<PAGE> 1
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 June 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 July 31, 1996, was:
Tele-Communications, Inc. Series A TCI Group common stock - 584,387,626 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 84,675,501 shares,
Tele-Communications, Inc. Series A Liberty Media Group
common stock - 146,071,981 shares,
and
Tele-Communications, Inc. Series B Liberty Media Group
common stock - 21,192,387 shares.
<PAGE> 2
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
Assets amounts in millions
------
<S> <C> <C>
Cash $ 334 118
Trade and other receivables, net 411 407
Inventories, net 90 104
Prepaid expenses 78 65
Prepaid program rights 42 47
Committed film inventory 138 122
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 2,681 2,372
Investment in Turner Broadcasting System, Inc.
("TBS") (note 6) 999 955
Property and equipment, at cost:
Land 84 88
Distribution systems 10,559 9,545
Support equipment and buildings 1,506 1,429
--------- ------
12,149 11,062
Less accumulated depreciation 4,139 3,653
--------- ------
8,010 7,409
--------- ------
Franchise costs 14,973 14,322
Less accumulated amortization 2,258 2,092
--------- ------
12,715 12,230
--------- ------
Other assets, at cost, net of amortization 1,818 1,734
--------- ------
$ 27,316 25,563
========= ======
</TABLE>
(continued)
I-1
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
Liabilities and Stockholders' Equity amounts in millions
------------------------------------
<S> <C> <C>
Accounts payable $ 147 243
Accrued interest 267 233
Accrued programming expense 398 318
Other accrued expenses 1,131 1,100
Debt (note 7) 13,334 13,211
Deferred income taxes 4,707 4,584
Other liabilities 192 195
------- ------
Total liabilities 20,176 19,884
------- ------
Minority interests in equity
of consolidated subsidiaries 945 651
Redeemable preferred stock 659 478
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust
Securities") holding solely subordinated debt
securities of TCI Communications, Inc. ("TCIC")
(note 8) 1,016 --
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 684,894,686 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 84,675,501 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 146,067,655 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 21,192,387 shares in 1996 and
21,196,868 shares in 1995 21 21
Additional paid-in capital 4,314 4,068
Cumulative foreign currency
translation adjustment (7) (9)
Unrealized holding gains for
available-for-sale securities, net of taxes 346 338
Accumulated deficit (756) (454)
------- ------
4,834 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 4,520 4,550
------- ------
Commitments and contingencies (note 10)
$27,316 25,563
======= ======
</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 Six months ended
June 30, June 30,
-------------------------- ---------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Cable and programming services $ 1,778 1,427 3,454 2,708
Net sales from electronic retailing services 244 221 500 441
--------- --------- --------- ---------
2,022 1,648 3,954 3,149
--------- --------- --------- ---------
Operating costs and expenses:
Operating 689 513 1,333 980
Cost of sales from electronic retailing services 152 143 316 279
Selling, general and administrative 618 481 1,205 915
Compensation relating to stock appreciation
rights 4 21 -- 18
Adjustment to compensation relating to
stock appreciation rights -- -- (5) --
Depreciation 259 231 511 432
Amortization 127 124 245 210
--------- --------- --------- ---------
1,849 1,513 3,605 2,834
--------- --------- --------- ---------
Operating income 173 135 349 315
Other income (expense):
Interest expense (265) (243) (526) (483)
Interest and dividend income 14 11 24 18
Share of losses of affiliates, net (note 5) (96) (43) (211) (71)
Loss on early extinguishment of debt (note 7) (66) -- (66) --
Minority interests in losses (earnings) of
consolidated subsidiaries, net (6) 10 (4) 21
Other, net (11) (18) 5 (11)
--------- --------- --------- ---------
(430) (283) (778) (526)
--------- --------- --------- ---------
Loss before income taxes (257) (148) (429) (211)
Income tax benefit 73 53 127 72
--------- --------- --------- ---------
Net loss (184) (95) (302) (139)
Dividend requirements on
preferred stocks (9) (9) (18) (17)
--------- --------- --------- ---------
Net loss attributable
to common stockholders $ (193) (104) (320) (156)
========= ========= ========= =========
Net earnings (loss) attributable to
common stockholders:
TCI Class A and Class B common stock $ -- (104) -- (156)
TCI Group Series A and Series B
common stock (197) -- (339) --
Liberty Media Group Series A and
Series B common stock 4 -- 19 --
--------- --------- --------- ---------
$ (193) (104) (320) (156)
========= ========= ========= =========
Net earnings (loss) attributable to common
stockholders per common share (note 3):
TCI Class A and Class B common stock $ -- (.16) -- (.24)
TCI Group Series A and Series B
common stock $ (.29) -- (.51) --
Liberty Media Group Series A and
Series B common stock $ .02 -- .11 --
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Common Stock Cumulative
----------------------------------------- foreign
Class B TCI Group Liberty Media Group Additional currency
Preferred -------------------- ------------------- paid-in translation
Stock Series A Series B Series A Series B capital adjustment
--------- -------- -------- -------- -------- ------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 672 85 143 21 4,068 (9)
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 Series G Preferred Stock -- 1 -- -- -- 14 --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- (18) --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- -- 5 --
Payment of preferred stock dividends -- -- -- -- -- (10) --
Foreign currency translation adjustment -- -- -- -- -- -- 2
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- -- -- --
-------- --- -- --- -- ----- --
Balance at June 30, 1996 $ -- 685 85 146 21 4,314 (7)
======== === == === == ===== ==
</TABLE>
<TABLE>
<CAPTION>
Unrealized
holding
gains for
available-
for-sale Total
securities, Accumulated Treasury stockholders'
net of taxes deficit stock equity
------------ ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1996 338 (454) (314) 4,550
Net loss -- (302) -- (302)
Issuance of common stock for
acquisition -- -- -- 269
Issuance of common stock upon
conversion of notes -- -- -- 1
Issuance of common stock upon
conversion of Series G Preferred Stock -- -- -- 15
Accreted dividends on all classes of
preferred stock -- -- -- (18)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- 5
Payment of preferred stock dividends -- -- -- (10)
Foreign currency translation adjustment -- -- -- 2
Change in unrealized holding gains for
available-for-sale securities 8 -- -- 8
---- ---- ---- -----
Balance at June 30, 1996 346 (756) (314) 4,520
==== ==== ==== =====
</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>
Six months ended
June 30,
-------------------
1996 1995
------- ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (302) (139)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 756 642
Compensation relating to appreciation rights -- 18
Adjustment to compensation relating to stock
appreciation rights (5) --
Share of losses of affiliates 211 71
Loss on early extinguishment of debt 66 --
Minority interests in earnings (losses) 4 (21)
Deferred income tax benefit (146) (66)
Other noncash charges (credits) (1) 1
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables (15) --
Change in inventories 12 12
Change in prepaids (15) (37)
Change in accrued interest 34 10
Change in other accruals and payables (68) 45
------- ------
Net cash provided by operating activities 531 536
------- ------
Cash flows from investing activities:
Cash paid for acquisitions (106) (239)
Capital expended for property and equipment (955) (780)
Additional investments in and
loans to affiliates and others (576) (837)
Proceeds from disposition of assets 102 21
Other investing activities (86) (78)
------- ------
Net cash used in investing activities (1,621) (1,913)
------- ------
Cash flows from financing activities:
Borrowings of debt 4,674 4,636
Repayments of debt (4,781) (3,658)
Prepayment penalties (60) --
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Contribution by minority shareholders of subsidiaries 314 --
Issuance of common stock -- 431
Preferred stock dividends (23) (12)
Dividends on subsidiary preferred stock and
Trust Securities (12) --
------- ------
Net cash provided by financing activities 1,306 1,397
------- ------
Net increase in cash 216 20
Cash at beginning of period 118 74
------- ------
Cash at end of period $ 334 94
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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 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
The loss attributable to common stockholders per common share for the three
months and six months ended June 30, 1995 was computed by dividing net loss
attributable to common stockholders by the weighted average number of
common shares outstanding during the period (656.4 million and 645.4
million, respectively). 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 six months ended June 30, 1996 was computed by dividing
net loss attributable to TCI Group Series A and Series B common
stockholders by the weighted average number of common shares outstanding of
TCI Group Series A and Series B common stock during the period (668.4
million and 663.2 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 six months ended June 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 (167.1 million and 165.8 million, respectively).
Common stock equivalents were not included in the computation because their
inclusion would be anti-dilutive to TCI.
(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 $492 million and $473 million for the six months
ended June 30, 1996 and 1995, respectively. Cash paid for income taxes was
$7 million and $47 million for the six months ended June 30, 1996 and 1995,
respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1996 1995
------- ------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 1,280 3,076
Liabilities assumed (377) (221)
Deferred tax liability recorded
in acquisitions (244) (1,067)
Minority interests in equity of
acquired entities (92) 66
Common stock and preferred stock issued
in acquisitions (461) (1,615)
------- ------
Cash paid for acquisitions $ 106 $ 239
======= ======
Exchange of consolidated
subsidiaries for note
receivable and equity
investment $ 285 --
======= ======
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 2 10
======= ======
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities $ 8 89
======= ======
Accrued preferred stock dividends $ 13 7
======= ======
Conversion of debt into additional minority
interest in consolidated subsidiary $ -- 14
======= ======
Common stock issued to subsidiaries in
Reorganization reflected as treasury stock $ -- 1
======= ======
Common stock issued in exchange for
cost investment $ -- 73
======= ======
Retirement of Class A common stock
previously held by subsidiary $ -- 10
======= ======
</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>
Six months ended
Combined Operations June 30,
------------------- ----------------------
1996 1995
--------- -------
amounts in millions
<S> <C> <C>
Revenue $2,615 2,446
Operating expenses (2,282) (1,985)
Depreciation and amortization (328) (316)
--------- -------
Operating income 5 145
Interest expense (234) (207)
Other, net (121) (113)
--------- -------
Net loss $ (350) (175)
========= =======
</TABLE>
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at June 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 $750 million) (see note 10),
Teleport Communications Group, Inc. (carrying value of $237 million),
TeleWest Communications plc ("TeleWest") (carrying value of $484 million),
various other foreign equity investments (cumulative carrying value of $424
million) and Discovery Communications, Inc. (carrying value of $126
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. The fx network will be transformed into a nationally distributed,
general entertainment and sports network. The regional sports networks
currently operated under the Prime Sports name will be relaunched under the
Fox Sports banner.
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly- owned
subsidiary of Liberty Media Group, and TINTA formed a venture (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
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.
(continued)
I-10
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
The Company owns shares of TBS common stock and shares of a class of
preferred stock of TBS which has voting rights and is convertible into TBS
common stock. The holders of those preferred shares, as a group, are
entitled to elect seven of fifteen members of the board of directors of
TBS, and the Company appoints three such representatives. However, voting
control over TBS continues to be held by its chairman of the board and
chief executive officer. The Company's total holdings of TBS common and
preferred stocks represent an approximate 7.4% voting interest for those
matters for which preferred and common stock vote as a single class. See
note 7.
At June 30, 1996 and December 31, 1995, the Company's investment in TBS
common stock had an aggregate market value of $821 million and $777
million, respectively (including unrealized holding gains of $497 million
and $453 million, respectively).
At June 30, 1996 and December 31, 1995, the Company's investment in TBS
preferred stock, carried at cost, had an aggregate market value of $980
million and $927 million, respectively, based upon the market value of the
common stock into which it is convertible. Such market value exceeded cost
by $802 million and $749 million, respectively, at such dates.
On September 22, 1995, the boards of directors of Time Warner, Inc. ("Time
Warner") and TBS approved plans to merge their respective companies (the
"TBS/Time Warner Merger"). Under the terms of their agreement, TBS
shareholders will receive 0.75 of a Time Warner common share for each TBS
Class A and Class B common share. Each holder of TBS Class C preferred
stock will receive 0.80 of a Time Warner common share for each of the 6
shares of TBS Class B common stock into which each share of Class C
preferred stock may be converted. Liberty Media Group will be entitled to
receive approximately 50.1 million shares of Time Warner common stock in
exchange for its TBS holdings.
(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
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.
Subject to certain conditions, Liberty Media Group has agreed to vote its
TBS shares for the TBS/Time Warner Merger. The Agreement in Principle is
subject to a final consent agreement being reached with the FTC. The
TBS/Time Warner Merger is subject to approval by the Federal Communications
Commission (the "FCC") and approval by the shareholders of TBS and Time
Warner. Consummation of the TBS/Time Warner Merger is not conditioned
upon consummation of the Spin-Off.
(continued)
I-12
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,018 7,713
Bank credit facilities (b) 3,258 3,854
Commercial paper 859 1,469
Convertible notes (c) 44 45
Other debt 155 130
-------- --------
$ 13,334 13,211
======== ========
</TABLE>
(a) During the six months ended June 30, 1996, the Company
redeemed certain notes payable which had 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.
(b) 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. In connection with such
termination, the Company recognized a loss on early
extinguishment of debt of $4 million related to the retirement
of deferred loan costs.
(c) These convertible notes, which are stated net of unamortized
discount of $181 million at June 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 six months ended June
30, 1996, certain of these notes were converted into 1,019,600
shares of Series A TCI Group Stock and 254,900 shares of
Series A Liberty Group Stock. At June 30, 1996, the notes
were convertible, at the option of the holders, into an
aggregate of 37,687,974 shares of Series A TCI Group Stock and
9,421,987 shares of Series A Liberty Group Stock.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings, specified
cash flow and financial ratios (primarily the ratios of cash flow to total
debt and cash flow to debt service, as defined), and include certain
limitations on indebtedness, investments, guarantees, dispositions, stock
repurchases and/or dividend payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of the Company. Also, as security for
borrowings under another of the Company's credit facilities, the Company
pledged a portion of its TBS common stock (with a quoted market value of
$804 million at June 30, 1996). Additionally, as security for one of the
Company's notes payable (with a balance of $39 million at June 30, 1996),
the Company has pledged the stock of one of its majority-owned
subsidiaries.
(continued)
I-13
<PAGE> 15
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 $13,334 million, was $13,466 million at June 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 $480
million at June 30, 1996 and (ii) variable interest rates (the "Variable
Rate Agreements") on notional amounts of $2,620 million at June 30, 1996.
During the six months ended June 30, 1996 and 1995, the Company's net
payments pursuant to the Fixed Rate Agreements were $8 million and $6
million, respectively; and the Company's net receipts pursuant to the
Variable Rate Agreements were $8 million and $2 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>
July 1996 8.2% $ 10 July 1996 8.2% $ 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 80 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.4% 450
------ April 1999 7.4% 100
$ 480 September 1999 7.2%-7.4% 300
====== February 2000 5.8%-6.6% 650
March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,620
======
</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
June 30, 1996, taking into consideration current interest rates and the
current creditworthiness of the counterparties. The Company would be
required to pay $50 million at June 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-14
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) 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 SecuritiesSM (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."
(9) 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 June 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-15
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
At June 30, 1996, there were 89,789,102 shares of Series A TCI Group
Stock and 20,634,241 shares of Series A Liberty Group Stock reserved
for issuance under exercise privileges related to options, convertible
debt securities and convertible preferred stock. Also, one share of
Series A TCI Group Stock is reserved for each share of Series B TCI
Group Stock, and one share of Series A Liberty Group Stock is reserved
for each share of Series B Liberty Group Stock. Additionally,
subsidiaries of TCI own an aggregate of 277,719 shares of TCI
Convertible Redeemable Participating Preferred Stock, Series F
("Series F Preferred Stock"). Each share of Series F Preferred Stock
is convertible into 1,287.51 shares of Series A TCI Group Stock.
In connection with the Viacom Acquisition discussed in note 11, a
subsidiary of the Company issued 6,257,961 shares of exchangeable
preferred stock. Each such share of exchangeable preferred stock is
exchangeable after the fifth anniversary of the date of issuance for
4.81 shares of Series A TCI Group Stock.
(10) 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.
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, $0.1
billion of which was contributed during the six months ended June 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 will receive approximately 11 million newly
issued shares of Silver King in exchange for its 37.5 million shares
of HSN.
(continued)
I-16
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995 pursuant
to which an option owned by Liberty Media Group to purchase 2 million
shares of Silver King Class B common stock (the "Option") (which shares
would constitute voting control of Silver King) would be transferred to
Silver Management Company ("Silver Company"), an entity in which
Liberty Media Group would own all of the non-voting equity interests
(which would constitute substantially all of the equity of such entity)
and Mr. Diller would own all of the voting equity interests. Silver
Company would thereafter exercise the Option and hold the shares of
Silver King Class B Common Stock purchased thereunder. In an amendment
to such agreement entered into in November 1995, Liberty Media Group
agreed to contribute all of its shares of HSN (which shares constitute
approximately 41% of the equity of HSN and approximately 80% of the
voting power of HSN) to Silver Company in return for additional
non-voting equity interests in Silver Company. Following such
contribution Silver Company would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing Silver Company's controlling interest
in Silver King to in excess of 80% of the voting power of Silver King).
The FCC approval required for the exercise of the Option by Silver
Company has been received, and it is currently expected that Silver
Company will exercise the Option in August 1996; however as a part of
said approval, the FCC imposed 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) will require the prior approval
of the FCC.
Each such transaction is subject to the satisfaction of certain
conditions, including the receipt of all necessary regulatory consents
and approvals. If consummated, HSN would cease to be a subsidiary of
the Company and therefore, the financial results of HSN would not be
consolidated with the 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 Silver Company. No assurance can
be given that the transaction will be consummated.
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 June 30, 1996,
these agreements require minimum payments aggregating approximately
$665 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 guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $306 million at June 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 in the aggregate
amount of $235 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.
(continued)
I-17
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(11) Subsequent Event
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.
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 terms of the Exchangeable Preferred Stock,
including its dividend, redemption and exchange features, were
designed to cause the Exchangeable Preferred Stock, in the opinion of
two investment banks, to initially trade at the Stated Value. The
Exchangeable Preferred Stock 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.
I-18
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. The following discussion focuses on material
changes in the trends, risks and uncertainties affecting the Company's results
of operations and financial condition.
(1) Material changes in financial condition:
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; TINTA; and Technology/Venture Capital. Such
organization provides for financial and operational independence in the four
operating units, each under the direction of its own chief executive officer,
while maintaining the synergies and scale economies provided by a common
corporate parent. While neither TINTA nor the Technology/Venture Capital unit
is currently significant to the Company as a whole, the Company believes each
unit has growth potential and each unit is unique enough in nature to warrant
separate focus.
On August 10, 1995, TCI distributed to its security holders of record one
hundred percent of the equity value of TCI attributable to Liberty Media Group.
The Liberty Group Stock is intended to reflect the separate performance of
Liberty Media Group. While the Liberty Group Stock constitutes common stock of
TCI, the issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. The TCI Group Stock is
intended to reflect the performance of 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,
$0.1 billion of which was contributed during the six months ended June 30,
1996. The business plan contemplates that Sprint Spectrum will require
additional equity thereafter.
(continued)
I-19
<PAGE> 21
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 10 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.
During the six months ended June 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 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) $1.7 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 securities 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 1996. The
outstanding balance of such facility was $387 million at June 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-20
<PAGE> 22
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 June 30, 1996, subsidiaries of the Company had approximately
$1.4 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 7 to the accompanying
consolidated financial statements for additional information regarding the
material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,100 million and $975 million for the six
months ended June 30, 1996 and 1995, respectively) to interest expense ($526
million and $483 million for the six months ended June 30, 1996 and 1995,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 209% and 202% for the
six months ended June 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,
approximately 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 ($531 million and $536 million for the
six months ended June 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.
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
$480 million at June 30, 1996 and (ii) variable interest rates on notional
amounts of $2,620 million at June 30, 1996. During the six months ended June
30, 1996 and 1995, the Company's net payments pursuant to the Fixed Rate
Agreements were $8 million and $6 million, respectively; and the Company's net
receipts pursuant to the Variable Rate Agreements were $8 million and $2
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.
(continued)
I-21
<PAGE> 23
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. Standard & Poor's Securities, Inc. ("Standard &
Poor's") and Fitch Investors Service, L.P. reaffirmed their respective ratings
for TCIC's senior debt at the last level of investment grade. In connection
with its reaffirmation, Standard & Poor's changed its outlook on TCIC from
stable to negative. 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.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $306
million at June 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 June 30, 1996, these agreements require minimum payments aggregating
approximately $665 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 in the aggregate amount of
$235 million.
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
(continued)
I-22
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
(2) Material changes in results of operations:
Cable 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 cable and programming services increased 25% and 28% for the
three months and six months ended June 30, 1996, respectively, as compared to
the corresponding periods of 1995. The three month increase is due to the net
effect of certain acquisitions (12%), increases in rates charged to the
Company's subscribers due to inflation, programming cost increases and channel
additions (5%), growth in the Company's satellite subscribers (4%), 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 (3%) offset by a 2% decrease due to the deconsolidation of the
Company's sports programming businesses (see discussion below). The six month
increase is due to the effect of certain acquisitions (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 (3%) and increases in the Company's
domestic and international programming and other revenue (3%).
(continued)
I-23
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Revenue of TCI's domestic programming services contributed $243 million and
$236 million of revenue for the six months ended June 30, 1996 and 1995,
respectively. This revenue was attributable to subscription and advertising
revenue at TCI's sports programming businesses, revenue from Netlink USA, a
marketer and distributor of programming to the United States home satellite
dish subscriber market and subscription revenue generated by Southern and
Encore Media Corporation.
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed two
sports programming ventures. In the United States, Liberty Media Group and
News Corp. formed the Fox-Liberty Venture into which Liberty Media Group
contributed interests in its national and regional sports networks and into
which News Corp. contributed its fx cable network and certain other assets.
Liberty Media Group received a 50% interest in the Fox-Liberty Venture and $350
million in cash. The fx Network will be transformed into a nationally
distributed, general entertainment and sports network. The regional sports
networks currently operated under the Prime Sports name will be relaunched
under the Fox Sports banner.
Internationally, News Corp. and the Liberty-TINTA LLC formed 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.
Net Sales From Electronic Retailing Services
HSN's net sales from electronic retailing services increased 10% and 13%
for the three months and six months ended June 30, 1996, respectively, as
compared to the corresponding periods in 1995. Such increases are due to 6%
and 8% increases in the number of packages shipped and 6% and 9% increases 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.
(continued)
I-24
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
On November 27, 1995, the Company announced that it had agreed to exchange
its controlling interest in HSN for shares of Silver King. The Company will
receive approximately 11 million newly issued shares of Silver King in exchange
for its 37.5 million shares of HSN. If consummated, HSN would cease to be a
subsidiary of the Company and therefore, the financial results of HSN would not
be consolidated with the financial results of Liberty Media Group. Although
the Company would cease to possess voting control over HSN, it would continue
to have an indirect equity interest in HSN through its ownership of the equity
securities of Silver Company. No assurance can be given that the transaction
will be consummated. For additional discussion of the foregoing transaction,
see note 10 to the accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses increased 34% and 36% for the three months and six
months ended June 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (21% and 16%) and
Primestar (3% and 4%) (see discussion below), such expenses increased 10% and
16%. 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. The Company experienced an increase in
programming costs in the first half of 1996 without increasing its rates
charged to its customers for Regulated Services until June 1996. 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. The Company anticipates that such increases
will result in additional revenue of approximately $20 million per month.
For the three months and six months ended June 30, 1996, cost of sales
increased $9 million or 6% and $37 million or 13%, respectively, as compared to
the same periods in 1995. Such increases relate primarily to an increase in
sales volume. As a percentage of net sales, cost of sales were relatively
comparable for the 1995 and the 1996 periods.
Selling general and administrative expenses ("SG&A") increased 28% and 32%
for the three months and six months ended June 30, 1996, respectively, as
compared to the corresponding periods of 1995. Exclusive of the effects of
acquisitions (10% and 10%) and Primestar (9% and 10%) (see discussion below),
SG&A increased 9% and 12%. Such increases are due primarily to salaries and
related payroll expenses.
During 1995, the Company changed its approach to how it ordered and stored
excess cable distribution equipment. The Company created material support
centers and consolidated all of its excess inventory. During the six months
ended June 30, 1996 and 1995, the Company incurred $4 million and $2 million,
respectively, of costs related to such material support centers. Additionally,
during 1996, the Company incurred approximately $16 million in expenses, as
compared to $4 million in 1995, related to initiatives to improve its customer
service and to continue the redesign of its computer and accounting systems.
(continued)
I-25
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
The Company has an interest in a partnership, PRIMESTAR Partners, L.P.
("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 six months
ended June 30, 1996, the Company's revenue and expenses related to its
Primestar satellite service increased significantly over the corresponding
period in 1995 as the number of the Company's Primestar subscribers increased
from approximately 220,000 subscribers at June 30, 1995 to approximately
660,000 subscribers at June 30, 1996. During the six months ended June 30,
1996, revenue increased from $61 million to $197 million and operating,
selling, general and administrative expenses increased from $50 million to $187
million, as compared to the six months ended June 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 (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 and the Company's
business of distributing Primestar programming. 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. Because the Satellite Spin-Off is subject to certain
conditions, including receipt of a "no action" letter from the Securities and
Exchange Commission, regulatory approval and an opinion of tax counsel that the
Satellite Spin-Off will not be taxable to the TCI Group stockholders, there is
no assurance that it will be completed.
The increase in the Company's depreciation expense in 1996 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems.
The systems will have optical fiber to neighborhood nodes with coaxial cable
distribution downstream from that point. Such optical fiber technology will
facilitate digital transmission of voice, video and data signals. 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-26
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Other Income (Expense) and Net Loss
At June 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 June 30, 1996 of $484 million and comprised $70 million and
$26 million of the Company's share of its affiliates' losses during the six
months ended June 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
$424 million at June 30, 1996 and accounted for $37 million and $22 million of
the Company's share of its affiliates' losses in 1996 and 1995, respectively.
Additionally, included in share of losses of affiliates for the six months
ended June 30, 1996 is $79 million attributable to Sprint Spectrum. Such
amount includes $34 million associated with prior periods.
The Company's net loss (before preferred stock dividend requirements) of
$302 million for the six months ended June 30, 1996 represents an increase of
$163 million, as compared to the Company's net loss (before preferred stock
dividend requirements) of $139 million for the six months ended June 30, 1995.
The Company's net loss (before preferred stock dividend requirements) of $184
million for the three months ended June 30, 1996 represents an increase of $89
million, as compared to the Company's net loss (before preferred stock dividend
requirements) of $95 million for the three months ended June 30, 1995. Such
increases are primarily the result of 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, the aforementioned increases
in depreciation and amortization expense and an increase in interest expense
due to higher debt balances and interest rates.
I-27
<PAGE> 29
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash $ 324,437 41,225
Trade and other receivables, net 54,120 107,180
Inventories, net 89,569 103,968
Prepaid expenses 6,643 14,176
Prepaid program rights 19,507 28,395
Committed film inventory 26,153 29,931
Investments in affiliates, accounted for under the
equity method, and related receivables (note 4) 214,497 299,331
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 989,462 945,282
Other investments, at cost, and related
receivables (note 6) 98,805 110,791
Property and equipment, at cost:
Land 19,580 21,254
Support equipment and buildings 119,306 180,051
Computer and broadcast equipment 45,182 44,962
---------- ---------
184,068 246,267
Less accumulated depreciation 36,396 42,233
---------- ---------
147,672 204,034
---------- ---------
Intangibles:
Excess cost over acquired net assets 273,796 364,995
Other intangibles 3,968 283,242
Cable distribution fees 133,411 115,746
---------- ---------
411,175 763,983
Less accumulated amortization 58,409 142,741
---------- ---------
352,766 621,242
---------- ---------
Other assets, at cost, net of amortization 6,937 12,081
---------- ---------
$2,330,568 2,517,636
========== =========
</TABLE>
(continued)
I-28
<PAGE> 30
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
Liabilities and Combined Equity amounts in thousands
- -------------------------------
<S> <C> <C>
Accounts payable $ 69,945 95,313
Accrued liabilities 109,294 168,107
Film licenses payable 36,721 34,864
Deferred revenue 8,530 50,803
Debt (note 7) 122,359 250,990
Deferred tax liability 225,567 201,909
Other liabilities 6,932 14,261
---------- ---------
Total liabilities 579,348 816,247
---------- ---------
Minority interests in equity of consolidated
subsidiaries 93,520 87,960
Combined equity (note 8):
Combined equity 1,354,954 1,336,125
Due to TCI Group 5,429 7,496
Unrealized gains on available-for-sale
securities, net of taxes 297,317 269,808
---------- ---------
1,657,700 1,613,429
---------- ---------
Commitments and contingencies (note 9)
$2,330,568 2,517,636
========== =========
</TABLE>
See accompanying notes to combined financial statements.
I-29
<PAGE> 31
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ----------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
Net sales from electronic retailing services $ 243,988 221,323 499,601 441,274
Programming services:
From TCI Group (note 8) 19,992 15,314 46,730 34,633
From others 57,740 106,449 196,018 201,390
------------ ------------ ------------ ----------
321,720 343,086 742,349 677,297
------------ ------------ ------------ ----------
Cost of sales, operating costs and expenses:
Cost of sales 151,679 142,835 316,491 279,096
Operating 58,942 93,865 176,639 199,448
Selling, general and administrative 67,824 96,680 160,596 192,815
Charges by TCI Group (note 8) 5,550 6,643 11,321 12,548
Compensation relating to stock
appreciation rights (note 8) 7,119 4,057 5,711 1,961
Restructuring charges -- -- -- 2,041
Depreciation 3,962 5,701 9,057 11,915
Amortization 9,424 31,066 22,870 40,772
------------ ------------ ------------ ----------
304,500 380,847 702,685 740,596
------------ ------------ ------------ ----------
Operating income (loss) 17,220 (37,761) 39,664 (63,299)
Other income (expense):
Interest expense
(6,022) (3,173) (12,501) (5,896)
Interest expense to TCI Group (note 8) -- (783) -- (1,526)
Dividend and interest income,
primarily from affiliates 2,206 1,827 4,371 3,939
Share of earnings of affiliates,
net (note 4) 4,456 4,297 12,755 3,362
Minority interests in losses (earnings) of
consolidated subsidiaries (2,873) 5,377 (6,357) 11,318
Loss on disposition of assets (8,035) -- (6,300) --
Litigation settlements -- -- -- (2,620)
Other, net 1,610 934 3,782 4,307
------------ ------------ ------------ ----------
(8,658) 8,479 (4,250) 12,884
------------ ------------ ------------ ----------
Earnings (loss) before income taxes 8,562 (29,282) 35,414 (50,415)
Income tax benefit (expense) (4,573) 17,160 (16,584) 28,143
------------ ------------ ------------ ----------
Net earnings (loss) $ 3,989 (12,122) 18,830 (22,272)
============ ============ ============ ==========
Earnings per common share (note 2) $ .02 .11
============ ============
</TABLE>
See accompanying notes to combined financial statements.
I-30
<PAGE> 32
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Six months ended June 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 18,830 -- -- 18,830
Sale of programming to TCI Group -- (46,730) -- (46,730)
Cost allocations from TCI Group -- 11,321 -- 11,321
Cable distribution fees -- 2,620 -- 2,620
Adjustment to allocation of
compensation relating to stock
appreciation rights -- (1,221) -- (1,221)
Intergroup tax allocation -- 7,665 -- 7,665
Net cash transfers from TCI Group (1) 24,278 -- 24,277
Change in unrealized holding gains
on available-for-sale securities -- -- 27,509 27,509
---------- -------- ------- ---------
Balance at June 30, 1996 1,354,954 5,429 297,317 1,657,700
========== ======== ======= =========
</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 Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
1996 1995
--------- ----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 18,830 (22,272)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 31,927 52,687
Compensation relating to stock appreciation rights 5,711 1,961
Share of earnings of affiliates (12,755) (3,362)
Deferred income tax expense (benefit) 5,660 (10,697)
Intergroup tax allocation 7,665 (17,446)
Minority interests in earnings (losses) 6,357 (11,318)
Loss on disposition of assets 6,300 --
Litigation settlements -- 2,620
Payments of litigation settlements (3,125) (22,600)
Noncash restructuring charges -- 2,041
Payments for restructuring charges (414) (509)
Noncash interest expense 3,378 --
Changes in operating assets and liabilities, net of
acquisitions:
Change in receivables (29,672) (15,897)
Change in inventories 15,606 8,807
Change in prepaid expenses 4,105 (9,196)
Change in payables, accruals and
deferred revenue (6,687) 4,995
--------- ----------
Net cash provided (used) by operating
activities 52,886 (40,186)
--------- ----------
Cash flows from investing activities:
Cash proceeds from dispositions 47,045 --
Cash paid for acquisitions (55,000) (33,739)
Capital expended for property and equipment (6,244) (19,485)
Additional investments in and loans to
affiliates and others (5,281) (23,255)
Return of capital from affiliates 1,500 9,220
Collections on loans to affiliates and others 866 1,449
Cash paid for cable distribution fees (17,665) (32,328)
Other investing activities (8,983) (1,911)
--------- ----------
Net cash used in investing activities (43,762) (100,049)
--------- ----------
Cash flows from financing activities:
Borrowings of debt 201,889 68,300
Repayments of debt (233,615) (12,138)
Change in cash transfers from (to) TCI (8,512) 36,813
Contributions by minority shareholders of subsidiaries 314,391 --
Distributions to minority shareholders of subsidiaries (65) (276)
--------- ----------
Net cash provided by financing
activities 274,088 92,699
--------- ----------
Net increase (decrease) in cash 283,212 (47,536)
Cash at beginning of period 41,225 62,963
--------- ----------
Cash at end of period $ 324,437 15,427
========= ==========
</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)
Notes to Combined Financial Statements
June 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"). However, Liberty Group Stock
constitutes common stock of TCI. The issuance of Liberty Group Stock
did not result in any transfer of assets or liabilities of TCI or any
of its subsidiaries or affect the rights of holders of TCI's or any of
its subsidiaries' debt. On August 10, 1995, TCI distributed to its
security holders of record on August 4, 1995, Liberty Group Stock
representing one hundred percent of the equity value attributable to
Liberty Media Group (the "Distribution"). Additionally, the
stockholders of TCI approved the redesignation of the previously
authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock ("TCI Group Stock").
TCI Group Stock is intended to reflect the separate performance of the
subsidiaries and assets not attributed to Liberty Media Group,
including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's
International Cable and Programming unit and (iii) TCI's
Technology/Venture Capital unit. Such subsidiaries and assets are
collectively referred to as "TCI Group". Intercompany balances
resulting from transactions with such units are reflected as
borrowings from or loans to TCI. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to Liberty Media Group for purposes of
preparing its combined financial statements, the change in the capital
structure of TCI does not affect the ownership or the respective legal
title to assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries will each continue to be
responsible for their respective liabilities. Holders of Liberty
Group Stock are holders of common stock of TCI and continue to be
subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities. The issuance of Liberty Group
Stock did not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
Liberty Media Group and the market price of shares of Liberty Group
Stock. In addition, net losses of any portion of TCI, dividends and
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce
funds of TCI legally available for dividends on all series of common
stock. Accordingly, Liberty Media Group financial information should
be read in conjunction with the TCI consolidated financial
information.
(continued)
I-33
<PAGE> 35
"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 six months ended June 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 (167.1 million and 165.8
million, respectively). Common stock equivalents were not included in
the computation because their inclusion would be anti-dilutive to TCI.
(continued)
I-34
<PAGE> 36
"LIBERTY MEDIA 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 $11,882,000 and $3,987,000 for the six
months ended June 30, 1996 and 1995, respectively. Cash paid for
income taxes during the six months ended June 30, 1996 and 1995 was
$569,000 and $385,000, respectively. In addition, Liberty Media Group
received an income tax refund of $10,725,000 during the six months
ended June 30, 1995.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------
1996 1995
--------- -------
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 55,000 33,554
Net liabilities assumed -- (926)
Contribution to combined equity from
TCI for acquisition -- (19,115)
Deferred tax liability recorded in acquisition -- (11)
Minority interests in equity of
acquired entities -- 20,237
--------- -------
$ 55,000 33,739
========= =======
Exchange of consolidated
subsidiaries for note
receivable and equity
investment $ 239,034 --
========= =======
Change in unrealized gains, net of deferred
income taxes, on available-for-sale securities $ 27,509 79,456
========= =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ -- 14,215
========= =======
</TABLE>
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
1996 1995
------------- -----------
amounts in thousands
<S> <C> <C>
Combined Operations
- -------------------
Revenue $1,552,026 1,178,905
Operating expenses (1,365,664) (1,024,589)
Depreciation and amortization (69,308) (54,047)
------------- -----------
Operating income 117,054 100,269
Interest expense (48,242) (44,628)
Other, net (74,699) (73,944)
------------- -----------
Net loss $ (5,887) (18,303)
============= ===========
</TABLE>
(continued)
I-35
<PAGE> 37
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the carrying value of Liberty Media
Group's investments, accounted for under the equity method, including
related receivables:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc.
("Discovery") $126,237 117,373
QVC, Inc. ("QVC") 90,097 81,160
Sunshine Network ("Sunshine") -- 8,221
SportsChannel Chicago ("Chicago") -- 29,722
Home Team Sports Limited Partnership
("HTS") -- 3,514
International Cable Channels
Partnership, Ltd. ("ICCP") 10,418 11,563
Premier Sports ("Australia") -- 4,212
Bet Holdings, Inc. ("BET") 17,652 15,353
Courtroom Television Network ("Court") 3,710 7,711
Superstar/Netlink Group LLC
("Superstar/Netlink") (44,280) --
Liberty/TINTA LLC ("Liberty/TINTA") 5,641 --
DMX Inc. ("DMX") 3,904 --
Liberty/Fox U.S. Sports LLC ("LFS") (14,484) --
Other 15,602 20,502
-------- -------
$214,497 299,331
======== =======
</TABLE>
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1996 1995
------- --------
amounts in thousands
<S> <C> <C>
Discovery $ 8,864 9,695
QVC 8,962 (2,691)
Sunshine 634 565
Chicago 3,065 3,552
HTS 397 164
ICCP (1,141) (213)
Australia (3,199) (6,592)
BET 2,299 1,827
Court (993) --
Superstar/Netlink 3,034 --
Liberty/TINTA (1,821) --
DMX (12,045) --
LFS 5,682 --
Other (983) (2,945)
------- --------
$12,755 3,362
======= ========
</TABLE>
(continued)
I-36
<PAGE> 38
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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. Superstar/Netlink is recorded under the equity
method of accounting.
Liberty Media Group has a 49.9% partnership interest in QE+ Ltd.
("QE+"), a limited partnership which distributes STARZ!, a first-run
movie premium programming service launched in 1994. Entities
attributed to TCI Group hold the remaining 50.1% partnership interest.
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 $133
million of which was paid through June 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.
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
$1,666,000 for the six months ended June 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.
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.
(continued)
I-37
<PAGE> 39
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Internationally, News Corp. and Liberty/TINTA formed a venture (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. 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, multi-point 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.
Certain of Liberty Media Group's affiliates are general partnerships
and any subsidiary of Liberty Media Group that is a general partner in
a general partnership is, as such, liable as a matter of partnership
law for all debts (other than non- recourse debts) of that partnership
in the event liabilities of that partnership were to exceed its
assets.
(5) Investment in Turner Broadcasting System, Inc.
Liberty Media Group owns shares of TBS common stock and shares of a
class of preferred stock of TBS which have voting rights and are
convertible into shares of TBS common stock. The holders of those
preferred shares, as a group, are entitled to elect seven of fifteen
members of the board of directors of TBS, and Liberty Media Group
appoints three such representatives. However, voting control over TBS
continues to be held by its chairman of the board and chief executive
officer. Liberty Media Group's total holdings of TBS common and
preferred stocks represent an approximate 7.5% voting interest for
those matters for which preferred and common stock vote as a single
class.
At June 30, 1996 and December 31, 1995, Liberty Media Group's
investment in TBS common stock had an aggregate market value of $811
million and $767 million, respectively (including unrealized holding
gains of $491 million and $447 million, respectively).
At June 30, 1996 and December 31, 1995, Liberty Media Group's
investment in TBS preferred stock, carried at cost, had an aggregate
market value of $980 million and $927 million, respectively, based
upon the market value of the common stock into which it is
convertible. Such market value exceeded cost by $802 million and $749
million, respectively, at such dates.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TBS common stock (with a
quoted market value of approximately $804 million at June 30, 1996).
See note 7.
(continued)
I-38
<PAGE> 40
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On September 22, 1995, the boards of directors of Time Warner, Inc.
("Time Warner") and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of their
agreement, TBS shareholders will receive 0.75 of a Time Warner common
share for each TBS Class A and Class B common share. Each holder of
TBS Class C preferred stock will receive 0.80 of a Time Warner common
share for each of the 6 shares of TBS Class B common stock into which
each share of Class C preferred stock may be converted. Liberty Media
Group will be entitled to receive approximately 50.1 million shares of
Time Warner common stock in exchange for its TBS holdings.
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 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.
(continued)
I-39
<PAGE> 41
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subject to certain conditions, Liberty Media Group has agreed to vote
its TBS shares for the TBS/Time Warner Merger. The Agreement in
Principle is subject to a final consent agreement being reached with
the FTC. The TBS/Time Warner Merger is subject to approval by the
Federal Communications Commission (the "FCC") and approval by the
shareholders of TBS and Time Warner. Consummation of the TBS/Time
Warner Merger is not conditioned upon consummation of the Spin-Off.
(6) Other Investments
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
amounts in thousands
<S> <C> <C>
Marketable equity securities $ 3,579 16,681
Convertible debt and accrued interest 23,342 23,000
Other investments and related receivables 71,884 71,110
--------- -------
$ 98,805 110,791
========= =======
</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 $190 million and $192
million at June 30, 1996 and December 31, 1995, respectively. No
independent external appraisals were conducted for those assets.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
amounts in thousands
<S> <C> <C>
Notes payable to bank (a) $ 20,000 135,000
Convertible subordinated debentures, net
of unamortized discount of $2,731,000 (b) 97,269 --
Note payable to partnership (c) 3,599 5,654
Bank credit facility (d) -- 30,000
Note payable to bank (e) -- 20,000
Note payable to bank (e) -- 51,600
Other debt, with varying rates and
maturities 1,491 8,736
-------- -------
$122,359 250,990
======== =======
</TABLE>
(continued)
I-40
<PAGE> 42
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) Payable by Home Shopping Network, Inc. ("HSN")
This revolving credit facility, as amended on February 13,
1996 (the "Credit Facility"), provides for borrowings up to
$120 million. During August 1996, HSN entered into a new
three-year $150 million Revolving Credit Facility (the "New
Facility") due August 2, 1999, which replaces the Credit
Facility. The New Facility is secured by the capital stock of
Home Shopping Club, Inc. and HSN Realty, Inc. (as was the
Credit Facility), wholly-owned subsidiaries of HSN. Under the
New 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 ICCP, Inc.
Encore ICCP, Inc. acquired a 50% general partnership interest
in ICCP in exchange for a note payable to the partnership with
an initial principal amount of $15 million. The note payable
accrues interest at 10% per annum and is guaranteed by Encore.
(d) Payable by Communications Capital Corp. ("CCC")
This revolving credit agreement, as amended, provides for
borrowings up to $325 million through August of 1997.
Borrowings under such agreement bear interest at optional
measures which approximate the prime rate. As security for
this indebtedness, Liberty Media Group has pledged
substantially all of its TBS Class B common stock. CCC must
pay an annual commitment fee of .3125% of the unfunded portion
of the commitment.
(e) Note payable was 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 June 30, 1996.
(continued)
I-41
<PAGE> 43
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Combined Equity
Stock Options and Stock Appreciation Rights
Estimates of the compensation relating to the options and/or stock
appreciation rights granted to employees of Liberty Media Group have
been recorded in the accompanying combined financial statements, but
are subject to future adjustment based upon the market value of Series
A TCI Group Stock and 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.
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 six months ended June 30,
1996 and 1995, Liberty Media Group was allocated $1,193,000 and
$1,533,000, 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 six months ended June 30,
1996 and 1995, aggregated $6,540,000 and $7,914,000, 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 $3,588,000 and $3,101,000
for the six months ended June 30, 1996 and 1995, respectively.
(continued)
I-42
<PAGE> 44
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
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
of the elements of a pre-existing tax sharing arrangement and contains
additional provisions regarding the allocation of certain consolidated
income tax attributes and the settlement procedures with respect to
the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. federal, state, local and foreign
tax consequences and relies upon the U.S. Internal Revenue Code of
1986 as amended, and any applicable state, local and foreign tax law
and related regulations. Beginning on the July 1, 1995 effective
date, Liberty Media Group is responsible to TCI for its share of
current consolidated income tax liabilities. TCI is responsible to
Liberty Media Group to the extent that Liberty Media Group's income
tax attributes generated after the effective date are utilized by TCI
to reduce its consolidated income tax liabilities. Accordingly, all
tax attributes generated by Liberty Media Group's operations after the
effective date including, but not limited to, net operating losses,
tax credits, deferred intercompany gains, and the tax basis of assets
are inventoried and tracked for the entities comprising Liberty Media
Group.
(continued)
I-43
<PAGE> 45
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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 June 30,
1996, these agreements require minimum payments aggregating
approximately $181 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.
On November 27, 1995, Liberty Media Group announced that it had agreed
to exchange its controlling interest in HSN for shares of Silver King
Communications, Inc. ("Silver King"). Liberty Media Group will
receive approximately 11 million newly issued shares of Silver King in
exchange for its 37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995 pursuant
to which an option (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 Silver Management Company ("Silver Company"), an entity
in which Liberty Media Group would own all of the non-voting equity
interests (which would constitute substantially all of the equity of
such entity) and Mr. Diller would own all of the voting equity
interests. Silver Company would thereafter exercise the Option and
hold the shares of the Silver King Class B Common Stock purchased
thereunder. In an amendment to such agreement entered into in November
1995, Liberty Media Group agreed to contribute all of its shares of HSN
(which shares constitute approximately 41% of the equity of HSN and
approximately 80% of the voting power of HSN) to Silver Company in
return for additional non-voting equity interests in Silver Company.
Following such contribution Silver Company would exchange such HSN
shares with Silver King for additional shares of Silver King Common
Stock and Class B Common Stock (thereby increasing Silver Company's
controlling interest in Silver King to in excess of 80% of the voting
power of Silver King). The FCC approval required for the exercise of
the Option by Silver Company has been received, and it is currently
expected that Silver Company will exercise the Option in August 1996;
however as a part of said approval, the FCC imposed 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) will
require the prior approval of the FCC.
Each such transaction is subject to the satisfaction of certain
conditions, including the receipt of all necessary regulatory consents
and approvals. If consummated, HSN would cease to be a subsidiary of
Liberty Media Group and therefore, the financial results of HSN would
not be consolidated with the financial results of Liberty Media Group.
Although Liberty Media Group would cease to possess voting control over
HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of Silver Company. No
assurance can be given that the transaction will be consummated.
I-44
<PAGE> 46
"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. However, the Liberty Group Stock constitutes common stock
of TCI. The issuance of Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed to its security holders of record on August 4, 1995, Liberty Group
Stock representing one hundred percent of the equity value attributable to
Liberty Media Group.
Following the Distribution, the TCI Group Stock is intended to reflect
the separate performance of TCI Group, which is generally comprised of the
subsidiaries and assets not attributed to Liberty Media Group, including (i)
TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable
and Programming unit and (iii) TCI's Technology/Venture Capital unit.
Intercompany balances resulting from transactions with such units are reflected
as borrowings from or loans to TCI. 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-45
<PAGE> 47
"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.
(continued)
I-46
<PAGE> 48
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Subject to certain conditions, Liberty Media Group has agreed to vote
its TBS shares for the TBS/Time Warner Merger. The Agreement in Principle is
subject to a final consent agreement being reached with the FTC. The TBS/Time
Warner Merger is subject to approval by the FCC and approval by the
shareholders of TBS and Time Warner. Consummation of the TBS/Time Warner
Merger is not conditioned upon consummation of the Spin-Off. 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.
Internationally, News Corp. and Liberty/TINTA formed the International
Venture to operate currently existing sports services in Latin America and
Australia and a variety of new sports services throughout the world except in
Asia and in the United Kingdom, Japan and New Zealand where prior arrangements
preclude an immediate collaboration. 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 November 27, 1995, Liberty Media Group announced that it had agreed
to exchange its controlling interest in HSN for shares of Silver King. Liberty
Media Group will receive approximately 11 million newly issued shares of Silver
King in exchange for its 37.5 million shares of HSN. If consummated, HSN would
cease to be a subsidiary of Liberty Media Group and therefore, the financial
results of HSN would not be consolidated with the financial results of Liberty
Media Group. Although Liberty Media Group would cease to possess voting
control over HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of Silver Company. No assurance
can be given that the transaction will be consummated. See note 9 to the
accompanying combined financial statements.
(continued)
I-47
<PAGE> 49
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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.
The consummation of all of the above described transactions, including
the ones already consummated, would materially affect the results of operations
of Liberty Media Group due to a substantial part of Liberty Media Group's
operations no longer being consolidated. At the same time, Liberty Media
Group's share of earnings or losses of affiliates could be materially impacted
by certain of these transactions.
Liberty Media Group's sources of funds include its available cash
balances, cash generated from operating activities, cash distributions from
affiliates, dividend and interest payments, asset sales, availability under
certain credit facilities, and loans and/or equity contributions from TCI
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.
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. Additionally, while
Liberty Media Group expects to receive distributions from Superstar/Netlink,
they may be lower than the cash historically generated and received by
Netlink's retail operations. In connection with the TBS/Time Warner Merger,
Time Warner has agreed to issue common stock to Liberty Media Group in exchange
for Liberty Media Group's holdings 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 would 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.
(continued)
I-48
<PAGE> 50
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $325 million. No borrowings were outstanding at June 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. 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 borrowings under the Credit Facility. Borrowings
of $20 million were outstanding on the Credit Facility at June 30, 1996. On
August 2, 1996, HSN entered into the New Facility which provides borrowings up
to $150 million. The New Facility replaces the Credit Facility and expires
August 2, 1999. 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 June 30, 1996, Liberty Media
Group's future minimum obligation related to certain film licensing agreements
was $181 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.
HSN has significant working capital needs for inventory and accounts
receivable. However, HSN expects to meet its recurring working capital needs
primarily through internally generated funds and its existing credit
facilities.
The FCC has initiated a number of rulemakings to implement various
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.
(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):
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.
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------------------
1996 1995
------------------------- -----------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
- -----------------------------
Programming Services
- --------------------
Revenue 100% $ 242,748 100% $ 236,023
Operating, selling, general &
administrative 79% 191,350 97% 228,221
Depreciation and amortization 5% 13,265 14% 32,792
------ --------- ------ ---------
Operating income (loss) 16% $ 38,133 (11%) $ (24,990)
====== ========= ===== =========
Electronic Retailing Services
- -----------------------------
Revenue 100% $ 499,601 100% $441,274
Cost of sales 63% 316,491 63% 279,096
Operating, selling, general and
administrative 31% 154,040 40% 177,310
Depreciation and amortization 4% 18,610 4% 19,870
------ --------- ------ ---------
Operating income (loss) 2% $ 10,460 (7%) $ (35,002)
====== ========= ====== =========
</TABLE>
(continued)
I-50
<PAGE> 52
"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 33% or $44 million for the three
months ended June 30, 1996 compared to the three months ended June 30, 1995.
Included in this $44 million decrease is an increase in revenue from Encore of
approximately $12 million for the three months ended June 30, 1996. Encore's
thematic multiplex services tripled the number of multiplex units during the
second quarter of 1996 compared to the second quarter of 1995 accounting for $7
million of Encore's increase in revenue. Encore's subscribers increased 41%
resulting in an increase in revenue of approximately $4 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
increased 3% or $7 million for the six months ended June 30, 1996, as compared
to the corresponding period of 1995. Revenue from Encore increased by $24
million for the six months ended June 30, 1996 compared to the six months ended
June 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 quarter of 1996, these businesses were
responsible for a $27 million decrease in revenue from Entertainment and
Information Programming Services for the six months ended June 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 six
months ended June 30, 1996 compared to the six months ended June 30, 1995.
Operating, selling, general and administrative expenses decreased 52%
or $59 million and 16% or $37 million for the three months and six months ended
June 30, 1996, respectively. 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 quarter of 1996, these businesses were responsible for $65 million
and $41 million of the decrease in operating, selling, general and
administrative expenses for the three months and six months ended June 30,
1996, respectively, compared to the corresponding periods in 1995. Operating
expenses for Encore increased $6 million and $7 million for the three months
and six months ended June 30, 1996, respectively, compared to the corresponding
periods in 1995 primarily due to increased programming costs. Operating
expenses for Southern and Intro also decreased during 1996.
(continued)
I-51
<PAGE> 53
"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 six months ended June 30, 1996, revenue for
HSN increased $23 million, or 10% and $58 million or 13%, respectively, as
compared to the same periods in 1995. Net sales of HSC increased $24 million
or 13% and $64 million or 17%, for the three months and six months ended June
30, 1996, respectively. HSC's sales reflect increases of 6% and 8% in the
number of packages shipped while the average price per unit sold increased 6%
and 9%. 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 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 quarter and six months ended June 30, 1996, HSN's gross profit
increased $14 million, or 18%, and $21 million, or 13%, respectively, compared
to the same periods in 1995. As a percentage of net sales, gross profit
increased to 38% from 35% for the second quarter of 1996, and remained
relatively constant at 37% for the six months ended June 30, 1996, compared to
the same periods in 1995.
Gross profit of HSC increased $16 million and $30 million for the
quarter and six months ended June 30, 1996, respectively. These increases were
partially offset by decreases related to HSND of $3 million and $10 million.
As a percentage of HSC's net sales, gross profit increased to 38% from 34% and
to 36% from 34% for the quarter and six months ended June 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 increase in HSN's gross profit percentage
in the quarter ended June 30, 1996, relates to warehouse sales and other
promotional events held during the second quarter of 1995 which reduced gross
profit in that period. For the six months ended June 30, 1996, HSN's constant
gross profit percentage, compared to 1995, primarily relates to the effect of
HSND's gross profit in 1995.
Operating, selling, general and administrative expenses decreased by
$9 million, to 31% of sales in the 1996 second quarter, compared with 38% of
sales in the 1995 second quarter. In late 1995 and the first quarter of 1996,
management of HSN instituted measures aimed at streamlining operations
primarily by reducing its work force and taking other actions to reduce
operating expenses. These changes resulted in some reduction of operating
expenses in the second quarter and first six 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. Much of the decrease in expenses was
a result of selling, marketing, engineering and programming expenses related to
HSND. In addition, HSN incurred $2 million in restructuring charges during the
six months ended June 30, 1995.
(continued)
I-52
<PAGE> 54
"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 six months ended June 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 expects to take
additional steps designed to attract both first-time and active customers
include improving product assortment, reducing the average price per unit,
improving inventory management and better planning of programmed shows. HSN
believes that its negative performance in the second quarter and first six
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. While management of HSN is optimistic that results will
continue to improve and HSN will remain profitable, 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 six months ended June 30, 1996, corporate expense, excluding
the impact of the stock appreciation rights, remained relatively comparable to
the same period of 1995. The amount of expense associated with stock
appreciation rights is based on the market price of the underlying common stock
as of the date of the financial statements. The expense is subject to future
adjustment based on market price fluctuations and, ultimately, on the final
determination of market value when the rights are exercised.
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 six months ended June 30, 1996 and 1995, Liberty Media Group
was allocated $1,193,000 and $1,533,000, 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-53
<PAGE> 55
"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 (losses) from affiliates was $4
million and $13 million for the three months and six months ended June 30, 1996,
respectively, compared to $4 million and $3 million for the corresponding
periods of 1995. The increase in earnings is largely due to the increase in
earnings of QVC. Liberty Media Group's share of earnings of affiliates
attributable to its interest in QVC increased from a loss of $3 million during
the six months ended June 30, 1995 to earnings of $9 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. Other increases in share of
earnings of affiliates are due to share of earnings of LFS and Superstar/Netlink
in 1996 of $9 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-54
<PAGE> 56
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 10 77
Trade and other receivables, net 357 300
Prepaid expenses 72 51
Prepaid program rights 22 19
Committed film inventory 112 92
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 2,422 2,073
Property and equipment, at cost:
Land 65 67
Distribution systems 10,550 9,536
Support equipment and buildings 1,350 1,213
--------- ------
11,965 10,816
Less accumulated depreciation 4,103 3,611
--------- ------
7,862 7,205
--------- ------
Franchise costs 14,973 14,322
Less accumulated amortization 2,258 2,092
--------- ------
12,715 12,230
--------- ------
Other assets, at cost, net of amortization 1,385 1,012
--------- ------
$ 24,957 23,059
========= ======
</TABLE>
(continued)
I-55
<PAGE> 57
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 77 148
Accrued interest 265 228
Accrued programming expense 352 272
Other accrued expenses 1,040 911
Debt (note 5) 13,211 12,960
Deferred income taxes 4,482 4,382
Other liabilities 186 181
--------- ------
Total liabilities 19,613 19,082
--------- ------
Minority interests in equity
of consolidated subsidiaries 807 563
Redeemable preferred stock 659 478
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts ("Trust
Securities") holding solely subordinated debt
securities of TCI Communications, Inc. ("TCIC")
(note 6) 1,016 --
Combined equity (note 7):
Combined equity, including preferred
stocks 2,825 2,884
Cumulative foreign currency
translation adjustment (7) (9)
Unrealized holding gains for available-for-sale
securities, net of taxes 49 68
Due from Liberty Media Group (5) (7)
--------- ------
Combined equity 2,862 2,936
--------- ------
Commitments and contingencies (note 9)
$ 24,957 23,059
========= ======
</TABLE>
See accompanying notes to combined financial statements.
I-56
<PAGE> 58
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- --------------------------
1996 1995 * 1996 1995 *
------- -------- -------- ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,720 1,321 3,258 2,507
Operating costs and expenses:
Operating 631 420 1,156 781
Programming charges from Liberty
Media Group (note 8) 20 15 47 35
Selling, general and administrative 550 384 1,044 720
Charges to Liberty Media Group (note 8) (6) (7) (11) (13)
Compensation relating to stock
appreciation rights (note 7) -- 16 -- 15
Adjustment to compensation relating to
stock appreciation rights (3) -- (11) --
Depreciation 256 227 502 422
Amortization 117 94 222 170
------- -------- -------- ------
1,565 1,149 2,949 2,130
------- -------- -------- ------
Operating income 155 172 309 377
Other income (expense):
Interest expense (258) (240) (513) (477)
Interest and dividend income 12 9 20 14
Interest income from Liberty Media
Group (note 8) -- 1 -- 1
Share of losses of affiliates, net (note 4) (98) (47) (221) (74)
Loss on early extinguishment of debt
(note 5) (66) -- (66) --
Minority interests in losses (earnings) of
consolidated subsidiaries, net (6) 4 (1) 9
Other, net (5) (17) 7 (10)
------- -------- -------- ------
(421) (290) (774) (537)
------- -------- -------- ------
Loss before income taxes (266) (118) (465) (160)
Income tax benefit 78 35 144 43
------- -------- -------- ------
Loss before loss of Liberty Media Group
through the date of Distribution
(note 1) (188) (83) (321) (117)
Loss of Liberty Media Group through
the date of Distribution (note 1) -- (12) -- (22)
------- -------- -------- ------
Net loss (188) (95) (321) (139)
Dividend requirements on
preferred stocks (9) (9) (18) (17)
------- -------- -------- ------
Net loss attributable to
common stockholders $ (197) (104) (339) (156)
======= ======== ======== ======
Loss attributable to common stockholders
per common share (note 2) $ (.29) (.51)
======= ========
</TABLE>
* Restated - see note 1.
See accompanying notes to combined financial statements.
I-57
<PAGE> 59
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Six months ended June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding
Combined Cumulative gains for Due
equity, foreign available- from
including currency for-sale Liberty
preferred translation securities, Media Combined
stocks adjustment net of taxes Group equity
------- -------- ------------ ------- --------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,884 (9) 68 (7) 2,936
Net loss (321) -- -- -- (321)
Purchase of programming from
Liberty Media Group -- -- -- 47 47
Cost allocations to Liberty
Media Group -- -- -- (11) (11)
Cable distribution fees -- -- -- (2) (2)
Adjustment to allocation of
compensation relating to stock
appreciation rights -- -- -- (1) (1)
Intergroup tax allocation
to Liberty Media Group -- -- -- (7) (7)
Net cash transfers to Liberty
Media Group -- -- -- (24) (24)
Change in unrealized gains
for available-for-sale
securities -- -- (19) -- (19)
Foreign currency translation
adjustment -- 2 -- -- 2
Accreted dividends on Tele-
Communications, Inc. ("TCI")
preferred stock subject to
mandatory redemption
requirements (13) -- -- -- (13)
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 Series G
Preferred Stock 15 -- -- -- 15
------- -------- ------- ------- -----
Balance at June 30, 1996 $ 2,825 (7) 49 (5) 2,862
======= ======== ======= ======= =====
</TABLE>
See accompanying notes to combined financial statements.
I-58
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 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** $ (321) (117)
Adjustments to reconcile net loss before
loss of Liberty Media Group to
net cash provided by operating activities:
Depreciation and amortization 724 592
Compensation relating to stock appreciation rights -- 15
Adjustment to compensation relating to stock
appreciation rights (11) --
Share of losses of affiliates 221 74
Loss on early extinguishment of debt 66 --
Deferred income tax benefit (152) (54)
Other noncash credits (10) (9)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 15 32
Change in prepaids (22) (26)
Change in accruals and payables (69) 37
Change in accrued interest 37 --
-------- --------
Net cash provided by operating activities 478 544
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions (51) (205)
Capital expended for property and equipment (949) (764)
Additional investments in and
loans to affiliates and others (574) (815)
Proceeds from dispositions of assets 55 21
Change in due from Liberty Media Group 9 --
Change in interest in Liberty Media Group -- (38)
Other investing activities (59) (18)
-------- --------
Net cash used in investing activities (1,569) (1,819)
-------- --------
Cash flows from financing activities:
Borrowings of debt 4,472 4,567
Repayments of debt (4,547) (3,644)
Prepayment penalties (60) --
Issuance of common stock -- 431
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Preferred stock dividends (23) (12)
Dividends on subsidiary preferred stock and
Trust Securities (12) --
-------- --------
Net cash provided by financing activities 1,024 1,342
-------- --------
Net increase (decrease) in cash (67) 67
Cash at beginning of period 77 11
-------- --------
Cash at end of period $ 10 78
======== ========
</TABLE>
* Restated - see note 1.
** Loss of Liberty Media Group does not use funds.
See accompanying notes to combined financial statements.
I-59
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
June 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". Intercompany balances
resulting from transactions with such units are reflected as
borrowings from or loans to TCI.
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-60
<PAGE> 62
"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 six months
ended June 30, 1995 to include Cablevision's results of operations for
the period from April 25, 1995 (the date Cablevision was acquired)
through June 30, 1995. Such restatement had no effect on TCI Group's
net loss for the three months or six months ended June 30, 1995.
Certain amounts have been reclassified for comparability with the 1996
presentation.
(continued)
I-61
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 six months ended June 30, 1996 was computed
by dividing net loss attributable to TCI Group Series A and Series B
common stockholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (668.4 million and 663.2 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-62
<PAGE> 64
"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 $476 million and $471 million for the six
months ended June 30, 1996 and 1995, respectively. Cash paid for
income taxes was $7 million and $47 million for the six months ended
June 30, 1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
1996 1995
---------- -------
amounts in millions
<S> <C> <C>
Cash received in acquisitions:
Fair value of assets acquired $ 1,225 3,062
Liabilities assumed (377) (221)
Deferred tax liability recorded
in acquisitions (244) (1,067)
Minority interests in equity of
acquired entities (92) 46
Common stock and preferred stock
issued in acquisitions (461) (1,615)
---------- -------
Cash received in acquisitions $ 51 205
========== =======
Change in unrealized gains, net of deferred
income taxes, on available-for-sale securities $ 19 89
========== =======
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 2 10
========== =======
Accrued preferred stock dividends $ 13 7
========== =======
TBS stock received in acquisition transferred
to Liberty Media Group $ -- 7
========== =======
Retirement of Class A common stock
previously held by subsidiary $ -- 10
========== =======
Common stock issued in exchange for
cost investment $ -- 73
========== =======
</TABLE>
(continued)
I-63
<PAGE> 65
"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>
Six months ended
Combined Operations June 30,
------------------- ----------------------
1996 1995
------- --------
amounts in millions
<S> <C> <C>
Revenue $ 1,186 1,283
Operating expenses (1,090) (1,012)
Depreciation and amortization (259) (262)
------- --------
Operating income (loss) (163) 9
Interest expense (186) (163)
Other, net (50) (39)
------- --------
Net loss $ (399) (193)
======= ========
</TABLE>
TCI Group has various investments accounted for under the equity
method. Some of the more significant investments held by TCI Group at
June 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 $750
million) (see note 9), Teleport Communications Group, Inc. (carrying
value of $237 million), TeleWest Communications plc ("TeleWest")
(carrying value of $484 million) and various other foreign equity
investments (cumulative carrying value of $424 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) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------- ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 8,921 7,713
Bank credit facilities (b) 3,237 3,617
Commercial paper 859 1,469
Convertible notes (c) 44 45
Other debt 150 116
------- ------
$13,211 12,960
======= ======
</TABLE>
(continued)
I-64
<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) During the six months ended June 30, 1996, TCI Group redeemed
certain notes payable which had 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.
(b) 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. In connection with such
termination, TCI Group recognized a loss on early
extinguishment of debt of $4 million related to the retirement
of deferred loan costs.
(c) These convertible notes, which are stated net of unamortized
discount of $181 million and $186 million at June 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 June 30, 1996, the
notes were convertible, at the option of the holders, into an
aggregate of 37,687,974 shares of Series A TCI Group Stock and
9,421,987 shares of Series A Liberty Group Stock.
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 as pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of TCI Group. As security for one of
TCI Group's notes payable (with a balance of $39 million at June 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 $13,211 million, was $13,340 million at June 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 $480 million at June 30, 1996 and (ii) variable interest
rates (the "Variable Rate Agreements") on notional amounts of $2,620
million at June 30, 1996. During the six months ended June 30, 1996
and 1995, the TCI Group's net payments pursuant to the Fixed Rate
Agreements were $8 million and $6 million, respectively; and TCI
Group's net receipts pursuant to the Variable Rate Agreements were $8
million and $2 million, respectively.
(continued)
I-65
<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (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>
July 1996 8.2% $ 10 July 1996 8.2% $ 10
August 1996 8.2% 10 August 1996 8.2% 10
November 1996 8.9% 150 September 1996 4.6% 150
October 1997 7.2%-9.3% 80 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.4% 450
---- April 1999 7.4% 100
$480 September 1999 7.2%-7.4% 300
==== February 2000 5.8%-6.6% 650
March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,620
======
</TABLE>
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However,
TCI Group does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that TCI Group would pay or receive to terminate the
agreements at June 30, 1996, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
TCI Group would be required to pay $50 million at June 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.
(continued)
I-66
<PAGE> 68
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) 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 SecuritiesSM (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.
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."
(7) Combined Equity
General
The rights of holders of the TCI Group Stock upon liquidation of TCI
are based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Group Stock to the aggregate market
capitalization, as defined, of the TCI Group Stock and the Liberty
Group Stock.
(continued)
I-67
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Options and Stock Appreciation Rights
Estimates of compensation relating to options and/or stock
appreciation rights 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.
(8) Transactions with Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges
are set at levels that management believes to be reasonable and that
approximate the costs Liberty Media Group would incur for comparable
services on a stand alone basis. During the six months ended June 30,
1996 and 1995, Liberty Media Group was allocated $1 million and $2
million, 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 determined that TCI general
corporate expenses should be allocated to Liberty Media Group based on
the amount of time TCI corporate employees (e.g. legal, corporate,
payroll, etc.) expend on Liberty Media Group matters. TCI management
evaluated several alternative allocation methods including assets,
revenue, operating income, and employees. Management did not believe
that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating
subsidiaries, and the way in which corporate resources are utilized.
TCI Group has a 50.1% partnership interest in QE+Ltd. ("QE+"), which
distributes STARZ!, a first-run movie premium programming service
launched in 1994. Entities attributed to Liberty Media Group hold the
remaining 49.9% partnership interest.
(continued)
I-68
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through July 1,
2005, up to a maximum amount of $350 million, approximately $133
million of which was paid through June 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 six
months ended June 30, 1996 and 1995 aggregated $25 million and $14
million, respectively. The affiliation agreement also provides that
QE+ will not grant materially more favorable terms and conditions to
other major cable system operators unless such more favorable terms
and conditions are made available to TCI Group. The affiliation
agreement also requires TCI Group to make payments to QE+ with respect
to a guaranteed minimum number of subscribers totaling approximately
$339 million for the years 1996, 1997 and 1998.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of such interest. Such right is
exercisable for a period of ten years beginning January 1, 1999 after
QE+ has had positive cash flow for two consecutive calendar quarters.
The right is exercisable only after all special capital contributions
from TCI Group have been repaid, including any preferred return as
discussed above.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined.
In addition, effective July 1, 1995, Liberty Media Group started
earning a "Content Fee" for certain services provided to QE+ equal to
4% of the gross revenue of QE+. Such Content Fees aggregated $2
million for the six months ended June 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 six months ended June 30,
1996 and 1995, aggregated $7 million and $8 million, respectively.
(continued)
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<PAGE> 71
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers
who are subscribers of TCI Group's cable systems. Aggregate
commissions and charges to TCI Group were $4 million and $3 million
for the six months ended June 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 Group not
incurred by entities attributed to Liberty Media Group or preferred
stock and the proceeds thereof should be specifically attributed to
and reflected on the combined financial statements of Liberty Media
Group to the extent that the debt is incurred or the preferred stock
is issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of
equity offerings are attributed entirely to TCI Group. After the
Distribution, all financial impacts of issuances of additional shares
of TCI Group Stock will be attributed entirely to TCI Group, 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
(continued)
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<PAGE> 72
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A tax sharing agreement (the "Tax Sharing Agreement") among TCI Group
and certain other subsidiaries of TCI was implemented effective July
1, 1995. The Tax Sharing Agreement formalizes certain of the elements
of a pre-existing tax sharing arrangement and contains additional
provisions regarding the allocation of certain consolidated income tax
attributes and the settlement procedures with respect to the
intercompany allocation of current tax attributes. The Tax Sharing
Agreement encompasses U.S. federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as
amended, and any applicable state, local and foreign tax law and
related regulations. Beginning on the July 1, 1995 effective date,
TCI Group will be responsible to TCI for its share of current
consolidated income tax liabilities. TCI will be responsible to TCI
Group to the extent that TCI Group's income tax attributes generated
after the effective date are utilized by TCI to reduce its
consolidated income tax liabilities. Accordingly, all tax attributes
generated by TCI Group's operations after the effective date
including, but not limited to, net operating losses, tax credits,
deferred intercompany gains, and the tax basis of assets are
inventoried and tracked for the entities comprising TCI Group.
(9) Commitments and Contingencies
Subsidiaries of TCI Group, Comcast, Cox and Sprint are partners in
Sprint Spectrum which was formed to engage in the business of
providing wireless communications services on a nationwide basis. TCI
Group owns an indirect 30% interest in Sprint Spectrum. Sprint
Spectrum was the successful bidder for personal communications
services ("PCS") licenses for 29 markets in 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, $0.1
billion of which was contributed during the six months ended June 30,
1996. The business plan contemplates that Sprint Spectrum will require
additional equity thereafter.
(continued)
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<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $306 million at June 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
June 30, 1996, these agreements require minimum payments aggregating
$484 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 in the aggregate
amount of $235 million.
Certain key employees of TCI Group hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statement, but are subject to
future adjustment based upon the market value of the respective common
stock and, ultimately, on the final market value when the rights are
exercised.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying combined financial statements.
(10) Subsequent Event
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").
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.
(continued)
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<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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, 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 terms of the Exchangeable Preferred Stock,
including its dividend, redemption and exchange features, were
designed to cause the Exchangeable Preferred Stock, in the opinion of
two investment banks, to initially trade at the Stated Value. The
Exchangeable Preferred Stock 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.
I-73
<PAGE> 75
"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.
Intercompany balances resulting from transactions with such units are reflected
as borrowings from or loans to TCI.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI does not
affect the ownership or the respective legal title to assets or responsibility
for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries
each continue to be responsible for their respective liabilities. Holders of
TCI Group Stock are holders of common stock of TCI and continue to be subject
to risks associated with an investment in TCI and all of its businesses, assets
and liabilities. The issuance of Liberty Group Stock did not affect the rights
of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition and TCI could affect
the combined results of operations or financial condition of TCI Group and the
market price of shares of the TCI Group Stock. In addition, net losses of any
portion of TCI, dividends or distributions on, or repurchases of, any series of
common stock, and dividends on, or certain repurchases of preferred stock would
reduce the funds of TCI legally available for dividends on all series of common
stock. Accordingly, TCI Group financial information should be read in
conjunction with the TCI and Liberty Media Group financial information.
(continued)
I-74
<PAGE> 76
"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 the Liberty Media Group or preferred stock
and the proceeds thereof should be specifically attributed to and reflected on
the combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of Liberty
Media Group.
Subsequent to the Distribution, borrowings from or loans to TCI Group
bear interest at such rates and have repayment schedules and other terms as are
established by the Board. The Board expects to make such determinations,
either in specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the use of proceeds by and creditworthiness of
the recipient Group, the capital expenditure plans and investment opportunities
available to each Group and the availability, cost and time associated with
alternative financing sources.
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,
$0.1 billion of which was contributed during the six months ended June 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)
I-75
<PAGE> 77
"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 10 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.
During the six months ended June 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 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) $1.7 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
securities 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 1996.
The outstanding balance of such facility was $387 million at June 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-76
<PAGE> 78
"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 June 30, 1996, TCI Group had approximately $900 million 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 5 to
the accompanying combined financial statements for additional information
regarding the material terms of the lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,022 million and $984 million for the six
months ended June 30, 1996 and 1995, respectively) to interest expense ($513
million and $477 million for the six months ended June 30, 1996 and 1995,
respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 199% and 206% for the six
months ended June 30, 1996 and 1995, respectively. The decrease in TCI Group's
interest coverage in 1996 is due to an increase in interest expense due to
higher debt balances and interest rates. Management of TCI Group believes that
the foregoing interest coverage ratio is adequate in light of the consistency
and nonseasonal nature of its cable television operations and the relative
predictability of TCI Group's interest expense, approximately 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 ($478 million and $544 million for
the six months ended June 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, proceeds from disposition
of assets will provide adequate sources of short-term and long-term liquidity
in the future. See TCI Group's combined statements of cash flows included in
the accompanying combined financial statements.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, TCI Group pays
(i) fixed interest rates ranging from 7.2% to 9.3% on notional amounts of $480
million at June 30, 1996 and (ii) variable interest rates on notional amounts
of $2,620 million at June 30, 1996. During the six months ended June 30, 1996
and 1995, TCI Group's net payments pursuant to the Fixed Rate Agreements were
$8 million and $6 million, respectively; and TCI Group's net receipts pursuant
to the Variable Rate Agreements were $8 million and $2 million, respectively.
TCI Group is exposed to credit losses for the periodic settlements of amounts
due under the interest rate exchange agreements in the event of nonperformance
by the other parties to the agreements. However, TCI Group does not anticipate
that it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties.
(continued)
I-77
<PAGE> 79
"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. Standard & Poor's Securities, Inc.
("Standard & Poor's") and Fitch Investors Service, L.P. reaffirmed their
respective ratings for TCIC's senior debt at the last level of investment
grade. In connection with its reaffirmation, Standard & Poor's changed its
outlook on TCIC from stable to negative. 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.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $306
million at June 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 June 30, 1996, these agreements require minimum
payments aggregating approximately $484 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 in the aggregate amount of
$235 million.
TCI Group's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by TCI Group)
and through net cash provided by their own operating activities.
(continued)
I-78
<PAGE> 80
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(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 30% for each of the three month and six month
periods ended June 30, 1996, respectively, as compared to the corresponding
periods of 1995. The three months increase is the result of the effect of
certain acquisitions (16%), an increase in TCI Group's satellite subscribers
(5%), increases in the rates charged for TCI Group's cable television service
due to inflation, programming cost increases 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
(1%). The six month increase is the result of the effect of certain
acquisitions (14%), an increase in TCI Group's satellite subscribers (5%),
increases in the rates charged for TCI Group's cable television service as
noted above (5%), growth in subscriber levels within TCI Group's cable
television systems (3%), and increases in advertising sales, international
programming and other revenue (3%).
(continued)
I-79
<PAGE> 81
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating expenses increased 50% and 48% for the three months and six
months ended June 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (27% and 24%) and
Primestar (4% and 5%) (see discussion below), such expenses increased 19% and
19%. 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. TCI Group experienced an increase in
programming costs in the second half of 1996 without increasing its rates
charged to its customers for Regulated Services until June 1996. 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. TCI Group anticipates that such increases
will result in additional revenue of approximately $20 million per month.
Selling, general and administrative ("SG&A") expenses increased 43%
and 45% for the three months and six months ended June 30, 1996, respectively,
as compared to the corresponding periods of 1995. Exclusive of the effects of
acquisitions (11% and 11%) and Primestar (11% and 13%) (see discussion below),
SG&A expenses increased 21% and 21%. Such increases are due primarily to
salaries and related payroll expenses.
During 1995, TCI Group changed its approach to how it ordered and
stored excess cable distribution equipment. TCI Group created material support
centers and consolidated all of its excess inventory. During the six months
ended June 30, 1996 and 1995, TCI Group incurred $4 million and $2 million,
respectively, of costs related to such material support centers. Additionally,
during the six months ended June 30, 1996, TCI Group incurred approximately $16
million in expenses (as compared to $4 million in 1995) related to initiatives
to improve its customer service and to continue the redesign of its computer
and accounting systems.
TCI Group has an interest in a partnership, PRIMESTAR Partners, L.P.
("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 six months
ended June 30, 1996, TCI Group's revenue and expenses related to its Primestar
satellite service increased significantly over the corresponding period in 1995
as the number of TCI Group's Primestar subscribers increased from approximately
220,000 subscribers at June 30, 1995 to approximately 660,000 subscribers at
June 30, 1996. During the six months ended June 30, 1996, revenue increased
from $61 million to $197 million and operating, selling, general and
administrative expenses increased from $50 million to $187 million, as compared
to the six months ended June 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.
(continued)
I-80
<PAGE> 82
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
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 and TCI Group's business of distributing
Primestar programming. 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. Because the Spin-Off is
subject to certain conditions, including receipt of a "no action" letter from
the Securities and Exchange Commission, regulatory approval and an opinion of
tax counsel that the Spin-Off will not be taxable to the TCI Group
stockholders, there is no assurance that it will be completed.
The increase in TCI Group's depreciation expense in 1996 is due to
acquisitions as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in TCI Group's cable systems. The
systems will have optical fiber to neighborhood nodes with coaxial cable
distribution downstream from that point. Such fiber optical technology will
facilitate digital transmission of voice, video and data signals. 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 the six months ended June 30, 1996 and 1995, Liberty Media Group
was allocated $1 million and $2 million, respectively, in corporate general and
administrative costs by TCI Group.
Prior to the determination of the Board to seek approval of
stockholders to distribute the Liberty Group Stock, TCI did not have formalized
intercompany allocation methodologies. In connection with such determination,
management of TCI has determined that TCI general corporate expenses should be
allocated to Liberty Media Group based on the amount of time TCI corporate
employees (e.g. legal, corporate, payroll, etc.) expend on Liberty Media Group
matters. TCI management evaluated several alternative allocation methods
including assets, revenue, operating income, and employees. Management did not
believe that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating subsidiaries,
the relative maturity of certain of the operating subsidiaries, and the way in
which corporate resources are utilized.
TCI Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
(continued)
I-81
<PAGE> 83
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
At June 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 June 30, 1996 of $484 million and comprised $70 million and
$26 million of TCI Group's share of its affiliates' losses during the six
months ended June 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 $424
million at June 30, 1996 and accounted for $37 million and $22 million of TCI
Group's share of its affiliates' losses in 1996 and 1995, respectively.
TCI Group's net loss (before preferred stock dividend requirements) of
$321 million for the six months ended June 30, 1996 represents an increase of
$182 million, as compared to TCI Group's net loss (before preferred stock
dividend requirements) of $139 million for the six months ended June 30, 1995.
TCI Group's net loss (before preferred stock dividend requirements) of $188
million for the three months ended June 30, 1996 represents an increase of $93
million, as compared to TCI Group's net loss (before preferred stock dividend
requirements) of $95 million for the three months ended June 30, 1995. Such
increases are primarily the result of 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, the aforementioned increases
in depreciation and amortization expense and an increase in interest expense
due to higher debt balances and interest rates.
I-82
<PAGE> 84
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 June
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:
Interactive Network, Inc. Shareholder Litigation
In January of 1995, two class action complaints ("Actions") were filed
against Interactive Network, Inc. ("Interactive") and certain of its
then current and former officers and directors (collectively the
"Interactive Defendants") in the United States District Court for the
Northern District of California which sought unspecified damages for
alleged violations of the disclosure requirements of the federal
securities laws. These Actions were filed on behalf of a class of
shareholders that purchased the stock of Interactive during the period
August 15, 1994 through November 22, 1994. Pursuant to an order of
the Court, the Actions were consolidated and in April 1995, a
Consolidated Amended Class Action Complaint captioned In re
Interactive Network Inc. Securities Litigation ("Consolidated Case")
was filed in the same court which again sought damages against the
Interactive Defendants for violations of the disclosure requirements
of the federal securities laws, which violations allegedly occurred
during the period May 2, 1994 through March 31, 1995. On June 17,
1996, a Third Amended Consolidated Class Action Complaint was filed in
the Consolidated Case against the Interactive Defendants and also
added Tele-Communications, Inc., TCI Communications, Inc., TCI
Development Corporation and Gary Howard as defendant parties
(collectively, the "TCI Defendants"). The Third Amended Consolidated
Class Action Complaint which was served upon the TCI Defendants
(except Gary Howard) on June 28, 1996, continues to seek damages
against the Interactive Defendants for violation of disclosure
requirements of the federal securities laws and also seeks similar
unspecified damages against the TCI Defendants predicated upon the
allegation that they were "controlling persons" of Interactive at the
time the alleged wrongs took place. 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.
(continued)
II-1
<PAGE> 85
TELE-COMMUNICATIONS, INC.
Item 1. Legal Proceedings (continued).
Interactive Network, Inc. v. Tele-Communications, Inc., et al.
On August 1, 1995, plaintiff filed suit in Superior Court, Alameda
County, California against Tele-Communications, Inc., TCI
Communications, Inc., TCI Development Corporation, TCI Programming
Holding Company III, TCI Cablevision of California, Inc., and Gary
Howard. Plaintiff claims, in part, that Tele-Communications, Inc.,
and the other defendants, intentionally undertook to control the
financial efforts of the plaintiff and attempted to seize plaintiff's
patented and proprietary technology for its own business purposes, and
misrepresented to plaintiff that it would provide financing and
cooperative marketing of the interactive technology and service. The
plaintiff filed claims for breach of fiduciary duty; abuse of control;
intentional interference with prospective economic advantage;
intentional interference with contractual relations; breach of
contract; breach of contract specifically against TCI Cablevision of
California, Inc.; constructive fraud; fraud and deceit; negligent
misrepresentation; misappropriation of corporate assets; unfair
competition; and unjust enrichment. As a result of motions filed by
the Defendants, the claims of misappropriation of corporate assets and
unjust enrichment have been dismissed.
Plaintiff seeks, in part, permanent injunctive relief, the return of
all patents and rights to plaintiff, and unspecified special,
compensatory, consequential, and punitive damages as well as fees and
costs.
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.
(continued)
II-2
<PAGE> 86
Item 1. Legal Proceedings (continued).
Viacom International, Inc. v. Tele-Communications, Inc., Liberty Media
Corporation, Satellite Services, Inc., Encore Media Corporation,
NetLink USA, Comcast Corporation, and QVC Network, Inc.
This suit was filed on September 23, 1993 in the United States District
Court for the Southern District of New York, and the complaint was
amended on November 9, 1993. The amended complaint alleged, among
other things, that the Company violated the antitrust laws of the
United States and the State of New York, violated the 1992 Cable Act,
breached an affiliation agreement, and tortiously interfered with the
Viacom Inc. - Paramount Communications, Inc. merger agreement and with
plaintiff's prospective business advantage. On January 20, 1995, the
parties entered into a settlement agreement under which this action was
to be dismissed with prejudice contemporaneously with the first closing
of the sale of certain cable systems pursuant to the Tele-Vue
Agreement. The Stipulation of Discontinuance with Prejudice was
executed by the parties and held in escrow pending the first closing of
the Viacom Acquisition described in note 11 to the accompanying
consolidated financial statements. The closing occurred and the case
was dismissed by Court Order on July 31, 1996. Such dismissal
represents the final resolution of this matter, and accordingly, it
will not be reported in future filings.
II-3
<PAGE> 87
TELE-COMMUNICATIONS, INC.
Item 6. Exhibit and Report on Form 8-K.
(a) Exhibit -
(27.1) Tele-Communications, Inc. Financial Data Schedule
(b) Report on Form 8-K filed during the quarter ended June 30,
1996 -
<TABLE>
<CAPTION>
Date of Item
Report Reported Financial Statements Filed
------- -------- --------------------------
<S> <C> <C>
June 19, 1996 Item 5 VII Cable
Three months ended March 31,
1995 and 1996;
Years ended December 31, 1993,
1994 and 1995
</TABLE>
II-4
<PAGE> 88
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: August 13, 1996 By: /s/ Stephen M. Brett
----------------------------------
Stephen M. Brett
Executive Vice President
Date: August 13, 1996 By: /s/ Bernard W. Schotters
----------------------------------
Bernard W. Schotters
Senior Vice President of
TCI Communications, Inc.
(Principal Financial Officer)
Date: August 13, 1996 By: /s/ Gary K. Bracken
----------------------------------
Gary K. Bracken
Senior Vice President of
TCI Communications, Inc.
(Principal Accounting Officer)
II-5
<PAGE> 89
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 SIX MONTHS ENDED JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 334
<SECURITIES> 0
<RECEIVABLES> 411
<ALLOWANCES> 0
<INVENTORY> 90
<CURRENT-ASSETS> 0
<PP&E> 12,149
<DEPRECIATION> 4,139
<TOTAL-ASSETS> 27,316
<CURRENT-LIABILITIES> 0
<BONDS> 13,334
659
0
<COMMON> 937
<OTHER-SE> 3,583
<TOTAL-LIABILITY-AND-EQUITY> 27,316
<SALES> 500
<TOTAL-REVENUES> 3,954
<CGS> 316
<TOTAL-COSTS> 1,333
<OTHER-EXPENSES> 756
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 526
<INCOME-PRETAX> (429)
<INCOME-TAX> 127
<INCOME-CONTINUING> (302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
