect upon the
financial condition of the Company.
DMX Shareholders Litigation
In September 1996, a putative class action complaint was filed with
the Delaware Court of Chancery in C.A. No 15206 by a stockholder of
DMX Inc. ("DMX"). The complaint was filed following the announcement
of a proposed business combination in which TCI Music, Inc. ("TCI
Music"), a newly formed entity, would acquire DMX. The proposed
business combination contemplates that the shareholders of DMX,
including subsidiaries of TCI that currently own approximately 45% of
DMX's outstanding stock, would receive shares of TCI Music Class A
common stock having one vote per share and representing approximately
19% of TCI Music's outstanding shares. TCI would hold TCI Music Class
B common stock having ten votes per share and representing
approximately 81% of the TCI Music common equity outstanding
immediately after the transaction. TCI would acquire those shares in
exchange for consideration that includes DMX subscriber accounts held
by TCI subsidiaries and equipment used by those subsidiaries to
distribute the DMX music service to TCI subscribers. The defendants
in the action include DMX, TCI and the directors of DMX (Jerold H.
Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr.,
Kent Burkhart, J.C. Sparkman and Menon Bhaskar). Mr. Fisher is a
director of and a consultant to TCI.
(continued)
II-7
<PAGE> 97
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
DMX Shareholders Litigation (continued)
The gravamen of the complaint is that the DMX directors would breach
their fiduciary duties by approving the proposed business combination.
Specifically, plaintiff alleges that, due to TCI's alleged control
over the DMX board, the DMX directors are unwilling to negotiate with
TCI to maximize the value for the public stockholders of DMX.
Plaintiff claims that the proposed consideration to be paid the public
stockholders of DMX is grossly unfair, inadequate and substantially
below the fair value of DMX. Plaintiff seeks to enjoin the
consummation of proposed business combination or, should the proposed
transaction proceed, to rescind the transaction. Plaintiff also seeks
unspecified rescissory and compensatory damages, fees and costs. The
action remains pending and discovery has not commenced. Based upon
the facts available, management believes that, although no assurance
can be given as to the outcome of this action, the ultimate
disposition should not have a material adverse effect upon the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholders held on August 15, 1996, the
following matters were voted upon by the stockholders of
Tele-Communications, Inc.:
1. To consider and vote upon a proposal to approve the
Tele-Communications, Inc. 1996 Incentive Plan. Such proposal
required the affirmative vote of a majority of the combined
voting power of the outstanding shares of Series A TCI Group
Stock, Series A Liberty Group Stock, Series B TCI Group Stock,
Series B Liberty Group Stock and Series C Preferred Stock,
voting as a single class (1,296,135,693 votes for; 236,284,538
votes against and 9,329,731 abstentions), and a majority of
the combined number of the outstanding shares of Series A TCI
Group Stock, Series A Liberty Group Stock, Series B TCI Group
Stock, Series B Liberty Group Stock and Series C Preferred
Stock, voting as a single class (430,927,200 shares for;
229,155,343 shares against and 9,096,775 abstentions).
2. The election of John C. Malone to the Board of Directors by
98.8% of the votes cast at such meeting (1,524,946,505 for;
18,695,179 withheld), the election of Tony Coelho to the Board
of Directors by 98.8% of the votes cast at such meeting
(1,524,567,381 for; 19,074,303 withheld) and the election of
Robert A. Naify to the Board of Directors by 99.0% of the
votes cast at such meeting (1,528,032,431 for; 15,609,253
withheld). Election of directors required a plurality of the
votes of the outstanding shares of Series A TCI Group Stock,
Series A Liberty Group Stock, Series B TCI Group Stock, Series
B Liberty Group Stock, Class B preferred stock, Series C
preferred stock, Series G preferred stock and Series H
preferred stock voting as a single class. Additionally,
subsequent to the meeting, Messrs. Donne F. Fisher, Kim
Magness, John W. Gallivan, Jerome H. Kern and Bob Magness
continued to serve as members of the Board of Directors
subject to re-election over staggered three year terms.
(continued)
II-8
<PAGE> 98
TELE-COMMUNICATIONS, INC.
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27.1) Tele-Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September
30, 1996:
<TABLE>
<CAPTION>
Date of Item Financial
Report Reported Statements Filed
------- -------- ----------------
<S> <C> <C>
July 2, 1996 Item 5 None
August 5, 1996 Item 2 None
September 3, 1996 Item 5 None
September 11, 1996 Item 5 None
</TABLE>
II-9
<PAGE> 99
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: November 14, 1996 By: /s/ Stephen M. Brett
----------------------------------
Stephen M. Brett
Executive Vice President
Date: November 14, 1996 By: /s/ Bernard W. Schotters
----------------------------------
Bernard W. Schotters
Senior Vice President of
TCI Communications, Inc.
Principal Financial
Officer)
Date: November 14, 1996 By: /s/ Gary K. Bracken
-----------------------------------
Gary K. Bracken
Senior Vice President of
TCI Communications, Inc.
(Principal Accounting
Officer)
II-10
<PAGE> 100
EXHIBIT INDEX
The following exhibit is filed herewith (according to the number assigned to it
in Item 601 of Regulation S-K) as noted:
(27.1) 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 NINE MONTHS ENDED SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 465
<SECURITIES> 0
<RECEIVABLES> 430
<ALLOWANCES> 0
<INVENTORY> 91
<CURRENT-ASSETS> 0
<PP&E> 13,133
<DEPRECIATION> 4,366
<TOTAL-ASSETS> 30,575
<CURRENT-LIABILITIES> 0
<BONDS> 15,118
654
0
<COMMON> 937
<OTHER-SE> 3,425
<TOTAL-LIABILITY-AND-EQUITY> 30,575
<SALES> 734
<TOTAL-REVENUES> 6,089
<CGS> 453
<TOTAL-COSTS> 2,056
<OTHER-EXPENSES> 1,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 803
<INCOME-PRETAX> (598)
<INCOME-TAX> 160
<INCOME-CONTINUING> (438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (438)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
