<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment No. 2)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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 Numbers 0-20421 and 0-5550
TELE-COMMUNICATIONS, INC.
and
TCI COMMUNICATIONS, INC.
----------------------------------------------------------
(Exact name of Registrants as specified in their charters)
<TABLE>
<S> <C>
State of Delaware 84-1260157 and 84-0588868
- ------------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Nos.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrants' telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of shares held in treasury), as of October 31, 1994, was:
Class A common stock - 485,117,335 shares; and
Class B common stock - 85,976,717 shares.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS, INC.
(Registrant)
Date: December 7, 1994 By: /s/ Stephen M. Brett
-------------------------------
Stephen M. Brett
Executive Vice President and
Secretary
TCI COMMUNICATIONS, INC.
(Registrant)
By: /s/ Stephen M. Brett
-------------------------------
Stephen M. Brett
Senior Vice President and
General Counsel
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Material changes in financial condition:
On August 4, 1994, TCIC and Liberty consummated the Mergers. The
transaction was structured as a tax free exchange of Class A and Class
B shares of both companies and preferred stock of Liberty for like
shares of TCI. TCIC shareholders received one share of TCI for each of
their shares. Liberty common shareholders received 0.975 of a share of
TCI for each of their common shares. TCI has not assumed any of TCIC's
or Liberty's indebtedness or other obligations that were outstanding at
the time the Mergers were consummated. The Mergers were accounted for
using predecessor cost due to related party considerations.
On August 5, 1994, Liberty, Comcast and QVC announced that they had
entered into the QVC Merger Agreement pursuant to which Comcast and
Liberty would acquire QVC. In accordance with the QVC Merger Agreement,
Comcast and Liberty commenced a tender offer for all shares of stock of
QVC at a net cash price of $46 per share of QVC common stock and a net
cash price of $460 per share of QVC preferred stock. Following
expiration of the tender offer, a corporation controlled by both
Comcast and Liberty will merge with QVC and any remaining shares of QVC
will be converted into cash at the same price as offered in the tender
offer.
The total cost of the acquisition of the QVC stock not currently owned
by Comcast or Liberty will be approximately $1.42 billion. Comcast and
Liberty have agreed to fund approximately $267 million and $20 million,
respectively, of the acquisition with the balance expected to be
provided through debt financing which, after the merger, will be an
obligation of QVC. The transaction is conditioned upon Comcast and
Liberty obtaining the requisite financing on satisfactory terms to
purchase all of the outstanding shares of QVC, upon receipt of certain
governmental approvals and other customary conditions. Liberty expects
that the funds required to make Liberty's $20 million cash contribution
will come from a combination of working capital and general corporate
funds and existing credit facilities of Liberty and/or TCIC.
As of August 8, 1994, TCI, TCIC and TeleCable entered into a merger
agreement, whereby TeleCable will be merged with and into TCIC. The
aggregate purchase price of $1.6 billion will be paid with shares of
TCI Class A common stock (currently estimated to be approximately 42
million shares), assumption of liabilities amounting to approximately
$300 million and 1 million shares of a new TCI convertible preferred
stock with an aggregate initial liquidation value of $300 million. Such
preferred stock shall accrue dividends at 5-1/2% per annum, shall be
convertible at the option of its holders into 10 million shares of TCI
Class A common stock and shall be redeemable by TCI after 5 years or
the holder can cause TCI to redeem after 10 years. The merger requires
the approval of the shareholders of TeleCable and various franchise and
other governmental authorities.
(continued)
I-28
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(1) Material changes in financial condition (continued):
Subsequent to September 30, 1994, subsidiaries of the Company, Comcast,
Cox and Sprint formed WirelessCo to engage in the business of providing
wireless communications services on a nationwide basis. Through
WirelessCo, the partners intend to bid for PCS licenses in PCS Auctions
to be conducted by the FCC. WirelessCo has applied for eligibility to
bid for licenses in 39 of the 51 MTAs for which PCS licenses will be
auctioned by the FCC commencing in December 1994. WirelessCo may also
invest in, affiliate with or acquire licenses from successful bidders
in the PCS Auctions. The Company owns a 30% interest in WirelessCo.
Subsidiaries of Cox, Sprint and the Company have also formed a separate
partnership, in which the Company owns a 35.3% interest, to bid for PCS
licenses for the Philadelphia MTA. The Company cannot predict the cost
of obtaining licenses in the PCS Auctions or the likelihood that
WirelessCo and the Philadelphia partnership will be successful bidders
for any of the PCS licenses for which they have applied to bid. If the
respective bidding strategies of WirelessCo and the Philadelphia
partnership are successful, however, the capital required to fund the
license costs and the construction of the PCS systems will be
substantial and the Company's share thereof would represent a material
increase in its capital requirements. The Company anticipates that it
would finance its share of the required capital through borrowings
under existing new credit facilities, although there can be no
assurance that additional financing would be available on terms desired
by the Company.
The Cable Partners and Sprint have also agreed upon the basis upon
which they would negotiate a definitive agreement for the formation of
NewTelco to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide
basis, using cable television facilities of the Cable Partners and
other cable television operators that agree to affiliate with NewTelco.
The parties intend that the Cable Partners would contribute their
interests in TCG and its affiliated entities and other competitive
access businesses to NewTelco. The Company currently owns an
approximately 29.9% interest in TCG and would own a 30% interest in
NewTelco. The modification or repeal of existing regulatory and
legislative barriers to competition in the local telephony market will
be necessary in order for NewTelco to provide its proposed services in
most states. Formation of NewTelco is subject to certain conditions
including the negotiation of a definitive partnership agreement and
contribution agreement. The contributions of TCG and other competitive
access businesses to NewTelco will be subject, among other things, to
the receipt of necessary regulatory and other consents and approvals.
(continued)
I-29
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(1) Material changes in financial condition (continued):
The Company is a holding company and its assets consist solely of
investments in its subsidiaries. The Company's rights, and therefore
the extent to which the holders of the Company's Preferred Stocks will
be able to participate in the distribution of assets of any subsidiary
upon the latter's liquidation or reorganization, will be subject to
prior claims of the subsidiary's creditors, including trade creditors,
except to the extent that the Company may itself be a creditor with
recognized claims against such subsidiary (in which case the claims of
the Company would still be subject to the prior claims of any secured
creditor of such subsidiary and of any holder of indebtedness of such
subsidiary that is senior to that held by the Company).
The Company's ability to pay dividends on any classes or series of
Preferred Stock is dependent upon the ability of the Company's
subsidiaries to distribute amounts to the Company in the form of
dividends, loans or advances or in the form of repayment of loans and
advances from the Company. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay
the dividends on any class or series of preferred stock or to make any
funds available therefor, whether by dividends, loans or their
payments. The payment of dividends, loans or advances to the Company by
its subsidiaries may be subject to statutory or regulatory
restrictions, is contingent upon the cash flows generated by those
subsidiaries and is subject to various business considerations.
Further, certain of the Company's subsidiaries are subject to loan
agreements that prohibit or limit the transfer of funds by such
subsidiaries to the Company in the form of dividends, loans, or
advances and require that such subsidiaries' indebtedness to the
Company be subordinate to the indebtedness under such loan agreements.
The Company's subsidiaries currently have the ability to transfer funds
to the Company in amounts exceeding the Company's dividend requirement
on any class or series of preferred stock. The amount of net assets of
subsidiaries subject to such restrictions exceeds the Company's
consolidated net assets.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing
activities. Although amounts expended for acquisitions and capital
expenditures exceed net cash provided by operating activities, the
borrowing capacity resulting from such acquisitions, construction and
internal growth has been and is expected to continue to be adequate to
fund the shortfall. See the Company's consolidated statements of cash
flows included in the accompanying consolidated financial statements.
Subsidiaries of the Company had approximately $1.9 billion in unused
lines of credit at September 30, 1994, excluding amounts related to
lines of credit which provide availability to support commercial paper.
Although such subsidiaries of the Company were in compliance with the
restrictive covenants contained in their credit facilities at said
date, additional borrowings under the credit facilities are subject to
the subsidiaries' continuing compliance with the restrictive covenants
(which relate primarily to the maintenance of certain ratios of cash
flow to total debt and cash flow to debt service, as defined in the
credit facilities) after giving effect to such additional borrowings.
TCI has not assumed any of TCIC's or Liberty's indebtedness or other
obligations that were outstanding at the time the Mergers were
consummated. See note 8 to the accompanying consolidated financial
statements for additional information regarding the material terms of
the subsidiaries' lines of credit.
(continued)
I-30
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(1) Material changes in financial condition (continued):
One measure of liquidity is commonly referred to as "interest
coverage". Interest coverage, which is measured by the ratio of
Operating Cash Flow (operating income before depreciation, amortization
and other noncash credits or charges) ($1,339 million and $1,409
million for the nine months ended September 30, 1994 and 1993,
respectively) to interest expense ($568 million and $549 million for
the nine months ended September 30, 1994 and 1993, respectively), is
determined by reference to the consolidated statements of operations.
The Company's interest coverage ratio was 236% and 257% for the nine
months ended September 30, 1994 and 1993, respectively. Management of
the Company believes that the foregoing interest coverage ratio is
adequate in light of the consistent and nonseasonal nature of its cable
television operations and the relative predictability of the Company's
interest expense, more than half of which results from fixed rate
indebtedness. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be
a substitute for cash flows provided by operating activities, a measure
of performance prepared in accordance with generally accepted
accounting principles, and should not be relied upon as such.
In July 1994, Rainbow purchased a 49.9% general partnership interest in
AMC from Liberty under the terms of a buy/sell provision contained in
the AMC partnership agreement for total cash proceeds of $180 million.
Liberty used a portion of these proceeds to repay debt to TCI totaling
$105 million of principal plus $7 million of accrued interest.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required
debt repayments and capital expenditures through borrowings under and
refinancing of their own credit facilities (which are generally not
guaranteed by the Company) and through net cash provided by their own
operating activities.
Approximately thirty-five percent of the franchises held by TCIC,
involving approximately 3.8 million basic subscribers, expire
within five years. There can be no assurance that the franchises for
TCIC's systems will be renewed as they expire although TCIC
believes that its cable television systems generally have been
operated in a manner which satisfies the standards established by the
Cable Communications Policy Act of 1984, as amended (the "1984 Cable
Act") for franchise renewal. However, in the event they are renewed,
TCIC cannot predict the impact of any new or different conditions
that might be imposed by the franchising authorities in connection
with such renewals. To date, they have not varied significantly from
the original terms.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion
picture studios from January 1, 1993 through December 31, 2002. The
aggregate minimum liability under certain of the license agreements is
approximately $368 million. The aggregate amount of the Film License
Obligations under other license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
produced by the motion picture studios, the amount of United States
theatrical film rentals for such qualifying films, and certain other
factors. Nevertheless, the Company's aggregate payments under the Film
License Obligations could prove to be significant.
(continued)
I-31
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(1) Material changes in financial condition (continued):
The Company is upgrading and installing optical fiber in its cable
systems at a rate such that in three years TCIC anticipates that it will
be serving the majority of its customers with state-of-the-art fiber
optic cable systems. Through September 30, 1994, TCIC's capital
expenditures amounted to $944 million. However, the Company is
continually reevaluating its capital expenditures and such expenditures
are subject to change based upon the effects to the Company's liquidity
arising from rate regulation.
The Company competes with operators of alternative methods of
distribution of the same or similar video programming as that offered
by its cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC to offer services in
direct competition with existing cable systems. One such competitor is
direct broadcast satellite ("DBS"). DBS services are offered directly
to subscribers owning home satellite dishes that vary in size depending
upon the power of the satellite; one DBS operator recently began
offering nationwide video services that can be received by a satellite
that measures approximately eighteen inches in diameter. DBS operators
can acquire the right to distribute over satellite all of the
significant cable television programming currently available on the
Company's cable systems. As the cost declines of equipment needed to
receive these transmissions, it is expected that the Company will
experience increased and substantial competition from DBS operators. The
1984 Cable Act, the regulations of the FCC and the Modification of
Final Judgment entered in United States v. AT&T currently prohibit
Regional Bell operating companies from providing video programming and
other information services directly to subscribers in their telephone
service areas (except in limited circumstances in rural areas). In
separate decisions, four United States District Courts have held that
the cross-entry prohibition in the 1984 Cable Act is unconstitutional
as a violation of the telephone companies First Amendment right to free
expression. All four decisions have been appealed (or are expected to
be appealed). If the current cross-entry restrictions are removed to
relaxed, the Company could face increased competition from telephone
companies which, in most cases, have greater financial resources than
the Company.
The FCC has authorized the provision of so-called "video-dialtone"
services by which independent video programmers may deliver services to
the home over telephone-provided circuits, thereby by-passing the local
cable system or other video providers. Although local exchange
telephone carriers, providing "video-dialtone" under the existing rules
are allowed only a limited financial interest in programming services
and must limit their role largely to that of a traditional "common
carrier," the current status of these rules is uncertain under the
court decisions referred to above. Numerous local exchange telephone
carriers have filed applications with the FCC for authorization to
construct video-dialtone systems and to provide such services. This
alternative means of distribution of video services to consumer's
homes, could eventually become a substantial competitor to the
Company's cable and other video delivery systems.
(continued)
I-32
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(1) Material changes in financial condition (continued):
Management believes that net cash provided by operating activities, the
ability of the Company and its subsidiaries to obtain additional
financing (including the subsidiaries available lines of credit and
access to public debt markets) and proceeds from disposition of assets
will provide adequate sources of short-term and long-term liquidity in
the future.
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992
Cable Act and imposed a moratorium on certain rate increases. As a
result of such actions, the Company's Regulated Services are subject to
the jurisdiction of local franchising authorities and the FCC.
Based on its analysis and interpretation of the FCC's 1993 and 1994
rate regulations, the Company estimates that the implementation of such
regulations will result in an aggregate annualized reduction of revenue
and operating income ranging from $280 million to $300 million. The
estimated annualized reduction in revenue assumes that the FCC will not
require further reductions beyond the current regulations and is prior
to any possible mitigating factors (none of which is assured) such as
(i) the provision of alternate service offerings (ii) the
implementation of rate adjustments to non-regulated services and (iii)
the utilization of cost-of-service methodologies, as described below.
Subject to certain limitations, the FCC's rate regulations generally
permit cable operators to adjust rates to account for inflation and
increases in certain external costs, including increases in programming
costs and compulsory copyright fees and any increase in the number of
regulated channels.
(continued)
I-33
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(2) Material changes in results of operations (continued):
Cable operators may justify rates higher than the benchmark
rates established by the FCC through demonstrating unusually high costs
based upon a cost-of-service showing. Under this methodology, cable
operators may be allowed to recover through the rates they charge for
Regulated Services, their normal operating expenses plus an interim
rate of return of 11.25%, which rate may be subject to change in the
future.
The Company believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to adjustment upon review, as described above. If, as a result
of the review process, a system cannot substantiate its rates, it could
be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds
of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other
Regulated Service rates would be retroactive to the later of September
1, 1993, or one year prior to the certification date of the applicable
franchise authority. The amount of refunds, if any, which could be
payable by the Company in the event that any system's rates were to be
successfully challenged, is not considered to be material.
Based on the foregoing, the Company believes that the 1993 and 1994
rate regulations have had a material effect on its results of
operations.
The "must carry" provisions mandate that cable companies within a
broadcast television station's reach, retransmit its signal. On July 2,
1993, the FCC voted to extend "must carry" rules to broadcast
television stations with shop-at-home formats. "Must carry"
requirements went into effect on October 6, 1993, and HSN, a
consolidated subsidiary of Liberty, experienced growth in carriage as a
result. The new law was challenged in the courts, and on June 27, 1994,
the United States Supreme Court in Turner Broadcasting System, Inc. v.
F.C.C. vacated the Federal District Court's decision upholding the law
as constitutional because genuine issues of material fact remained
unresolved. The "must carry" statute and regulations remain in place
pending the outcome of further proceedings before the Federal District
Court. If "must carry" ultimately is ruled unconstitutional, a portion
of this growth in cable carriage may be reversed and HSN's revenues may
be adversely effected.
(continued)
I-34
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(2) Material changes in results of operations (continued):
Revenue increased by approximately 10% for the nine months ended
September 30, 1994 compared to the corresponding period of 1993. Such
increase was the result of the Mergers (7%), the growth in subscriber
levels within the Company's cable television systems (4%), the effect
of certain acquisitions (2%) and certain new services (1%), net of a
decrease in revenue (4%) due to rate reductions required by rate
regulation implemented pursuant to the 1992 Cable Act. In the third
quarter of 1994, the Company experienced a decrease in the price
charged for those services that are subject to rate regulation under
the 1992 Cable Act.
Operating costs and expenses increased by 18% for the nine months ended
September 30, 1994 compared to the corresponding period of 1993. The
consolidation of Liberty in the Mergers resulted in an increase
of $205 million in operating, selling, general and administrative
expenses. Due to the aforementioned program to upgrade and install
optical fiber in its cable systems, the Company's capital expenditures
and depreciation expense have increased. Additionally, the Company
incurred $30 million of programming and marketing costs associated with
the launch in 1994 of a new premium programming service to its
subscribers. The Company cannot determine whether and to what extent
increases in the cost of programming will effect its operating costs.
Additionally, the Company cannot predict how these increases in the
cost of programming will affect its revenue but intends to recover
additional costs to the extent allowed by the aforementioned FCC rate
regulations. The Company recorded an adjustment of $8 million in 1994
to reduce its liability for compensation relating to stock appreciation
rights resulting from a decline in the market price of the Company's
Class A common stock.
The Company is a shareholder of TeleWest Communications plc (formerly
TCI/US West Cable Communications Group) ("TeleWest UK"), a company that
is currently operating and constructing cable television and telephone
systems in the United Kingdom ("UK"). TeleWest UK, which is accounted
for under the equity method, had a carrying value at September 30, 1994
of $296 million and accounted for $32 million and $17 million of the
Company's share of its affiliates' losses in 1994 and 1993,
respectively. In February 1994, the Company acquired a consolidated
investment in Flextech plc ("Flextech"), a programming and video
distribution company located in the UK. Flextech accounted for
$135 million of the Company's total assets and $65 million of the
Company's equity investments at September 30, 1994 and has generated
losses in 1994 of $18 million (before deducting the minority interests'
40% share of such losses). In addition, the Company has other less
significant investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia and certain
other foreign countries. In the aggregate, such other investments had a
carrying value of $46 million at September 30, 1994 and accounted for
$14 million of the Company's share of its affiliates' losses in 1994.
In connection with its investments in the above-described foreign
entities, the Company is exposed to the risk that unfavorable and
potentially volatile fluctuations in exchange rates with respect to the
UK pound and other foreign currencies will cause the Company to
experience unrealized foreign currency translation losses. To a much
lesser extent, the Company is exposed to the risk that unfavorable and
potentially volatile foreign currency fluctuations will cause the
Company to experience realized and unrealized losses with respect to
transactions denominated in currencies other than the respective
functional currencies of the Company and its various foreign affiliates.
Because the Company views its foreign assets as long-term investments,
the Company generally does not hedge its exposure to short-term
movements in foreign currencies. Due to the difficulty in accurately
predicting the timing and amount of future cash inflows and outflows
associated with the Company's foreign investments, the Company
presently does not believe that it is prudent to hedge its exposure to
currency risk on a long-term basis.
The Company's net earnings (before preferred stock dividends)of $25
million for the three months ended September 30, 1994 represented an
increase of $90 million as compared to the Company's net loss (before
preferred stock dividends) of $65 million for the corresponding period
of 1993. Such increase is principally the result of the effect of
improved share of earnings from Liberty prior to the Mergers
(principally resulting from the gain recognized by Liberty upon the
sale of its investment in AMC) and the reduction in income tax expense
(principally resulting from the required recognition in the third
quarter of 1993 of the cumulative effect of the change in the Federal
income tax rate from 34% to 35%), net of the effect of the
aforementioned reduction in rates charged for Regulated Services.
(continued)
I-35
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
(2) Material changes in results of operations (continued):
The Company's net earnings (before preferred stock dividends) of $63
million for the nine months ended September 30, 1994 represented an
increase of $49 million as compared to the Company's net earnings
(before preferred stock dividends) of $14 million for the corresponding
period of 1993. Such increase is principally the result of the
aforementioned increase in share of earnings of Liberty prior to the
Mergers, the decrease in income tax expense, net of the aforementioned
reduction in rates charged for Regulated Services and the decrease in
gain on disposition of assets.
I-36
<PAGE> 12
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Material changes in financial condition:
On August 4, 1994, TCIC and Liberty consummated the Mergers. The
transaction was structured as a tax free exchange of Class A and Class
B shares of both companies and preferred stock of Liberty for like
shares of TCI. TCIC shareholders received one share of TCI for each of
their shares. Liberty common shareholders received 0.975 of a share of
TCI for each of their common shares. TCI has not assumed any of TCIC's
indebtedness or other obligations that were outstanding at the time the
Mergers were consummated.
As of August 8, 1994, TCI, TCIC and TeleCable entered into a merger
agreement, whereby TeleCable will be merged into TCIC. The aggregate
purchase price of $1.6 billion will be paid with shares of TCI Class A
common stock (currently estimated to be approximately 42 million
shares), assumption of liabilities amounting to approximately $300
million and 1 million shares of a new TCI convertible preferred stock
with an aggregate initial liquidation value of $300 million. Such
preferred stock shall accrue dividends at 5-1/2% per annum, shall be
convertible at the option of its holders into 10 million shares of TCI
Class A common stock and shall be redeemable by TCI after 5 years or
the holder can cause TCI to redeem after 10 years. The merger requires
the approval of the shareholders of TeleCable and various franchise and
government authorities.
Subsequent to September 30, 1994, subsidiaries of TCI, Comcast, Cox
and Sprint formed WirelessCo to engage in the business of providing
wireless communications services on a nationwide basis. Through
WirelessCo, the partners intend to bid for PCS licenses in PCS
Auctions to be conducted by the FCC. WirelessCo has applied for
eligibility to bid for licenses in 39 of the 51 MTAs for which PCS
licenses will be auctioned by the FCC commencing in December 1994.
WirelessCo may also invest in, affiliate with or acquire licenses from
successful bidders in the PCS Auctions. The Company owns a 30%
interest in WirelessCo. Subsidiaries of Cox, Sprint and the Company
have also formed a separate partnership, in which the Company owns a
35.3% interest, to bid for PCS licenses for the Philadelphia MTA. The
Company cannot predict the cost of obtaining licenses in the PCS
Auctions or the likelihood that WirelessCo and the Philadelphia
partnership will be successful bidders for any of the PCS licenses for
which they have applied to bid. If the respective bidding strategies
of WirelessCo and the Philadelphia partnership are successful,
however, the capital required to fund the license costs and the
construction of the PCS systems will be substantial and the Company's
share thereof would represent a material increase in its capital
requirements. The Company anticipates that it would finance its share
of the required capital through borrowings under existing and new
credit facilities, although there can be no assurance that additional
financing would be available on terms desired by the Company.
(continued)
I-54
<PAGE> 13
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(1) Material changes in financial condition (continued):
The Cable Partners and Sprint have also agreed upon the basis upon
which they would negotiate a definitive agreement for the formation of
NewTelco to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide
basis, using cable television facilities of the Cable Partners and
other cable television operators that agree to affiliate with NewTelco.
The parties intend that the Cable Partners would contribute their
interests in TCG and its affiliated entities and other competitive
access businesses to NewTelco. The Company currently owns an
approximately 29.9% interest in TCG and would own a 30% interest in
NewTelco. The modification or repeal of existing regulatory and
legislative barriers to competition in the local telephony market will
be necessary in order for NewTelco to provide its proposed services in
most states. Formation of NewTelco is subject to certain conditions
including the negotiation of a definitive partnership agreement and
contribution agreement. The contributions of TCG and other competitive
access businesses to NewTelco will be subject, among other things, to
the receipt of necessary regulatory and other consents and approvals.
TCIC generally finances acquisitions and capital expenditures through
net cash provided by operating and financing activities. Although
amounts expended for acquisitions and capital expenditures exceed net
cash provided by operating activities, the borrowing capacity resulting
from such acquisitions, construction and internal growth has been and
is expected to continue to be adequate to fund the shortfall. See
TCIC's consolidated statements of cash flows included in the
accompanying consolidated financial statements.
TCIC had approximately $1.8 billion in unused lines of credit at
September 30, 1994, excluding amounts related to lines of credit which
provide availability to support commercial paper. Although TCIC was in
compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit
facilities are subject to TCIC's 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 TCIC's lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage". Interest coverage, which is measured by the ratio of
Operating Cash Flow (operating income before depreciation, amortization
and other noncash credits or charges) ($1,325 million and $1,409 million
for the nine months ended September 30, 1994 and 1993, respectively) to
interest expense ($566 million and $549 million for the nine months
ended September 30, 1994 and 1993, respectively), is determined by
reference to the consolidated statements of operations. TCIC's interest
coverage ratio was 234% and 257% for the nine months ended September
30, 1994 and 1993, respectively. Management of TCIC 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 TCIC's interest expense, more than
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.
(continued)
I-55
<PAGE> 14
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(1) Material changes in financial condition (continued):
In July 1994, Rainbow purchased a 49.9% general partnership interest in
AMC from Liberty under the terms of a buy/sell provision contained in
the AMC partnership agreement for total cash proceeds of $180 million.
Liberty used a portion of these proceeds to repay debt to TCIC totaling
$192 million of principal plus $7 million of accrued interest.
TCIC'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 TCIC) and through net cash provided by their own
operating activities.
Certain subsidiaries' loan agreements contain restrictions regarding
transfers of funds to the parent company in the form of loans, advances
or cash dividends. The amount of net assets of such subsidiaries
exceeds TCIC's consolidated net assets. However, net cash provided by
operating activities of other subsidiaries which are not restricted
from making transfers to the parent company have been and are expected
to continue to be sufficient to enable the parent company to meet its
cash obligations.
Approximately thirty-five percent of the franchises held by TCIC,
involving approximately 3.8 million basic subscribers, expire within
five years. There can be no assurance that the franchises for TCIC's
systems will be renewed as they expire although TCIC believes that its
cable television systems generally have been operated in a manner which
satisfies the standards established by the 1984 Cable Act for franchise
renewal. However, in the event they are renewed, TCIC cannot predict
the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with such renewals. To date,
they have not varied significantly from the original terms.
TCIC competes with operators of alternative methods of distribution
of the same or similar video programming as that offered by its
cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC to offer services in
direct competition with existing cable systems. One such competitor is
DBS. DBS services are offered directly to subscribers owning home
satellite dishes that vary in size depending upon the power of the
satellite; one DBS operator recently began offering nationwide video
services that can be received by a satellite that measures
approximately eighteen inches in diameter. DBS operators can acquire
the right to distribute over satellite all of the significant cable
television programming currently available on TCIC's cable systems. As
the cost declines of equipment needed to receive these transmissions,
it is expected that TCIC will experience increased and substantial
competition from DBS operators. The 1984 Cable Act, the regulations of
the FCC and the Modifications of Final Judgment entered in United
States v. AT&T currently prohibit Regional Bell operating companies
from providing video programming and other information services
directly to subscribers in their telephone service areas (except in
limited circumstances in rural areas). In separate decisions, four
United States District Courts have held that the cross-entry
prohibition in the 1984 Cable Act is unconstitutional as a violation
of the telephone companies First Amendment right to free expression.
All four decisions have been appealed (or are expected to be
appealed). If the current cross-entry restrictions are removed or
relaxed, TCIC could face increased competition from telephone
companies which, in most cases, have greater financial resources than
TCIC.
(continued)
I-56
<PAGE> 15
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(1) Material changes in financial condition (continued):
The FCC has authorized the provision of so-called "video-dialtone"
services by which independent video programmers will deliver services
to the home over telephone-provided circuits, thereby by-passing the
local cable systems or other video providers. Although local exchange
telephone carriers providing "video-dialtone" under the existing rules
are allowed only a limited financial interest in programming services
and must limit their role largely to that of a traditional "common
carrier," the current status of these rules is uncertain under the
court decisions referred to above. Numerous local exchange telephone
carriers have filed applications with the FCC for authorization to
construct video-dialtone systems and to provide such services. This
alternative means of distribution of video services to consumer's
homes, could eventually become a substantial competitor to TCIC's
cable and other video delivery systems.
TCIC is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion
picture studios from January 1, 1993 through December 31, 2002. The
aggregate minimum liability under certain of the license agreements is
approximately $105 million. The aggregate amount of the Film License
Liability under other license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
produced by the motion picture studios, the amount of United States
theatrical film rentals for such qualifying films, and certain other
factors. Nevertheless, TCIC's aggregate payments under the Film License
Liability could prove to be significant.
TCIC is upgrading and installing optical fiber in its cable
systems at a rate such that in three years TCIC anticipates that it
will be serving the majority of its customers with state-of-the-art
fiber optic cable systems. Through September 30, 1994, TCIC's capital
expenditures amounted to $944 million. However, TCIC is continually
reevaluating its capital expenditures and such expenditures are
subject to change based upon the effects to TCIC's liquidity arising
from rate regulation.
Subsequent to September 30, 1994, the Company was reorganized based
upon four lines of business: Domestic Cable and Communications;
Programming; International Cable and Programming; and
Technology/Venture Capital. Upon reorganization, certain of the assets
of TCIC were transferred to the other operating units (e.g. TBS, QVC,
Discovery, TeleWest UK, etc.).
Management believes that net cash provided by operating activities,
TCIC's ability to obtain additional financing (including its available
lines of credit and its access to public debt markets) and proceeds
from disposition of assets will provide adequate sources of short-term
and long-term liquidity in the future.
(continued)
I-57
<PAGE> 16
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992
Cable Act and imposed a moratorium on certain rate increases. As a
result of such actions, TCIC's Regulated Services are subject to the
jurisdiction of local franchising authorities and the FCC.
Based on its analysis and interpretation of the FCC's 1993 and 1994
rate regulations, TCIC estimates that the implementation of such
regulations will result in an aggregate annualized reduction of revenue
and operating income ranging from $280 million to $300 million. The
estimated annualized reduction in revenue assumes that the FCC will not
require further reductions beyond the current regulations and is prior
to any possible mitigating factors (none of which is assured) such as
(i) the provision of alternate service offerings (ii) the
implementation of rate adjustments to non-regulated services and (iii)
the utilization of cost-of-service methodologies, as described below.
Subject to certain limitations, the FCC's rate regulations generally
permit cable operators to adjust rates to account for inflation and
increases in certain external costs, including increases in programming
costs and compulsory copyright fees and any increase in the number of
regulated channels.
Cable operators may justify rates higher than the benchmark
rates established by the FCC through demonstrating unusually high costs
based upon cost-of-service showing. Under this methodology, cable
operators may be allowed to recover through the rates they charge for
Regulated Services, their normal operating expenses plus an interim
rate of return of 11.25%, which rate may be subject to change in the
future.
(continued)
I-58
<PAGE> 17
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(2) Material changes in results of operations (continued):
TCIC believes that it has complied, in all material respects, with the
provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCIC's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark
and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date
of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to the later of September 1, 1993,
or one year prior to the certification date of the applicable franchise
authority. The amount of refunds, if any, which could be payable by
TCIC in the event that any system's rates were to be successfully
challenged, is not considered to be material.
Based on the foregoing, TCIC believes that the 1993 and 1994 rate
regulations have had a material effect on its results of operations.
Revenue increased by approximately 4% for the nine months ended
September 30, 1994 compared to the corresponding period of 1993. Such
increase was the result of growth in subscriber levels within TCIC's
cable television systems (4%), the effect of certain acquisitions (2%)
and certain new services (2%), net of a decrease in revenue (4%) due
to rate reductions required by rate regulation implemented pursuant to
the 1992 Cable Act. In the third quarter of 1994, TCIC experienced a
decrease in the price charged for those services that are subject to
rate regulation under the 1992 Cable Act.
Operating costs and expenses have increased by 9% for the nine
months ended September 30, 1994 compared to the corresponding period of
1993. Due to the aforementioned program to upgrade and install optical
fiber in its cable systems, capital expenditures and depreciation
expense have increased. Additionally, TCIC incurred $30 million of
programming and marketing costs associated with the launch in February
1994 of a new premium programming service to its subscribers. TCIC
cannot determine whether and to what extent increases in the cost of
programming will effect its operating costs. Additionally, TCIC cannot
predict how these increases in the cost of programming will affect its
revenue but intends to recover additional costs to the extent allowed
by the aforementioned FCC rate regulations. TCIC recorded an adjustment
of $6 million in 1994 to reduce its liability for compensation relating
to stock appreciation rights resulting from a decline in the market
price of TCI's Class A common stock.
At September 30, 1994, TCIC had an investment in TeleWest UK, a
company that is currently operating and constructing cable television
and telephone systems in the UK. TeleWest UK, which is accounted for
under the equity method, had a carrying value at September 30, 1994 of
$296 million and accounted for $32 million and $17 million of TCIC's
share of its affiliates' losses in 1994 and 1993, respectively. In
February 1994, TCIC acquired a consolidated investment in Flextech, a
programming and video distribution company located in the UK. Flextech
accounted for $135 million of TCIC's total assets and $65 million of
TCIC's equity investments at September 30, 1994 and has generated
losses in 1994 of $18 million (before deducting the minority interests'
40% share of such losses). In addition, at September 30, 1994, TCIC had
other less significant investments in video distribution and
programming businesses located in the UK, other parts of Europe, Asia
and certain other foreign countries. In the aggregate, such other
investments had a carrying value of $46 million at September 30, 1994
and accounted for $14 million of TCIC's share of its affiliates' losses
in 1994. As previously discussed, the Company was restructured
subsequent to September 30, 1994. In connection with such
restructuring, TCIC's ownership in the aforementioned entities will be
transferred to another operating unit and TCIC will no longer be
exposed to the risk associated with unfavorable fluctuations in foreign
currency exchange rates.
(continued)
I-59
<PAGE> 18
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
(2) Material changes in results of operations continued):
TCIC's net earnings of $23 million for the three months ended
September 30, 1994 represented an increase of $88 million as compared
to TCIC's net loss (before preferred stock dividends) of $65
million for the corresponding period of 1993. Such increase is
principally the result of the effect of improved share of earnings from
Liberty prior to the Mergers (principally resulting from the gain
recognized by Liberty upon the sale of its investment in AMC) and the
reduction in income tax expense (principally resulting from the
required recognition in the third quarter of 1993 of the cumulative
effect of the change in the Federal income tax rate from 34% to 35%),
net of the effect of the aforementioned reduction in rates charged for
Regulated Services.
TCIC's net earnings of $61 million for the nine months ended
September 30, 1994 represented an increase of $47 million as compared
to TCIC's net earnings (before preferred stock dividends) of $14
million for the corresponding period of 1993. Such increase is
principally the result of the aforementioned increase in share of
earnings of Liberty prior to the Mergers, the decrease in income tax
expense, net of the aforementioned reduction in rates charged for
Regulated Services and the decrease in gain on disposition of assets.
I-60
