<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(Amendment No. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December
31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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)
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)
Registrants' telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $1.00 per share
Class B common stock, par value $1.00 per share
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, par value $.01 per share
TCI Communications, Inc. meets the conditions set forth in General
Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this form with
the reduced disclosure format.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Tele-Communications, Inc.'s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
-----
Indicate by check mark whether Tele-Communications, Inc. and TCI
Communications, Inc.(1) have 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) have been subject to such filing requirements for the past 90
days. Yes X No
----- -----
The aggregate market value of the voting stock held by nonaffiliates
of Tele-Communications, Inc., computed by reference to the last sales price of
such stock, as of the close of trading on February 10, 1995, was
$13,811,439,150.
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of shares held in treasury), as of February 10, 1995, was:
Class A common stock - 571,690,775 shares; and
Class B common stock - 85,114,800 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.
May 1, 1995
TELE-COMMUNICATIONS, INC.
(Registrant)
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
TCI COMMUNICATIONS, INC.
1994 ANNUAL REPORT ON FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-40
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-40
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . I-55
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . II-3
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . II-26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . II-26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-13
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . III-19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
</TABLE>
<PAGE> 4
PART I.
Item 1. Business.
(a) General Development of Business
Tele-Communications, Inc. ("TCI" or the "Company"), through its
subsidiaries and affiliates, is principally engaged in the construction,
acquisition, ownership, and operation of cable television systems and the
provision of satellite-delivered video entertainment, information and home
shopping programming services to various video distribution media, principally
cable television systems. The Company also has investments in cable and
telecommunications operations and television programming in certain
international markets as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies. The Company is a Delaware corporation and was
incorporated in 1994. TCI Communications, Inc. ("TCIC") and its predecessors
have been engaged in the cable television business since the early 1950's.
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive agreement to combine the two companies
(the "TCI/Liberty Combination"). The transaction was consummated on August 4,
1994 and 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 a newly formed
holding company, Tele-Communications, Inc. (formerly TCI/Liberty Holding
Company). In connection with the TCI/Liberty Combination, Old TCI changed its
name to TCI Communications, Inc. and TCI/Liberty Holding Company changed its
name to Tele-Communications, Inc. Old TCI common 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 shares. Holders of Liberty Class E,
6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Liberty Class E
Preferred Stock") received shares of TCI Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock, a new preferred stock of TCI having
designations, preferences, rights and qualifications, limitations and
restrictions that are substantially identical to those of the Liberty Class E
Preferred Stock, except that the holders of the new preferred stock are
entitled to one vote per share in any general election of directors of TCI.
The other classes of preferred stock of Liberty held by Old TCI were converted
into shares of TCI Class A Preferred Stock, a new series of preferred stock of
TCI having a substantially equivalent fair market value to that which was given
up.
As of January 26, 1995, TCI, TCIC and TeleCable Corporation
("TeleCable") consummated a transaction, whereby TeleCable was merged into TCIC
(the "TeleCable Merger"). The aggregate $1.6 billion purchase price was
satisfied by TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of approximately 42
million shares of TCI Class A common stock and 1 million shares of TCI
Convertible Preferred Stock, Series D (the "Series D Preferred Stock") with an
aggregate initial liquidation value of $300 million. The Series D Preferred
stock, which accrues dividends at a rate of 5.5% per annum, is convertible into
10 million shares of TCI Class A common stock. The Series D Preferred Stock is
redeemable for cash at the option of TCI after five years and at the option of
either TCI or the holder after ten years. The amount of net liabilities
assumed by TCIC and the number of shares of TCI Class A common stock issued to
TeleCable's shareholders are subject to post-closing adjustments.
I-1
<PAGE> 5
During 1994, subsidiaries of the Company, Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
formed a partnership ("WirelessCo") to engage in the business of providing
wireless communications services on a nationwide basis. Through WirelessCo,
the partners have been participating in auctions ("PCS Auctions") of broadband
personal communications services ("PCS") licenses being conducted by the FCC.
In the first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets, including
New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth,
Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The
aggregate license cost for these licenses is approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which
holds a PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and has agreed to make capital contributions to
APC equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox, which holds a pioneer
preference PCS license for the Los Angeles-San Diego market, and WirelessCo
have also agreed on the general terms and conditions upon which Cox (with a 60%
interest) and WirelessCo (with a 40% interest) would form a partnership to hold
and develop a PCS system using the Los Angeles-San Diego license. APC and the
Cox partnership would affiliate their PCS systems with WirelessCo and be part
of WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand. The Company owns a 30% interest in
WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed their
respective interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("NewTelco") to engage in the business of providing
local wireline communications services to residences and businesses on a
nationwide basis. NewTelco will serve its customers primarily through the
cable television facilities of cable television operators that affiliate with
NewTelco in exchange for agreed-upon compensation. The modification of
existing regulations and laws governing the local telephony market will
be necessary in order for NewTelco to provide its proposed services on a
competitive basis in most states. Subject to agreement upon a schedule for
upgrading its cable television facilities in selected markets and certain other
matters, the Company has agreed to affiliate certain of its cable systems with
NewTelco. The capital required for the upgrade of the Company's cable
facilities for the provision of telephony services is expected to be
substantial. See also related discussion under the caption Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Subsidiaries of the Company, Cox and Comcast, together with
Continental Cablevision, Inc. ("Continental"), own Teleport Communications
Group, Inc. and TCG Partners (collectively, "TCG"), which is one of the largest
competitive access providers in the United States in terms of route miles. The
Company, Cox and Comcast have entered into an agreement with MajorCo and
NewTelco to contribute their interests in TCG and its affiliated entities to
NewTelco. The Company currently owns an approximate 29.9% interest in TCG.
The closing of this contribution is subject to the satisfaction of certain
conditions, including the receipt of necessary regulatory and other consents
and approvals. In addition, the Company, Comcast and Cox intend to negotiate
with Continental, which owns a 20% interest in TCG, regarding their acquisition
of Continental's TCG interest. If such agreement cannot be reached, they will
need to obtain Continental's consent to certain aspects of their agreement with
Sprint.
Subject to agreement upon an initial business plan, the MajorCo
partners have committed to make cash capital contributions to MajorCo of $4.0
to $4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
I-2
<PAGE> 6
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV") and RCS
Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase Agreement (the
"Tele-Vue Agreement") pursuant to which RCS Pacific agreed to acquire
from Tele-Vue the assets of cable television systems serving approximately 1
million subscribers as of December 31, 1994 for total consideration of
approximately $1,983 million, subject to adjustment in accordance with the
terms of the Tele-Vue Agreement. A subsidiary of TCI has agreed to loan $600
million in cash to IP-IV. IP-IV will, in turn, loan such $600 million to RCS
Pacific. RCS Pacific could use the proceeds of the aforementioned loan as a
portion of the total cash consideration to be paid to Tele-Vue, or at the
option of TCI, to purchase $600 million of TCI Class A common stock. Should
TCI elect to sell such common stock, RCS Pacific has the option to pay the
consideration to Tele-Vue by delivery of RCS Pacific's short-term note of up to
$600 million of the consideration with the balance to be paid in cash. Such
note, if it is delivered, will be secured by RCS Pacific's pledge of shares of
stock of TCI having an aggregate market value equal to the principal amount of,
and accrued interest on, the note delivered to Tele-Vue. The consummation of
the transactions contemplated by the Tele-Vue Agreement is conditioned, among
other things, on receipt of approvals of various franchise and other
governmental authorities and receipt of "minority tax certificates" from
the FCC. Both Houses of Congress have passed legislation to repeal previous
legislation which provided for "minority tax certificates". The bills are
currently in conference. There can be no assurance that the conditions
precedent to closing the asset purchase will be satisfied, or that the parties
will be able to agree on different terms, if necessary.
TCI, through its indirect wholly-owned subsidiary, TCID-IP IV, Inc.
would hold a 25% limited partnership interest in IP-IV, and IP-IV would in turn
hold a 79% limited partnership interest in RCS Pacific.
Pursuant to an Agreement and Plan of Merger dated as of August 4,
1994, as amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc.
(the "Purchaser"), a corporation which is jointly owned by Comcast and Liberty,
commenced an offer (the "QVC Tender Offer") to purchase all outstanding shares
of common stock and preferred stock of QVC, Inc. ("QVC").
The QVC Tender Offer expired at midnight, New York City time, on
February 9, 1995, at which time the Purchaser accepted for payment all shares
of QVC which had been tendered in the QVC Tender Offer. Following consummation
of the QVC Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC.
During the fourth quarter of 1994, the Company was reorganized based
upon four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization").
Following is a brief description of the units the Company operates in
addition to its Domestic Cable and Communications services:
Programming
The Company and its affiliates provide satellite-delivered video
entertainment, information and home shopping television services to video
distribution outlets, including cable television systems, broadcast television
stations and the direct-to-home satellite market. The Company has ownership
interests in several domestic programming businesses, including Turner
Broadcasting System, Inc. ("TBS"); Discovery Communications, Inc.; Home
Shopping Network, Inc.; QVC; Encore Media Corporation; BET Holdings, Inc.;
International Family Entertainment; E! Entertainment Television; and two
national and 15 regional sports networks. Recently, the Company launched
STARZ!, a first-run premium programming service. The Company is also the owner
of Netlink USA, a provider of programming packages to home satellite dish
owners. Excluding the Company's investment in TBS and Netlink USA,
substantially all of the ownership interests included in the Programming unit
were acquired in the TCI/Liberty Combination.
International Cable and Programming
The Company has investments in cable and telecommunications operations
and television programming in international markets. The Company seeks to
invest in markets with favorable regulatory environments and attractive growth
opportunities. Among its overseas investments, the Company has a 38% interest
in TeleWest Communications plc ("TeleWest"). TeleWest provides cable television
and residential and business cable telephony in the United Kingdom. The Company
also has a majority interest in Flextech p.l.c. ("Flextech"), which provides
television programming in the United Kingdom through its interest in Bravo, The
Children's Channel, UK Gold, UK Living and The Family Channel UK. Through
certain other joint ventures, the Company has interests in cable television
systems and television programming in Hungary, Norway, Sweden, Israel, Ireland,
Malta, France, Chile, Puerto Rico, the Dominican Republic, New Zealand,
Australia, Singapore and Japan.
Technology/Venture Capital
The Company is an investor in companies and joint ventures involved in
developing and providing programming for new television and telecommunications
technologies. Current investments and technologies under development include
interactive and set-top box technology, entertainment software and other
services for wireline and wireless switched broadband interactive networks. The
Company has formed a joint venture with Sega of America and Time Warner
Entertainment Company, L.P. to develop and market the first video game channel,
called "The Sega Channel." More recently, the Company has made investments in
TSX Corporation, a producer of communications equipment, and Interactive
Network, Inc., a developer of interactive television programming systems. The
Company also has an investment in Acclaim Entertainment, Inc. ("Acclaim") and
has formed a joint venture with Acclaim to develop, acquire and distribute
games and other interactive entertainment software over various
telecommunications networks. The Company has also created the National Digital
Television Center, a provider of digital compression and authorization services
to program suppliers and to cable television systems and other video
distribution outlets. In addition to its technology investments, the Company
operates Western Tele-Communications, Inc., a wholesale provider of long
distance, voice, data and other telecommunications services.
The Board of Directors of TCI has adopted a proposal which, if
approved by the stockholders, would authorize the Board to issue a new class of
stock ("Liberty Group Common Stock") which corresponds to TCI's Programming
Unit ("Liberty Media Group"). While the Liberty Group Common Stock would
constitute common stock of TCI, it is intended to reflect the separate
performance of such programming services. If shareholder approval is obtained,
TCI intends to distribute to its security holders one hundred percent of the
equity value of TCI attributable to Liberty Media Group.
I-3
<PAGE> 7
(b) Financial Information about Industry Segments
The Company operates principally in two industry segments subsequent
to the TCI/Liberty Combination: cable and communications services and
programming services. Home shopping is a programming service which includes a
retail function. Relevant information with respect to the Company's
International Cable and Programming Unit and Technology/Venture Capital Unit
are contained in the discussion of the Company's Cable and Communications Unit
due to their immateriality. The Company sold its motion picture theatre
business and certain theatre-related real estate assets in 1992. Amounts
related to the motion picture theatre business and certain theatre-related real
estate assets are discontinued operations and are set forth separately in the
consolidated financial statements and related notes included in Part II of this
Report.
(c) Narrative Description of Business
CABLE AND COMMUNICATIONS SERVICES
General. Cable television systems receive video, audio and data
signals transmitted by nearby television and radio broadcast stations,
terrestrial microwave relay services and communications satellites. Such
signals are then amplified and distributed by coaxial cable and optical fiber
to the premises of customers who pay a fee for the service. In many cases,
cable television systems also originate and distribute local programming.
Service Charges. The Company offers a limited "basic service"
(primarily comprised of local broadcast signals and public, educational and
governmental access channels) and a broader "expanded" tier (primarily
comprised, in addition to the basic service, of specialized programming
services, in such areas as health, family entertainment, religion, news,
weather, public affairs, education, shopping, sports and music). The monthly
fee for "basic service " generally ranges from $8.00 to $10.00, and the monthly
service fee for the "expanded" tier generally ranges from $11.00 to $15.00.
The Company offers "premium services" (referred to in the cable television
industry as "Pay-TV" and "pay-per-view") to its customers. Such services
consist principally of feature films, as well as live and taped sports events,
concerts and other programming. The Company offers Pay-TV services for a
monthly fee generally ranging from $9.00 to $14.00 per service, except for
certain movie or sports services (such as various regional sports networks and
certain pay-TV channels) offered at $1.00 to $5.00 per month and pay-per-view
movies offered separately generally at $3.00 per movie and certain pay-per-view
events offered separately at $10.00 to $40.00 per event. Charges are usually
discounted when multiple Pay-TV services are ordered. The Company does not
generally require basic subscribers to "buy-through" the "expanded" service to
receive a Pay-TV service in its systems.
The Company does not charge for additional outlets in a subscriber's
home. As further enhancements to their cable services, customers may generally
rent converters, with or without a remote control device, for a monthly charge
ranging from $0.50 to $3.00 each, as well as purchase a channel guide for a
monthly charge ranging from $0.85 to $2.00. Also a nonrecurring installation
charge (which is based upon the FCC's rules which regulate hourly service
charges for each individual cable system) of up to $60.00 is usually charged.
Monthly fees for basic and Pay-TV services to commercial customers
vary widely depending on the nature and type of service. Except under the
terms of certain contracts to provide service to commercial accounts, customers
are free to discontinue service at any time without penalty.
As noted below, the Company's service offerings and rates were
affected by rate regulations issued by the FCC in 1993 and 1994. See Federal
Regulation - Cable and Communications Services below.
I-4
<PAGE> 8
Subscriber Data. TCI operates its cable television systems either
directly through its regional operating divisions or indirectly through certain
subsidiaries or affiliated companies. Basic and Pay-TV cable and satellite
customers served by TCI and its consolidated subsidiaries are summarized as
follows (amounts in millions):
<TABLE>
<CAPTION>
Basic subscribers at December 31,
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Managed through the Company's
regional operating divisions (1)(2) 10.7 9.8 9.4 6.4 5.1
TKR Cable II, Inc. and
TKR Cable III, Inc. (3) 0.3 0.3 0.3 -- --
United Artists
Entertainment Company ("UAE") (4) -- -- -- 2.3 2.2
Other non-managed subsidiaries 0.7 0.6 0.5 0.2 1.2
----- ----- ----- ----- -----
11.7 10.7 10.2 8.9 8.5
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Pay TV subscribers at December 31,
------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Managed through the Company's
regional operating divisions (1)(2) 11.5 9.5 8.8 6.1 3.3
TKR Cable II, Inc. and
TKR Cable III, Inc. (3) 0.2 0.2 0.3 -- --
UAE (4) -- -- -- 2.2 1.8
Other non-managed subsidiaries 0.7 0.6 0.5 0.1 0.7
----- ----- ----- ----- -----
12.4 10.3 9.6 8.4 5.8
===== ===== ===== ===== =====
</TABLE>
(1) In August of 1994, the TCI/Liberty Combination was consummated.
(2) In December of 1992, SCI Holdings, Inc. ("SCI") consummated a
transaction (the "Split-Off") that resulted in the ownership of its
cable television systems being split between its two stockholders,
which stockholders were Comcast and the Company. The Split-Off was
effected by the distribution of approximately 50% of the net assets of
SCI to three holding companies formed by the Company (the "Holding
Companies"). Immediately following the Split-Off, the Company owned a
majority of the common stock of the Holding Companies. As such, the
Company, which previously accounted for its investment in SCI using
the equity method, now consolidates its investment in the Holding
Companies. One of the Holding Companies, TKR Cable I, Inc., is
managed through the Company's regional operating divisions.
(3) Management of the remaining two Holding Companies was assumed by an
affiliated company of TCI in December of 1992.
(4) Management assumed by the Company's regional operating divisions in
January of 1992.
I-5
<PAGE> 9
At December 31, 1994, TCI operated substantially all of its
consolidated cable television systems through five regional operating divisions
- -- Central, East, Great Lakes, Southeast and West. Subsequent to December 31,
1994, the Company consolidated the East operating division into its Great Lakes
and Southeast regional operating divisions. The table below sets forth certain
statistical data of TCI's regional operating divisions as of December 31, 1994.
The information for the Great Lakes and Southeast operating divisions includes
data for the East cable television systems that were consolidated with such
operating divisions in 1995.
<TABLE>
<CAPTION>
Homes Basic Basic Pay-TV Pay
Division passed subscribers penetration (1) subscriptions (2) penetration (3)
-------- ------ ----------- --------------- ----------------- ---------------
amounts in millions, except for percentages
<S> <C> <C> <C> <C> <C>
Central (4) 4.2 2.2 52% 2.5 114%
Great Lakes (5) 5.9 3.9 66% 3.8 97%
Southeast (6) 3.6 2.1 58% 2.3 110%
West (7) 4.1 2.5 61% 2.9 116%
----- ----- -----
Total 17.8 10.7 60% 11.5 107%
===== ===== =====
</TABLE>
(1) Calculated by dividing the number of basic subscribers by the number
of homes passed.
(2) A basic customer may subscribe to one or more Pay-TV services and the
number of Pay-TV subscriptions reflected represents the total number
of such subscriptions to Pay-TV services.
(3) Calculated by dividing the number of Pay-TV subscriptions by the
number of basic subscribers.
(4) Central operating division includes cable television systems located
in Colorado, Kansas, Nebraska, New Mexico, North Dakota, Oklahoma,
South Dakota, Texas and Wyoming.
(5) Great Lakes operating division includes cable television systems
located in Connecticut, Illinois, Indiana, Kentucky, Maine,
Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New
York, Ohio, Pennsylvania, Rhode Island, Vermont and West Virginia.
(6) Southeast operating division includes cable television systems located
in Alabama, Arkansas, Delaware, District of Columbia, Florida,
Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, North
Carolina, Puerto Rico, South Carolina, Tennessee and Virginia.
(7) West operating division includes cable television systems located in
Arizona, California, Idaho, Nevada, Montana, Oregon, Utah and
Washington.
I-6
<PAGE> 10
TCI, its subsidiaries and affiliates operate cable television systems
throughout the continental United States and Hawaii and, through certain joint
ventures accounted for under the equity method, have cable television systems
and investments in the United Kingdom, other parts of Europe, Asia, Latin
America and certain other foreign countries.
Other Communications Services. The Sega Channel, the Company's joint
venture with Time Warner and Sega of America is the industry's first
interactive game delivery service, providing Sega Genesis video games
on-demand, 24 hours a day. Subscribers can choose from a wide selection of
games, special versions of soon-to-be released titles, gameplay tips, news,
contests and promotions. Consumer testing in 12 markets was successfully
completed during 1994. The Channel began a launch program in key markets in
December 1994.
In February 1995, the Company acquired approximately 10% of the common
stock of Acclaim, a leading publisher of interactive entertainment software. In
addition, TCI and Acclaim are forming a joint venture for the development and
electronic distribution of interactive video game entertainment.
Compressed digital video technology converts as many as ten analog
signals (now used to transmit video and voice) into a digital format and
compresses such signals (which is accomplished primarily by eliminating the
redundancies in television imagery) into the space normally occupied by one
analog signal. The digitally compressed signal will be uplinked to a
satellite, which will send the signal back down to a customer's satellite dish
or to a cable system's headend to be distributed, via optical fiber and coaxial
cable, to the customers home. At the home, a set-top video terminal will
convert the digital signal back into analog channels that can be viewed on a
normal television set. The Company intends to begin offering such technology
to its cable subscribers as the set-top terminals become available for
distribution. The Company has established the National Digital Television
Center in Denver during 1994 to compress, uplink, encrypt and authorize
reception of digital television signals as well as provide digital television
and multimedia production services. Through March 1995, the Center has
established long term contracts to provide services to a dozen content
providers, digitally compressing and distributing more than 100 channels of
programming.
The Company is focusing on the commercialization of broadband Internet
and online services access over cable networks. In March 1995, the Company
released a preliminary specification and requirements for a broadband cable
modem. When commercially available at mass market prices, this device could
enable broadband access from personal computers to the Internet and online
services with significantly enhanced speed and capabilities. In 1994 the
Company invested in a partnership with Microsoft Corporation for development of
The Microsoft Network. The Microsoft Network will offer an improved online
service to compete with existing services.
On February 2, 1994, United Artists European Holdings, Ltd. ("UAEH"),
a wholly-owned subsidiary of the Company, merged all of the issued share
capital and loan stock of each of the following of its wholly-owned
subsidiaries into Flextech (the "Flextech Merger"): Bravo Classic Movies
Limited, United Artists Limited (Children's Channel), United Artists
Investments Limited and United Artists Entertainment Limited (Programming)
(collectively, "The European Programming Assets"). Flextech's shares trade
publicly on the Unlisted Securities Market of the London Stock Exchange. In
the Flextech Merger, UAEH received 52,356,707 ordinary shares of Flextech
stock, representing an approximate 60% interest in Flextech subsequent to the
closing of the Flextech Merger. In connection with the Flextech Merger, the
Company also committed to make certain additional loans to and investments in
Flextech. All but 4.6 million pounds of such committments were fully satisfied
by the Company during 1994.
The Company has entered into long-term agreements with substantially
all of its program suppliers in order to obtain favorable rates for programming
and to protect the Company from unforeseen future increases in the Company's
cost of programming.
Local Franchises. Cable television systems generally are constructed
and operated under the authority of nonexclusive permits or "franchises"
granted by local and/or state governmental authorities. Federal law, including
the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"), limits the power of the franchising authorities to impose certain
conditions upon cable television operators as a condition of the granting or
renewal of a franchise.
I-7
<PAGE> 11
Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories
of programming offered to subscribers; rate regulation; provision of service to
certain institutions; provision of channels for public access and commercial
leased-use; and maintenance of insurance and/or indemnity bonds. The Company's
franchises also typically provide for periodic payments of fees, generally
ranging from 3% to 5% of revenue, to the governmental authority granting the
franchise. Franchises usually require the consent of the franchising authority
prior to a transfer of the franchise or a transfer or change in ownership or
operating control of the franchisee.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof. Under the 1984 Cable Act, if a
franchise is lawfully terminated, and if the franchising authority acquires
ownership of the cable television system or effects a transfer of ownership to
a third party, such acquisition or transfer must be at an equitable price or,
in the case of a franchise existing on the effective date of the 1984 Cable
Act, at a price determined in accordance with the terms of the franchise, if
any.
In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable Federal, state and local law. The 1984 Cable
Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet the standards established
by the 1984 Cable Act. The Company believes that its cable television systems
generally have been operated in a manner which satisfies such standards and
allows for the renewal of such franchises; however, there can be no assurance
that the franchises for such systems will be successfully renewed as they
expire.
Most of the Company's present franchises had initial terms of
approximately 10 to 15 years. The duration of the Company's outstanding
franchises presently varies from a period of months to an indefinite period of
time. Approximately 1,400 of the Company's franchises expire within the next
five years. This represents approximately thirty-five percent of the
franchises held by the Company and involves approximately 3.8 million basic
subscribers.
Technological Changes. Cable operators have traditionally used
coaxial cable for transmission of television signals to subscribers. Optical
fiber is a technologically advanced transmission medium capable of carrying
cable television signals via light waves generated by a laser. The Company is
installing optical fiber in its cable systems at a rate such that in two years
TCI anticipates that it will be serving the majority of its customers with
state-of-the-art fiber optic cable systems. The systems, which facilitate
digital transmission of television signals as discussed below, will have
optical fiber to neighborhood nodes with coaxial cable distribution downstream
from that point.
I-8
<PAGE> 12
In 1994 the Company entered into an agreement with Microsoft
Corporation ("Microsoft") to test the full potential of interactive television
using upgraded TCI cable television and networking technologies and Microsoft's
software. Beginning in 1995, a first phase will test the technical design and
operations of a few basic services using Microsoft and TCI employees in
Redmond, Washington. A second phase will use a broader base of TCI customers
in Seattle to test a wide variety of broadband interactive television services
and features.
Competition. Cable television competes for customers in local markets
with other providers of entertainment, news and information. The competitors
in these markets include broadcast television and radio, newspapers, magazines
and other printed material, motion picture theatres, video cassettes and other
sources of information and entertainment including directly competitive cable
television operations. The passage of the 1992 Cable Act was designed to
increase competition in the cable television industry.
There are alternative methods of distributing the same or similar
video programming offered by cable television systems. Further, these
technologies have been encouraged by Congress and the FCC to offer services in
direct competition with existing cable systems. In addition to broadcast
television stations, the Company competes in a variety of areas with other
service providers that offer Pay-TV and other satellite-delivered programming
to subscribers on a direct over-the-air basis. Multi-channel programming
services are distributed by communications satellites directly to home
satellite dishes ("HSDs") serving residences, private businesses and various
non-profit organizations. Cable programmers have developed marketing efforts
directed to HSD owners. The Company estimates that there are currently in
excess of 3.5 million HSDs in the United States, most of which are in the 6 to
10 foot range.
I-9
<PAGE> 13
A more significant competitive impact is expected from medium power
and higher power communications satellites ("DBS") that use higher frequencies
to transmit signals that can be received by dish antennas much smaller in size.
The Company has an interest in an entity, Primestar Partners, that distributes
a multi-channel programming service via a medium power communications satellite
to HSDs of approximately 3 feet in size. Such service currently serves an
estimated 250,000 HSDs in the United States. Two other service providers,
DirecTV, a subsidiary of GM Hughes Electronics, and United States Satellite
Broadcasting, a subsidiary of Hubbard Broadcasting, Inc., began offering
multi-channel programming services to HSDs in 1994 via high power
communications satellites that require a dish antenna of only approximately 18
inches. Additionally, such DBS operators have acquired the right to distribute
all of the significant cable television programming services. The Company's
application for a license to launch and operate a high power direct broadcast
satellite was granted by the FCC in 1992 and the satellite is currently under
construction. Competition from both medium and high power DBS services could
become substantial as developments in technology continue to increase satellite
transmitter power, and decrease the cost and size of equipment needed to
receive these transmissions.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmissions; that DBS is not currently
subject to local regulation of service and prices or required to pay franchise
fees; and that the capital costs for the ground segment of a DBS system (the
reception equipment) are directly related to and limited by the number of
service subscribers. DBS's disadvantages presently include limited ability to
tailor the programming package to the interests of different geographic
markets, such as providing local news, other local origination services and
local broadcast stations; signal reception being subject to line of sight
angles; and intermittent interference from atmospheric conditions and
terrestrially generated radio frequency noise. The effect of competition from
these services cannot be predicted. The Company nonetheless assumes that such
competition could be substantial in the near future.
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions
are removed or relaxed, the Company will face increased competition from
telephone companies which, in most cases, have greater financial resources than
the Company. All major telephone companies have announced plans to acquire
cable television systems or provide video services to the home through fiber
optic technology.
I-10
<PAGE> 14
The FCC 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 provider. Under the FCC decision, such services would
require no local franchise agreement or payment to the city or local
governmental authority. Although telephone companies providing
"video-dialtone" were originally allowed only a limited financial interest in
programming services and their role was limited largely to that of a
traditional "common carrier," the FCC recently has proposed relaxation of these
restrictions and has authorized some telephone companies to offer programming
services directly to subscribers. Telephone companies have filed numerous
applications with the FCC for authorization to construct video-dialtone systems
to provide such services. This alternative means of distributing video
services to the consumer's home represents a direct competitive threat to the
Company.
Another alternative method of distribution is the multi-channel
multi-point distribution systems ("MMDS"), which deliver programming services
over microwave channels received by subscribers with a special antenna. MMDS
systems are less capital intensive, are not required to obtain local franchises
or pay franchise fees, and are subject to fewer regulatory requirements than
cable television systems. Although there are relatively few MMDS systems in
the United States that are currently in operation or under construction,
virtually all markets have been licensed or tentatively licensed. The FCC has
taken a series of actions intended to facilitate the development of wireless
cable systems as alternative means of distributing video programming, including
reallocating the use of certain frequencies to these services and expanding the
permissible use of certain channels reserved for educational purposes. The
FCC's actions enable a single entity to develop an MMDS system with a potential
of up to 35 channels, and thus compete more effectively with cable television.
Developments in compression technology have significantly increased the number
of channels that can be made available from other over-the-air technologies.
Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or upon
expiration of such franchises in expectation that the existing franchise will
not be renewed. The 1992 Cable Act promotes the granting of competitive
franchises. An increasing number of cities are exploring the feasibility of
owning their own cable systems in a manner similar to city-provided utility
services.
The Company also competes with Master Antenna Television ("MATV")
systems and Satellite MATV ("SMATV") systems, which provide multi-channel
program services directly to hotel, motel, apartment, condominium and similar
multi-unit complexes within a cable television system's franchise area,
generally free of any regulation by state and local governmental authorities.
In addition to competition for subscribers, the cable television
industry competes with broadcast television, radio, the print media and other
sources of information and entertainment for advertising revenue. As the cable
television industry has developed additional programming, its advertising
revenue has increased. Cable operators sell advertising spots primarily to
local and regional advertisers.
The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. There are a large number of individual and multiple
system cable television operators in the United States but, measured by the
number of basic subscribers, the Company is the largest provider of cable
television services.
I-11
<PAGE> 15
The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and there
can be no assurance that existing, proposed or as yet undeveloped technologies
will not become dominant in the future.
Regulation and Legislation. The operation of cable television systems
is extensively regulated through a combination of Federal legislation and FCC
regulations, by some state governments and by most local government franchising
authorities such as municipalities and counties. The regulation of cable
television systems at the federal, state and local levels is subject to the
political process and has been in constant flux over the past decade. This
process continues in the context of legislative proposals for new laws and the
adoption or deletion of administrative regulations and policies. Further
material changes in the law and regulatory requirements must be anticipated and
there can be no assurance that the Company's business will not be adversely
affected by future legislation, new regulation or deregulation.
Federal Regulation. The 1984 Cable Act and the 1992 Cable Act
extensively regulate the cable television industry. Among other things, the
1984 Cable Act (a) requires cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial
use by unaffiliated third parties; (b) permits franchise authorities to require
the cable operator to provide channel capacity, equipment and facilities for
public, educational and governmental access; (c) limits the amount of fees
required to be paid by the cable operator to franchise authorities to a maximum
of 5% of annual gross revenues; and (d) regulates the revocation and renewal of
franchises as described above.
The 1992 Cable Act greatly expands federal and local regulation of the
cable television industry. Because many of the regulations adopted by the FCC
to implement the 1992 Cable Act are subject to reconsideration and because many
of the 1992 Cable Act provisions are currently subject to litigation, it is
difficult to predict the impact of this legislation upon the Company. However,
the Company believes that the legislation taken as a whole has had and will
continue to have a material adverse impact upon the cable industry in general
and upon the Company's cable operations specifically. See also related
discussion under the caption Management's Discussion and Analysis of Financial
Condition and Results of Operations. Certain of the more significant areas of
regulation imposed by the 1992 Cable Act are discussed below.
Regulation of Program Licensing. The 1992 Cable Act directed the FCC
to promulgate regulations regarding the sale and acquisition of cable
programming between multichannel video program distributors (including cable
operators) and programming services in which a cable operator has an
attributable interest. The legislation and the implementation regulations
adopted by the FCC preclude most exclusive programming contracts (unless the
FCC first determines the contract serves the public interest) and generally
prohibit a cable operator which has an attributable interest in a programmer
from improperly influencing the terms and conditions of sale to unaffiliated
multichannel video program distributors. Further, the 1992 Cable Act requires
that such cable affiliated programmers make their programming services
available to cable operators and competing video technologies such as MMDS and
DBS services on terms and conditions that do not unfairly discriminate among
such competitors.
Regulation of Carriage of Programming. Under the 1992 Cable Act the
FCC has adopted regulations prohibiting cable operators from requiring a
financial interest in a program service as a condition to carriage of such
service, coercing exclusive rights in a programming service or favoring
affiliated programmers so as to restrain unreasonably the ability of
unaffiliated programmers to compete.
I-12
<PAGE> 16
Regulation of Cable Service Rates. The Company's cable systems are
subject to rate regulation. The 1992 Cable Act required that the FCC establish
standards and procedures governing regulation of rates for basic cable service
and equipment to be implemented by state and local cable franchising
authorities. The 1992 Cable Act also required that the FCC, upon complaint
from a franchising authority or a cable subscriber, review the "reasonableness"
of rates for additional tiers of cable service. On April 1, 1993, the FCC
adopted rate regulations governing virtually all cable systems. Services
offered on an individual services basis, such as pay television and
pay-per-view services are not subject to rate regulation. The FCC subsequently
established September 1, 1993 as the effective date for its rate regulations.
On February 22, 1994, the FCC announced that it had adopted revised benchmark
regulations, which regulations were effective on July 15, 1994. As a result of
such actions, the Company's basic and tier service rates and its equipment and
installation charges are subject to the jurisdiction of local franchising
authorities and the FCC. Under such regulations, existing basic and tier
service rates were evaluated initially against "benchmark" rates established by
the FCC. Equipment and installation charges are regulated based on actual
costs.
On February 22, 1994, the FCC also adopted interim "cost-of-service"
rules which allow cable operators to justify rates in excess of the benchmark
based on higher costs. The FCC stated that under its interim cost-of-service
rules, a cable operator may recover through rates for regulated cable services
its normal operating expenses plus an interim rate of return equal to 11.25
percent on the rate base, as defined, which rate may be subject to change in
the future. However, the FCC has excluded from the rate base acquisition costs
in excess of the book value of tangible assets and of allowable intangible
assets at the time of acquisition, has declined to prescribe depreciation rates
and has suggested that the rules will have limited application. The FCC also
adopted rules governing transactions between cost-of-service regulated cable
operators and their affiliates.
The FCC's rate regulations generally permit most cable operators to
adjust rates to account for inflation and increases in certain external costs,
including increases in programming costs and compulsory copyright fees, to the
extent such increases exceed the rate of inflation. However, a cable operator
may pass through increases in the cost of programming services affiliated with
such cable operator to the extent such costs exceed the rate of inflation only
if the price charged by the programmer to the affiliated cable operator
reflects either prevailing prices offered in the marketplace by the programmer
to unaffiliated third parties or the fair market value of the programming. The
FCC's revised regulations confirm that increases in pole attachment fees will
not be accorded external cost treatment.
The regulations also provide a mechanism for adjusting rates when
regulated tiers are affected by channel additions or deletions. Cable
operators adding or deleting channels on a regulated tier will be required to
adjust the per-channel benchmark for that tier based on the number of channels
offered after the addition or deletion. Additional programming costs resulting
from channel additions will be accorded the same external treatment as other
program costs increases, and cable operators presently are permitted to recover
a mark-up on their programming expenses. The rules provide an alternative
methodology for adding programming services to cable programming service tiers
which includes a flat fee increase per added channel, with an aggregate cap on
such increases plus a license fee reserve on price increases through 1996.
Increases in the license fees for newly added services are included within such
cap. In 1997, an additional flat fee increase will be available and the
license fees for additional channels and for increases in existing channels
will not be subject to the aggregate cap. These regulations for adding
services are scheduled to expire on December 31, 1997.
I-13
<PAGE> 17
The FCC has continued to revise its regulations regarding rate
adjustments when regulated tiers are affected by channel additions or
deletions. Recently the FCC adopted regulations which permit certain
additional channels of programming to be added to regulated tiers.
The FCC recently adopted rules that permit channels of new programming
services to be added to cable systems in a separate new product tier which the
FCC has determined will not be rate regulated at this time.
The Company reduced many of its rates and has limited rate increases
in response to FCC regulations. Such actions have had a material adverse
effect on the operating income of the Company's cable systems. Many of these
rate regulations are subject to change during the course of ongoing proceedings
before the FCC. The rate regulations have also been challenged in court.
Regulation of Customer Service. As required by the 1992 Cable Act,
the FCC has adopted comprehensive regulations establishing minimum standards
for customer service and technical system performance. Franchising authorities
are allowed to enforce stricter customer service requirements than the FCC
standards.
Regulation of Carriage of Broadcast Stations. The 1992 Cable Act
granted broadcasters a choice of "must carry" rights or "retransmission
consent" rights. As of October of 1993, cable operators were required to
secure permission from broadcasters that elected retransmission consent rights
before retransmitting the broadcasters' signals. Established "superstations"
were not granted such rights. Local and distant broadcasters can require cable
operators to make payments as a condition to carriage of such broadcasters'
station on a cable system. The 1992 Cable Act imposed obligations to carry
"local" broadcast stations for such stations which chose a "must carry" right
as distinguished from the "retransmission consent" right described above. The
rules adopted by the FCC provided for mandatory carriage by cable systems after
September 1, 1993, of all local full-power commercial television broadcast
signals, including the signals of stations carrying home-shopping programming
and, depending on a cable system's channel capacity, non-commercial television
broadcast signals, or, at the option of commercial broadcasters after October
6, 1993, the right to deny such carriage unless the broadcaster consents. The
FCC's must carry rules are currently under review in the United States District
Court for the District of Columbia. The Company is currently retransmitting
the signals of broadcasters which elected negotiated "retransmission consent"
rights.
Ownership Regulations. The 1992 Cable Act required the FCC to (1)
promulgate rules and regulations establishing reasonable limits on the number
of cable subscribers which may be served by a single multiple system cable
operator or entities in which it has an attributable interest; (2) prescribe
rules and regulations establishing reasonable limits on the number of channels
on a cable system that will be allowed to carry programming in which the owner
of such cable system has an attributable interest; and (3) consider the
necessity and appropriateness of imposing limitations on the degree to which
multichannel video programming distributors (including cable operators) may
engage in the creation or production of video programming. On September 23,
1993, the FCC adopted regulations establishing a 30 percent limit on the number
of homes passed nationwide that a cable operator may reach through cable
systems in which it holds an attributable interest, (attributable for these
purposes is if its ownership interest therein is 5% or greater or if there are
any common directors) with an increase to 35% if the additional cable systems
are minority controlled. However, the FCC stayed the effectiveness of its
ownership limits pending the appeal of a September 16, 1993 decision by the
United States District Court for the District of Columbia which, among other
things, found unconstitutional the provision of the 1992 Cable Act requiring
the FCC to establish such ownership limits. If the ownership limits are
determined on appeal to be constitutional, they may affect the Company's
ability to acquire interests in additional cable systems.
I-14
<PAGE> 18
On September 23, 1993, the FCC also adopted regulations limiting
carriage by a cable operator of national programming services in which that
operator holds an attributable interest (using the same attribution standards
as were adopted for its limits on the number of homes passed nationwide that a
cable operator may reach through its cable systems) to 40 percent of the first
75 activated channels on each of the cable operator's systems. The rules
provide for the use of two additional channels or a 45 percent limit, whichever
is greater, provided that the additional channels carry minority controlled
programming services. The regulations also grandfather existing carriage
arrangements which exceed the channel limits, but require new channel capacity
to be devoted to unaffiliated programming services until the system achieves
compliance with the regulations. Channels beyond the first 75 activated
channels are not subject to such limitations, and the rules do not apply to
local or regional programming services. These rules may limit carriage of the
Company's programming services on certain systems of cable operators affiliated
with the Company.
In the same rulemaking, the FCC concluded that additional restrictions
on the ability of multichannel distributors to engage in the creation or
production of video programming presently are unwarranted.
Under the 1992 Cable Act and the FCC's regulations, cable operators
may not hold a license for a MMDS system within the same geographic area in
which it provides cable service. Additionally, cable operators are prohibited,
subject to certain exceptions, from selling a cable system within 3 years of
acquisition or construction of such cable system.
The 1992 Cable Act contains numerous other provisions which together
with the 1984 Cable Act creates a comprehensive regulatory framework.
Violation by a cable operator of the statutory provisions or the rules and
regulations of the FCC can subject the operator to substantial monetary
penalties and other significant sanctions such as suspension of licenses and
authorizations, issuance of cease and desist orders, and imposition of
penalties that could be of severe consequence to the conduct of a cable
operator's business.
Many of the specific obligations imposed on the operation of cable
television systems under these laws and regulations are complex, burdensome and
increase the Company's costs of doing business. Numerous petitions have been
filed with the FCC seeking reconsideration of various aspects of the
regulations implementing the 1992 Cable Act. Petitions for judicial review of
regulations adopted by the FCC, as well as other court challenges to the 1992
Cable Act and the FCC's regulation, also remain pending. The Company is
uncertain how the courts and/or the FCC will ultimately rule or whether such
rulings will materially change any existing rules or statutory requirements.
Further, virtually all are subject to revision at the discretion of the
appropriate governmental authority.
In the normal course of business, the Company obtains licenses
from the FCC for two-way communications stations, and in certain cases
microwave relay stations and other facilities. Based upon its experience and
knowledge with the renewal process, the Company has no reason to believe that
such licenses will not be renewed as they expire.
Pursuant to lease agreements with local public utilities, the cable
facilities in the Company's cable television systems are generally attached to
utility poles or are in underground ducts controlled by the utility owners.
The rates and conditions imposed on the Company for such attachments or
occupation of utility space are generally subject to regulation by the FCC or,
in some instances, by state agencies, and are subject to change.
I-15
<PAGE> 19
Proposed Changes in Regulation. The regulation of cable television
systems at the federal, state and local levels is subject to the political
process and has been in constant flux over the past decade. This process
continues in the context of legislative proposals for new laws and the adoption
or deletion of administrative regulations and policies. Further material
changes in the law and regulatory requirements must be anticipated and there
can be no assurance that the Company's business will not adversely be affected
by future legislation, new regulation or deregulation. There are proposals
before the Congress and the FCC which, if adopted, would provide further
encouragement for local telephone companies to enter the business of cable
television and to directly compete with existing cable systems. In addition, a
number of recent court decisions have held that FCC cross- ownership
regulations restricting telephone company entry into cable television are
unconstitutional.
Copyright Regulations. The Copyright Revision Act of 1976 (the
"Copyright Act") provides cable television operators with a compulsory license
for retransmission of broadcast television programming without having to
negotiate with the stations or individual copyright owners for retransmission
consent for the programming. The availability of the compulsory license is
conditioned upon the cable operators' compliance with applicable FCC
regulations, certain reporting requirements and payment of appropriate license
fees, including interest charges for late payments, pursuant to the schedule of
fees established by the Copyright Act and regulations promulgated thereunder.
The Copyright Act also empowers the Copyright Office to periodically review and
adjust copyright royalty rates based on inflation and/or petitions for
adjustments due to modifications of FCC rules. The FCC has recommended to
Congress the abolition of the compulsory license for cable television carriage
of broadcast signals, a proposal that has received substantial support from
members of Congress. Any material change in the existing statutory copyright
scheme could significantly increase the costs of programming and be adverse to
the business interests of the Company.
State and Local Regulation. Cable television systems are generally
licensed or "franchised" by local municipal or county governments and, in some
cases, by centralized state authorities with such franchises being given for
fixed periods of time subject to extension or renewal largely at the discretion
of the issuing authority. The specific terms and conditions of such franchises
vary significantly depending on the locality, population, competitive services,
and a host of other factors. While this variance takes place even among
systems of essentially the same size in the same state, franchises generally
are comprehensive in nature and impose requirements on the cable operator
relating to all aspects of cable service including franchise fees, technical
requirements, channel capacity, subscriber rates, consumer and service
standards, "access" channel and studio facilities, insurance and penalty
provisions and the like. Local franchise authorities generally control the
sale or transfer of cable systems to third parties and such authority often
affords local governmental officials the power to affect the disposition of the
cable property as well as to obtain other concessions from the operator. The
franchising process, like the federal regulatory climate, is highly politicized
and no assurances can be given that the Company's franchises will be extended
or renewed or that other problems will not be engendered at the local level.
There appears to be a growing trend for local authorities to impose more
stringent requirements on cable operators often increasing the costs of doing
business. The 1984 Cable Act grants certain protective procedures in
connection with renewal of cable franchises, which procedures were further
clarified by the renewal provisions of the 1992 Cable Act.
PROGRAMMING SERVICES
The Company is an investor in and manager of entities engaged in the
production, acquisition and distribution through all available forms of media,
including cable television systems, broadcast television stations, HSDs, DBS,
on-line and interactive services, home video and traditional retail outlets, of
globally branded entertainment, educational and informational programming and
software, including multimedia products, both analog and digitally delivered.
The various entertainment, education and information programming and
programming-related businesses in which the Company has interests fall into two
categories: sports programming services; and general entertainment and
information services. The Company is also engaged in electronic retailing,
direct marketing, advertising sales, infomercials and transaction processing.
I-16
<PAGE> 20
The following table sets forth the Company's programming interests
which are held directly and indirectly through partnerships, joint ventures,
common stock investments and instruments convertible into common stock.
Ownership percentages in the table are approximate, calculated as of March 1,
1995 and, where applicable, assume conversion to common stock by all holders of
convertible securities. In some cases, the Company's interest may be subject
to buy/sell procedures or repurchase rights.
SPORTS PROGRAMMING SERVICES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES AT INTEREST
12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
amounts in thousands, except percentages
<S> <C> <C> <C>
NATIONAL SPORTS
NETWORKS
America One Liberty Sports, Inc. 14,941 (1) 100.0%
Prime Network Prime SportsChannel 45,947 34.0%(2)(3)
NewSport Networks Associates 5,363
Prime Sports Radio Liberty Sports, Inc. N/A 100.0%
Prime Sports Showcase Liberty Sports, Inc. 1,800 100.0%
Liberty Satellite Sports(4) Affiliated Regional 1,401 68.0%(2)(3)
Communications, Ltd.
("ARC")
REGIONAL SPORTS
NETWORKS
Home Team Sports Home Team Sports Limited 2,810 20.5%(2)
Partnership
Prime Sports- Liberty Sports, Inc. 535 100.0%
Intermountain West
Prime Sports-KBL Liberty Sports, Inc. 1,623 100.0%
Prime Sports-Southwest ARC 4,138 68.0%(2)
Prime Sports-Midwest ARC 300 68.0%(2)
Prime Sports-Rocky Liberty Sports, Inc. 1,525 78.5%(2)
Mountain
Prime Sports-Northwest LMC Northwest Cable Sports, 2,188 60.0%(3)
Inc.
Prime Sports-West Liberty Sports, Inc. 4,170 100.0%
La Cadena Deportiva Liberty Sports Inc. 900 100.0%
Prime Sports-Upper Upper Midwest Cable Partners 429 38.6%(2)(3)
Midwest
SportsChannel Chicago SportsChannel Chicago 2,330 50.0%(3)
Associates
SportsChannel Pacific SportsChannel Pacific 3,242 50.0%(3)
Associates
SportsChannel SportsChannel Prism 2,355 23.0%(2)(3)
Philadelphia/PRISM Associates
SportSouth Network SportSouth Network, L.P. 4,270 44.0%(3)
Sunshine Network Sunshine Network JV 3,380 38.0%(2)(3)
INTERNATIONAL SPORTS
PROGRAMMING
Premier Sports Network LMC International, Inc. 2 50.0%
Prime International ARC 138 68.0%
</TABLE>
I-17
<PAGE> 21
GENERAL ENTERTAINMENT AND INFORMATION SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES at INTEREST
12/31/94
- -------------------------------------------------------------------------------------------------------------
amounts in thousands, except percentages
<S> <C> <C> <C>
MOVIE SERVICES
Encore Encore Media Corporation 5,405 90%
Love Stories Encore Media Corporation 304 90%
Westerns Encore Media Corporation 304 90%
Mystery Encore Media Corporation 304 90%
Action Encore Media Corporation 185 90%
True Stories and Encore Media Corporation 180 90%
Drama
WAM! America's Youth Encore Media Corporation 185 90%
Network
STARZ! QE+Ltd. 1,348 90%
Request TV Reiss Media Enterprises, Inc. 23,853 (5) 40%(3)
Viewer's Choice PPVN Holding Company 26,386 (5) 10%
EDUCATION/INFORMATION
Court TV Courtroom Television Network 15,550 33%(3)
The Discovery Channel Discovery Communications, Inc. 61,500 49%
The Learning Channel Discovery Communications, Inc. 31,500 49%
Discovery Asia Discovery Communications, Inc. 462 49%
Discovery Europe Discovery Communications, Inc. 9,100 49%
TLC Europe Discovery Communications, Inc. (6) 49%
Discovery Latin Discovery Communications, Inc. 2,900 49%
America
What on Earth Ingenius 20 (5) 50%
X*Change Ingenius 26,500 (5) 50%
MacNeil/Lehrer Productions N/A 66%
GENERAL ENTERTAINMENT
Americana Television N/A 66%(3)
Productions LLC
BET Cable Network BET Holdings, Inc. 40,282 18%
BET Action BET Holdings, Inc. 6,571 18%
Pay-Per-View
The Box Video Jukebox Network, Inc. 21,548 (US) 5.5%
650 (UK)
Digital Music Express International Cablecasting 32,281 (5) 8.6%(3)
("DMX") Technologies, Inc.
E! Entertainment E! Entertainment Television, Inc. 26,792 10%(3)
The Family Channel International Family 58,800 18.5%(7)(8)
Entertainment, Inc.
Cable Health Club International Family 1,002 18.5%
Entertainment, Inc.
International Channel International Cable Channels 5,839 45%(3)
Partnership Ltd.
CNN Turner Broadcasting System, Inc. 62,800 23%(9)
Cartoon Network Turner Broadcasting System, Inc. 12,100 23%(9)
Headline News Turner Broadcasting System, Inc. 54,200 23%(9)
TNT Turner Broadcasting System, Inc. 60,800 23%(9)
Turner Classic Movies Turner Broadcasting System, Inc. 3,200 23%(9)
WTBS Turner Broadcasting System, Inc. 62,100 23%(9)
tv! Network TV Network Corporation 6,900 100%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
I-18
<PAGE> 22
ELECTRONIC RETAILING SERVICES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PROGRAMMING SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
SERVICES at INTEREST
12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
amounts in thousands, except percentages
<S> <C> <C> <C>
Home Shopping Club Home Shopping Network 62,000 (10) 41.5%(11)
(HSN 1, HSN 2, HSN
Spree)
QVC Network QVC, Inc. 50,000 42.6%
Q2 QVC, Inc. 11,568 42.6%
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION SUBSIDIARY/AFFILIATE SUBSCRIBERS OWNERSHIP
at INTEREST
12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
amounts in thousands, except percentages
Distribution of TBS Southern Satellite Systems, Inc. 58,522 100%
SuperStation
signal (in the US)
Distribution of TBS Royal Communications, Inc. 916 100%
SuperStation
signal (in Canada)
Distribution of Netlink USA 380 100%
programming to Netlink International 20 100%
HSD market
UHF/LPTV broadcast Silver King Communications, Inc. 28,000 (1) 23%(12)
TV stations
Hardware/software Asian Television and N/A 44%
sales and Communications LLC
consulting
</TABLE>
(1) Number of television households in broadcast areas.
(2) Includes indirect interest attributed through ARC's ownership. Gives
effect to a currently exercisable option by Group W Services, Inc.,
which, if exercised, would reduce the Company's ownership interest in
ARC from 76.66% to 68%. Group W has given notice of its intent to
exercise such option, with a closing anticipated in 1995.
(3) The interests of the Company in these entities are presently or will
become subject to buy-sell arrangements under which one owner may
initiate the arrangement by giving notice setting forth value for the
entity and other owners then elect either to buy the interest of the
initiating owner or to sell their interests to the initiating owner.
In the case of agreements with multiple parties, a party electing
to purchase the initiating party's interest must also purchase the
interest of any other party that has elected to sell.
(4) Distributor of Sports Programming to HSD and DBS markets.
(5) Number of subscribers to whom service is available.
(6) Included with Discovery Europe.
(7) Assumes conversion of preferrred stock, $22 million face amount,
convertible at $6.67 per share.
I-19
<PAGE> 23
(8) Assumes conversion of notes, $23 million face amount, convertible at
$11.11 per share.
(9) Assumes the conversion of preferred stock into 6 shares of Class B
common stock for each share of preferred stock.
(10) Includes broadcast households and cable subscribers.
(11) The Company has 80% voting power.
(12) Assumes exercise of an option to purchase 2,000,000 shares of Class B
common stock at $1.50 per share. See description of Silver King
Communi-cations, Inc. in Other Assets below.
Sports Programming Services
National Sports Programming Services. The Company has varying
interests in several national sports services. Such national sports services
can be used as "backdrop" services, stand-alone services or both. The term
backdrop service is used to distinguish between original programming produced
by a regional sports network and ancillary programming purchased by the
regional sports network from others to supplement its programming service.
Liberty Sports, Inc. ("Liberty Sports") also acts on occasion as a
syndicator of sports events programming to the broadcast television market.
In September of 1994, Liberty Sports launched Prime Sports Radio
("PSR"), a 24-hour per day all sports radio programming service. PSR ended
1994 with affiliate distribution in 22 United States markets. The largest
affiliated markets are Boston, Houston and Pittsburgh. The programming service
is offered to radio stations on an inventory split basis and delivered via
satellite. There are 11,500 radio stations in the United States and each of
the 261 rated markets has several stations which would meet Liberty Sports'
affiliate criteria. The format is designed to provide the affiliates with
sports information at a national level with the flexibility to customize for
local interest. PSR will cross-promote the Company's regional sports networks
with radio in their respective markets.
Regional Sports Programming Services. The Company also has varying
interests in several regional sports networks (the "Liberty Sports Networks"),
which have been formed for the purpose of acquiring, developing, producing,
syndicating and distributing sports programming of primarily local and regional
interest by satellite to cable television operators and other multi-channel
video programming distributors, and to HSD owners in specified geographic
areas.
Effective January 1, 1995, Liberty Sports changed the names of its
owned and operated regional sports networks to "Prime Sports". Programming
will be restructured to create uniformity throughout the networks without
losing the regional or "home town team" aspect of individual networks. Liberty
Sports believes the name changes and consistent programming and on-air look
will improve national recognition of the networks for both viewers and the
advertising community.
The Liberty Sports Networks derive revenue from two principal sources:
(1) fees paid by cable operators pursuant to affiliation agreements entered
into with the regional sports networks and (2) the sale of advertising time to
local, regional and national advertisers. Each cable operator or other
distributor is typically charged a monthly fee per subscriber in its systems
receiving the programming service, which fees vary depending on the level of
service at which the distributor offers the network to its subscribers and the
proximity of the cable system to the venue of the major sporting events
distributed by the network. The affiliation agreements generally provide for
limited increases during their term in the fees charged by the networks.
I-20
<PAGE> 24
In addition to owning interests in and operating regional sports
networks, Liberty Sports also provides various services to affiliated and
non-affiliated networks. Liberty Sports, through Liberty Satellite Sports,
acts as a marketing agent to HSD owners and distributors to HSD owners for
certain of the regional sports networks with which it is affiliated. In
addition, Liberty Sports provides support services, such as master control and
satellite uplinking services, and certain program scheduling, post-production
and editing services, to certain of its affiliated networks.
Each of the Liberty Sports Networks sells advertising time to local,
regional and national advertisers. Approximately 25% of the consolidated
revenue derived from the Company's sports programming businesses for the year
ended December 31, 1994, was derived from advertising sales (including barter
transactions). Advertising revenue as a percentage of each network's total
revenue varies from network to network, with the more established networks
generally deriving a greater percentage of their revenue from advertising sales
than the newer networks with fewer subscribers. To date, the networks have
concentrated their efforts on increasing the numbers of subscribers to which
their programming service is made available and improving the quantity and
quality of the programming offered. If the networks are successful in this
regard, the Company believes that advertising sales could become a more
significant source of revenue for its sports networks in the future.
The cost of acquiring sports programming rights is the principal
expense of the sports networks. The Liberty Sports Networks typically enter
into rights contracts with one or more professional sports teams in their
regions and acquire rights to collegiate sporting events through arrangements
with regional conferences, individual schools and programming syndicators. The
duration of the rights agreements with the professional teams range from one to
ten years, with most of the existing agreements having remaining terms from two
to four years. The rights contracts for collegiate sporting events typically
range from two to three years. Pursuant to the professional sports rights
agreements, the networks usually acquire the exclusive right to distribute via
cable and other forms of pay television, in their respective regions, a
specified number of games that are not subject to national cable or broadcast
contracts. The arrangements with respect to collegiate sports are more varied,
but usually also provide exclusive regional distribution rights (other than via
over-the-air broadcast television) as to a specified number of events. The
grant of both professional and collegiate rights under such agreements are
generally subordinate to rights granted under league or conference national
broadcast and national cable contracts. In most cases, contracts provide for a
charge per game or event, subject to limited increases over the term of the
contract, with either a minimum annual exhibition requirement or a minimum
payment requirement or both. In certain recent cases a regional network has
also acquired broadcast or radio rights to professional team or collegiate
events and has sub-licensed such rights to broadcast or radio distributors.
Certain factors such as player strikes, or bankruptcy of leagues or individual
teams may have an adverse effect on the revenue of the Liberty Sports Networks.
The value of the exhibition rights granted under sports rights
contracts, and in some cases the financial commitments incurred thereunder, are
subject to certain contingencies that are not within the control of the
networks, such as the relationship of a professional team to a different
region, changes in the schools participating in a particular collegiate
conference, the terms of applicable national broadcast or cable contracts, and
the rules and regulations of the applicable professional collegiate league,
conference or association.
I-21
<PAGE> 25
International Sports Programming Services. Liberty Sports also sells
and delivers certain programming internationally to satellite and cable
programming distributors in Asia, Europe, Latin America and South America.
Such programming consists primarily of United States domestic sports
programming to which Liberty Sports has acquired international distribution
rights and of programming acquired outside the United States.
In January 1995, Liberty Sports launched "Premier Sports Network," a
sports programming service for distribution in Australia and New Zealand, in
partnership with Australia Sports Pty, Ltd. ("Australis"). Liberty Sports
produces and manages the service. Premier Sports Network is currently
delivered as part of a multi-channel pay television package distributed by
Australis to approximately 2,000 subscribers.
General Entertainment and Information Services
Movie Services. "Encore," which is produced and distributed by Encore
Media Corporation ("EMC"), was launched in mid-1991 and primarily airs movies
from the 1960's, 1970's and 1980's. As of December 31, 1994, the service was
being offered by cable operators and other distribution technologies to
approximately 20.4 million households, of which approximately 5.4 million
subscribed to Encore. The service is generally offered as a single premium
service or in conjunction with other programming services. In either case, the
subscription price paid by the subscriber for Encore is generally lower than
the prices charged for other premium movie services. During 1994, Encore
launched six new thematic multiplex services. Three of these pay services
(Love Stories, Westerns and Mystery) launched in July 1994 and the remaining
three (Action, True Stories and Drama and WAM!, America's Youth Network)
launched in September 1994. Cable operators pay EMC a per subscriber fee for
the services. The Company's cable and communications services have entered
into an affiliation agreement with EMC and currently accounts for approximately
72% of its total subscribers. EMC obtains rights to air movies by entering
into film licensing agreements with the holders of distribution rights. EMC has
entered into agreements extending through 2005 with various distributors to
exhibit certain films. EMC has entered into various other agreements where
license fees are contingent on future production, sales and certain other
criteria.
STARZ! is a first-run premium movie programming service which is
managed by EMC. As of December 31, 1994, STARZ! was offered by the Company to
its cable systems, of which approximately 1.4 million elected to receive
STARZ!.
The Company also has interests in Request TV and Viewer's Choice which
provide pay-per-view movies and pay-per-view events to cable operators. Both
Request TV and Viewer's Choice act as intermediaries between movie studios,
event promoters and cable operators providing scheduling for movies to be sold
on a pay-per-view basis, satellite distribution of such movies, marketing and
promotion, and, in some instances, billing and collection services. For
providing these services, they are paid a negotiated percentage of pay-per view
revenue generated by their respective affiliated cable operators.
I-22
<PAGE> 26
Education/Information Services. The principal businesses of Discovery
Communications, Inc. ("Discovery") are the advertiser-supported basic cable
networks "The Discovery Channel", and "The Learning Channel". The Discovery
Channel provides nature, science and technology, history, exploration and
adventure programming and is distributed to customers in virtually all cable
homes. The Learning Channel broadcasts a variety of educational and
non-fiction programming to customers constituting approximately 47% of all
cable television customers in the United States. The Learning Channel has
distribution to more than 31.5 million homes as of December 1994. In addition,
through internally generated funding, significant investments are being made by
Discovery in building a documentary programming library. Discovery is
expanding the Discovery brand name by establishing channels based in Europe,
Latin America and Asia, a substantial portion of the programming of which is
drawn from Discovery's own documentary programming library. In November 1994,
Discovery announced its intent to launch four new networks: "Animal Planet", a
nature network; "Quark!", a science and technology network; "Time Traveler", a
history network; and "Living", a home repair network.
In January 1995, the Company acquired a 66-2/3% general partnership
interest in MacNeil/Lehrer Productions ("MLP"). MLP is the primary producer of
the "MacNeil/Lehrer News Hour" on PBS and a producer of other high-quality
documentary and public affairs programming. The Company is attempting to
increase the level of production at MLP by finding new markets for MLP
documentary and public affairs programming. These markets may include cable,
as well as broadcast networks, on line services and CD-ROM applications.
Ingenius is a general partnership between the Company and Reuters New
Media, Inc. Ingenius operates "X*Change", an information service which is
delivered via cable to personal computers. X*Change consists of news, weather,
sports and limited stock quotes, and is offered to subscribers as part of their
cable service. X*Change is currently available to approximately 30 million
households.
Ingenius has also developed "What On Earth", a daily multimedia
learning resource delivered via cable to personal computers using X*Change.
What on Earth delivers six news stories each day, including international news
articles, world sports, and significant cultural events and features. The news
stories comprise text, video, audio pronunciation of key words, glossary,
activities associated with each news story and lesson plans for teachers. What
on Earth was launched on February 10, 1995 and is currently available to
approximately 20,000 educators who already receive X*Change.
"Court TV" provides live and/or tape delayed coverage and analysis of
selected criminal and civil legal proceedings. The Court TV service was
received by approximately 15.5 million subscribers at December 31, 1994.
General Entertainment. Turner Broadcasting System, Inc. ("TBS") is a
diversified information and entertainment company, which produces, finances and
distributes entertainment and news programming worldwide, and has operations in
motion pictures, animation and television production, video television
syndication, licensing and merchandising and publishing. Through its
subsidiaries, TBS owns and operates four domestic entertainment networks, (TBS
SuperStation, Turner Network Television, the Cartoon Network and Turner Classic
Movies); three international entertainment networks (TBS Latin America, Cartoon
Network Latin America, and TNT & Cartoon Network Europe); three news networks
(Cable News Network, Headline News and Cable News Network International); a
motion picture and television production company (Castle Rock Entertainment);
and an independent producer and distributor of motion pictures (New Line Cinema
Corporation). TBS also has ownership interests in two professional sports
teams (the Atlanta Braves and the Atlanta Hawks) and a regional sports network
(SportSouth Network, in which the Company also has an interest).
I-23
<PAGE> 27
International Family Entertainment, Inc.'s ("IFE") principal business
is "The Family Channel," an advertiser-supported basic cable network carried by
cable television systems reaching 95% of all United States cable television
households. Its programming consists of a variety of comedies, adventures,
children's shows, westerns and inspirational and other programs. As of
December 31, 1994, The Family Channel was being provided to approximately 58.8
million subscribers.
"BET Cable Network" is a cable television network whose programming
targets interests and concerns of black Americans. The network's productions,
most of which are live, include hosted music video programs and variety shows.
Acquired programs include situation comedies, soap operas, movies, gospel music
programs and sports and entertainment specials. As of December 31, 1994, BET
Cable Network was being provided to approximately 40 million subscribers.
"E! Entertainment Television" ("E!") is a 24-hour network featuring
programming about celebrities and entertainment. The network's programming mix
includes entertainment news reports, original programs and exclusive live
coverage of major awards shows and celebrity events. E! was distributed to
more than 26 million subscribers as of the end of December 1994.
International Cablecasting Technologies, Inc. ("ICT") is primarily
engaged in programming, distributing and marketing a premium digital music
service, Digital Music Express ("DMX"), which provides 24-hour per day,
commercial-free, CD quality music programming.
"International Channel" is a basic cable service providing
multi-lingual programming. As of December 31, 1994, International Channel was
being carried by 167 cable systems, which account for a total of 5.8 million
subscribers.
"tv! Network", a new 24-hour basic cable service, features
programming from new and existing cable networks which are not widely
distributed. tv! Network also previews premium and pay-per-view services and
showcases the latest developments in programming, new technology and emerging
interactive services. As of December 31, 1994, Network had approximately 7
million subscribers.
"The Box" is a viewer interactive music video service produced by
Video Jukebox Network, Inc. ("VJN") and offered through cable television
systems and low-power television stations that are located within the 900 or
976 telephone service range. Viewers may select the music videos they desire
to watch by calling a designated 900 or 976 telephone number, in which case
they pay a fee to VJN for their selections, or they may passively view the
music videos selected by others, in which case there is no additional charge
for the service.
Americana Television Productions ("ATP") is a new production company
formed in February 1995 to produce and distribute television shows for the
cable, satellite and broadcast markets, as well as home video and audio
product. ATP's video library includes nearly 600 hours of original programming
highlighting traditional music, people and crafts which are uniquely American.
I-24
<PAGE> 28
Competition. The business of distributing programming for cable
television is highly competitive. The number of channels available to the
average subscriber of a domestic cable television system is 60 or less. The
various entertainment and information programming companies described above in
which the Company has interests (the "Programming Companies") directly compete
with other programming services for distribution and, when distribution is
obtained, the programming offered by the Programming Companies competes, in
varying degrees, for viewers and advertisers with other cable programming
services and off-air broadcast television, radio, print media, motion picture
theaters, video cassettes and other sources of information and entertainment.
Important competitive factors are the prices charged for programming, the
quantity, quality and variety of the programming offered and effectiveness of
marketing efforts. With the advent of new compression technologies,
competition for channel capacity may substantially decrease, although
additional competitors may have the opportunity to enter the marketplace. No
predictions can be made with respect to the viability of these technologies or
the extent to which they will ultimately impact the availability of channel
capacity.
In addition to competition for cable distributors, viewers and
advertisers, the Programming Companies also compete, to varying degrees, for
programming. With respect to the acquisition of sports programming rights, the
Programming Companies compete for national rights principally with the national
broadcast television networks, a number of national cable services that
specialize in or carry sports programming, and television "superstations",
which distribute sports and other programming to cable television systems by
satellite, and with independent syndicators that acquire and resell such rights
nationally, regionally and locally. They also compete for local and regional
rights with those competitors, with local broadcast television stations and
with other local and regional sports networks. The owners of distribution
outlets such as cable television systems may also contract directly with the
sports teams in their service areas for the right to distribute a number of
such teams' games on their systems. Recently, at least one sports league has
entered into an agreement with a national DBS distribution outlet for the
distribution of selected league games. With respect to the acquisition of
non-sports programming (such as syndicated programs and movies) which is not
produced by or specifically for the Programming Companies, competitors include
the national broadcast television networks, local broadcast television
stations, suppliers of premium services and pay-per-view programs and other
cable program suppliers.
As set forth in the discussion of Federal Regulation-Programming
Companies below, the FCC's "financial interest and syndication" rules limit the
ability of the three major broadcast networks to distribute network programs
through syndication to broadcast stations and to acquire certain financial
interests or domestic syndication rights in first-run non-network programs.
However, these rules are scheduled to expire in November 1995. Elimination of
these restrictions could permit a myriad of broadcast station/network
production/exhibition arrangements, further increasing competition to the
Programming Companies in the acquisition and sale of programming.
In a series of decisions, federal courts have invalidated the statute
prohibiting telephone companies from providing video programming and other
information directly to subscribers in their telephone service areas. Although
these decisions remain subject to review, telephone companies have begun to
invest in and/or form entities for the production and/or acquisition of
programming. Such entities will provide further competition to the Programming
Companies in the creation, acquisition and/or sale of programming. Certain
proposals also are pending before the FCC and Congress which would eliminate or
relax the statutory restrictions on telephone companies.
I-25
<PAGE> 29
Satellite Transponder Agreements. The Company's entertainment and
information programming services subsidiaries and 50% owned affiliates
described above lease satellite transponders as follows: 6 full time leases
and one shared lease on a "protected" or "transponder protected" basis, and 15
full time "unprotected" leases for an aggregate of 21 transponders on 10
domestic and 2 international communications satellites. Domestic
communications satellite transponders may be leased full or part time on a
"protected", "transponder protected" or "unprotected" basis. When the carrier
provides services to a customer on a "protected" basis, replacement
transponders are reserved on board the satellite for use in the event the
"protected" transponder fails. Should there be no reserve transponders
available, the "protected" customer will displace an "unprotected" transponder
customer on the same satellite. In certain cases, the carrier also maintains a
protection satellite and should a satellite fail completely, all lessors'
"protected" transponders would be moved to the protection satellite. The
customer who leases an "unprotected" transponder has no reserve transponders
available, and may have its service interrupted for an indefinite period when
its transponder is required to restore a "protected" service.
Although the Company believes it has taken reasonable steps to ensure
its continued satellite transmission capability, there can be no assurance that
termination or interruption of satellite transmissions will not occur. Such a
termination or interruption of service by one or more of these satellites could
have a material adverse effect on the results of operations and financial
condition of the programming group.
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which the Company has
no control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites. Many of the commercial satellites now in orbit will
have to be replaced in the next few years. The federal government has placed
restrictions on the launching of commercial satellites by means of the space
shuttle, causing manufacturers of commercial satellites to rely on alternative
delivery systems to place these satellites in orbit. Additional commercial
launching facilities are being developed currently, but there can be no
assurance that the launch systems currently in place, or to be developed, will
be able to replace the domestic communications satellites as their useful lives
end.
Several of the Company's transponder leases provide the right to use
the transponders to provide compressed digital video services. Use of
compressed digital video service may result in greater transponder capacity.
Federal Regulation - Programming Companies. The FCC regulates the
providers of satellite communications services and facilities for the
transmission of programming services, the cable television systems that carry
such services and to some extent the programming services themselves. The 1984
Cable Act and the 1992 Cable Act extensively regulate the cable television
industry.
The 1984 Cable Act, among other things, requires cable television
systems with 36 or more "activated" channels to reserve a percentage of such
channels for commercial use by unaffiliated third parties and permits franchise
authorities to require the cable operator to provide channel capacity,
equipment and facilities for public, educational and governmental access.
I-26
<PAGE> 30
The 1992 Cable Act has expanded greatly the scope of federal and local
regulation. Because a number of the regulations adopted by the FCC to
implement the 1992 Cable Act remain subject to reconsideration and because many
of the 1992 Cable Act provisions are currently subject to litigation, it is
difficult to predict the impact of this legislation upon the Company. However,
the Company believes that the legislation taken as a whole and as presently
implemented has had and will continue to have a material adverse impact upon
the Company's programming operations. See also related discussion under the
caption Management's Discussion and Analysis of Financial Condition and Results
of Operations. Certain of the more significant areas of regulation imposed by
the 1992 Cable Act upon the Company's programming operations are discussed
below.
Regulation of Program Licensing. The 1992 Cable Act directed the FCC
to promulgate regulations regarding the sale and acquisition of cable
programming between multichannel video program distributors (including cable
operators) and programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations
adopted by the FCC preclude virtually all exclusive programming contracts with
cable operators (unless the FCC first determines the contract serves the public
interest) and generally prohibit a cable operator which has an attributable
interest in a programmer from improperly influencing the terms and conditions
of sale to unaffiliated multichannel video distributors. Further, the 1992
Cable Act requires that such affiliated programmers make their programming
services available to cable operators and competing video technologies such as
MMDS and DBS services on terms and conditions that do not unfairly discriminate
among such technologies.
Regulation of Carriage of Programming. Under the 1992 Cable Act, the
FCC has adopted regulations prohibiting cable operators from requiring a
financial interest in a program service as a condition to carriage of such
service, coercing exclusive rights in a programming service or favoring
affiliated programmers so as to restrain unreasonably the ability of
unaffiliated programmers to compete.
Regulation of Cable Service Rates. As set forth in the above
discussion of regulation affecting the Company's cable and communications
services, under the 1992 Cable Act, cable systems are subject to extensive rate
regulation. The FCC has established standards and procedures governing
regulation of rates for basic cable service and equipment to be implemented by
state and local cable franchising authorities and for the FCC's review of the
"reasonableness" of rates for additional tiers of cable service upon complaint
from a franchising authority or a cable subscriber.
The aggregate cap and flat fee mark-up elements of these regulations
may adversely affect higher-cost programming services, including the regional
sports networks in which the Company has an ownership interest, while expanding
the carriage of programming services with lower license fees, including
programming services in which the Company has an ownership interest.
The complexity of and numerous revisions to the FCC's rate regulations
have impaired the willingness and ability of cable operators to add programming
services and to invest in additional cable plant to expand channel capacity.
Consequently, the cumulative impact of the FCC's rate regulation is likely to
continue to have an adverse impact on the Company's programming interests.
I-27
<PAGE> 31
Regulation of Carriage of Broadcast Stations. The 1992 Cable Act
granted broadcasters a choice of "must carry" rights or "retransmission
consent" rights. Such statutorily mandated expansion of carriage of broadcast
stations coupled with the requirements of the 1984 Cable Act noted above could
adversely affect some or substantially all of the programming services in which
the Company holds an interest by decreasing the carriage of such services in
cable systems with limited channel capacity.
Ownership Regulations. In addition to the rules and regulations
establishing reasonable limits on the number of cable subscribers which may be
served by a cable operator or entities in which it has an attributable interest
as previously described, the 1992 Cable Act required the FCC to prescribe rules
and regulations establishing reasonable limits on the number of channels on a
cable system that will be allowed to carry programming in which the owner of
such cable system has an attributable interest and to consider the necessity
and appropriateness of imposing limitations on the degree to which multichannel
video programming distributors (including cable operators) may engage in the
creation or production of video programming.
The FCC also adopted regulations in 1993 limiting carriage by a cable
operator of national programming services in which the operator holds an
attributable interest. These rules, which currently are subject to pending
petitions for reconsideration before the FCC, may limit carriage of the
Company's programming services on certain systems of cable operators affiliated
with the Company.
In the same rulemaking, the FCC concluded that additional restrictions
on the ability of multichannel distributors to engage in the creation or
production of video programming presently are unwarranted.
Numerous petitions have been filed with the FCC seeking
reconsideration of various aspects of the regulations implementing the 1992
Cable Act. Petitions for judicial review of regulations adopted by the FCC, as
well as other court challenges to the 1992 Cable Act and the FCC's regulations,
also remain pending. The Company is uncertain how the courts and/or FCC
ultimately will rule or whether such rulings will materially change any
existing rules or statutory requirements. Further, virtually all are subject
to revision at the discretion of the appropriate governmental authority.
Proposed Changes in Regulation. The regulation of cable television
systems at the federal, state and local levels is subject to the political
process and has been in constant flux over the past decade. This process
continues in the context of legislative proposals for new laws and the adoption
or deletion of administrative regulations and policies. Further material
changes in the law and regulatory requirements must be anticipated and there
can be no assurance that the Company's programming business will not be
affected adversely by future legislation, new regulation or deregulation.
I-28
<PAGE> 32
Satellites and Uplink. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. Certain satellites are more valuable than others to
cable television programmers based on whether a particular satellite is used by
other programmers of popular cable services. Under current policy, the Galaxy
V, Spacenet 2, SatCom C-1 and SatCom C-3 service providers are not subject to
the market exit provisions of Section 214 of the Communications Act of 1934, as
amended (the "Communications Act") and may therefore cease providing
communications services to customers on short notice, provided that such action
is just, reasonable and non-discriminatory, and subject to any additional
rights or remedies to which the customer and the carrier may have agreed. The
Company has no reason to believe that such service providers have any intention
to cease providing transmission services via their respective satellite
systems. See Transmission of SuperStation WTBS below and Satellite Transponder
Arrangements above. The other Programming Companies in which the Company has
interests have separate arrangements with satellite service providers for
transmission of their services.
Financial Interest and Syndication. The FCC's "financial interest and
syndication" rules limit the ability of the three major broadcast networks to
distribute network programs through syndication to broadcast stations. The
major broadcast networks have not been restricted from distributing network
programs to cable or satellite programmers, such as the Programming Companies.
However, under the original rules, network programming has been available to
non-network broadcast television stations only through syndicators in which the
three major networks have no financial interest. At the same time, networks
have been prohibited from purchasing syndication rights or obtaining financial
interests in programs obtained from outside (non-network) producers. In
response to the decision of the United States Court of Appeals for the Seventh
Circuit in Schurz Communications, Inc. v. FCC, the FCC released modified
financial interest and syndication rules in 1993. Although the FCC relaxed the
financial interest and syndication rules in many respects, under the modified
rules the three major networks are prohibited from: (a) actively syndicating
any prime-time entertainment or first-run non-network programming to television
stations in the United States; (b) acquiring financial interests or domestic
syndication rights in any first-run non-network program or series distributed
in the United States unless that program or series was produced solely
"in-house" by the network; and (c) warehousing programming by withholding it
from the syndication market beyond certain defined periods. However, the rules
are scheduled to expire in November 1995.
Elimination or further modification of these restrictions could permit
a myriad of broadcast station/network production/exhibition arrangements that
now only cable operators and the major broadcast networks (to the extent of
distributing to cable and satellite programmers) are permitted to undertake,
further increasing competition to the Programming Companies in the acquisition
and sale of programming. The grant of expanded syndication powers to the three
major networks could lessen the attractiveness and/or availability of the major
networks' programming to cable system operators and programmers because they
would have to compete directly for such programming with broadcast stations and
could be less likely to secure cable/broadcast network exclusive distribution
and other arrangements.
I-29
<PAGE> 33
Copyright licensing procedures have not yet been negotiated for the
public performance of non-dramatic musical works used in connection with
various programming services provided by the Programming Companies. The
American Society of Composers, Authors and Publishers ("ASCAP") and Broadcast
Music, Inc. ("BMI"), organizations which license the public performance of
musical compositions of their members or affiliated composers, authors and
publishers, respectively, had claimed that cable programmers and cable system
operators each must have a separate license to lawfully exhibit programs and
advertisements containing musical compositions. Such split licensing has been
held unlawful under the ASCAP and BMI Consent Decrees, respectively, by the
United States Court of Appeals for the Second Circuit in the Turner case in
1992 and by United States District Court for Washington, D.C. in the NCTA case
in 1991. BMI has indicated that it does not consider itself bound by this
decision in the NCTA case.
Electronic Retailing Services
The Company currently provides electronic retailing services through a
subsidiary, Home Shopping Network, Inc. ("HSN") and through an equity
affiliate, QVC.
HSN
As of March 1, 1995, the Company owned 41.5% of the common stock of
HSN, which represents 80.4% voting control (as a result of multiple voting
rights associated with HSN Class B common stock held by the Company). The
primary business and principal source of revenue of HSN is electronic retail
sales of merchandise by Home Shopping Club, Inc. ("HSC"), a wholly owned
subsidiary of HSN. HSC sells a variety of consumer goods and services by means
of HSC's live, customer-interactive retail sales programs which are transmitted
twenty-four hours a day, seven days a week, via satellite to cable television
systems, affiliated broadcast television stations and HSD's. As of December
31, 1994, HSC programming could be received by approximately 62 million homes,
including broadcast television households and cable television subscribers.
HSC's product offerings include: jewelry, hardgoods (such as consumer
electronics, housewares and toys), softgoods (primarily clothing), cosmetics;
and other product categories which include collectibles and consumables. For
calendar 1994, jewelry, hardgoods, softgoods, cosmetics and other categories
accounted for approximately 41%, 34%, 14%, 10% and 1% respectively, of HSC's
sales. HSC principally purchases merchandise made to its specifications and
also purchases inventories from retailers. The mix of products and source of
such merchandise depends upon a variety of factors including price and
availability. HSC has no long- term commitments with any of its vendors, and,
historically, there have been various sources of supply available for each
category of merchandise sold by HSC.
As part of HSC's customer service policy, HSC maintains a return
policy under which a customer may, generally within thirty days, return for any
reason any item purchased from HSC, except certain special sales items, for a
full refund of the purchase price, including the original shipping and handling
charges.
Transmission and Programming. HSC produces retail sales programs in
its studios located in St. Petersburg, Florida. These programs are distributed
to cable television systems, broadcast television stations and HSD's by means
of HSN's satellite uplink facilities to satellite transponders leased by HSN
which retransmit the signals received from HSN. Any cable television system,
broadcast television station or HSD owner in the United States and the
Caribbean Islands equipped with standard satellite receiving facilities is
capable of receiving HSC programming.
I-30
<PAGE> 34
HSN has lease agreements securing full time use of three transponders
on three domestic communications satellites. Although HSN believes it is
taking every reasonable measure to ensure its continued satellite transmission
capability, there can be no assurance that termination or interruption of
satellite transmission will not occur. Such a termination or interruption of
service by one or more of these satellites could have a material adverse effect
on the operation and financial condition of HSN. See Federal Government
Regulation of Satellite Transmissions below. The availability of replacement
satellites and transponder time beyond current leases is dependent on a number
of factors over which HSN has no control, including competition among
prospective users of available transponders and the availability of satellite
launching facilities for replacement satellites.
Federal Government Regulation of Satellite Transmission. The FCC
grants licenses to construct and operate satellite uplink facilities which
transmit signals to satellites. These licenses are generally issued without a
hearing if suitable frequencies are available. HSN has been granted two
licenses for operation of C-Band satellite transmission facilities and two
licenses for operation of Ku-Band satellite transmission facilities on a
permanent basis in Clearwater and St. Petersburg, Florida.
Affiliation with Cable Systems. HSC enters into affiliation
agreements with cable system operators to carry HSC. HSC's standard
affiliation agreement provides that the cable operator generally will receive a
commission of 5% of the net sales of merchandise sold to customers located
within the cable operator's franchise area (from both cable and non-cable
households). In addition, HSC also purchases advertising time from affiliated
operators and in certain markets, pays additional commissions for sales above a
specified minimum amount. Although there is some variation among affiliation
agreements with cable operators, the current standard affiliation agreement
provides for an initial term of five years which is automatically renewable for
subsequent one year terms. During the past year, due to the possibility of
"must carry" being found unconstitutional, HSN embarked on an aggressive
campaign to bring the "must carry" households under contract by volunteering to
pay commissions to certain cable operators. See Effect on HSN of the 1992
Cable Act, below. As an additional contract incentive, HSN offered to make
payments of cable distribution fees, primarily consisting of up-front payments,
based on the number of subscribers committed to the contract by the cable
operator. In exchange for these payments, HSN required significant long term
commitments of up to fifteen years, with an average term of ten years, for the
current programming carriage and additional carriage of HSC's programming. Due
to HSN's success in obtaining long term carriage commitments, in the event
"must carry" is ruled unconstitutional, HSN does not believe the ruling will
have a material adverse effect on HSN or result in a significant loss in
carriage. Affiliation agreements were entered into during the year with the
Company's cable and communications services.
I-31
<PAGE> 35
Affiliation Agreements with Broadcast Television Stations. In July
1986, HSN initiated a program to broaden the viewership of HSC's programming
services by acquiring broadcast television stations in principal television
markets through Silver King Communications, Inc. ("SKC"). On December 28,
1992, HSN distributed the capital stock of SKC to HSN shareholders, in the form
of a pro rata stock dividend. Each SKC station has an affiliation agreement
with HSC to carry HSC's programming through December 28, 1997 that is
automatically renewable at SKC's option for a five-year term, unless written
notice is given at least 18 months prior to the expiration date. HSC pays an
affiliation fee to SKC based on hourly rates and, upon reaching certain sales
levels, commissions on net sales. Certain of the SKC stations have realized
additional compensation during the year, and those stations, and possibly
others, are expected to continue to receive additional compensation during
subsequent years of their affiliation agreements if "must carry" survives legal
challenge. See Effect on HSN of the 1992 Cable Act below. SKC owns 12 full
power UHF television stations (the "Stations") which serve 8 of the 12 largest
metropolitan television markets in the United States. SKC also owns 21 low
power television ("LPTV") stations that broadcast HSC's programming services.
LPTV stations have lower power transmitters than conventional television
stations, and therefore, the broadcast signal of an LPTV station does not cover
as broad a geographical area as conventional broadcast stations.
In addition to affiliation agreements with the SKC broadcast
television and LPTV stations, HSC has entered into affiliation agreements with
other broadcast television stations and LPTV stations. The broadcast station
affiliation agreements may generally be terminated upon proper notice and
specify the payment of fixed fees for the carriage of HSC programming.
Distribution, Data Processing and Telecommunications. HSN's
fulfillment subsidiaries ship merchandise purchased by customers from
warehouses located in St. Petersburg, Florida; Salem Virginia; Waterloo, Iowa;
and Reno, Nevada. Substantially all inventory resides at HSN's four
fulfillment centers prior to being offered for sale. Merchandise typically is
delivered to customers within 7 to 10 days of placing an order with HSC. HSN
currently operates several Unisys main frame computers and has extensive
proprietary data processing and order processing systems which facilitate the
timely delivery of merchandise to customers. HSN's computerized systems track
purchase orders, inventory, customer orders, shipping records, and customer
payments.
To facilitate merchandise orders by its customers, HSC installed a
state-of-the-art fiber optic telephone system and switching complex which was
developed for HSN. HSC also utilizes a computerized voice response phone
answering system (the "VRU System") capable of handling incoming sales calls.
The VRU System provides callers with the option to place their order by means
of touch tone input or to be transferred, in the case of new members or if the
customer requires personal service, to an operator.
I-32
<PAGE> 36
Competition-HSN. HSN operates in a highly competitive environment.
It is in direct competition with businesses which are engaged in retail
merchandising and competes most intensely with other electronic retailers,
direct marketing retailers such as mail order companies, companies that sell
from catalogs, and other discount volume retail outlets and companies that
market through computer technology. HSN also competes for access to its
customers with broadcasters and alternative forms of entertainment and
information, such as programming for network and independent broadcast
television stations, basic and pay cable television services, satellite master
antenna systems, HSD's and home entertainment centers. In particular, the
price and availability of programming for cable television systems affects the
availability of these channels for HSN's programs and the compensation which
must be paid to the cable operators for carriage of HSC programming. In
addition, HSN believes that due to a number of factors, including the
development by cable operators of alternative sources of cable operator owned
programming, the competition for channel capacity has substantially increased.
With the advent of new compression technologies on the horizon, this
competition for channel capacity may substantially decrease, although
additional competitors may have the opportunity to enter the marketplace. No
predictions can be made with respect to the viability of these technologies or
the extent to which they will ultimately impact the availability of channel
capacity.
HSN was the first specialty retailer to market merchandise by means of
live, nationally televised sales programs. There are other companies, some
having an affiliation or common ownership with cable operators, that now market
merchandise by means of live television. A number of other entities are
engaged in direct retail sales businesses which utilize television in some form
and which target the same markets in which HSN operates. Some of HSN's
competitors are larger and more diversified than HSN, or are affiliated with
cable operators which have a substantial number of subscribers. HSN cannot
predict the degree of success with which it will meet competition in the
future.
In addition to the above factors, HSN's affiliation with broadcast
television stations creates another set of competitive conditions. These
stations compete for television viewers primarily within the local markets.
HSN's affiliated broadcast television stations are located in highly
competitive markets and compete against both VHF and UHF stations. Due to
technical factors, a UHF television generally requires greater power and a
higher antenna to secure substantially the same geographical coverage as a VHF
television station. Under present FCC regulations, additional UHF commercial
television broadcasting stations may be operated in all such markets, with the
possible exception of New York City. HSN cannot quantify the competitive
effect of the foregoing or any other sources of video programming on any of
HSN's affiliated television stations, nor can it predict whether such
competition will have a material adverse effect on its operations.
In summary, HSN operates in a highly competitive environment in which,
among other things, technological change, changes in distribution patterns,
media innovations, data processing improvements and new entrants make the
competitive position of both HSN and its competitors extremely difficult to
predict.
Effect on HSN of the 1992 Cable Act. Among the many provisions of the
1992 Cable Act is one that mandates that cable systems carry the signals of
local commercial television stations ("must carry") or, at the station's
option, that cable systems and television stations negotiate a fee to be paid
by cable systems for the retransmission by such cable systems of the local
television stations broadcast signal. See Federal Regulation-Programming
Companies above. HSC's full-time broadcast affiliates have all requested "must
carry" status in lieu of a retransmission fee.
I-33
<PAGE> 37
In July 1993, the FCC ruled that stations predominantly used for the
transmission of sales presentations or program-length commercials operate in
the public interest and are entitled to "must carry" status. A petition for
reconsideration of the FCC's ruling currently is pending before the FCC. HSN
has filed in opposition to that petition. In addition, the limitation on
carriage of affiliated programming entities, discussed in Federal
Regulation-Programming Companies above, may limit carriage of HSN's programming
services on certain systems of cable operations affiliated with the Company.
In April 1993, a decision by the United States District Court for the
District of Columbia upheld the constitutional validity of the mandatory signal
carriage requirements of the 1992 Cable Act. On appeal, in a multi-opinion
decision released on June 27, 1994, the Supreme Court vacated the District
Court decision and remanded the case to the District Court to permit the
development of a full factual record concerning the need for "must carry".
Pending judicial resolution, the "must carry" rules remain in effect.
Therefore, HSN 2 programming carried by HSC's broadcast affiliates generally is
being transmitted by cable operators located within the broadcast markets. As
a result of "must carry", HSC has experienced increased cable distribution of
its programming due to an increase in the number of cable systems that carry
HSC programming.
In November 1994 the FCC issued, pursuant to the 1992 Cable Act,
"going forward" rules regarding the fees cable operators can impose upon
subscribers for new programming. The going forward rules provide that cable
operators can increase the charges to subscribers due to increases in external
programming costs. The cable operator must offset these increases by revenues
it receives from all sources other than advertising. As a revenue provider to
the cable operator, this ruling may have an adverse effect on HSN's ability to
seek and maintain new cable carriage. HSN has filed a Petition for
Reconsideration asking that shop-at-home programming revenues be excluded from
the cable operator's external cost adjustment.
In September 1993, the FCC adopted a Notice of Inquiry initiating a
proceeding to evaluate the commercial programming practices of broadcast
television stations (including stations with shop at home formats) and seeking
comment on whether the public interest would be served by establishing limits
on the amount of commercial matter broadcast by television stations. The FCC
has received comments and reply comments. Although the FCC is only seeking
comments at this time and has not made any proposals to limit the amount of
commercialization on television stations, there can be no assurance whether or
when such proposals will be forthcoming, what the nature of such proposals
might be, whether they will be implemented, and thus what impact, if
implemented, they would have on HSN.
QVC
The Company owns a 42.6% interest in QVC. The remaining 57.4% of QVC
is owned by Comcast, which manages the day-to-day operations of QVC.
QVC markets and sells a wide variety of consumer products and services
primarily by means of its televised shopping programs, known as "QVC" and "Q2".
As of December 31, 1994, QVC's programs were being transmitted by cable
television systems on a full-time basis to approximately 47 million subscribers
and on a part-time basis to approximately 3.1 million subscribers. Cable
television system operators that have entered into affiliation agreements with
QVC carry its programming as part of their basic service and pursuant to such
agreements receive from QVC 5% of net sales of merchandise sold to customers
located in the cable operator's service area. QVC is also a joint venturer in
the operation of Mexican and British televised shopping programs. QVC faces
most of the same competitive factors that HSN does, described above under
Competition-HSN.
I-34
<PAGE> 38
Other Assets
Silver King Communications, Inc. The Stations serve eight of the 12
largest metropolitan television markets in the United States. As of December
31, 1994, the Stations reached approximately 28 million households, which is one
of the largest audience reaches of any owned and operated independent
television broadcast group in the United States. In addition to the HSC
programming, the Stations broadcast advertising inserts, issue-responsive
programming, children's programming, ethnic, information and/or religious
programming and public service announcements. At December 31, 1994, SKC held
options to purchase 5 additional LPTV stations and held construction permits
for 2 additional LPTV stations.
On February 11, 1993, the Company entered into an Option Agreement
with RMS Limited Partnership ("RMS") pursuant to which the Company had the
right to purchase 2,000,000 shares of the Class B Common Stock of SKC at $1.00
per share. On September 23, 1994, the Company and RMS entered into an
Amendment to the Option Agreement which, among other things, extended the
exercise period of the option to February 11, 1999, and increases the exercise
price by $0.25 each year with the final exercise price from February 12, 1998
to February 11, 1999 being $2.25. The current option exercise price is $1.50.
Upon exercise of the option, the Company would control SKC by virtue of the
voting power of the SKC Class B Stock.
It is a condition to the exercise of the option that the Company or
its assignee receive all necessary FCC and other approvals prior to the
exercise. As of the date hereof, the Company has not filed any application for
the consent of the FCC to any such transfer. Under present FCC rules it is
unlikely that the Company will be able to obtain the consent of the FCC with
respect to the exercise of its options because of the Company's ownership of
certain cable television assets. However, FCC rules and regulations do permit
certain types of noncontrolling direct and indirect interests in SKC to be held
by the Company. If the Company is unable to obtain consent to exercise the
option, the Company may assign the option to a third party.
Transmission of TBS SuperStation ("WTBS"). Through its wholly owned
subsidiary Southern Satellite Systems, Inc. ("Southern") and Southern's wholly
owned subsidiary, Royal Communications, Inc. ("Royal"), the Company transmits
the signal of WTBS, a 24-hour independent UHF television station originated by
TBS to cable television system operators and operators of other non-broadcast
distribution media who receive the signal on their earth stations and offer the
service to their subscribers. Southern also makes the WTBS signal available to
HSD owners through program packagers. A substantial portion of Southern's
consolidated revenue for calendar year 1994 was derived from the HSD market.
No payment to TBS is required for the transmission by Southern of the WTBS
signal. See Federal Regulation-Southern below. At December 31, 1994, Southern
(and Royal) transmitted WTBS for reception by an estimated 59.4 million homes
throughout the United States, Puerto Rico, the United States Virgin Islands,
and Canada. Cable and other operators pay Southern a per-subscriber fee for
this service, generally pursuant to written affiliation agreements, the
expiration dates of which range from 1995 to 2004.
I-35
<PAGE> 39
Competition-Southern. Although Southern is currently the sole
satellite carrier of WTBS, other independent television stations are
transmitted by other carriers. Southern does not have an agreement with TBS
with respect to the retransmission of the WTBS signal and there are no specific
statutory or regulatory restrictions that would prevent any satellite carrier
from transmitting the WTBS signal so long as the carrier meets the passive
carrier requirements of the Copyright Act, as amended and any applicable
requirements of the Communications Act of 1934, as amended, or, if the carrier
serves HSD owners, so long as the carrier meets the requirements of the
Satellite Home Viewer Act of 1988 (the "SHV Act"). Further, Southern has no
control over the programming on such station. TBS produces and distributes
other cable programming services, including "TNT", a basic cable entertainment
service, and TBS has and may be expected to continue to give priority to the
programming needs of such services in allocating programming owned by it or to
which it has national distribution rights. Southern's business could be
adversely affected by any change in the type, mix or quality of the programming
on WTBS that results in the service being less desirable to cable operators and
their subscribers. TBS derives significant revenue from the sale of
advertising time on WTBS, however, and the Company therefore believes that TBS
has an economic incentive to maintain the audience appeal of WTBS's
programming.
Federal Regulation-Southern. Southern markets the WTBS signal through
program packagers to HSD owners. Pursuant to the SHV Act, Congress granted a
compulsory copyright license to satellite carriers retransmitting the broadcast
signals of "superstations", such as WTBS, and network stations to the public
for private home viewing. In 1994, Congress extended this license until
December 31, 1999. Pursuant to the provisions of the SHV Act, on May 1, 1992
the Copyright Royalty Tribunal ("CRT") adopted an increase in the compulsory
license fees for the HSD market effective January 1, 1993, which Congress has
extended through July 1, 1997, thus increasing Southern's copyright payment by
17%. New fees after July 1, 1997, will be determined either through
negotiations with the copyright owners of the signals being carried or, if no
agreement can be reached, by an arbitration panel conducted under the auspices
of the Copyright Office.
Copyright Regulations. The Copyright Act provides cable television
operators with a compulsory copyright license for retransmission of broadcast
television programming without having to negotiate program rights with the
stations or individual copyright owners. However, see Regulation of Carriage
of Broadcast Stations above, regarding the imposition of retransmission consent
for broadcast stations. Therefore, cable systems that carry distant broadcast
signals, such as WTBS, must pay royalty fees to the Register of Copyrights, the
amount of which is based upon a formula utilizing the amount of the system's
semi-annual gross receipts and the number and type of distant signals carried
by the system. Any increases in the required fees could adversely affect the
competitive position of WTBS and therefore, Southern. The Copyright Act
empowers the Copyright Office to review periodically and adjust copyright
royalty rates based on inflation and/or petitions for adjustments due to
modifications of FCC rules. Further, the FCC has recommended to Congress the
abolition of the compulsory license for cable television carriage of broadcast
signals, a proposal that has received substantial support from members of
Congress. If the compulsory license is abolished, Southern would not be
permitted to distribute WTBS to cable operators unless the cable operator and
the copyright owners or licensees of the programming contained on the WTBS
signal being retransmitted reach an agreement for the licensing of such
programming.
I-36
<PAGE> 40
Southern is not permitted to provide the WTBS signal to HSD owners
under the separate compulsory license extended to cable systems. Under
regulations adopted by the Copyright Office, satellite carriers such as
Southern are not "cable systems" within the meaning of the Copyright Act. In
1994, the United States Court of Appeals for the Eleventh Circuit upheld such
regulations in an action challenging their validity brought by Southern and
other satellite carriers, and the Supreme Court declined to review that
decision. Thus, if the license granted under the SHV Act is not further
extended, satellite carriers will be required to negotiate private licenses for
the retransmission of copyrighted material to HSD owners after 1999.
Syndicated Exclusivity. The FCC's syndicated exclusivity rules, which
became effective January 1, 1990, require cable systems with more than 1,000
subscribers to delete programming from distant broadcast signals if exclusive
local broadcast rights to such programming have been purchased by a television
station which broadcasts in the locale of the cable system and such station
requests the cable system to "black out" such programming. These rules could
lead to cable operators dropping distant broadcast signals from their systems
because of the administrative difficulty of providing for the blackout and
because the service may be less attractive to subscribers if a material portion
of its programming were blacked out. Although such rules could therefore
result in additional channels becoming available for certain of the Programming
Companies' services, they could have an adverse effect on Southern's business
if WTBS were to carry a material amount of programming subject to deletion.
TBS has stated that it is programming WTBS to avoid blackouts and that, because
it has a reasonable basis for believing that deletions of its programming will
not be required, it is offering, as permitted by the FCC, to indemnify cable
operators that carry WTBS in order to ensure that its programming is not
blacked out. Southern cannot control TBS's programming decisions with respect
to WTBS, nor can it predict what the long-term response of the cable television
industry will be to the syndicated exclusivity rules.
An FCC license is also required to construct and operate the uplinking
equipment which transmits program signals to satellites. The FCC has granted a
license to Southern for its uplink of the WTBS signal and licenses for a
terrestrial path which carries the signal from the TBS facilities to the uplink
facilities, which licenses Southern has assigned to LMC SatCom, Inc.
Satellite carriers, including carriers like Southern that lease
transponders from others rather than owning a satellite, may provide their
services as a private carrier and/or as a common carrier. Common carriers are
required, pursuant to the Communications Act, to provide services on terms and
conditions that are just, reasonable and non-discriminatory. The FCC does not
set the rates charged by non-dominant common carriers. However, the United
States Court of Appeals for the District of Columbia Circuit in AT&T Co. v. FCC
has invalidated the FCC's permissive de-tariffing rules for non-dominant
carriers and its streamlined tariff filing rules for such carriers.
Consequently, even non-dominant carriers are required to file tariffs pursuant
to the FCC's rules. Private carriers are subject to a lesser degree of
regulation by the FCC. The Copyright Act exempts any carrier from liability
for copyright infringement in delivering television broadcast signals to cable
television systems if it meets the passive carrier requirements of the
Copyright Act.
Netlink USA ("Netlink"). Netlink markets and distributes programming
to the United States HSD subscriber market. As of December 31, 1994,
approximately 380,000 HSD owners, or 18% of the estimated authorized HSD
subscriber market subscribed to programming through Netlink. Netlink acquires
rights from programmers to market various satellite-transmitted programming,
including services such as ESPN, CNN, HBO, WTBS (which it purchases from
Southern) and the Discovery Channel, to HSD owners. Netlink offers HSD owners
various packages of programming for monthly, quarterly or annual subscription
periods.
I-37
<PAGE> 41
In addition, Netlink uplinks and sells the signals of nine broadcast
television stations to other HSD packagers and marketers in the United States
and, through Netlink International, in Canada. As of December 31, 1994,
approximately 500,000 HSD households subscribed to one or more of such stations
through HSD packages offered by Netlink and other HSD packaging and marketing
companies. The other HSD packaging and marketing companies pay Netlink a fee
for the right to distribute these services to their customers.
Competition - Netlink. Netlink competes with several large HSD
program packagers, some of which are affiliated with well-known, large
programmers and cable television system operators. Because a significant
portion of Netlink's sales are generated through HSD dealers, Netlink also
competes for dealer relationships on the basis of commission rates and quality
of service offered to the dealer and its customers. In addition, the HSD
market faces competition from cable television as well as emerging technologies
such as DBS services, which were launched in 1994. DBS uses higher power
Ku-Band frequencies that can be received by significantly smaller, and possibly
less expensive, hardware than HSDs that receive C-Band frequencies. Because of
the smaller dish size, DBS may be more widely accepted than HSD systems in
urban markets. Although the Company is unable to predict the effects of DBS
competition, the Company believes that for the foreseeable future more
programming will be available for the HSD market than DBS because programming
for cable television systems is transmitted on C-Band frequencies. While HSD
C-Band dishes can be equipped to receive Ku-Band frequencies, small DBS dishes
cannot reliably receive C-Band frequencies. Given the initial investment costs
of an HSD system, the Company believes that a significant portion of current
HSD owners will continue to use HSD services rather than invest in a DBS
system.
Netlink leases nine satellite transponders on an "unprotected" or
"transponder unprotected" basis on two separate communications satellites.
Netlink has "seniority status" on such satellite transponders which results in
Netlink having favorable ranking should transponders be required to restore a
"protected" service.
GENERAL
Legislative, administrative and/or judicial action may change all or
portions of the foregoing statements relating to competition and regulation.
The Company has not expended material amounts during the last three
fiscal years on research and development activities.
There is no one customer or affiliated group of customers to whom
sales are made in an amount which exceeds 10% of the Company's consolidated
revenue.
Compliance with Federal, state and local provisions which have been
enacted or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Company.
At December 31, 1994, the Company had approximately 32,000 employees,
the majority of which are employees of TCI Communications, Inc. Of these
employees, approximately 666 were located in its corporate headquarters
and most of the balance were located at the Company's various facilities
in the communities in which the Company owns and/or operates cable
television systems or programming services.
(d) Financial Information about Foreign & Domestic Operations and Export
Sales
The Company has neither material foreign operations nor export sales.
I-38
<PAGE> 42
Item 2. Properties.
The Company owns its executive offices in a suburb of Denver,
Colorado. It leases most of its regional and local operating offices. The
Company owns many of its head-end and antenna sites. Its physical cable
television properties, which are located throughout the United States, consist
of system components, motor vehicles, miscellaneous hardware, spare parts and
other components. The Company's programming subsidiaries generally own their
production and transmitting equipment and facilities.
The Company's cable television facilities are, in the opinion of
management, suitable and adequate by industry standards. Physical properties
of the Company are not held subject to any major encumbrance.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Company
is a party or to which any of its property is subject, except as follows:
On September 30, 1994, an action captioned The Carter Revocable Trust
by H. Allen Carter and Sharlynn Carter as Trustee v. Tele-Communications,
Inc.; IR-Daniels Partners III; Daniels Ventures, Inc.; Cablevision Equities IV;
Daniels & Associates, Inc.; and John V. Saeman, 94-N-2253, was filed in the
United States District Court for the District of Colorado. The suit alleges
that all the defendants violated disclosure requirements under the Securities
Exchange Act of 1934, and that defendants IR-Daniels Partners III (now known as
IR-TCI Partners III"), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.)
and Daniels & Associates, Inc. (now known as TCI Cablevision Associates, Inc.
or "D&A") breached a fiduciary duty to plaintiff and other limited partners of
American Cable TV Investors 3 (the "ACT 3 Partnership"), in connection with (i)
the sale to TCI Communications, Inc. of ACT 3 Partnership's ownership interest
in the Redlands System and (ii) the sale to affiliates of TCIC of ACT 3
Partnership's ownership interests in other cable television systems (the "ACT 3
Transactions").
Plaintiff brings this action on behalf of himself and purports to
bring it as a class action on behalf of all persons who were limited partners
(the "ACT 3 Limited Partners") of the Partnership as of the close of business
on October 1, 1993 and who had their proxies solicited by the defendants in
connection with the ACT 3 Transactions that allegedly "resulted in the
dissolution of the ACT 3 Partnership and the loss of their limited partnership
interests."
Plaintiff seeks unspecified damages that allegedly include, but are
not limited to (i) the difference between the value of ACT 3 Partnership's
interest in the Redlands System (as a percentage of the appraised value of that
system as determined by a 1992 appraisal) and the amount paid by TCIC for the
ACT 3 Partnership's interest in the Redlands System, plus the amount of a fee
paid to D&A, and (ii) the difference between the fair market value of the
limited partnership interests owned by members of a putative class and value
received by members of the putative class pursuant to the ACT 3 Transactions.
Plaintiff also seeks interest and consequential damages.
I-39
<PAGE> 43
The defendants have moved to dismiss various claims asserted in the
complaint and plaintiff has opposed such motions. Discovery on the issue of
class certification is underway and merits discovery is scheduled to commence
on or after April 11, 1995. The defendants believe that the claims asserted
are without merit and intend to vigorously defend this action. Management of
the Company 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.
On September 30, 1994, an action captioned WEBBCO v.
Tele-Communications, Inc.; IR-Daniels Partners II; Daniels Ventures, Inc.;
Cablevision Equities III; Daniels & Associates, Inc.; and John V. Saeman,
94-N-2254, was filed in the United States District Court for the District of
Colorado. The suit alleges that all the defendants violated disclosure
requirements under the Securities Exchange Act of 1934, and that defendants
IR-Daniels Partners II (now known as IR-TCI Partners II"), Daniels Ventures,
Inc. (now known as TCI Ventures, Inc.) and D&A breached a fiduciary duty to
plaintiff and other limited partners of American Cable TV Investors 2 (the "ACT
2 Partnership"), in connection with the sale to TCIC of ACT 2 Partnership's
ownership interest in the Redlands System (the "ACT 2 Transaction").
Plaintiff brings this action on behalf of himself and purports to
bring it as a class action on behalf of all persons who were limited partners
(the "ACT 2 Limited Partners") of the ACT 2 Partnership as of the close of
business on October 1, 1993 and who had their proxies solicited by the
defendants in connection with the ACT 2 Transaction that allegedly "resulted in
the dissolution of the ACT 2 Partnership and the loss of their limited
partnership interests."
Plaintiff seeks unspecified damages that allegedly include, but are
not limited to (i) the difference between the value of ACT 2 Partnership's
interest in the Redlands System (as a percentage of the appraised value of that
system as determined by a 1992 appraisal) and the amount paid by TCIC for ACT 2
Partnership's interest in the Redlands System, plus the amount of a fee paid to
D&A, and (ii) the difference between the fair market value of the limited
partnership interests owned by members of a putative class and value received
by members of the putative class pursuant to the ACT 2 Transaction. Plaintiff
also seeks interest and consequential damages.
The defendants have moved to dismiss various claims asserted in the
complaint and plaintiff has opposed such motions. Discovery on the issue of
class certification is underway and merits discovery is scheduled to commence
on or after April 11, 1995. The defendants believe that the claims asserted
are without merit and intend to vigorously defend this action. Management of
the Company 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.
Intellectual Property Development Corporation v. UA-Columbia
Cablevision of Westchester, Inc. and Tele-Communications, Inc. On September 1,
1994, plaintiff filed suit in federal court in New York for the alleged
infringement of a patent for an invention used in broadcasting systems with
fiber optic transmission lines. Plaintiff seeks injunctive relief and
unspecified treble damages. Based upon the facts available, management
believes that, although no assurance can be given as to the outcome of this
action, the ultimate disposition of this action should not have a material
adverse effect upon the financial condition of the Company.
I-40
<PAGE> 44
QVC Shareholders Litigation. In July 1994, eight putative class
action lawsuits were filed by certain shareholders of the company in the
Delaware Court of Chancery on behalf of unspecified classes of holders of QVC
common stock. On August 3, 1994, these actions were consolidated under the
caption In re QVC Shareholders Litigation, Consolidated Civil Action No. 13590
(Court of Chancery, New Castle County, State of Delaware) (the "Consolidated
Action"). The defendants named in the designated complaint in the Consolidated
Action included QVC and its then directors (Barry Diller, Bruce R. Ramer, Linda
J. Wachner, William F. Costello, J. Bruce Llewellyn, Brian L. Roberts, Ralph J.
Roberts and Joseph M. Segal). In their designated complaint in the
Consolidated Action, plaintiffs alleged, among other things, that the QVC
directors breached their fiduciary duties by failing to take all possible steps
to seek out and encourage the best offer for QVC following the announcement by
Comcast of a merger proposal to acquire QVC. Plaintiffs sought, among other
things, an injunction ordering the defendants to auction QVC and an award of
unspecified damages to the members of the plaintiff class. On July 22, 1994,
Comcast and Liberty made a merger proposal to QVC in order to acquire the
remaining shares of QVC common stock that Comcast and Liberty collectively did
not already own.
During early August 1994, counsel for the plaintiffs in the
Consolidated Action advised counsel for Liberty that they were preparing to
amend the designated complaint to name Comcast and Liberty as defendants. On
August 3-4, 1994, plaintiffs' counsel negotiated with counsel for Liberty with
respect to a proposed increase in the consideration to be paid to QVC's public
shareholders as well as the accelerated payment of such consideration, as bases
for the possible settlement of the Consolidated Action. On August 5,
plaintiffs, defendants, Comcast and Liberty executed a memorandum of
understanding which contemplates the settlement and dismissal with prejudice of
the Consolidated Action. On August 4, 1994, Comcast, Liberty, QVC Programming
Holdings, Inc. and the company executed a merger agreement which, among other
things, reflected the parties' agreement to the terms and transactions
contemplated by the memorandum of understanding. On August 19, 1994, as
contemplated by the memorandum of understanding, plaintiffs filed a
consolidated amended class action complaint with the Delaware Court of Chancery
against QVC, the company's directors, Comcast and Liberty.
The proposed settlement of the Consolidated Action is subject to
numerous conditions set forth in the memorandum of understanding and, if
approved by the Delaware Court of Chancery, would result in a dismissal with
prejudice of the Consolidated Action, and a complete release of all claims,
known or unknown, arising out of or related to the acts, transactions or
occurrences that are alleged in the Consolidated Action. Defendants in the
Consolidated Action have entered into the memorandum of understanding and are
proposing to enter into the stipulation of settlement for the Consolidated
Action solely because the proposed settlement would eliminate the distraction,
burden and expense of the litigation. 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.
I-41
<PAGE> 45
In re Liberty Media Corporation Shareholders Litigation, Cons. C.A.
No. 13168 (Del. Ch.): In October 1993, after the announcement that Liberty
would recombine with TCI through the mergers of TCIC and Liberty with
subsidiaries of a newly formed holding company, seven putative class action
lawsuits were filed by Liberty stockholders in the Court of Chancery of the
State of Delaware (the "Delaware Chancery Court") on behalf of unspecified
classes of the holders of Liberty common stock (other than defendants). The
original defendants included certain directors of Liberty (Bob Magness, John C.
Malone, Peter R. Barton, H.F. Lenfest, Robert L. Johnson and Paul A. Gould),
Liberty and TCI. These actions were consolidated by the Delaware Chancery
Court on October 27, 1993 under the caption In re Liberty Media Corporation
Shareholder Litigation, Cons. C.A. No. 13168 (the "Liberty Stockholder
Action"). On December 21, 1994, plaintiffs were permitted by the Delaware
Chancery Court to file a second consolidated amended complaint against the
defendants named in the pending complaint and Liberty directors David Wargo and
David Rapley. The pending complaint is on behalf of a putative class
consisting of all holders of Liberty common stock (except the defendants and
their affiliates) from and after October 7, 1993 through the date of the
TCI/Liberty Combination. Plaintiffs allege that the Liberty stockholders
received inadequate consideration in the TCI/Liberty Combination, that the
defendants impeded the ability of third parties to seek to acquire Liberty, and
that the defendants failed to conduct an auction or market check following the
announcement of the proposed TCI/Liberty Combination. Plaintiffs seek to
rescind the TCI/Liberty Combination, to require defendants to take all
appropriate steps to enhance Liberty's value as an acquisition candidate, to
account to the plaintiff class for all profits obtained by defendants, and to
require defendants to pay unspecified damages to the plaintiff class. The case
remains pending before the Delaware Chancery Court. Discovery has commenced in
the action. Management of the Company believes that plaintiffs' complaint is
without merit, and intends to contest vigorously the plaintiffs' allegations.
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.
In re Home Shopping Network, Inc. Shareholders Litigation, Cons. C.A.
No. 12868 (Del. Ch.): Following the announcement in February 1993 by Liberty
of a merger proposal to acquire Home Shopping Network, Inc. ("HSN"), eight
complaints were filed with the Delaware Chancery Court on behalf of unspecified
classes of HSN stockholders (other than defendants). Pursuant to orders
approved by the Delaware Chancery Court on February 19, 1993 and March 15,
1993, the eight actions were consolidated for all purposes under the caption In
re Home Shopping Network, Inc. Shareholders Litigation, Cons. C.A. No. 12868
(the "HSN Stockholder Action"). The defendants in the action have included
Liberty, Liberty Program Investments, Inc. ("LPI"), John C. Malone, Peter R.
Barton, Robert R. Bennett and John M. Draper (collectively the "Liberty
Defendants"), Roy M. Speer, RMS Limited Partnership ("RMS"), Gerald F. Hogan,
Les R. Wandler, J. Anthony Forstmann, John J. McNamara, QVC, Inc. ("QVC") and
HSN. Plaintiffs originally alleged that the February 1993 merger proposal by
Liberty to acquire HSN was fundamentally unfair to the public stockholders of
HSN, that the consideration in the Liberty merger proposal did not represent
the fair value of HSN stock, and that the HSN directors breached their
fiduciary duties in responding to the Liberty merger proposal. In addition,
plaintiffs alleged that Roy M. Speer and RMS breached their fiduciary duties to
the HSN stockholders in approving and consummating the sale to Liberty in
February 1993 of a majority of the HSN voting stock, and that Liberty aided and
abetted their supposed breach of fiduciary duty. Plaintiffs sought an
injunction against the consummation of the Liberty merger proposal, unspecified
money damages, and to rescind the sale of HSN stock by RMS to Liberty.
Following Liberty's withdrawal on April 9, 1993 of its merger proposal to HSN
and Liberty's announcement on April 23, 1993 of a partial tender offer to
purchase additional shares of HSN stock (the "Liberty Tender Offer"), the
complaint in the HSN Stockholder Action was amended on April 26, 1993. The
amended and supplemental complaint included the additional allegations that,
among other things, the Liberty Tender Offer was coercive and contained an
unfair price, that
I-42
<PAGE> 46
the HSN directors breached their fiduciary duties in responding to the Liberty
Tender Offer, and that Liberty's disclosures in its tender offer circular were
false and misleading. Plaintiffs sought, among other relief, an injunction
preventing consummation of the Liberty Tender Offer, an order enjoining the
defendants from taking any action to eliminate the supposedly separate class
voting rights of the holders of HSN common stock on any business combination
involving the company, and unspecified money damages.
Following expedited discovery and a hearing, the Delaware Chancery
Court issued an opinion on May 19, 1993 denying plaintiffs' motion to enjoin
the Liberty Tender Offer. The Liberty Tender Offer closed on May 20, 1993. On
June 6, 1993, plaintiffs in the HSN Stockholder Action filed a second amended
and supplemental complaint, which among other things set forth additional
allegations against Liberty regarding its supposed failure to disclose material
information in connection with the Liberty Tender Offer. Plaintiffs further
alleged that HSN issued a misleading Schedule 14D-9 in response to the Liberty
Tender Offer. On July 12, 1993, after QVC made a merger proposal to HSN,
plaintiffs in the HSN Stockholder Action filed a third consolidated amended and
supplemental class action complaint which added QVC as an additional defendant
and which contained additional allegations that the financial terms of the
proposed merger between HSN and QVC were unfair to the HSN stockholders. QVC
withdrew its merger proposal to HSN on November 5, 1993. On November 16, 1994,
plaintiffs and all defendants entered into a stipulation in connection with a
contemplated settlement of the HSN Stockholder Action, as well as the Section
203 Action and the Delaware Federal Action (as defined below) which is
described more fully below. In accordance with the parties settlement
stipulation, the Delaware Chancery Court dismissed the HSN Stockholders Action
on January 24, 1995. This represents the final resolution of this matter, and,
accordingly, this case will not be reported in future filings. See "Settlement
Of Delaware Actions."
7547 Corp. v. Liberty Media Corporation: Following Liberty's
announcement of a partial tender offer to purchase additional shares of HSN
stock, on April 26, 1993, four HSN stockholders commenced an action in the
Delaware Chancery Court on behalf of an unspecified class of HSN stockholders
(other than defendants) (the "Section 203 Action"). The defendants included
Liberty, LPI, HSN, Roy M. Speer, Les R. Wandler, Franklin J. Chu, J. Anthony
Forstmann, Thomas A. James, John J. McNamara, William J. Ramsey and Michael V.
Roberts. Plaintiffs alleged that, upon the agreement in principle in December
1992 by Liberty to purchase from an affiliate of Roy M. Speer a majority of the
HSN voting stock (the "Agreement in Principle"), Liberty became a non-exempt
"interested stockholder" of HSN within the meaning of Section 203 of the
Delaware General Corporation Law ("Section 203"). Plaintiffs contended that,
as a supposedly non-exempt "interested stockholder" of HSN, Liberty engaged in
a prohibited "business combination" within the meaning of Section 203 by
purchasing additional shares of HSN stock through the Liberty Tender Offer.
Plaintiffs also asserted that Liberty's offer to purchase in the Liberty Tender
Offer contained certain misrepresentations and omissions. Plaintiffs sought
declaratory and injunctive relief, unspecified money damages and an injunction
prohibiting Liberty from engaging in any "business combination" as defined in
Section 203 until December 1995. Following expedited discovery and a hearing,
the Delaware Chancery Court issued an opinion on May 19, 1993 denying
plaintiffs' motion to enjoin the closing of the Liberty Tender Offer. The
Liberty Tender Offer closed on May 20, 1993. On May 11, 1994, the Liberty
defendants in the Section 203 Action filed their answer to plaintiffs'
complaint which denied plaintiffs' allegations of wrongdoing and raised certain
affirmative defenses.
I-43
<PAGE> 47
On June 24, 1994 plaintiffs in the Section 203 Action filed an amended
complaint which, in addition to the person and entities named as defendants in
the original complaint, named Barton, Bennett, Draper, Hogan, Malone, Leo J.
Hindery and George C. McNamee as defendants. The persons named as additional
defendants in the amended complaint are past or present directors of HSN who,
in addition to certain of the original defendants, allegedly committed or aided
and abetted the alleged wrongdoing.
The gravamen of the amended complaint in the Section 203 Action was
that, prior to the time when Liberty reached an understanding with RMS on
December 4, 1992, to allow Liberty to purchase a controlling equity interest in
HSN, the HSN Board and the HSN Executive Committee allegedly failed to approve
the proposed transaction and, thereby, failed under Section 203(a)(1) to exempt
Liberty from the restrictions under Section 203 on any "business combination"
with HSN. Plaintiffs asserted that upon realizing that the HSN Board failed on
December 4, 1992, to exempt Liberty from the restrictions of Section 203, HSN
created a record of (i) a supposed meeting of the HSN Executive Committee on
December 4, 1992, which never occurred; and (ii) purported action by the HSN
Executive Committee at the allegedly fictional meeting on December 4, 1992, to
exempt Liberty from the restrictions of Section 203. The amended complaint in
the Section 203 Action also alleged that, by asserting that Liberty was exempt
from Section 203, Liberty and the other defendants allegedly misrepresented a
material fact to all sellers of HSN shares after the public announcement of the
Agreement in Principle on December 7, 1992 (including the members of the Tender
Subclass), as well as to the present holders of HSN shares. Plaintiffs also
alleged that the Liberty Tender Offer constituted a prohibited "business
combination" under Section 203.
Plaintiffs in the Section 203 Action further asserted that the members
of the HSN Executive Committee (Speer, Wandler and Ramsey) had disabling
conflicts of interest which prevented the HSN Executive Committee from taking
effective action to exempt Liberty from the restrictions of Section 203. HSN
and the individual defendants allegedly aided and abetted Liberty in its
asserted scheme to misrepresent its status under Section 203. The individual
defendants also allegedly breached their fiduciary duties by failing to correct
Liberty's asserted misrepresentation of its exemption from Section 203.
Plaintiffs in the Section 203 Action sought a declaratory judgment that Liberty
is subject to Section 203, an award of damages to the plaintiff class members
who sold their HSN shares, and unspecified rescissionary and injunctive relief.
On November 16, 1994, plaintiffs and all defendants entered into a stipulation
in connection with a contemplated settlement of the Section 203 Action, as well
as the HSN Stockholder Actions and the Delaware Federal Action (as defined
below), which is described more fully below. In accordance with the parties'
settlement stipulation, the Delaware Chancery Court dismissed the Section 203
Action on January 27, 1995. This represents the final resolution of this
matter, and, accordingly, this case will not be reported in future filings.
See "Settlement Of Delaware Actions."
I-44
<PAGE> 48
Gerda Bartnik, et al. v. Home Shopping Network, Inc. et al., C.A. Nos.
93-336\347\406\480 (D. Del.) (the "Delaware Federal Action"): Following the
announcement on July 12, 1993 of a proposed merger between QVC and HSN, three
complaints were filed in the United States District Court for the District of
Delaware (the "Delaware Federal Court"). The three complaints were
consolidated by order of the Delaware Federal Court on September 14, 1993. On
December 16, 1993, three actions that had been filed in, consolidated by and
transferred from the United States District Court for the District of Colorado
were consolidated with the Delaware Federal Action. On February 15, 1994,
plaintiffs filed a consolidated and amended complaint. The action sought
unspecified damages on behalf of a putative class consisting of all purchasers
of HSN common stock prior to March 30, 1993 who thereafter sold such shares on
public exchanges prior to July 12, 1993 or in the Liberty Tender Offer. The
defendants included Liberty, LPI, John C. Malone, Peter R. Barton and Robert R.
Bennett, QVC, HSN, Gerald F. Hogan, J. Anthony Forstmann, John N. McNamara, Roy
M. Speer and Les R. Wandler. Plaintiffs alleged that, between March 30, 1993
and July 12, 1993, the Liberty Defendants failed to disclose their supposed
"plans and expectations" for a merger of HSN and QVC. Plaintiffs also alleged
that (i) defendants supposedly made misleading and overly negative disclosures
between April-July 1993 regarding the business activities and prospects of HSN
which had the effect of artificially depressing the price of HSN shares; (ii)
defendants allegedly misled sellers of HSN shares by failing to disclose
defendants' expectations regarding a July 1993 ruling by the Federal
Communications Commission which improved the business prospects of HSN; and
(iii) Liberty and HSN supposedly misled the HSN stockholders by making
incorrect disclosures (particularly in connection with the Liberty Tender
Offer) regarding Liberty's ability to control the HSN stockholder vote on
certain fundamental corporate transactions. Plaintiffs asserted that the
foregoing alleged acts and omissions violated the federal securities laws and
state law. On November 16, 1994, plaintiffs and all defendants entered into a
stipulation in connection with a contemplated settlement of the Delaware
Federal Action, as well as the HSN Stockholder Action and the Section 203
Action, which is described more fully below. In accordance with the parties'
settlement stipulation, the Delaware Federal Court dismissed the Delaware
Federal Action on January 24, 1995. This represents the final resolution of
this matter, and, accordingly, this case will not be reported in future
filings. See "Settlement Of Delaware Actions."
Consolidated Home Shopping Network, Inc. Shareholders Derivative
Action: In December 1992, two stockholder derivative actions were filed on
behalf of HSN in the United States District Court for the Middle District of
Florida, Tampa Division (the "Florida Federal Court"). The original defendants
included Roy M. Speer, Les R. Wandler, Franklin J. Chu, J. Anthony Forstmann,
Thomas A. James, John J. McNamara, Michael J. Ramsey, Michael V. Roberts and
HSN. On February 23, 1993, the Florida Federal Court granted a motion to
consolidate these lawsuits into a single action styled as 7457 Corp. v. Speer,
No. 92-1966-Civ-T-15A and No. 92- 2045-Civ-T-99C (the "Florida Derivative
Action"). On April 16, 1993, plaintiffs in the Florida Derivative Action filed
a consolidated amended complaint which added RMS, Richard Speer and Western
Hemisphere Sales, Inc. ("Western") as defendants. HSN is named as a nominal
defendant with respect to the two derivative claims in the amended complaint.
Plaintiffs also assert a claim that the individual defendants (other than Roy
M. Speer) are liable to an unspecified class of HSN stockholders because HSN's
proxy materials during 1991-1993 supposedly were false and misleading. The
derivative claims in the suit allege that the HSN director defendants breached
their duties to HSN and its stockholders by failing to exercise due care and
diligence in the management of HSN. Western and Richard Speer are alleged to
have aided and abetted such breaches. Plaintiffs also assert that Roy M. Speer
violated various legal duties by causing HSN to enter into certain commercially
unreasonable licensing, liquidations and other arrangements with Western
(collectively, the "R. Speer/Western Arrangements"), by paying a former HSN
executive unwarranted fees in exchange for the former executive's silence
concerning derivative allegations involving HSN and
I-45
<PAGE> 49
then shifting such fee obligations to HSN, and by causing HSN to purchase a
business of Western at a commercially unreasonable price. On May 24, 1993,
plaintiffs in the Florida Derivative Action filed a second amended consolidated
complaint naming Liberty and LPI as additional defendants. As to Liberty and
LPI, the second amended complaint seeks unspecified damages on behalf of an
unspecified class of HSN stockholders based on allegations that, among other
things, Liberty's offer to purchase HSN common stock in May 1993 failed to
disclose material information and otherwise violated the "going private" rules
under the federal securities laws (the "Liberty Class Claims"). The Florida
Derivative Action remains pending before the Florida Federal Court. On
February 8, 1994, the parties to the Florida Derivative Action (other than
Liberty and LPI) signed a memorandum of understanding (the "Florida Derivative
MOU") in connection with a contemplated settlement of the derivative claims and
class claims against HSN (the "Florida Derivative Settlement"). In the Florida
Derivative MOU, the parties agreed, in principle and subject to the approval of
the Florida Derivative Settlement by the Florida Federal Court as follows: (i)
Roy M. Speer will pay $2 million to HSN, as well as pay an additional $1
million to HSN in order to partially fund the proposed settlement of the
Florida Federal Actions (see "Florida Federal Securities Actions Against HSN");
and (ii) HSN will pay $4.5 million to Western in exchange for releases from the
R. Speer/Western Arrangements; (iii) the parties agreed to certain limitations
on the rights of Roy M. Speer to seek indemnification for the advancement of
expenses from HSN; (iv) HSN agreed to release any claim against Roy M. Speer,
RMS, Richard Speer and Western arising out of any action by any federal or
state taxing authority relating to the treatment of payments to Western
pursuant to the R. Speer/ Western Arrangements; (v) the parties agreed to
additional releases of potential claims against each other; and (vi) the
parties agreed to several supplemental agreements. In conjunction with the
Florida Derivative Settlement, HSN also has agreed to pay such attorneys' fees
as may be awarded by the Florida Federal Court to plaintiffs' counsel. The
Florida Derivative Settlement, as contemplated by the Florida Derivative MOU
and, if approved by the Florida Federal Court, would result in the dismissal
with prejudice of all claims in the Florida Derivative Action (other than the
Liberty Class Claims), and a complete release of all claims that have been or
could have been or in the future might be asserted by HSN against any of the
defendants based on the allegations, transactions, matters or occurrences,
representations or omissions set forth, referred or related in any way to the
complaints in the Florida Derivative Action. The contemplated settlement is
conditioned upon, among other things, the approval of the Florida Federal Court
following notice of the Florida Derivative Settlement to the stockholders of
HSN and a hearing before the Florida Federal Court on the fairness of the
Florida Derivative Settlement. On April 22, 1994, the Florida Federal Court
entered an order dismissing without prejudice the Liberty Class Claims.
Liberty believes that the Liberty Class Claims are barred as to the
contemplated plaintiff class in the Florida Derivative Action, under principles
of collateral estoppel and release because the Delaware Federal Court and the
Delaware Chancery Court approved the settlement and dismissal of the HSN
Stockholder Action and the Delaware Federal Action. This represents the final
resolution of this matter, and accordingly, this case will not be reported in
future filings. See "Settlement Of Delaware Actions."
I-46
<PAGE> 50
Settlement Of Delaware Actions. On November 16, 1994, plaintiffs and
all defendants in the HSN Stockholder Action, the Section 203 Action and the
Delaware Federal Action entered into a stipulation in connection with a
contemplated settlement of such actions (the "Delaware Settlement"). The
settlement of the HSN Stockholder Action and the Delaware Federal Action
(collectively, the "HSN/Federal Actions") was approved by the Delaware Chancery
Court and the Delaware Federal Court on January 24, 1995. In accordance with
the final orders approving the settlement of the HSN/Federal Actions, Liberty
created a $13.7 million settlement fund in full settlement of any and all
claims whatsoever which have been or could have been made in the HSN/Federal
Actions by any members of a plaintiff class (other than defendants) consisting
of (i) all record and beneficial owners of HSN common stock (the "HSN Shares")
from December 4, 1992 through and including November 5, 1993, (ii) all sellers
of HSN Shares in the Liberty Tender Offer; and (iii) all sellers of HSN Shares
from March 30, 1993 through and including July 12, 1993 (collectively, the
"Holder/Seller Class"). The Delaware Settlement provides that the net proceeds
of the settlement fund will be distributed to the members of the subsclasses in
subsections (ii) and (iii) of the preceding sentence (the "Seller Class
Members") in accordance with a method of loss calculation and a plan of
allocation and distribution which has been approved by the Delaware Courts.
The Delaware Settlement resulted in the dismissal with prejudice of the HSN
Stockholder Action and the Delaware Federal Action, and (subject to certain
exceptions) a complete release of all claims that have been, or could have
been, or in the future might be asserted by any member of the Holder/Seller
Class against any of the Settling Delaware Defendants in such actions based on
the allegations, transactions, matters or occurrences, representations or
omissions set forth, referred or related in any way to the complaints in the
HSN Stockholder Action and the Delaware Federal Action. The Liberty Defendants
have denied, and continue to deny, that they have committed or have threatened
to commit any violations of law or breaches of duty to the plaintiffs or any
member of the Holder/Seller Class. The Liberty Defendants agreed to settle the
HSN/Federal Actions solely because the settlement eliminated the distraction,
burden and expense of further litigation.
In approving the settlement and dismissal of the Section 203 Action on
January 27, 1995, the Delaware Court of Chancery certified a plaintiff class
consisting of all record or beneficial holders, purchasers or sellers of HSN
common stock from December 4, 1992 through December 4, 1995. In accordance
with the parties' settlement stipulation, the Delaware Court of Chancery
entered a final order dismissing with prejudice all claims which were, could
have been or in the future might be asserted by any member of the plaintiff
class relating in any manner to Liberty's purchase of HSN stock in exchange
for, among other things, the agreement by Liberty and HSN that, as defined in
Delaware antitakeover statute, the consummation of any "business combination"
prior to December 4, 1995 between HSN and Liberty or any of its "affiliates" or
"associates" shall be subject to the prior approval of the HSN board of
directors and the authorization at an annual or special meeting of the HSN
stockholders, and not by written consent, by the affirmative vote of the
holders of at least a majority of the outstanding HSN voting stock which is not
"owned" by Liberty. Although HSN and Liberty denied the allegations of the
complaint in the Section 203 Action and raised affirmative defenses, both
companies and certain additional defendants agreed to the settlement in order
to halt the substantial expense, inconvenience and distraction of the
litigation.
I-47
<PAGE> 51
In conjunction with the settlement of the Delaware Federal Action, the
HSN Stockholder Action, the Florida Derivative Action and the Florida Federal
Actions, certain defendants in those lawsuits agreed through their attorneys on
February 8, 1994 that, upon the final consummation of the proposed settlements
in all such actions, all such parties released each other as to any claims for
contribution relating to the claims actually asserted in those proceedings (the
"Release Agreement"). The parties to the Release Agreement are HSN, Roy M.
Speer, Les R. Wandler, Franklin J. Chu, J. Anthony Forstmann, Gerald F. Hogan,
Thomas A. James, John J. McNamara, William J. Ramsey, Michael V. Roberts, RMS,
Liberty, LPI, John C. Malone, Peter R. Barton, Robert R. Bennett, and John M.
Draper.
Florida Federal Securities Actions Against HSN: During April 1993,
nine purported class action lawsuits (collectively, the "Florida Federal
Actions") were filed against HSN, Roy M. Speer and, in certain cases, RMS and
several former officers and/or directors of HSN, including Les R. Wandler,
Fernando DiFilippo, Jr., Lowell R. Paxson, Franklin J. Chu, John J. McNamara,
Michael V. Roberts and Edward Vaughn. The complaints alleged, in general,
that certain public filings, announcements and statements by Roy M. Speer and
HSN between November 1992 and April 1993 omitted to disclose material facts
relating to HSN's business practices, including (among other things) that HSN
employees allegedly accepted improper compensation from vendors, that HSN
and/or Roy M. Speer and Lowell Paxson allegedly paid the company's former
general counsel (Fernando DiFilippo, Jr.) to prevent the disclosure of such
vendor bribes, that HSN allegedly engaged in undisclosed related party
transactions, that unspecified vendors made improper payments to HSN employees
(including Roy M. Speer and Lowell Paxson), that HSN assets and funds allegedly
were transferred improperly to Western, that HSN's inventory practices were
deceptive and that HSN allegedly made an improper loan to one of the company's
financial advisors. The suits alleged that the defendants' actions or
omissions violated the federal securities laws and state law. The actions
sought to recover damages, punitive damages, interest, costs and fees on behalf
of various putative classes of purchasers of HSN common stock. The Florida
Federal Actions were assigned the following civil action numbers by the Florida
Federal Court: 93-602-CIV-T-23B, 93-608-CIV-T-15C, 93-610-CIV-T-21B,
93-613-CIV-T-17B, 93-621-CIV-T-15A, 93-623-CIV-T-23A, 93-624- CIV-T-17B,
93-681-CIV-T-17A and 93-679-CIV-T-21C. Plaintiff in C.A. No. 93-621-CIV-T-15A
voluntarily dismissed his claims without prejudice on April 22, 1993. The
Florida Federal Actions (other than C.A. No. 93-679-CIV-T-21C) were
consolidated on June 6, 1994 by the Florida Federal Court and the parties were
directed to file their papers in the action styled as Goldstein v. Speer, No.
93- 602-CIV-T-23B.
I-48
<PAGE> 52
On October 10, 1994, the parties to the Florida Federal Actions
entered into a stipulation in connection with a contemplated settlement of such
actions (the "Florida Federal Settlement"). The settlement of the Florida
Federal Actions was approved by the Florida Federal Court on January 9, 1995.
In accordance with the final order approving the settlement of the Florida
Federal Actions, HSN paid $9.6 million to create a fund in full settlement of
any and all claims whatsoever which have been or could have been made in the
Florida Federal Actions by any members of a plaintiff class consisting of all
purchasers of HSN common stock (other than defendants and other related
parties) from June 1, 1992 through and including April 12, 1993 (collectively,
the "Purchaser Class"). The Florida Federal Settlement provides that the net
proceeds of the settlement fund will be distributed to the members of the
Purchaser Class in accordance with a plan of distribution approved by the
Florida Federal Court. The Florida Federal Settlement resulted in the
dismissal with prejudice of the Florida Federal Actions, and a complete release
of all claims, known or unknown, arising out of or related to the acts,
transactions, or occurrences that are alleged in the Florida Federal Actions or
which relate to the purchase of HSN common stock from June 1, 1992 through and
including April 12, 1993. HSN has denied, and continues to deny, that it has
committed or has threatened to commit any violations of laws or breaches of
duty to the plaintiffs or any member of the Purchaser Class. HSN agreed to
settle the Florida Federal Actions solely because the settlement eliminates the
distraction, burden and expense of further litigation. This represents the
final resolution of this matter, and, accordingly, this case will not be
reported in future filings.
Cooper, et al. v. UCTC of Baltimore, Inc., et al. On October 24,
1994, plaintiffs, three current employees of United Cable Television of
Baltimore Limited Partnership and two spouses of such current employees, filed
suit in the Circuit Court for Baltimore City against UCTC of Baltimore, Inc.,
United Cable Television of Baltimore Limited Partnership, TCI East, Inc. and
Tele- Communications, Inc. The suit alleges, inter alia, eight various tort
claims, including assault, false imprisonment, intentional infliction of
emotional distress, invasion of privacy by intrusion, invasion of privacy by
false light, defamation by slander, defamation by libel and loss of consortium
in connection with an incident that occurred October 26, 1993, at the Baltimore
system. Each plaintiff seeks $1,000,000 compensatory damages and $5,000,000
punitive damages per count. The loss of consortium claim is limited to four of
the five plaintiffs. The Company intends to contest the state court case. On
November 1, 1994, plaintiffs also filed an action in United States District
Court for the District of Maryland alleging discrimination on the basis of race
in violation of 42 U.S.C. Section 1981 and loss of consortium. Both counts
sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages
for each plaintiff (the loss of consortium claim is limited to four of the five
plaintiffs). On January 6, 1995, the parties stipulated to the dismissal of
the case without prejudice, which dismissal the Court approved on January 9,
1995. The Company intends to contest the state court case. 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.
I-49
<PAGE> 53
Miles Whittenburg, Jr., et al., v. Tele-Communications, Inc., et al.
On April 9, 1994, plaintiffs, six current employees of United Cable Television
of Baltimore Limited Partnership and four spouses, filed suit in the Circuit
Court for Baltimore City against Tele-Communications, Inc., TCI East, Inc.,
UCTC of Baltimore, Inc., and United Cable Television of Baltimore Limited
Partnership. The suit alleges, inter alia, nine various tort claims, including
but not limited to, false imprisonment, assault, battery, intentional
infliction of emotional distress, invasion of privacy by intrusion, invasion of
privacy by false light, defamation by slander, defamation by libel, and loss of
consortium in connection with an incident that occurred October 26, 1993, at
the Baltimore system. Each of the nine counts in the complaint seek
compensatory damages of $1,000,000 per plaintiff, and punitive damages of
$5,000,000 per plaintiff. On October 24, 1994, plaintiffs also filed in the
United States District Court for the District of Maryland, a lawsuit containing
claims of discrimination on the basis of race in violation of 42 U.S.C. Section
1981 and loss of consortium. Both counts sought compensatory damages of
$1,000,000 per plaintiff and punitive damages of $5,000,000 per plaintiff. The
loss of consortium claims apply to eight of the plaintiffs. On January 6,
1995, the parties stipulated to the dismissal of the case without prejudice,
which dismissal the Court approved on January 9, 1995. The Company intends to
contest the state court case. 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.
Elmer Lewis v. Tele-Communications, Inc., et al. On June 23, 1994,
plaintiff filed suit in the United States District Court for the District of
Maryland against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore,
Inc. and United Cable Television of Baltimore Limited Partnership. On August
2, 1994, the suit was consolidated for all purposes with Tyrone Belgrave, et
al. v. Tele-Communications, Inc. et al. The suit alleges, inter alia, false
imprisonment, assault, employment defamation, intentional infliction of
emotional distress, unreasonable intrusion upon seclusion, invasion of privacy
by false light, wrongful discharge and discrimination on the basis of race.
The complaint also seeks divestiture of the Baltimore City cable franchise from
the Company. Each of the ten counts in the complaint seek compensatory damages
of $1,000,000 and punitive damages of $5,000,000. In a decision dated October
3, 1994, the Court granted defendants' motion to dismiss the intentional
infliction of emotional distress, unreasonable intrusion upon seclusion,
invasion of privacy by false light, wrongful discharge and violation of cable
franchise agreement claims. On February 4, 1995, the federal court dismissed
the federal claims without prejudice and remanded the remaining state claims to
Circuit Court for Baltimore City. On February 14, 1995, Lewis and his spouse
filed an amended complaint in Circuit Court for Baltimore City against the
current defendants (the amended complaint was consolidated with the Belgrave
and Fannell plaintiffs). Lewis alleges assault, civil conspiracy to commit
assault, battery, civil conspiracy to commit battery, false imprisonment, civil
conspiracy to commit false imprisonment, intentional infliction of emotional
distress, civil conspiracy to intentionally inflict emotional distress,
invasion of privacy by intrusion, civil conspiracy to commit invasion of
privacy by intrusion, defamation, civil conspiracy to defame, invasion of
privacy by false light, and civil conspiracy to commit invasion of privacy by
false light. Lewis and his spouse also allege loss of consortium. Each claim
seeks $1,000,000 in compensatory damages and $5,000,000 in punitive damages per
plaintiff. The Company intends to contest the case. 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.
I-50
<PAGE> 54
Tyrone Belgrave, et al., v. Tele-Communications, Inc., et al. On
February 8, 1994, Tyrone Belgrave and 26 other current or former employees of
United Cable Television of Baltimore Limited Partnership filed suit in the
Circuit Court for Baltimore City against Tele-Communications, Inc., TCI East,
Inc., UCTC of Baltimore, Inc., and United Cable Television of Baltimore Limited
Partnership. The action alleges, inter alia, false imprisonment, assault,
employment defamation, intentional infliction of emotional distress,
unreasonable intrusion upon seclusion, invasion of privacy by false light,
wrongful discharge and discrimination on the basis of race. The complaint also
seeks divestiture of the Baltimore City cable franchise from the Company. Six
counts in the complaint each seek compensatory damages of $1,000,000 per
plaintiff, and punitive damages of $5,000,000 per plaintiff. Three other
counts in the complaint each seek compensatory damages for $1,000,000 per
plaintiff and punitive damages of $5,000,000 per plaintiff. On March 29, 1994,
the defendants removed the case to the United States District Court for the
District of Maryland. In a decision dated October 3, 1994, the Court granted
defendants motion to dismiss the intentional infliction of emotional distress,
unreasonable intrusion upon seclusion, invasion of privacy by false light,
wrongful discharge and violation of cable franchise agreement claims. On
February 9, 1995, the federal court dismissed the federal claims without
prejudice and remanded the remaining state claims to the Circuit Court for
Baltimore City. On February 14, 1995, 37 persons (the 27 original plaintiffs
and 10 spouses of plaintiffs) filed an amended complaint in Circuit Court for
Baltimore City against the current defendants. (The amended complaint was
consolidated with the Lewis and Fannell plaintiffs). The 27 existing
plaintiffs allege assault, civil conspiracy to commit assault, battery, civil
conspiracy to commit battery, false imprisonment, civil conspiracy to commit
false imprisonment, intentional infliction of emotional distress, civil
conspiracy to intentionally inflict emotional distress, invasion of privacy by
intrusion, civil conspiracy to commit invasion of privacy by intrusion,
defamation, civil conspiracy to defame, invasion of privacy by false light, and
civil conspiracy to commit invasion of privacy by false light. Ten existing
plaintiffs and their spouses allege loss on consortium. Ten existing
plaintiffs also allege wrongful discharge and civil conspiracy to wrongfully
terminate. Each claim seeks $1,000,000 in compensatory damages and $5,000,000
in punitive damages per plaintiff. The Company intends to contest the case.
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.
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
alleges 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. ("Paramount") merger agreement and with plaintiff's
prospective business advantage. The amended complaint further alleges that
even if plaintiff is ultimately successful in its bid to acquire Paramount, its
competitive position will still be diminished because the Company, through
Liberty, will have forced plaintiff to expend additional financial resources to
consummate the acquisition. Plaintiff is seeking permanent injunctive relief
and actual and punitive or treble damages of an undisclosed amount. Plaintiff
claims that the Company, along with Liberty, has conspired to use its monopoly
power in cable television markets to weaken unaffiliated programmers and deny
access to essential facilities necessary for distributing programming to cable
television
I-51
<PAGE> 55
systems. Plaintiff also alleges that the Company has conspired to deny
essential, technology necessary for distributing programming to owners of home
satellite dishes. Plaintiff claims that the Company is engaging in these
alleged conspiracies in an attempt to monopolize alleged national markets for
non-broadcast television programming and distribution. On October 11, 1994,
the United States District Court granted Tele-Communications, Inc. and the
other defendants' motion for partial summary judgment and dismissed Viacom's $2
billion damage claim alleging that defendants tortiously interfered with its
contract to merge with Paramount and with the prospective business advantage
Viacom claimed it had in seeking to merge with Paramount. The Court also held
that the $2 billion difference between plaintiff's cost to acquire Paramount
under its original proposed merger agreement with Paramount and the costs it
finally incurred when plaintiff acquired Paramount pursuant to a merger
agreement entered into after an auction, was not incurred as a result of an
antitrust injury and could not be asserted as a discreet element of Viacom's
damage even if Viacom was ultimately successful in proving any or all of its
antitrust claims. Viacom has also voluntarily dismissed its claims that the
defendants violated Section 7 of the Clayton Act and that certain of the
defendants breached the affiliation agreement they had with Viacom. On January
20, 1995, the parties entered into a settlement agreement under which this
action is 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 has been executed
by the parties and is being held in escrow pending the first closing described
above. 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.
Euan Fannell v. Tele-Communications, Inc., et al. On February 8,
1994, Euan Fannell, the former general manager of UCTC of Baltimore, Inc. filed
suit in the Circuit Court for Baltimore City against Tele-Communications, Inc.,
TCI East, Inc., UCTC of Baltimore, Inc., and United Cable Television of
Baltimore Limited Partnership. The suit alleges, inter alia, employment
defamation, intentional infliction of emotional distress, unreasonable
intrusion upon seclusion, invasion of privacy by false light, breach of
contract, and discrimination on the basis of race. The complaint also seeks
divestiture of the Baltimore City cable franchise of the Company. The
plaintiff seeks $10,000,000 in compensatory damages and $50,000,000 in punitive
damages with respect to the intentional infliction of emotional distress claim;
and $10,000,000 in compensatory damages and $50,000,000 in punitive damages
with respect to each of five other counts. On March 29, 1994, the defendants
removed the case to the United States District Court for the District of
Maryland and the case was subsequently consolidated with the Belgrave case. In
a decision dated November 15, 1994, the federal court dismissed plaintiffs'
intentional infliction of emotional distress, unreasonable intrusion upon
seclusion, invasion of privacy by false light, and violation of cable franchise
agreement claims. On February 9, 1995, the federal court dismissed the federal
claims without prejudice and remanded the remaining state claims to the Circuit
Court for Baltimore City. On February 14, 1995, plaintiff filed an amended
complaint in Circuit Court for Baltimore City against the current defendants.
The amended action alleges intentional infliction of emotional distress, civil
conspiracy to intentionally inflict emotional distress, invasion of privacy by
intrusion, civil conspiracy to commit invasion of privacy by intrusion,
defamation, civil conspiracy to defame, invasion of privacy by false light,
civil conspiracy to commit invasion of privacy by false light, wrongful
discharge, civil conspiracy to wrongfully terminate, and breach of contract.
With respect to all claims other than breach of contract, plaintiff seeks
$1,000,000 in compensatory damages and $5,000,000 in punitive damages. With
respect to the breach of contract claim, plaintiff seeks $100,000 plus
prejudgment interest. The Company intends to contest the case. 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.
I-52
<PAGE> 56
Leonie Palumbo, et al. v. Tele-Communications, Inc., et al. On
February 8, 1994, Leonie Palumbo, a former employee of TCI East, Inc., filed a
class action suit in the United States District Court for the District of
Columbia against Tele-Communications, Inc., John Malone, and J.C. Sparkman.
The action alleges, on behalf of a class of past, present and future black
employees of the Company, and all past, present and future black applicants for
employment with the Company, discrimination on the basis of race. The
complaint seeks unspecified compensation and punitive damages as well as
injunctive relief for these violations. The Company intends to contest the
action. 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.
Les Dunnaville v. United Artists Cable, et al. On February 9, 1994,
Les Dunnaville and Jay Sharrieff, former employees of United Cable Television
of Baltimore Limited Partnership, filed an amended complaint in the Circuit
Court for Baltimore City against United Cable Television of Baltimore Limited
Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three
company employees, Roy Harbert, Tony Peduto, and Richard Bushie (the suit was
initially filed on December 3, 1993, but the parties agreed on December 30,
1993 that no responsive pleading would be due pending filing of an amended
complaint). The action alleges, inter alia, intentional interference with
contract, tortious interference with prospective advantage, defamation, false
light, invasion of privacy, intentional infliction of emotional distress, civil
conspiracy, violation of Maryland's Fair Employment Practices Law, and
respondeat superior with respect to the individual defendants. Six counts in
the complaint each seek compensatory damages of $1,000,000 and punitive damages
of $1,000,000; the intentional infliction of emotional distress count seeks
compensatory damages of $1,000,000 and punitive damages of $2,000,000; and the
count which alleges violation of Maryland's Fair Employment Practices Law seeks
damages of $500,000. By order dated May 18, 1994, the Court dismissed the
respondant superior claim. The Company intends to contest the action. 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.
I-53
<PAGE> 57
Tony Jeffreys, et al v. Tele-Communications, Inc. et al. On February
7, 1995, Tony Jeffreys and 41 current and former employees of United Cable
Television of Baltimore Limited Partnership filed a complaint in Circuit Court
for Baltimore City against Tele-Communications, Inc., UCT of Baltimore, Inc.,
United Cable Television of Baltimore Limited Partnership, UCTC of Baltimore,
Inc. and TCI East, Inc. With two exceptions, these plaintiffs are also
parties to identical claims asserted in the amended complaints filed on
February 14, 1994 in the previously described Belgrave, Fannell and Lewis
actions. The action alleges, in part, that the Companies engaged U.S.
Corporate Investigations, Inc. and Blackburn Associates and conspired to
illegally terminate the employment of management personnel and employees of the
Baltimore system which culminated in the October 26, 1993, incident described
in earlier reports. Plaintiffs seek damages in connection with their claims of
assault, civil conspiracy to commit assault, battery, civil conspiracy to
commit battery, false imprisonment, civil conspiracy to commit false
imprisonment, intentional infliction of emotion distress, civil conspiracy to
intentionally inflict emotional distress, invasion of privacy by intrusion,
civil conspiracy to commit invasion of privacy by intrusion, defamation as to
plaintiff Fannell, defamation as to all plaintiffs except Fannell, civil
conspiracy to defame, invasion of privacy by false light, civil conspiracy to
commit invasion of privacy by false light, wrongful discharge, civil conspiracy
to wrongfully terminate, breach of contract as to plaintiff Fannell, and loss
of consortium. Each count seeks $1,000,000 in compensatory damages and
$5,000,000 in punitive damages per plaintiff. The Company intends to contest
this action. 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.
Leo Wagner v. United Cable Television of Baltimore Limited
Partnership. On February 8, 1994, a current salesman of the Baltimore system
filed a suit in the United States District Court for the District of Maryland
against United Cable Television of Baltimore Limited Partnership. The
plaintiff alleges that he has been the victim of reverse discrimination in
violation of 42 U.S.C. Section 1981 and Title VII of the Civil Rights Act of
1946, and that the Partnership has retaliated against him because he filed
charges of discrimination with the Baltimore Community Relations Commission and
the Equal Employment Opportunity Commission. He seeks unspecified back pay and
lost wages, $250,000 in compensatory damages, and $10,000,000 in punitive
damages. The Company intends to contest this action. Based upon the facts
available, management believes that, although no assurance can be given as to
the outcome of this action, the ultimate disposition should not have a material
adverse effect upon the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
I-54
<PAGE> 58
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Shares of Tele-Communications, Inc.'s Class A and Class B common stock
are traded in the over-the-counter market on the Nasdaq National Market under
the symbols TCOMA and TCOMB, respectively. The following table sets forth the
range of high and low sales prices of shares of Class A and Class B common
stock for the periods indicated as furnished by Nasdaq. The prices have been
rounded up to the nearest eighth, and do not include retail markups, markdowns,
or commissions. The transaction whereby TCI Communications, Inc. and Liberty
Media Corporation became wholly-owned subsidiaries of Tele-Communications, Inc.
was consummated on August 4, 1994.
<TABLE>
<CAPTION>
Class A Class B
---------------- ----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1993:
----
First quarter 25-1/2 20-3/4 25-1/2 21
Second quarter 24 17-1/2 24 18-3/8
Third quarter 26-3/4 21-5/8 27 22
Fourth quarter 33-1/4 24-7/8 40 25-1/2
1994:
----
First quarter 30-1/4 20-3/8 32-3/4 22
Second quarter 23-3/8 18-1/4 24-3/4 21-1/4
Third quarter 23-7/8 19-3/4 25-3/4 21-1/4
Fourth quarter 25 20-1/4 25-3/4 21-1/2
</TABLE>
As of March 9, 1995, there were 8,802 holders of record of the
Company's Class A common stock and 671 holders of record of the Company's
Class B common stock (which amounts do not include the number of shareholders
whose shares are held of record by brokerage houses but include each brokerage
house as one shareholder).
The Company has not paid cash dividends on its Class A or Class B
common stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the Company's Board of
Directors in light of the Company's earnings, financial condition and other
relevant considerations. Certain loan agreements contain provisions that limit
the amount of dividends, other than stock dividends, that the Company may pay
(see note 7 to the Tele-Communications, Inc. consolidated financial
statements). See also related discussion under the caption Management's
Discussion and Analysis of Financial Condition and Results of Operations.
II-1
<PAGE> 59
Item 6. Selected Financial Data.
The following tables present selected information relating to the
financial condition and results of operations of Tele-Communications, Inc. for
the past five years.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
amounts in millions
Summary Balance Sheet Data:
--------------------------
<S> <C> <C> <C> <C> <C>
Property and equipment, net $ 5,876 4,935 4,562 4,081 4,156
Franchise costs, net $ 9,444 9,197 9,300 8,104 7,348
Net assets of discontinued
operations $ -- -- -- 242 54
Total assets $ 19,528 16,520 16,310 15,166 14,106
Debt $ 11,162 9,900 10,285 9,455 8,922
Stockholders' equity $ 2,971 2,112 1,726 1,570 748
Common shares outstanding
(net of treasury shares):
Class A common stock 491 403 382 370 310
Class B common stock 85 47 48 49 48
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
amounts in millions, except per share data
Summary Statement of
--------------------
Operations Data:
---------------
<S> <C> <C> <C> <C> <C>
Revenue $ 4,936 4,153 3,574 3,214 2,940
Operating income $ 788 916 864 674 546
Earnings (loss) from:
Continuing operations $ 55 (7) 7 (78) (191)
Discontinued operations -- -- (15) (19) (63)
------- ------ ------ ------ ------
55 (7) (8) (97) (254)
Dividend requirement on
redeemable preferred stocks (8) (2) (15) -- --
------- ------ ------ ------ ------
Net earnings (loss) attributable
to common shareholders $ 47 (9) (23) (97) (254)
======= ====== ====== ====== ======
Earnings (loss) attributable to
common shareholders
per common share:
Continuing operations $ .09 (.02) (.01) (.22) (.54)
Discontinued operations -- -- (.04) (.05) (.18)
------- ------ ------ ------ ------
$ .09 (.02) (.05) (.27) (.72)
======= ====== ====== ====== ======
Weighted average common
shares outstanding 541 433 424 360 355
</TABLE>
II-2
<PAGE> 60
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
TELE-COMMUNICATIONS, INC.
General
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement (the "TCI/Liberty Merger
Agreement") to combine the two companies (the "TCI/Liberty Combination"). The
transaction was consummated on August 4, 1994 and 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 a newly formed holding company, TCI/Liberty Holding
Company. In connection with the TCI/Liberty Combination, Old TCI changed its
name to TCI Communications, Inc. ("TCIC") and TCI/Liberty Holding Company
changed its name to Tele-Communications, Inc. ("TCI" or the "Company"). Old
TCI common shareholders received one share of TCI for each of their common
shares. Liberty common shareholders received 0.975 of a share of TCI for each
of their common shares. Upon consummation of the TCI/Liberty Combination,
certain subsidiaries of TCIC exchanged the 79,335,038 shares of Old TCI Class A
common stock held by such subsidiaries for 79,335,038 shares of TCI Class A
common stock. Such ownership is reflected as treasury stock at such
subsidiaries' historical cost.
TCIC owned 3,477,778 shares of Liberty Class A common stock and 55,070
shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Liberty Class E Preferred Stock"). Upon consummation of the
TCI/Liberty Combination, TCIC received 3,390,833 shares of TCI Class A common
stock and 55,070 shares of TCI Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock ("Class B Preferred Stock"), a new preferred stock of
TCI having designations, preferences, rights and qualifications, limitations
and restrictions that are substantially identical to those of the Liberty Class
E Preferred Stock, except that the holders of the Class B Preferred Stock will
be entitled to one vote per share in any general election of directors of TCI.
The Class B Preferred Stock received by TCIC eliminates in consolidation.
Upon consummation of the TCI/Liberty Combination, the remaining
classes of preferred stock of Liberty held by TCIC were converted into shares
of Class A Preferred Stock, a new series of preferred stock of TCI having a
substantially equivalent fair market value to that which was given up. All
such preferred stock eliminates in consolidation.
Liberty owned 2,988,009 shares of Old TCI Class A common stock and
3,537,712 shares of Old TCI Class B common stock. Such shares were replaced
with the same number of shares of TCI Class A and Class B common stock upon
consummation of the TCI/Liberty Combination.
TCIC's and Liberty's ownership of TCI common stock are reflected as
treasury stock in the accompanying consolidated financial statements. Such
amounts have been recorded at the historical cost previously reflected by TCIC
and Liberty.
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and other related
party considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the earnings
or losses generated by Liberty (by recognizing 100% of Liberty's earnings or
losses before deducting preferred stock dividends) through the date the
TCI/Liberty Combination was consummated.
II-3
<PAGE> 61
The TCI/Liberty Combination was accounted for using predecessor cost
due to the aforementioned related party considerations.
During the fourth quarter of 1994, the Company was reorganized based
upon four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). The Company reorganized its structure to provide 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 the International Cable and Programming unit nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in
nature to warrant separate operational focus.
The Board of Directors of TCI has adopted a proposal which, if
approved by the stockholders, would authorize the Board to issue a new class of
stock ("Liberty Group Common Stock") which corresponds to TCI's programming
services ("Liberty Media Group"). The Programming unit include the
production, acquisition and distribution of globally branded entertainment,
education and information programming services and software for distribution
through all available formats and media; and home shopping via television and
other interactive media, direct marketing, advertising sales, infomercials and
transaction processing. While the Liberty Group Common Stock would constitute
common stock of TCI, it is intended to reflect the separate performance of such
programming services. TCI intends to distribute to its security holders one
hundred percent of the equity value of TCI attributable to Liberty Media Group.
Summary of Operations
The Company operates principally in two industry segments subsequent
to consummation of the TCI/Liberty Combination: cable and communications
services and programming services. Home shopping is a programming service
which includes a retail function. Separate amounts of the aforementioned
services have been provided to enhance the readers understanding of the
Company. The Technology/Venture Capital and the International Cable and
Programming portions of the Company's business have been included with cable
and communications services due to their immateriality. The tables below set
forth for the periods presented, the percentage relationship that certain items
bear to revenue. This summary provides trend data relating to the normal
recurring operations of the Company. Balances in the following table have been
presented net of any intercompany amounts associated with the provision of
programming services among the groups. Other items of significance are
discussed separately under separate captions below. Amounts set forth below
reflect the Company's motion picture theatre exhibition industry segment as
discontinued operations.
II-4
<PAGE> 62
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1994 1993 1992
---- ---- ----
amounts in millions, except for percentages
Cable and Communications Services
---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue 100% $ 4,247 100% $ 4,153 100% $ 3,574
Operating costs and expenses
before depreciation
and amortization 56 2,390 56 2,326 54 1,946
Depreciation and amortization 23 992 22 911 22 764
---- ------- ---- ------- ---- -------
Operating income 21% $ 865 22% $ 916 24% $ 864
==== ======= ==== ======= ==== =======
Programming Services:
--------------------
Electronic Retailing Services:
Net revenue 100% $ 482 -- $ -- -- $ --
Cost of sales 65 313 -- -- -- --
Operating costs and expenses
before depreciation
and amortization 30 145 -- -- -- --
Depreciation and amortization 3 15 -- -- -- --
---- ------- ---- ------- ---- -------
Operating income 2% $ 9 -- $ -- -- $ --
==== ======= ==== ======= ==== =======
Other Programming Services:
Revenue 100% $ 207 -- $ -- -- $ --
Operating costs and expenses
before depreciation and
amortization 136 282 -- -- -- --
Depreciation and amortization 5 11 -- -- -- --
---- ------- ---- ------- ---- -------
Operating income (loss) (41)% $ (86) -- $ -- -- $ --
==== ======= ==== ======= ==== =======
</TABLE>
Cable and Communications Services
Revenue increased by approximately 2% from 1993 to 1994. Such
increase was the result of the TCI/Liberty Combination in August of 1994 (1%),
growth in subscriber levels within the Company's cable television systems (5%),
the effect of certain other 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 Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and a decrease in revenue (3%)
due to the transfer of Netlink USA to the Programming unit in the
Reorganization. Netlink USA's operations were included in Cable and
Communications Services in 1993 and 1992, but have been reflected in
Programming Services for all of 1994. In the second half of 1994, the Company
experienced an additional decrease, in excess of that which was incurred in
1993, in the price charged for those services that are subject to rate
regulation under the 1992 Cable Act. Revenue increased by approximately 16%
from 1992 to 1993. Such increase was the result of an acquisition in late 1992
(10%), growth in subscriber levels within the Company's cable television
systems (4%) and increases in prices charged for cable services (3%), net of a
decrease in revenue (1%) due to rate reductions required by rate regulation
implemented pursuant to the 1992 Cable Act. See related discussion below.
II-5
<PAGE> 63
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the Federal Communications Commission ("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 Company estimates that the FCC's 1993 and 1994 rate regulations
will result in an aggregate annualized reduction of revenue and operating
income ranging from $280 million to $300 million based upon rates charged prior
to implementation of such rate regulation. 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.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher 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% on the rate
base, as defined, which rate may be subject to change in the future.
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. The FCC substantially revised its rules for adding and deleting
services in November 1994 and has provided an alternative methodology for
adding services to cable programming service tiers which includes a flat fee
increase per added channel and an aggregate limit on such increases with an
additional license fee reserve. The FCC's rate regulations also permit
cable operators to "pass through" increases in programming costs and certain
other external costs which exceed the rate of inflation. However, a cable
operator may pass through increases in the cost of programming services
affiliated with such cable operator to the extent such costs exceed the
rate of inflation only if the price charged by the programmer to the
affiliated cable operator reflects prevailing prices offered in the
marketplace by the programmer to unaffiliated third parties or the fair
market value of the programming.
Based on the foregoing, 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.
II-6
<PAGE> 64
Operating costs and expenses before depreciation and amortization have
increased by 3% for the year ended December 31, 1994 compared to the
corresponding period of 1993. The consolidation of Liberty resulted in an
increase of $18 million in operating, selling, general and administrative
expenses from Liberty's cable television systems. 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. In 1993,
the Company incurred certain one-time direct charges relating to the
implementation of the FCC rate regulations. Due to a program to upgrade and
install optical fiber in its cable systems, the Company's capital expenditures
and depreciation expense have increased. The Company 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 the
Company's Class A common stock. The Company made several separate grants (in
1992 and 1993) of stock options issued in tandem with stock appreciation
rights. The Company recorded compensation relating to such stock appreciation
rights of $31 million and $1 million in 1993 and 1992, respectively. During
1992, the Company streamlined its operating structure through the consolidation
of three of its regional operating divisions into two divisions. In connection
with the consolidation of these divisional offices, the Company incurred
restructuring charges of approximately $8 million which are reflected in the
accompanying consolidated financial statements for the year ended December 31,
1992.
Effective April 1, 1993, based upon changes in FCC regulations, the
Company revised its estimate of the useful lives of certain distribution
equipment to correspond to the Company's anticipated remaining period of
ownership of such equipment. The revision resulted in a decrease in net
earnings of approximately $12 million (or $.03 per share) for the year ended
December 31, 1993.
Electronic Retailing Services
This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination. HSN's primary business is the sale of merchandise to
viewers of the home shopping programming produced and distributed by Home
Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of HSN.
Revenue for 1994 represents net sales for HSC. HSN believes that
future levels of net sales of HSC will be dependent, in large part, on program
carriage, market penetration and merchandising management. Program carriage is
defined as the number of cable systems and broadcast television stations that
carry HSC programming. Market penetration represents the level of active
purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSC programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSC programming while evaluating
the expected profitability of each contract.
II-7
<PAGE> 65
The 1992 Cable Act contains "must carry" provisions which mandate that
cable companies within a broadcast television station's reach retransmit its
signal, subject to certain limitations on this obligation depending upon a
cable system's channel capacity. The FCC adopted rules which extend such "must
carry" provisions to broadcast television stations with shop-at-home formats
effective October 6, 1993. As a result of the mandatory carriage of stations
carrying home-shopping programming, HSN has experienced growth in cable
carriage. However, the constitutionality of the "must carry" provisions of the
1992 Cable Act has been challenged in the courts. Although the "must carry"
provisions were upheld as constitutional by a three-judge panel of the United
States District Court for the District of Columbia, the Supreme Court vacated
the District Court's decision because genuine issues of material fact remain
unresolved. The "must-carry" statutory provisions and regulations remain in
effect pending the outcome of the ongoing proceedings before the District
Court. During the past year, HSN has aggressively pursued and obtained long
term carriage commitments from a number of cable operators. As a result of
HSN's success in obtaining such commitments, the exposure to loss of revenue
should the "must-carry" rules be declared unconstitutional has been largely
mitigated.
HSN expects that certain of its costs will increase in the future.
Management believes that selling and marketing expenses will be at higher
levels in future periods as HSN maintains its efforts to increase the number of
cable systems carrying HSC programming, increase market penetration and develop
new electronic opportunities. In addition, these expenses will increase if
program carriage increases. Broadcast expenses are expected to increase in
future periods. "Must carry" legislation, as discussed above, is expected to
result in increases in certain operating expenses related to cable and
broadcast carriage in dollars. However, as a percentage of sales, the effect
is not currently determinable.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
Other Programming Services
Revenue of TCI's consolidated entertainment and information
programming services represented 4% or $207 million, of total consolidated
revenue for 1994. This revenue was attributable to subscription and
advertising revenue at TCI's consolidated sports programming businesses ($58
million), revenue from Netlink USA, a marketer and distributor of programming
to the United States home satellite dish subscriber market ($132 million) and
subscription revenue generated by Southern Satellite Systems, Inc. ("Southern")
and Encore Media Corporation ("EMC") ($17 million). Programming expenses
represented 4% or $136 million total operating expenses (including cost of
sales). The Company incurred $44 million of programming costs and $7 million
of marketing costs associated with the launch in 1994 of a new premium
programming service to its subscribers. The programming costs of such new
premium service is included in the aforementioned $136 million total
programming costs. The Company's Other Programming Services will continue to
reflect losses associated with the new premium service as the Company's
programming costs are reflected in the operations of the Programming group and
the revenue from the subscribers of such service are reflected in the Company's
Cable and Communications group. However, although there can be no assurance,
as the Cable and Communications group increases its distribution of this
service to its subscribers, management of the Company believes that the
consolidated impact from such premium service should be positive.
Other Income and Expense
The Company's weighted average interest rate on borrowings was 7.5%,
7.2% and 7.6% during 1994, 1993 and 1992, respectively. At December 31, 1994,
after considering the net effect of various interest rate hedge and exchange
agreements (see note 7 to the consolidated financial statements) with notional
amounts aggregating $1,730 million, the Company had $4,818 million (or 43%) of
fixed-rate debt with a weighted average interest rate of 8.9% and $6,344
million (or 57%) of variable-rate debt with interest rates approximating the
prime rate (8.5% at December 31, 1994).
II-8
<PAGE> 66
The Company is a shareholder of TeleWest Communications plc (formerly
TCI/US WEST Cable Communications Group or "TeleWest UK") ("TeleWest
Communications"), a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). TeleWest
Communications, which is accounted for under the equity method, had a carrying
value at December 31, 1994 of $454 million and comprised $43 million, $28
million and $26 million of the Company's share of its affiliates' losses in
1994, 1993 and 1992, respectively. In February 1994, the Company acquired a
consolidated investment in Flextech p.l.c. ("Flextech"). Flextech accounted
for net losses of $24 million (before deducting the minority interests' 40%
share of such losses) in 1994. In addition, the Company has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments had a carrying value of $135 million at December 31, 1994 and
accounted for $50 million of the Company's share of its affiliates' losses in
1994.
In November of 1994, TCI and US West, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000 ordinary
shares and 76,500,000 convertible preference shares of TeleWest Communications
(the "TeleWest Exchange"). Following the completion of the TeleWest Exchange,
TeleWest Communications conducted an initial public offering in November of
1994 in which it sold 243,740,000 ordinary shares for aggregate net proceeds of
401 million pounds (the "TeleWest IPO"). Upon completion of the TeleWest
Exchange and the TeleWest IPO, TCI and US WEST, Inc. each became the owners of
36% of the ordinary shares and 38% of the total outstanding ordinary and
convertible preference shares of TeleWest Communications. As a result of the
TeleWest IPO and the associated dilution of the Company's ownership interest of
TeleWest Communications, the Company has recognized a nonrecurring gain
amounting to $161 million (before deducting the related tax expense of $57
million). There is no assurance that the Company will realize similar
nonrecurring gains in future periods.
TeleWest Communications, which is currently constructing broadband
cable television and telephony networks in the UK, has incurred net losses
since its inception. At December 31, 1994, TeleWest Communications had
completed approximately 37% of its network construction and, within five years
it is expected that approximately 97% of TeleWest Communications' network
construction will be complete. Although there is no assurance, the Company
believes (i) that the continued expansion of TeleWest Comunications' networks
ultimately will provide TeleWest Communications with a revenue base that will
exceed its expenses and (ii) that TeleWest Communications' present and future
sources of liquidity (including the net proceeds from the TeleWest IPO and
certain bank credit facilities) will be sufficient to meet TeleWest
Communications' liquidity requirements for the foreseeable future. The
Company has no present intention to make significant loans to or investments
in TeleWest Communications.
In connection with its investments in the above-described foreign
entities, the Company, through the International Cable and Programming unit, is
exposed to the risk that unfavorable and potentially volatile fluctuations in
exchange rates with respect to the UK currency 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 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 amounts of future foreign cash
inflows and outflows associated with the Company's foreign investments.
Although the Company continually evaluates the advantages and disadvantages of
hedging its exposure to currency risk on a long-term basis, the Company
historically has not entered into any significant long-term hedge agreements.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased
49.9% of Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share of
Liberty's earnings prior to the TCI/Liberty Combination.
The Company sold certain investments and other assets for an aggregate
net pre-tax gain of $42 million and $9 million in 1993 and 1992, respectively.
During 1994, 1993 and 1992, the Company recorded losses of $9 million,
$17 million and $67 million, respectively, from early extinguishments of debt.
Included in the 1992 amount was $52 million from the extinguishment of the SCI
Holdings, Inc. ("SCI") indebtedness (see note 4 to the consolidated financial
statements). There may be additional losses associated with early
extinguishments of debt in the future.
II-9
<PAGE> 67
Interest and dividend income was $36 million, $34 million and $69
million in 1994, 1993 and 1992, respectively. Included in the 1992 amounts was
$30 million earned on the preferred stock investment that was repurchased by a
subsidiary of SCI in 1992 (see note 4 to the consolidated financial
statements). In connection with such repurchase, the Company received a
premium amounting to $14 million which has been separately reflected in the
accompanying consolidated statements of operations.
Income Taxes
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate from 34%
to 35%. The Company has reflected the tax rate change in its consolidated
statements of operations. Such tax rate change resulted in an increase of $76
million to the Company's income tax expense and deferred income tax liability
in the third quarter of 1993.
Net Earnings (Loss)
The Company's net earnings (before preferred stock dividends) of $55
million for the year ended December 31, 1994 represented an increase of $62
million as compared to the Company's net loss (before preferred stock
dividends) of $7 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 TCI/Liberty Combination (principally resulting from the
gain recognized by Liberty upon the sale of its investment in AMC), the
recognition of a nonrecurring gain resulting from the TeleWest IPO and the
associated dilution of TCI's ownership in TeleWest Communications, 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 and the
decrease in gain on disposition of assets.
The Company's loss (before preferred stock dividends) of $7 million
for the year ended December 31, 1993 represented a decrease of $14 million as
compared to the Company's earnings from continuing operations of $7 million for
the corresponding period of 1992. Such decline was due primarily to an
increase in income tax expense arising from the aforementioned tax rate change
enacted in the third quarter of 1993, an increase in compensation relating to
stock appreciation rights and the reduction of interest and dividend income
resulting from the disposition at the end of 1992 of a preferred stock
investment, net of an increase in gain on disposition of assets, a reduction in
loss from early extinguishment of debt and a reduction in minority interest in
earnings of consolidated subsidiaries attributable to the repurchase of certain
preferred stock of a consolidated subsidiary.
On May 12, 1992, the Company sold its motion picture theatre business
and certain theatre-related real estate assets (see note 14 to the accompanying
consolidated financial statements). Accordingly, the operations of the
Company's motion picture theatre exhibition industry segment have been
reclassified and reflected as "discontinued operations" in the accompanying
consolidated financial statements.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1994.
II-10
<PAGE> 68
Recent Accounting Pronouncements
In November of 1992, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" ("Statement No. 112"). As the
Company's present accounting policies generally are in conformity with the
provisions of Statement No. 112, the Company does not believe that Statement
No. 112 will have a material effect on the Company. Statement No. 112 is
effective for years beginning after December 31, 1994.
In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities ("Statement No. 115"), effective for fiscal years beginning after
December 15, 1993. Under Statement No. 115, debt securities that TCI has both
the positive intent and ability to hold to maturity are carried at amortized
cost. Debt securities that TCI does not have the positive intent and ability
to hold to maturity and all marketable equity securities are classified as
available-for-sale or trading and are carried at fair value. Unrealized
holding gains and losses on securities classified as available-for-sale are
carried net of taxes as a separate component of stockholders' equity.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings.
The Company applied Statement No. 115 beginning in the first quarter
of 1994. Application of Statement No. 115 resulted in a net increase of $304
million to stockholders' equity on January 1, 1994, representing the
recognition of unrealized appreciation, net of taxes, for the Company's
investments in marketable equity securities determined to be
available-for-sale. Such amount was adjusted by $182 million recorded in the
TCI/Liberty Combination. The amount of net unrealized gain was reduced by $233
million through December 31, 1994. The majority of the aggregate unrealized
gain is comprised of the Company's investment in Turner Broadcasting System,
Inc. ("TBS") common stock ($100 million) and QVC, Inc. ("QVC") common stock
($127 million). The Company holds no material debt securities.
The FASB has recently issued other accounting pronouncements which are
not yet effective. The Company does not expect that these pronouncements will
have a material effect on the Company's consolidated financial statements.
Liquidity and Capital Resources
During 1994, subsidiaries of the Company, Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
formed a partnership ("WirelessCo") to engage in the business of providing
wireless communications services on a nationwide basis. Through WirelessCo,
the partners have been participating in auctions ("PCS Auctions") of broadband
personal communications services ("PCS") licenses being conducted by the FCC.
In the first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets, including
New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth,
Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The
aggregate license cost for these licenses is approximately $2.1 billion.
II-11
<PAGE> 69
WirelessCo has also invested in American PSC, L.P. ("APC"), which
holds a PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and has agreed to make capital contributions to
APC equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox, which holds a pioneer
preference PCS license for the Los Angeles-San Diego market, and WirelessCo
have also agreed on the general terms and conditions upon which Cox (with a 60%
interest) and WirelessCo (with a 40% interest) would form a partnership to hold
and develop a PCS system using the Los Angeles-San Diego license. APC and the
Cox partnership would affiliate their PCS systems with WirelessCo and be part
of WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand. The Company owns a 30% interest in
WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial. The Company anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed their
respective interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("NewTelco") to engage in the business of providing
local wireline communications services to residences and businesses on a
nationwide basis. NewTelco will serve its customers primarily through the
cable television facilities of cable television operators that affiliate with
NewTelco in exchange for agreed-upon compensation. The modification of
existing regulations and laws governing the local telephony market will be
necessary in order for NewTelco to provide its proposed services on a
competitive basis in most states. Subject to agreement upon a schedule for
upgrading its cable television facilities in selected markets and certain other
matters, the Company has agreed to affiliate certain of its cable systems with
NewTelco. The capital required for the upgrade of the Company's cable
facilities for the provision of telephony services is expected to be
substantial.
Subsidiaries of the Company, Cox and Comcast, together with
Continental Cablevision, Inc. ("Continental"), own Teleport Communications
Group, Inc. and TCG Partners (collectively, "TCG"), which is one of the largest
competitive access providers in the United States in terms of route miles. The
Company, Cox and Comcast have entered into an agreement with MajorCo and
NewTelco to contribute their interests in TCG and its affiliated entities to
NewTelco. The Company currently owns an approximate 29.9% interest in TCG.
The closing of this contribution is subject to the satisfaction of certain
conditions, including the receipt of necessary regulatory and other consents
and approvals. In addition, the Company, Comcast and Cox intend to negotiate
with Continental, which owns a 20% interest in TCG, regarding their acquisition
of Continental's TCG interest. If such agreement cannot be reached, they will
need to obtain Continental's consent to certain aspects of their agreement with
Sprint.
II-12
<PAGE> 70
Subject to agreement upon an initial business plan, the MajorCo
partners have committed to make cash capital contributions to MajorCo of $4.0
to $4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
At December 31, 1994, the Company was liable for a $720 million letter
of credit which guarantees contributions to WirelessCo. The Company pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. There were no borrowings
pursuant to such letter of credit at December 31, 1994.
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI,
and TeleCable Corporation ("TeleCable") consummated a transaction whereby
TeleCable was merged into TCIC (the "TeleCable Merger"). The aggregate $1.6
billion purchase price was satisfied by TCIC's assumption of approximately $300
million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of approximately 42 million shares of TCI Class A common stock and
1 million shares of TCI Convertible Preferred stock, Series D (the "Series D
Preferred Stock") with an aggregate initial liquidation value of $300 million.
The Series D Preferred Stock, which accrues dividends at a rate of 5.5% per
annum, is convertible into 10 million shares of TCI Class A common stock. The
Series D Preferred Stock is redeemable for cash at the option of TCI after five
years and at the option of either TCI or the holder after ten years. The
amount of net liabilities assumed by TCIC and the number of shares of TCI Class
A common stock issued to TeleCable's shareholders are subject to post-closing
adjustments.
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV") and RCS
Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase Agreement (the
"Tele-Vue Agreement") pursuant to which RCS Pacific agreed to acquire from
Tele-Vue the assets of cable television systems serving approximately 1 million
subscribers as of December 31, 1994 for total consideration of approximately
$1,983,000,000, subject to adjustment in accordance with the terms of the
Tele-Vue Agreement. A subsidiary of TCI has agreed to loan $600 million in
cash to IP-IV. IP-IV will, in turn, loan such $600 million to RCS Pacific. RCS
Pacific could use the proceeds of the aforementioned loan as a portion of the
total cash consideration to be paid to Tele-Vue, or at the option of TCI, to
purchase $600 million of TCI Class A common stock. Should TCI elect to sell
such common stock, RCS Pacific has the option to pay the consideration to
Tele-Vue by delivery of RCS Pacific's short-term note of up to $600 million of
the total consideration with the balance to be paid in cash. Such note, if it
is delivered, will be secured by RCS Pacific's pledge of shares of stock of TCI
having an aggregate market value equal to the principal amount of, and accrued
interest on, the note delivered to Tele-Vue. The consummation of the
transactions contemplated by the Tele-Vue Agreement is conditioned, among other
things, on receipt of approvals of various franchise and other governmental
authorities and receipt of "minority tax certificates" from the FCC. Both
Houses of Congress have passed legislation to repeal previous legislation
which provided for minority tax certificates. The bills are currently in
conference. There can be no assurance that the conditions precedent to closing
the asset purchase will be satisfied, or that the parties will be able to agree
on different terms, if necessary. Separately, TCI and Viacom have reached
agreement regarding the settlement of litigation currently pending between
them. Final settlement of the litigation will be subject, among other things,
to the effectiveness of a new affiliation agreement covering TCI's long-term
carriage of Showtime and The Movie Channel. Effectiveness of this affiliation
agreement, in turn, is subject to certain conditions, including completion of
the cable transactions described above.
II-13
<PAGE> 71
TCI, through its indirect wholly-owned subsidiary, TCID-IP IV, Inc.
("TCID-IP IV"), would hold a 25% limited partnership interest in IP-IV, and
IP-IV would in turn hold a 79% limited partnership interest in RCS Pacific. TCI
would account for its investment in IP-IV under the equity method of accounting.
It is anticipated that if the transactions contemplated by the Tele-Vue
Agreement are consummated, TCI's consolidated net income will be significantly
reduced because of losses allocable to TCID-IP IV from its investment in IP-IV.
As a result of the depreciation and amortization arising from allocation of the
purchase price to the assets to be acquired by RCS Pacific and as a result of
the interest expense resulting from the third party debt incurred by RCS
Pacific to finance the acquisition, it is expected that RCS Pacific will incur
losses for some time after the acquisition.
Pursuant to an Agreement and Plan of Merger dated as of August 4,
1994, as amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc.
(the "Purchaser"), a corporation which is jointly owned by Comcast and Liberty,
commenced an offer (the "QVC Tender Offer") to purchase all outstanding shares
of common stock and preferred stock of QVC, Inc. ("QVC").
The QVC Tender Offer expired at midnight, New York City time, on
February 9, 1995, at which time the Purchaser accepted for payment all shares
of QVC which had been tendered in the QVC Tender Offer. Following consummation
of the QVC Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC.
In connection with the financing of the QVC merger, the Purchaser
entered into a credit facility. The credit facility is secured by
substantially all of the assets of QVC. In addition, Comcast and Liberty have
pledged their shares of QVC (as the surviving corporation following the QVC
merger) pursuant to the credit facility. Neither Liberty nor Comcast has
provided any guarantees of the credit facility.
In connection with the transactions contemplated under a stockholders
agreement entered into among Comcast, Liberty and the Purchaser, TCI has
undertaken to cause Liberty to comply with each of its representations,
warranties, covenants, agreements and obligations under the stockholders
agreement. All such undertakings will terminate at such time as equity
securities of Liberty or the Liberty Group Common Stock have been distributed
and such securities impute a market capitalization of Liberty in excess of $2
billion.
Upon consummation of the aforementioned QVC transactions, the Company
is deemed to exercise significant influence over QVC and, as such, will account
for its investment in QVC under the equity method. Had the Company accounted
for its investment under the equity method during 1994, the Company would have
reflected additional share of earnings of QVC of $8 million (of which $1
million would have been included in the Company's share of Liberty's earnings
prior to the TCI/Liberty Combination). Additionally, the Company's investment
in QVC, its deferred tax liability and its unrealized gain from
available-for-sale securities would have been reduced by $216 million, $89
million and $127 million, respectively, had the Company accounted for its
investment in QVC under the equity method during 1994. The 1994 consolidated
financial statements will be restated in the first quarter of 1995.
Pursuant to an underwritten public offering, the Company sold
19,550,000 shares of TCI Class A common stock in February of 1995. The Company
received net proceeds of approximately $401 million. Such proceeds were
immediately used to reduce outstanding indebtedness under credit facilities.
II-14
<PAGE> 72
The Company's assets consist primarily 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 of TCI 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 amount of net assets of subsidiaries subject to such
restrictions exceeds the Company's consolidated net assets. 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. Net cash provided by operating activities of 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.
Subsidiaries of the Company had approximately $1.8 billion in unused
lines of credit at December 31, 1994 excluding amounts related to lines of
credit which provide availability to support commercial paper. Although
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 such 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). The Company believes that the aforementioned FCC 1993 and 1994 rate
regulations will not materially impact the availability under its subsidiaries'
lines of credit or its ability to repay indebtedness as it matures. See note 7
to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.
II-15
<PAGE> 73
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)($1,798 million, $1,858 million and $1,637 million
in 1994, 1993 and 1992, respectively) to interest expense ($785 million, $731
million and $718 million in 1994, 1993 and 1992, respectively), is determined
by reference to the consolidated statements of operations. The Company's
interest coverage ratio was 229%, 254% and 228% for 1994, 1993 and 1992,
respectively. Management of the Company 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 the
Company's interest expense, almost half of which results from fixed rate
indebtedness. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense,
and should not be considered in isolation of 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 ($1,005 million, $1,251
million and $957 million in 1994, 1993 and 1992, 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, 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 and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the Company pays (i) fixed interest rates ranging from
7.2% to 9.9% on notional amounts of $550 million at December 31, 1994 and (ii)
variable interest rates on notional amounts of $2,605 million at December 31,
1994. During the years ended December 31, 1994, 1993 and 1992, the Company's
net payments pursuant to its fixed rate exchange agreements were $26 million,
$38 million and $46 million, respectively. During the years ended December 31,
1994, 1993 and 1992, the Company's net receipts pursuant to its variable rate
exchange agreements were $36 million, $31 million and $7 million, respectively.
The Company's interest rate hedge agreements fix the maximum variable interest
rates on notional amounts of $325 million at 11%. 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.
Approximately thirty-five percent of the franchises held by the
Company, involving approximately 3.8 million basic subscribers, expire within
five years. There can be no assurance that the franchises for the Company's
systems will be renewed as they expire although the Company 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 (the "1984 Cable Act"), as supplemented by the renewal provisions of the
1992 Cable Act, for franchise renewal. However, in the event they are renewed,
the Company cannot predict the impact of any new or different conditions that
might be imposed by the franchising authorities in connection with the
renewals. To date they have not varied significantly from the original terms.
The Company competes with operators who provide, via alternative
methods of distribution, the same or similar video programming as that offered
by the Company's cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC. One such technology 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; two DBS operators 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 of equipment needed to receive these
transmissions declines, the Company expects that it will experience increased
and substantial competition from DBS operators.
II-16
<PAGE> 74
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions
are removed or relaxed, the Company will face increased competition from
telephone companies which, in most cases, have greater financial resources than
the Company. All major telephone companies have announced plans to acquire
cable television systems or provide video services to the home through fiber
optic technology.
The FCC 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 provider. Under the FCC decision, such services would
require no local franchise agreement or payment to the city or local
governmental authority. Although telephone companies providing
"video-dialtone" were originally allowed only a limited financial interest in
programming services and their role was limited largely to that of a
traditional "common carrier," the FCC recently has proposed relaxation of these
restrictions and has authorized some telephone companies to offer programming
services directly to subscribers. Telephone companies have filed numerous
applications with the FCC for authorization to construct video-dialtone systems
to provide such services. This alternative means of distributing video
services to the consumer's home represents a direct competitive threat to the
Company.
The Company's entertainment and information programming services
subsidiaries and 50% owned affiliates lease satellite transponders as follows:
6 full time leases and one shared lease on a "protected" or "transponder
protected" basis, and 15 full time "unprotected" leases for an aggregate of 21
transponders on 10 domestic and 2 international communications satellites.
Domestic communications satellite transponders may be leased full or part time
on a "protected", "transponder protected" or "unprotected" basis. When the
carrier provides services to a customer on a "protected" basis, replacement
transponders are reserved on board the satellite for use in the event the
"protected" transponder fails. Should there be no reserve transponders
available, the "protected" customer will displace an "unprotected" transponder
customer on the same satellite. In certain cases, the carrier also maintains a
protection satellite and should a satellite fail completely, all lessors'
"protected" transponders would be moved to the protection satellite. The
customer who leases an "unprotected" transponder has no reserve transponders
available, and may have its service interrupted for an indefinite period when
its transponder is required to restore a "protected" service.
Although the Company believes it has taken reasonable steps to ensure
its continued satellite transmission capability, there can be no assurance that
termination or interruption of satellite transmissions will not occur. Such a
termination or interruption of service by one or more of these satellites could
have a material adverse effect on the results of operations and financial
condition of the programming group.
II-17
<PAGE> 75
The availability of replacement satellites and transponder time beyond
current leases is dependent on a number of factors over which the Company has
no control, including competition among prospective users for available
transponders and the availability of satellite launching facilities for
replacement satellites. Many of the commercial satellites now in orbit will
have to be replaced in the next few years. The federal government has placed
restrictions on the launching of commercial satellites by means of the space
shuttle, causing manufacturers of commercial satellites to rely on alternative
delivery systems to place these satellites in orbit. Additional commercial
launching facilities are being developed currently, but there can be no
assurance that the launch systems currently in place, or to be developed, will
be able to replace the domestic communications satellites as their useful lives
end.
The Company is currently the sole satellite carrier of WTBS, a 24-hour
independent UHF television station originated by TBS to cable television system
operators and operators of other non-broadcast distribution media who receive
the signal on their earth stations and offer the service to their subscribers.
Other independent television stations are transmitted by other carriers.
Southern does not have an agreement with TBS with respect to the retransmission
of the WTBS signal and there are no specific statutory or regulatory
restrictions that would prevent any satellite carrier from transmitting the
WTBS signal so long as the carrier meets the passive carrier requirements of
the Copyright Revision Act of 1976, as amended and any applicable requirements
of the Communications Act of 1934, as amended, or, if the carrier serves home
satellite dish owners, so long as the carrier meets the requirements of the
Satellite Home Viewer Act of 1988. Further, Southern has no control over the
programming on such station. TBS produces and distributes other cable
programming services, and TBS has and may be expected to continue to give
priority to the programming needs of such services in allocating programming
owned by it or to which it has national distribution rights. Southern's
business could be adversely affected by any change in the type, mix or quality
of the programming on WTBS that results in the service being less desirable to
cable operators and their subscribers. TBS derives significant revenue from
the sale of advertising time on WTBS, however, and the Company therefore
believes that TBS has an economic incentive to maintain the audience appeal of
WTBS's programming.
The Company is upgrading and installing optical fiber in its cable
systems at a rate such that in two years TCI anticipates that it will be
serving the majority of its customers with state-of-the-art fiber optic cable
systems. The Company made capital expenditures of $1,264 million in 1994 and
the Company expects to expend similar amounts in 1995 to provide for the
continued rebuilding of its cable systems. However, such proposed expenditures
are subject to reevaluation based upon changes in the Company's liquidity,
including those resulting from rate regulation.
The Company is obligated to pay fees for the license to exhibit
certain qualifying films that are released theatrically by various motion
picture studios through December 31, 2006 (the "Film License Obligations").
The aggregate minimum liability under certain of the license agreements is
approximately $405 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. Additionally, the Company has guaranteed up to $70 million of
similar license fee obligations of another affiliate.
II-18
<PAGE> 76
The Company intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. The Company's obligation for
certain sports program rights contracts as of December 31, 1994 was $170
million. It is expected that sufficient cash will be generated by the
programming services to satisfy these commitments. However, the continued
development of such services may require additional financing and it cannot be
predicted whether the Company will obtain such financing on terms acceptable to
the Company.
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. Generally, any
refunds of the excess portion of all other Regulated Services rates would be
retroactive to the later of September 1, 1993, or one year prior to the
implementation of the rate reduction. 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.
The Company believes that the FCC's comprehensive system of rate
regulation, including regulation of the changes in rates when programming
services are added or deleted from service tiers, also may have an adverse
effect on the programming services in which the Company has an ownership
interest by limiting the carriage of such services and/or the ability and
willingness of cable operators to pay the rights fees for such carriage.
The FCC has adopted rules providing for mandatory carriage by cable
systems after September 1, 1993 of all local full-power commercial television
broadcast signals (up to one-third of all channels), including the signals of
stations carrying home-shopping programming after October 6, 1993, and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals. Alternatively, after October 6, 1993, commercial
broadcasters have the right to deny such carriage unless they grant
retransmission consent. The "must-carry" statutory provisions and regulations
remain in effect pending the outcome of ongoing judicial proceedings to resolve
challenges to their constitutionality. TCI believes that, by requiring such
carriage of broadcast signals, these regulations may adversely affect the
ability of TCI's programming services to obtain carriage on cable systems with
limited channel capacity. To the extent that carriage is thereby limited, the
subscriber and advertising revenues available to TCI's programming services
also will be limited. However, as discussed above, such regulations have
resulted in expanded cable distribution of HSN, which is carried by a number of
full-power commercial broadcast television stations.
The FCC has adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels
or a 45 percent limit, whichever is greater, provided that the additional
channels carry minority controlled programming services. The regulations
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations. Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services. These rules, which
currently are subject to pending petitions for reconsideration before the FCC,
may limit carriage of the Company's programming services on certain cable
systems of cable operators in which TCI has ownership interests.
II-19
<PAGE> 77
On September 23, 1993, the FCC also adopted regulations establishing a
30% limit on the number of homes passed nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. Under the FCC regulations, if the ownership limits are determined to
be constitutional, they may limit TCI's future ability to acquire interests in
additional cable systems.
A number of petitions for reconsideration of various aspects of the
regulations implementing the 1992 Cable Act remain pending before the FCC.
Petitions for judicial review of regulations adopted by the FCC, as well as
other court challenges to the 1992 Cable Act and the FCC's regulations, also
remain pending. The Company is uncertain how the courts and/or the FCC
ultimately will rule or whether such rulings will materially change any
existing rules or statutory requirements.
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.
TCI COMMUNICATIONS, INC.
General
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC were
transferred to the other operating units. The most significant transfers were
as follows: (i) TBS and Discovery Communications, Inc. ("Discovery") were
transferred to the Programming unit and (ii) TeleWest UK was transferred to the
International Cable and Programming unit. As consideration for such transfers
of assets, TCIC received 8 shares of TCI Class A common stock and 169,155
shares of TCI Redeemable Convertible Preferred Stock, Series E with a
liquidation value of $22,303 per share. Such investment in TCI has been
reflected at TCIC's historical cost of the transferred assets and is included
as a reduction of stockholder's(s') equity.
II-20
<PAGE> 78
Summary of Operations
The following table sets forth, for the periods indicated, the
percentage relationship that certain items bear to revenue and the percentage
increase or decrease of the dollar amount of such items as compared to the
prior period. This summary provides trend data relating to TCIC's normal
recurring operations. Other items of significance are discussed separately
under the captions "Other Income and Expense", "Income Taxes" and "Net Loss"
below.
<TABLE>
<CAPTION>
Relationship to
Revenue Period to Period
Years ended Increase
December 31, Years ended
---------------------- December 31,
1994 1993 1993-94
---- ---- -------------
<S> <C> <C> <C>
Revenue 100% 100% 4%
Operating costs and
expenses before
depreciation and
amortization 58 56 8%
Depreciation and
amortization 23 22 8%
---- ----
Operating income 19% 22% (11)%
==== ====
</TABLE>
Revenue increased by approximately 4% from 1993 to 1994. Such
increase was the result of growth in subscriber levels within TCIC's cable
television systems (5%), 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
second half of 1994, TCIC experienced an additional decrease, in the excess of
that which was incurred in 1993, in price charged for those services that are
subject to rate regulation under the 1992 Cable Act.
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.
TCIC estimates that the FCC's 1993 and 1994 rate regulations will
result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such regulation. 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.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher 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% on the rate
base, as defined, which rate may be subject to change in the future.
II-21
<PAGE> 79
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. The FCC substantially revised its rules for adding and deleting
services in November 1994 and has provided an alternative methodology for
adding services to cable programming service tiers which includes a flat fee
increase per added channel and an aggregate limit on such increases with an
additional license fee reserve. The FCC's rate regulations also permit cable
operators to "pass through" increases in programming costs and certain other
external costs which exceed the rate of inflation. However, a cable operator
may pass through increases in the cost of programming services affiliated with
such cable operator to the extent such costs exceed the rate of inflation only
if the price charged by the programmer to the affiliated cable operator
reflects prevailing prices offered in the marketplace by the programmer to
unaffiliated third parties or the fair market value of the programming.
Based on the foregoing, TCIC believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse effect on its
results of operations.
Operating costs and expenses before depreciation and amortization have
increased by 8% for the year ended December 31, 1994 compared to the
corresponding period of 1993. TCIC incurred $29 million of programming and
marketing costs associated with the launch in 1994 of a new premium programming
service to its subscribers. Such premium programming service became a part of
the Programming unit in the Reorganization. TCIC cannot determine whether and
to what extent increases in the cost of programming will effect its operating
costs. However, such programming costs have increased at a greater percentage
than increases in revenue of Regulated Services. In 1993, TCIC incurred
certain one-time direct charges relating to the implementation of the FCC rate
regulations. Due to a program to upgrade and install optical fiber in its
cable systems, TCIC's capital expenditures and depreciation expense have
increased. TCIC recorded an adjustment of $5 million in 1994 to reduce its
liability for compensation relating to stock appreciation rights resulting from
a decline in the market price of TCIC's Class A common stock. TCIC made several
separate grants (in 1992 and 1993) of stock options issued in tandem with stock
appreciation rights. TCIC recorded compensation relating to such stock
appreciation rights of $31 million in 1993.
Effective April 1, 1993, based upon changes in FCC regulations, TCIC
revised its estimate of the useful lives of certain distribution equipment to
correspond to TCIC's anticipated remaining period of ownership of such
equipment. The revision resulted in a decrease in net earnings of
approximately $12 million (or $.03 per share) for the year ended December 31,
1993.
Other Income and Expense
TCIC's weighted average interest rate on borrowings was 7.5% and 7.2%
during 1994 and 1993, respectively. At December 31, 1994, after considering
the net effect of various interest rate hedge and exchange agreements (see
note 6 to the consolidated financial statements) with notional amounts
aggregating $1,730 million, TCIC had $4,770 million (or 45%) of fixed-rate debt
with a weighted average interest rate of 8.9% and $5,942 million (or 55%) of
variable-rate debt with interest rates approximating the prime rate (8.5% at
December 31, 1994).
II-22
<PAGE> 80
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 was accounted for under the equity method comprised $40
million and $28 million of TCIC's share of its affiliates' losses in 1994 and
1993, respectively. In February 1994, TCIC acquired a consolidated investment
in Flextech. Flextech accounted for net losses in 1994 of $21 million (before
deducting the minority interests' 40% share of such losses). In addition, TCIC
had other less significant investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other investments
accounted for $44 million of TCIC's share of its affiliates' losses in 1994.
In connection with the Reorganization, TCIC's ownership in the aforementioned
entities was transferred to the International Cable and Programming unit
effective December 1, 1994, and TCIC is no longer exposed to the risk
associated with unfavorable fluctuations in foreign currency exchange rates
nor will it continue to incur the aforementioned losses associated with such
investments.
In November of 1994, TCI and US WEST, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000 ordinary
shares and 76,500,000 convertible preference shares of Telewest Communications.
Following the completion of the TeleWest Exchange, TeleWest Communications
conducted an initial public offering in November of 1994 in which it sold
243,740,000 ordinary shares for aggregate net proceeds of pounds sterling 401
million. Upon completion of the TeleWest Exchange and the TeleWest IPO, TCI
and US WEST, Inc. each became the owners of 36% of the ordinary shares and
38% of the total outstanding ordinary and convertible preference shares of
TeleWest Communications. As a result of the TeleWest IPO and the associated
dilution of TCI's ownership interest of TeleWest Communications, TCIC has
recognized a nonrecurring gain amounting to $161 million (before deducting the
related tax expense of $57 million). There is no assurance that TCIC will
realize similar nonrecurring gains in future periods.
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and other related
party considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the earnings
or losses generated by Liberty (by recognizing 100% of Liberty's earnings or
losses before deducting preferred stock dividends) through the date the
TCI/Liberty Combination were consummated.
On July 11, 1994, Rainbow purchased 49.9% of Liberty's 50% general
partnership interest in AMC. The gain recognized by Liberty in connection with
the disposition of AMC was $183 million and is included in TCIC's share of
Liberty's earnings prior to the TCI/Liberty Combination.
TCIC recognized share of earnings from Discovery of $5 million and $6
million in 1994 and 1993, respectively. Subsequent to the Reorganization, TCIC
will no longer include such share of earnings in its operations.
TCIC sold certain investments and other assets for an aggregate net
pre-tax gain of $42 million in 1993.
During 1994 and 1993, TCIC recorded losses of $9 million and $17
million, respectively, from early extinguishments of debt. There may be
additional losses associated with early extinguishments of debt in the future.
Interest and dividend income was $35 million and $34 million in 1994
and 1993, respectively. Included in each amount was $5 million of dividends
earned on TCIC's investment in TBS. Subsequent to the Reorganization, TCIC
will no longer be the recipient of such stock dividends.
II-23
<PAGE> 81
Income Taxes
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate from 34%
to 35%. TCIC reflected the tax rate change in its consolidated statements of
operations. Such tax rate change resulted in an increase of $76 million to
TCIC's income tax expense and deferred income tax liability in the third
quarter of 1993.
Net Earnings (Loss)
TCIC's net earnings of $92 million for the year ended December 31,
1994 represented an increase of $99 million as compared to TCIC's net loss
(before preferred stock dividends) of $7 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 TCI/Liberty Combination
(principally resulting from the gain recognized by Liberty upon the sale of its
investment in AMC), TCIC's recognition of a nonrecurring gain resulting from
the TeleWest IPO and the associated dilution of TCIC's ownership interest in
TeleWest Communications, 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 and the decrease in gain on disposition of assets.
Inflation has not had a significant impact on TCIC's results of
operations during the two-year period ended December_31, 1994.
Recent Accounting Pronouncements
In November of 1992, the FASB issued Statement No. 112. As TCIC's
present accounting policies generally are in conformity with the provisions of
Statement No. 112, TCIC does not believe that Statement No. 112 will have a
material effect on TCIC. Statement No. 112 is effective for years beginning
after December 31, 1994.
In May 1993, the FASB issued Statement No. 115, effective for fiscal
years beginning after December 15, 1993. Under Statement No. 115, debt
securities that TCIC has both the positive intent and ability to hold to
maturity are carried at amortized cost. Debt securities that TCIC does not
have the positive intent and ability to hold to maturity and all marketable
equity securities are classified as available-for-sale or trading and are
carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are carried net of taxes as a separate
component of stockholder's(s') equity. Unrealized holding gains and losses
classified as trading are reported in earnings.
TCIC applied Statement No. 115 beginning in the first quarter of 1994.
Application of Statement No. 115 resulted in a net increase of $304 million to
stockholder's(s') equity on January 1, 1994, representing the recognition of
unrealized appreciation, net of taxes, for TCIC's investments in marketable
equity securities determined to be available-for-sale. Such amount was
subsequently reduced by $141 million immediately prior to the Reorganization.
In conjunction with the Reorganization, TCIC transferred its investments in
certain marketable equity securities, the most significant of which was its
investment in TBS common stock. As a result, TCIC's unrealized holding gain
for available-for-sale securities, net of taxes, was reduced by $161 million in
the Reorganization.
The FASB has recently issued other accounting pronouncements which are
not yet effective. TCIC does not expect that these pronouncements will have a
material effect on TCIC's consolidated financial statements.
II-24
<PAGE> 82
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of Tele-Communications, Inc. are
filed under this Item, beginning on Page II-27 and the consolidated financial
statements of TCI Communications, Inc. are filed under this Item, beginning on
Page II-76. The financial statement schedules required by Regulation S-X are
filed under Item 14 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
II-25
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
Tele-Communications, Inc. and subsidiaries as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
II-26
<PAGE> 84
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------------ -----------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 74 1
Trade and other receivables, net 301 232
Inventories, net 121 --
Investment in Liberty Media Corporation
("Liberty") (note 3) -- 489
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 1,215 645
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 660 491
Investment in QVC, Inc. ("QVC") (note 6) 281 2
Property and equipment, at cost:
Land 91 73
Distribution systems 7,705 6,629
Support equipment and buildings 1,085 818
Computer and broadcast equipment 61 --
-------- ------
8,942 7,520
Less accumulated depreciation 3,066 2,585
-------- ------
5,876 4,935
-------- ------
Franchise costs 11,152 10,620
Less accumulated amortization 1,708 1,423
-------- ------
9,444 9,197
-------- ------
Other assets, at cost, net of amortization 1,556 528
-------- ------
$ 19,528 16,520
======== ======
</TABLE>
(continued)
II-27
<PAGE> 85
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Balance Sheets, continued
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------------ -----------------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 201 124
Accrued interest 183 157
Other accrued expenses 809 500
Debt (note 7) 11,162 9,900
Deferred income taxes (note 11) 3,613 3,310
Other liabilities 160 114
-------- ------
Total liabilities 16,128 14,105
-------- ------
Minority interests in equity
of consolidated subsidiaries 429 285
Redeemable preferred stocks (note 8) -- 18
Stockholders' equity (note 9):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Convertible Preferred Stock, Series C,
$.01 par value -- --
Class A common stock, $1 par value
Authorized 1,100,000,000 shares;
issued 576,979,498 shares in 1994
and 481,837,347 shares in 1993 577 482
Class B common stock, $1 par value
Authorized 150,000,000 shares;
issued 89,287,429 shares in 1994
and 47,258,787 shares in 1993 89 47
Additional paid-in capital 2,959 2,293
Cumulative foreign currency
translation adjustment, net of taxes (4) (29)
Unrealized holding gains for
available-for-sale securities, net of taxes 253 --
Accumulated deficit (293) (348)
-------- ------
3,581 2,445
Treasury stock, at cost (86,030,992 and
79,335,038 shares of Class A common
stock in 1994 and 1993 and 4,172,629
shares of Class B common stock in 1994) (610) (333)
-------- ------
Total stockholders' equity 2,971 2,112
-------- ------
Commitments and contingencies (note 12)
$ 19,528 16,520
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
II-28
<PAGE> 86
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Operations
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue (note 13):
From cable and programming services (note 3) $ 4,454 4,153 3,574
Net sales from home shopping services 482 -- --
-------- ----- -----
4,936 4,153 3,574
-------- ----- -----
Operating costs and expenses:
Operating (note 3) 1,445 1,190 1,028
Cost of sales 313 -- --
Selling, general and administrative (note 4) 1,380 1,105 909
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating to stock
appreciation rights (8) -- --
Restructuring charge -- -- 8
Depreciation 700 622 512
Amortization 318 289 252
-------- ----- -----
4,148 3,237 2,710
-------- ----- -----
Operating income (note 13) 788 916 864
Other income (expense):
Interest expense (785) (731) (718)
Interest and dividend income 36 34 69
Share of earnings of Liberty (note 3) 125 4 22
Share of losses of other affiliates, net (note 4) (120) (76) (105)
Gain on sale of stock by equity investee (note 4) 161 -- --
Gain (loss) on disposition of assets (10) 42 9
Premium received on redemption of
preferred stock investment (note 4) -- -- 14
Loss on early extinguishment of debt (9) (17) (67)
Minority interests in losses (earnings) of
consolidated subsidiaries, net 2 (5) (41)
Other, net (17) (6) (2)
-------- ----- -----
(617) (755) (819)
-------- ----- -----
Earnings from continuing operations
before income taxes 171 161 45
Income tax expense (note 11) (116) (168) (38)
-------- ----- -----
Earnings (loss) from continuing operations 55 (7) 7
Loss from discontinued operations,
net of income taxes (note 14) -- -- (15)
-------- ----- -----
Net earnings (loss) 55 (7) (8)
Dividend requirements on preferred stocks (8) (2) (15)
-------- ----- -----
Net earnings (loss) attributable
to common stockholders $ 47 (9) (23)
======== ===== =====
Primary and fully diluted earnings (loss)
attributable to common stockholders per
common and common equivalent share (note 1):
Continuing operations $ .09 (.02) (.01)
Discontinued operations -- -- (.04)
-------- ----- -----
$ .09 (.02) (.05)
======== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
II-29
<PAGE> 87
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Cumulative
foreign
Class B Series C Common stock Additional currency
Preferred Preferred ------------------- paid-in translation
Stock Stock Class A Class B capital adjustment
-------- --------- ------- ------- ----------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ -- -- 449 49 1,738 --
Net loss -- -- -- -- -- --
Conversion of public debentures
(note 7) -- -- 7 -- 105 --
Issuance of common stock upon
exercise of options -- -- 1 -- 13 --
Issuance of Class A common
stock for acquisition and
investment -- -- 5 -- 93 --
Dividends on redeemable
preferred stocks -- -- -- -- (15) --
Foreign currency translation
adjustment -- -- -- -- -- (19)
Acquisition and retirement
of common stock -- -- -- (1) (25) --
------- ----- --- -- ----- ---
Balance at December 31, 1992 -- -- 462 48 1,909 (19)
Net loss -- -- -- -- -- --
Issuance of common stock
upon conversion of notes
(note 7) -- -- 20 -- 383 --
Issuance of common stock upon
exercise of options -- -- -- -- 7 --
Dividends on redeemable
preferred stocks -- -- -- -- (2) --
Foreign currency translation
adjustment -- -- -- -- -- (10)
Acquisition and retirement
of common stock -- -- -- (1) (4) --
------- ----- --- -- ----- ---
Balance at December 31, 1993 $ -- -- 482 47 2,293 (29)
------- ----- --- -- ----- ---
Unrealized
holding Note
gains for receivable
available- from Total
for-sale related Accumulated Treasury stockholders'
securities party deficit stock equity
---------- --------- ----------- -------- ---------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 -- -- (333) (333) 1,570
Net loss -- -- (8) -- (8)
Conversion of public debentures
(note 7) -- -- -- -- 112
Issuance of common stock upon
exercise of options -- -- -- -- 14
Issuance of Class A common
stock for acquisition and
investment -- -- -- -- 98
Dividends on redeemable
preferred stocks -- -- -- -- (15)
Foreign currency translation
adjustment -- -- -- -- (19)
Acquisition and retirement
of common stock -- -- -- -- (26)
---- ---- ---- ---- -----
Balance at December 31, 1992 -- -- (341) (333) 1,726
Net loss -- -- (7) -- (7)
Issuance of common stock
upon conversion of notes
(note 7) -- -- -- -- 403
Issuance of common stock upon
exercise of options -- -- -- -- 7
Dividends on redeemable
preferred stocks -- -- -- -- (2)
Foreign currency translation
adjustment -- -- -- -- (10)
Acquisition and retirement
of common stock -- -- -- -- (5)
---- ---- ---- ---- -----
Balance at December 31, 1993 -- -- (348) (333) 2,112
---- ---- ---- ---- -----
</TABLE>
(continued)
II-30
<PAGE> 88
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Stockholders' Equity, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Cumulative
foreign
Class B Series C Common stock Additional currency
Preferred Preferred ------------------- paid-in translation
Stock Stock Class A Class B capital adjustment
-------- --------- ------- ------- ----------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- -- 482 47 2,293 (29)
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 (note 5) -- -- -- -- -- --
Net earnings -- -- -- -- -- --
Conversion of redeemable preferred
stock (note 8) -- -- 1 -- 17 --
Issuance of common stock upon
conversion of notes (note 7) -- -- 3 -- -- --
Issuance of common stock upon
exercise of stock option -- -- -- -- 3 --
Acquisition and retirement of
common stock -- -- -- -- (2) --
Consummation of the TCI/Liberty
Combination (notes 1 and 3) -- -- 85 42 383 --
Issuance of Series C Preferred
Stock in acquisition (note 9) -- -- -- -- 168 --
Accreted dividends on all classes of
preferred stock -- -- -- -- (8) --
Accreted dividends on all classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- 8 --
Payment of preferred stock
dividends -- -- -- -- (4) --
Foreign currency translation
adjustment -- -- -- -- -- 25
Issuance of TCI Class A common
stock to subsidiaries of TCI
in Reorganization -- -- -- -- (23) --
Issuance of Class A common stock
for investment -- -- 6 -- 124 --
Repayment of note receivable
from related party (note 9) -- -- -- -- -- --
Change in unrealized holding gains
for available-for-sale
securities (note 5) -- -- -- -- -- --
------- ----- --- -- ----- ---
Balance at December 31, 1994 $ -- -- 577 89 2,959 (4)
======= ===== === == ===== ===
Unrealized
holding Note
gains for receivable
available- from Total
for-sale related Accumulated Treasury stockholders'
securities party deficit stock equity
---------- --------- ----------- -------- ---------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 -- -- (348) (333) 2,112
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 (note 5) 304 -- -- -- 304
Net earnings -- -- 55 -- 55
Conversion of redeemable
preferred stock (note 8) -- -- -- -- 18
Issuance of common stock upon
conversion of notes (note 7) -- -- -- -- 3
Issuance of common stock upon
exercise of stock option -- -- -- -- 3
Acquisition and retirement of
common stock -- -- -- -- (2)
Consummation of the TCI/Liberty
Combination (notes 1 and 3) 182 (15) -- (285) 392
Issuance of Series C Preferred
Stock in acquisition (note 9) -- -- -- -- 168
Accreted dividends on all
classes of preferred stock -- -- -- -- (8)
Accreted dividends on all
classes of preferred stock
not subject to mandatory
redemption requirements -- -- -- -- 8
Payment of preferred stock
dividends -- -- -- -- (4)
Foreign currency translation
adjustment -- -- -- -- 25
Issuance of TCI Class A common
stock to subsidiaries of TCI
in Reorganization -- -- -- 23 --
Issuance of Class A common stock
for investment -- -- -- -- 130
Repayment of note receivable
from related party (note 9) -- 15 -- (15) --
Change in unrealized holding
gains for available-for-sale
securities (note 5) (233) -- -- -- (233)
------ ---- --- ---- ----
Balance at December 31, 1994 253 -- (293) (610) 2,971
====== ==== === ==== =====
</TABLE>
See accompanying notes to consolidated financial statements.
II-31
<PAGE> 89
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 55 (7) (8)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,018 911 764
Compensation relating to stock appreciation
rights -- 31 1
Adjustment to compensation relating to stock
appreciation rights (8) -- --
Payment for stock appreciation rights -- -- (80)
Share of earnings of Liberty (125) (4) (22)
Share of losses of other affiliates 120 76 105
Gain on sale of stock by equity investee (161) -- --
Deferred income tax expense 33 139 28
Minority interests in earnings (losses) (2) 5 41
Amortization of debt discount 1 27 27
Loss on early extinguishment of debt 9 17 67
Loss (gain) on disposition of assets 10 (42) (9)
Noncash interest expense 5 -- --
Premium received on preferred stock
investment redemption -- -- (14)
Payment of premium received on
preferred stock investment redemption -- 14 --
Noncash interest and dividend income (8) (7) (40)
Discontinued operations -- -- 15
Restructuring charge -- -- 8
Payment on restructuring charge -- (8) --
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 15 (32) (3)
Change in inventories (26) -- --
Change in accrued interest 13 63 --
Change in other accruals and payables 56 68 77
----------- ----- ------
Net cash provided by operating activities 1,005 1,251 957
----------- ----- ------
</TABLE>
(continued)
II-32
<PAGE> 90
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from investing activities:
Cash paid for acquisitions (358) (158) (1,256)
Capital expended for property and equipment (1,264) (947) (526)
Cash proceeds from disposition of assets 39 149 66
Payment received on preferred
stock investment redemption -- 183 --
Cash proceeds from disposition of discontinued
operations -- -- 220
Discontinued operations -- -- 9
Additional investments in and
loans to affiliates and others (445) (361) (205)
Repayment of loans by affiliates and others 148 62 32
Return of capital from affiliates 24 1 1
Other investing activities (136) (99) (155)
------- ------ ------
Net cash used in investing activities (1,992) (1,170) (1,814)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt 4,676 6,305 5,354
Repayments of debt (3,607) (6,321) (4,435)
Repayment of short-term notes to affiliate -- -- (22)
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends (4) (2) (15)
Repurchases of preferred stock -- (92) (5)
Issuances of common stock 1 6 7
Repurchases of common stock -- (4) (19)
-------- ------ ------
Net cash provided (used) by financing
activities 1,060 (114) 859
-------- ------ ------
Net increase (decrease) in cash 73 (33) 2
Cash at beginning of year 1 34 32
-------- ------ ------
Cash at end of year $ 74 1 34
========= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
II-33
<PAGE> 91
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. (formerly TCI/Liberty Holding Company) and those
of all majority-owned subsidiaries ("TCI" or the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The TCI/Liberty Combination
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty entered into a
definitive merger agreement (the "TCI/Liberty Merger Agreement") to combine
the two companies (the "TCI/Liberty Combination"). The transaction was
consummated on August 4, 1994 and 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 a newly formed holding company, TCI/Liberty Holding
Company. In connection with the TCI/Liberty Combination, Old TCI changed
its name to TCI Communications, Inc. ("TCIC") and TCI/Liberty Holding
Company changed its name to Tele-Communications, Inc. Old TCI 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 (see note 3). Upon consummation of the TCI/Liberty Combination,
certain subsidiaries of TCIC exchanged the 79,335,038 shares of Old TCI
Class A common stock held by such subsidiaries for 79,335,038 shares of TCI
Class A common stock. Such ownership is reflected as treasury stock at
such subsidiaries' historical cost in the accompanying consolidated
financial statements.
Reorganization
During the fourth quarter of 1994, the Company was reorganized based upon
four lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital (the
"Reorganization"). Upon Reorganization, certain of the assets of TCIC and
Liberty were transferred to the other operating units. As consideration
for such transfer of assets by TCIC and Liberty, TCI issued 317,112 shares
of TCI Class A common stock and 246,402 shares of Redeemable Convertible
Preferred Stock, Series E ("Series E Preferred Stock") (see note 9).
(continued)
II-34
<PAGE> 92
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1994 and 1993 was not material.
Inventories, net
Inventories, consisting of products held for sale, are valued at the lower
of cost or market, cost being determined using the first-in, first-out
method. Cost includes freight, certain warehousing costs and other
allocable overhead. Market is determined on the basis of replacement cost
or net realizable value, giving consideration to obsolescence and other
factors. The inventory balances are presented net of a reserve of $19
million at December 31, 1994.
Investments
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("Statement No. 115"), effective for fiscal
years beginning after December 15, 1993. Under Statement No. 115, debt
securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the
Company does not have the positive intent and ability to hold to maturity
and all marketable equity securities are classified as available-for-sale
or trading and carried at fair value. Unrealized holding gains and losses
on securities classified as available-for-sale are carried net of taxes as
a separate component of shareholders' equity. Unrealized holding gains and
losses on securities classified as trading are reported in earnings.
Marketable equity securities held by the Company were reported at the lower
of cost or market prior to the adoption of Statement No. 115, and any
declines in the value which were other than temporary were reflected as a
reduction in the Company's carrying value of such investment.
Other investments in which the ownership interest is less than 20% but do
not fall within the guidelines of Statement No. 115 are generally carried
at cost. For those investments in affiliates in which the Company's voting
interest is 20% to 50%, the equity method of accounting is generally used.
Under this method, the investment, originally recorded at cost, is adjusted
to recognize the Company's share of the net earnings or losses of the
affiliates as they occur rather than as dividends or other distributions
are received, limited to the extent of the Company's investment in,
advances to and guarantees for the investee. The Company's share of net
earnings or losses of affiliates includes the amortization of purchase
adjustments.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as gains or losses in the Company's consolidated statement of
operations.
(continued)
II-35
<PAGE> 93
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including
interest during construction and applicable overhead, are capitalized.
During 1994, 1993 and 1992, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems, 3 to 40 years for support
equipment and buildings and 6 to 13 years for computer and broadcast
equipment.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or
other dispositions of property, the original cost and cost of removal of
such property are charged to accumulated depreciation, and salvage, if any,
is credited thereto. Gains or losses are only recognized in connection
with the sales of properties in their entirety. However, recognition of
gains on sales of properties to affiliates accounted for under the equity
method is deferred in proportion to the Company's ownership interest in
such affiliates.
Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years.
Costs incurred by the Company in obtaining franchises are being amortized
on a straight-line basis over the life of the franchise, generally 10 to 20
years.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from the Company's financial
liabilities are recognized as interest expense. Gains and losses on early
terminations of derivatives are included in the carrying amount of the
related debt and amortized as yield adjustments over the remaining terms of
the debt. The Company does not use such instruments for trading purposes.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the common equity of those consolidated subsidiaries. Further,
the minority interests' share of losses is not recognized if the minority
holders of common equity of consolidated subsidiaries have the right to
cause the Company to repurchase such holders' common equity.
Included in minority interests in equity of consolidated subsidiaries is
$50 million in each of 1994 and 1993 of preferred stocks (and accumulated
dividends thereon) of certain subsidiaries. The current dividend
requirements on these preferred stocks aggregate $6 million per annum and
such dividend requirements are reflected as minority interests in the
accompanying consolidated statements of operations.
(continued)
II-36
<PAGE> 94
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement of
operations items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity.
Net Sales from Home Shopping Services
Net sales include merchandise sales and shipping and handling revenues, and
are reduced by incentive discounts and sales returns to arrive at net
sales. The Company's sales policy allows merchandise to be returned at the
customer's discretion, generally up to 30 days after the date of sale. An
allowance for returned merchandise is provided based upon past experience.
Earnings (Loss) Per Common and Common Equivalent Share
Primary earnings per common and common equivalent share attributable to
common stockholders was computed by dividing net earnings attributable to
common stockholders by the weighted average number of common and common
equivalent shares outstanding (540.8 million for the year ended December
31, 1994).
Fully diluted earnings per common and common equivalent share attributable
to common stockholders was computed by dividing earnings attributable to
common stockholders by the weighted average number of common and common
equivalent shares outstanding (540.8 million for the year ended December
31, 1994). Shares issuable upon conversion of the Convertible Preferred
Stock, Series C ("Series C Preferred Stock") (see note 9) have not been
included in the computation of weighted average shares because their effect
would be anti-dilutive.
Loss per common share attributable to common stockholders for the years
ended December 31, 1993 and 1992 was computed by dividing net loss
attributable to common stockholders by the weighted average number of
common shares outstanding (432.6 million for the year ended December 31,
1993 and 424.1 million for the year ended December 31, 1992). Common
stock equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
Reclassification
Certain amounts have been reclassified for comparability with the 1994
presentation.
II-37
(continued)
<PAGE> 95
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $758 million, $641 million and $689 million for
the years ended December 31, 1994, 1993 and 1992, respectively. Also,
during these periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $1,921 172 1,231
Liabilities assumed, net of current assets (648) (7) 21
Deferred tax liability recorded
in acquisitions (190) (7) 7
Minority interests in equity of
acquired entities (35) -- --
Note receivable from related party
assumed 15 -- --
Common stock and preferred stock
issued in acquisitions (808) -- (3)
Common stock issued to TCIC and
Liberty in the TCI/Liberty Combination
reflected as treasury stock (note 3) 285 -- --
Unrealized gains on available-for-sale
securities of acquired entities (182) -- --
------ --- -----
Cash paid for acquisitions $ 358 158 1,256
====== === =====
Common stock issued upon conversion
of redeemable preferred stock $ 18 -- --
====== === =====
Effect of foreign currency translation
adjustment on book value of foreign
consolidated subsidiaries and equity
method investments $ 25 10 19
====== === =====
TCI common stock issued to subsidiaries
in Reorganization reflected as
treasury stock $ 23 -- --
====== === =====
</TABLE>
(continued)
II-38
<PAGE> 96
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended
December 31,
----------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Unrealized gains, net of deferred income
taxes, on available-for-sale securities
as of January 1, 1994 $ 304 -- --
====== ====== ======
Reduction in unrealized gains, net of deferred
income taxes, on available-for-sale securities
exclusive of unrealized gains recorded in
the TCI/Liberty Combination $ 233 -- --
====== ====== ======
Common stock issued upon conversion
of notes (with accrued interest
through conversion) $ 3 403 112
====== ====== ======
Repayment of note receivable from related
party with shares of TCI Class A
common stock $ 15 -- --
====== ====== ======
Receipt of notes receivable upon
disposition of Liberty common
stock and preferred stock $ -- 182 --
====== ====== ======
Noncash exchange of equity investment
for consolidated subsidiary and
equity investment $ -- 22 --
====== ====== ======
Noncash capital contribution to
Community Cable Television ("CCT") $ -- 22 --
====== ====== ======
Common stock surrendered in lieu of cash
upon exercise of stock options $ 2 1 7
====== ====== ======
Value of TCI Class A common stock issued
as part of purchase price of equity
investment $ -- -- 95
====== ====== ======
Note received upon disposition of assets $ -- -- 15
====== ====== ======
</TABLE>
(continued)
II-39
<PAGE> 97
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(3) Investment in Liberty Media Corporation
TCIC owned 3,477,778 shares of Liberty Class A common stock and 55,070
shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Liberty Class E Preferred Stock"). Upon consummation of
the TCI/Liberty Combination, TCIC received 3,390,833 shares of TCI Class A
common stock and 55,070 shares of TCI Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock ("Class B Preferred Stock"), a new
preferred stock of TCI having designations, preferences, rights and
qualifications, limitations and restrictions that are substantially
identical to those of the Liberty Class E Preferred Stock, except that the
holders of the Class B Preferred Stock will be entitled to one vote per
share in any general election of directors of TCI (see note 9). The Class
B Preferred Stock received by TCIC eliminates in consolidation.
Upon consummation of the TCI/Liberty Combination, the remaining classes of
preferred stock of Liberty held by TCIC were converted into shares of Class
A Preferred Stock, a new series of preferred stock of TCI having a
substantially equivalent fair market value to that which was given up. All
such preferred stock eliminates in consolidation (See note 9.)
Liberty owned 2,988,009 shares of Old TCI Class A common stock and
3,537,712 shares of Old TCI Class B common stock. Such shares were
replaced with the same number of shares of TCI Class A and Class B common
stock upon consummation of the TCI/Liberty Combination.
TCIC's and Liberty's ownership of TCI common stock are reflected as
treasury stock in the accompanying consolidated financial statements. Such
amounts have been recorded at the historical cost previously reflected by
TCIC and Liberty.
Due to the significant economic interest held by TCIC through its ownership
of Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the
equity method. Accordingly, TCIC had not recognized any income relating to
dividends, including preferred stock dividends, and TCIC recorded the
earnings or losses generated by Liberty (by recognizing 100% of Liberty's
earnings or losses before deducting preferred stock dividends) through the
date the TCI/Liberty Combination was consummated.
(continued)
II-40
<PAGE> 98
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The TCI/Liberty Combination was accounted for using predecessor cost due to
the aforementioned related party considerations. The results of operations
of such acquired entity have been consolidated with those of the Company
since the date the TCI/Liberty Combination was consummated. On a pro forma
basis, the Company's revenue would have been increased by approximately
$790 million and $1,153 million for the years ended December 31, 1994 and
1993, respectively, had the acquisition occurred prior to January 1, 1993.
On a pro forma basis, the Company's net earnings would have remained
unchanged as the Company had recognized 100% of Liberty's earnings or
losses through the date the TCI/Liberty Combination was consummated. On a
pro forma basis, the Company's earnings per share would have decreased by
$ .01 for the year ended December 31, 1994 and the Company's loss per
share would have remained unchanged for the year ended December 31, 1993
had the acquisition occurred prior to January 1, 1993. The foregoing
unaudited pro forma financial information was based upon historical results
of operations adjusted for acquisition costs and, in the opinion of
management, is not necessarily indicative of the results had the Company
operated the acquired entity prior to January 1, 1993.
Summarized unaudited financial information of Liberty as of December 31,
1993 and for the period from January 1, 1994 through August 4, 1994 and for
the years ended December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1993
----
Consolidated Financial Position amounts in millions
-------------------------------
<S> <C>
Cash and cash equivalents $ 91
Investment in TCI common stock 104
Other investments and
related receivables 372
Other assets, net 870
-------
Total assets $ 1,437
=======
Debt $ 446
Deferred income taxes 2
Other liabilities 307
Minority interests 175
Redeemable preferred stocks 155
Stockholders' equity 352
-------
Total liabilities and
stockholders' equity $ 1,437
=======
</TABLE>
(continued)
II-41
<PAGE> 99
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
Consolidated Operations amounts in millions
-----------------------
<S> <C> <C> <C>
Revenue $ 790 1,153 157
Operating expenses (726) (1,105) (144)
Depreciation and amortization (32) (49) (16)
------ ------ ----
Operating income (loss) 32 (1) (3)
Interest expense (22) (31) (7)
Other, net 115 36 32
------ ------ ----
Net earnings $ 125 4 22
====== ====== ====
</TABLE>
Prior to the TCI/Liberty Combination, TCIC purchased sports and other
programming from certain subsidiaries of Liberty. Charges to TCIC (which
were based upon customary rates charged to others) for such programming
were $27 million, $44 million and $44 million for the period from January
1, 1994 through August 4, 1994 and for the years ended December 31, 1993
and 1992, respectively. Such amounts are included in operating expenses in
the accompanying consolidated statements of operations. Certain
subsidiaries of Liberty purchased from TCIC, at TCIC's cost plus an
administrative fee, certain pay television and other programming. In
addition, a consolidated subsidiary of Liberty paid a commission to TCIC
for merchandise sales to customers who were subscribers of TCIC's cable
systems. Aggregate commission and charges for such programming were $10
million, $11 million and $3 million for the period from January 1, 1994
through August 4, 1994 and for the years ended December 31, 1993 and 1992,
respectively. Such amounts are recorded in revenue in the accompanying
consolidated statements of operations.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9% of
Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share
of Liberty's earnings prior to the TCI/Liberty Combination.
In January 1992, the Company and Liberty formed CCT, a general partnership
created for the purpose of acquiring and operating cable television
systems. The definitive partnership agreement was executed in March 1992.
Pursuant to a cable television management agreement, a subsidiary of TCI
provided management services for cable television systems owned by CCT.
The subsidiary received a fee equal to 3% of the gross cable television
revenue of the partnership prior to the TCI/Liberty Combination.
(4) Investments in Affiliates
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at
December 31, 1994 are TeleWest Communications plc ("TeleWest
Communications") (carrying value of $454 million), Discovery
Communications, Inc. (carrying value of $113 million) and Teleport
Communications Group, Inc. ("TCG") (carrying value of $126 million).
(continued)
II-42
<PAGE> 100
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Company is a shareholder of TeleWest Communications plc (formerly
TCI/US WEST Cable Communications Group or "TeleWest UK") ("TeleWest
Communications"), a company that is currently operating and constructing
cable television and telephone systems in the United Kingdom ("UK").
TeleWest Communications, which is accounted for under the equity method,
had a carrying value at December 31, 1994 of $454 million and comprised $43
million, $28 million and $26 million of the Company's share of its
affiliates' losses in 1994, 1993 and 1992, respectively. In February 1994,
the Company acquired a consolidated investment in Flextech p.l.c.
("Flextech"). Flextech accounted for net losses of $24 million (before
deducting the minority interests' 40% share of such losses) in 1994. In
addition, the Company has other less significant equity method investments
in video distribution and programming businesses located in the UK, other
parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying
value of $135 million at December 31, 1994 and accounted for $50 million of
the Company's share of its affiliates' losses in 1994.
On November 22, 1994, TCI and US West, Inc. each exchanged their respective
50% ownership interest in TeleWest UK for 302,250,000 ordinary shares and
76,500,000 convertible preference shares of TeleWest Communications (the
"TeleWest Exchange"). Following the completion of the TeleWest Exchange,
TeleWest Communications conducted an initial public offering on
November 23, 1994 in which it sold 243,740,000 ordinary shares for
aggregate net proceeds of 401 million pounds (the "TeleWest IPO"). Upon
completion of the TeleWest Exchange and the TeleWest IPO, TCI and US West,
Inc. each became the owners of 36% of the ordinary shares and 38% of the
total outstanding ordinary and convertible preference shares of TeleWest
Communications. As a result of the TeleWest IPO and the associated
dilution of the Company's ownership interest of TeleWest Communications,
Inc., the Company has recognized a nonrecurring gain amounting to
$161 million (before deducting the related tax expense of $57 million).
On December 2, 1992, SCI Holdings, Inc. ("SCI") consummated a transaction
(the "Split-Off") that resulted in the ownership of its cable systems being
split between its two stockholders, which stockholders were Comcast
Corporation ("Comcast") and the Company. Prior to the Split-Off, the
Company had an investment in the common stock of SCI and the preferred
stock of its wholly-owned subsidiary, Storer Communications, Inc.
("Storer").
The Split-Off, which permitted refinancing of substantially all of the
publicly held debt of SCI and the preferred stock of Storer, was effected
by the distribution of approximately 50% of the net assets of SCI to three
holding companies formed by the Company (the "Holding Companies").
Prior to the Split-Off, the Company contributed its SCI common stock to the
Holding Companies in exchange for 100% of such Holding Companies' common
stock. The amount of SCI common stock contributed to each of the Holding
Companies was based upon the proportionate value of net assets to be
received by each of the Holding Companies in the Split-Off. SCI then
merged into Storer and the SCI common stock held by the Holding Companies
was converted into Storer common stock.
(continued)
II-43
<PAGE> 101
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Also prior to the Split-Off, (i) the Holding Companies incurred long-term
debt aggregating approximately $1.1 billion and contributed substantially
all of the resulting proceeds to Storer and (ii) a consolidated subsidiary
of TCI redeemed approximately $476 million of its debt securities held by
Storer with proceeds of its separate financing, and an affiliate of Comcast
redeemed approximately $274 million of its debt securities held by Storer.
In turn, Storer utilized substantially all of the proceeds of such
contributions and redemptions to repurchase its preferred stock and
extinguish all of its debt. The Company's share of Storer's loss on early
extinguishment of debt was $52 million and such amount is included in loss
on early extinguishment of debt in the accompanying consolidated statements
of operations. Additionally, the Company received a premium, amounting to
$14 million, on the repurchase of the Storer preferred stock. Such amount
is reflected separately in the accompanying consolidated financial
statements.
In the Split-Off, Storer redeemed its common stock held by the Holding
Companies in exchange for 100% of the capital stock of certain operating
subsidiaries of Storer.
Immediately following the Split-Off, the Company owned a majority of the
common stock of the Holding Companies and Comcast owned 100% of the common
stock of Storer. As such, the Company, which previously accounted for its
investment in SCI using the equity method, now consolidates its investment
in the Holding Companies. The assets of the Holding Companies were
recorded at predecessor cost.
In connection with the Company's 1988 acquisition of an equity interest in
SCI, a subsidiary of the Company issued certain debt and equity securities
to Storer for $650 million. Such debt securities were redeemed and the
equity securities were received by one of the Holding Companies in the
Split-Off. Interest charges and preferred stock dividend requirements on
these debt and equity securities, prior to the Split-Off, aggregated $81
million for the period ended December 2, 1992. The Company's share of
losses of SCI, prior to the Split-Off for the period ended December 2, 1992
amounted to $51 million, as adjusted for the effect of interest and
dividends accounted for by Storer as capital transactions due to their
related party nature.
(continued)
II-44
<PAGE> 102
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Summarized unaudited financial information for affiliates other than
Liberty is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $ 2,243 1,059
Franchise costs, net 1,231 266
Feature film inventory 115 --
Other assets, net 1,512 727
-------- -----
Total assets $ 5,101 2,052
======== =====
Debt $ 2,579 593
Due to (from) TCI (2) 78
Feature film rights payable 16 --
Other liabilities 681 338
Owners' equity 1,827 1,043
-------- -----
Total liabilities and equity $ 5,101 2,052
======== =====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1993 1992
---- ---- ----
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 2,015 713 1,224
Operating expenses (1,674) (648) (786)
Depreciation and amortization (398) (127) (303)
---------- ------- -------
Operating income (loss) (57) (62) 135
Interest expense (169) (37) (295)
Other, net 82 98 (234)
---------- ------- -------
Net loss $ (144) (1) (394)
========== ======= =======
</TABLE>
(continued)
II-45
<PAGE> 103
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 (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.
The Company owns shares of a class of preferred stock of TBS which has
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 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 12% voting interest for those matters for which
preferred and common stock vote as a single class.
The Company's investment in TBS common stock had an aggregate market value
of $803 million (which exceeded cost by $485 million) at December 31, 1993.
The Company applied Statement No. 115 beginning in the first quarter of
1994. Application of Statement No. 115 resulted in a net increase of $304
million to stockholders' equity on January 1, 1994, representing the
recognition of unrealized appreciation, net of taxes, for the Company's
investment in marketable equity securities determined to be
available-for-sale. Such amount was adjusted by $182 million recorded in
the TCI/Liberty Combination. The amount of net unrealized gain was reduced
by $233 million through December 31, 1994. The majority of such unrealized
gain is comprised of the Company's investment in TBS common stock ($100
million) and QVC common stock ($127 million) (see note 6). The Company
holds no material debt securities.
The Company's investment in TBS preferred stock, carried at cost, had an
aggregate market value of $579 million and $954 million, based upon the
market value of the common stock into which it is convertible, (which
exceeded cost by $406 million and $781 million) at December 31, 1994 and
1993, respectively.
(6) Investment in QVC, Inc.
Pursuant to an Agreement and Plan of Merger dated as of August 4, 1994,
as amended (the "QVC Merger Agreement"), QVC Programming Holdings, Inc.
(the "Purchaser"), a corporation which is jointly owned by Comcast
Corporation ("Comcast") and Liberty, commenced an offer (the "QVC Tender
Offer") to purchase all outstanding shares of common stock and preferred
stock of QVC, Inc. ("QVC").
(continued)
II-46
<PAGE> 104
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The QVC Tender Offer expired at midnight, New York City time, on
February 9, 1995, the Purchaser accepted for payment all shares of QVC
which had been tendered in the QVC Tender Offer. Following consummation of
the QVC Tender Offer, the Purchaser was merged with and into QVC with QVC
continuing as the surviving corporation. The Company owns an approximate
43% interest of the post-merger QVC.
A credit facility entered into by the Purchaser is secured by substantially
all of the assets of QVC. In addition, Comcast and Liberty have pledged
their shares of QVC pursuant to such credit facility.
TCI's ownership of QVC was received in the TCI/Liberty Combination.
Liberty had begun accounting for its investment in QVC under the cost
method in May 1994, upon its determination to remain outside of the
previous QVC shareholders agreement. Prior to such determination, Liberty
had accounted for its investment in QVC under the equity method.
Upon consummation of the aforementioned QVC transactions, the Company is
deemed to exercise significant influence over QVC and, as such, will
account for its investment in QVC under the equity method. Had the Company
accounted for its investment under the equity method during 1994, the
Company would have reflected additional share of earnings of QVC of $8
million (of which $1 million would have been included in the Company's
share of Liberty's earnings prior to the TCI/Liberty Combination).
Additionally, the Company's investment in QVC, its deferred tax liability
and its unrealized gain from available-for-sale securities would have been
reduced by $216 million, $89 million and $127 million, respectively, had
the Company accounted for its investment in QVC under the equity method
during 1994. The 1994 consolidated financial statements will be restated
in the first quarter of 1995.
(continued)
II-47
<PAGE> 105
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ------------
December 31, 1994 1994 1993
----------------- ---- ----
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Senior notes 8.5% $ 5,412 5,052
Bank credit facilities 7.3% 4,045 3,344
Commercial paper 6.6% 445 44
Notes payable 10.2% 1,024 1,321
Convertible notes (a) 9.5% 45 47
Other debt -- 191 92
-------- -----
$ 11,162 9,900
======== =====
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $186 million and $197 million at December 31, 1994 and 1993,
respectively, mature on December 18, 2021. The notes require (so long
as conversion of the notes has not occurred) an annual interest
payment through 2003 equal to 1.85% of the face amount of the notes.
During the year ended December 31, 1993, certain of these notes were
converted into 819,000 shares of TCI Class A common stock. During the
year ended December 31, 1994, certain of these notes were converted
into 2,350,000 shares of TCI Class A common stock. At December 31,
1994, the notes were convertible, at the option of the holders, into
an aggregate of 38,710,990 shares of TCI Class A common stock.
On October 28, 1993, the Company called for redemption of its remaining
Liquid Yield Option(TM) Notes. In connection with such call for
redemption, Notes aggregating $405 million were converted into 18,694,377
shares of TCI Class A common stock and Notes aggregating less than $1
million were redeemed together with accrued interest to the redemption
date. Prior to the aforementioned redemption, Notes aggregating $6 million
were converted into 259,537 shares of TCI Class A common stock during 1993.
During the year ended December 31, 1992, TCI called for redemption all of
its 7% convertible subordinated debentures. Debentures aggregating $114
million were converted into 6,636,881 shares of TCI Class A common stock
and the remaining debentures were redeemed at 104.2% of the principal
amount together with accrued interest to the redemption date.
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.
(continued)
II-48
<PAGE> 106
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
As security for borrowings under one of its credit facilities, TCI pledged
a portion of the common stock (with a quoted market value of approximately
$479 million at December 31, 1994) it holds of TBS.
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 9.9% on notional amounts of $550
million at December 31, 1994 and (ii) variable interest rates (the
"Variable Rate Agreements") on notional amounts of $2,605 million at
December 31, 1994. During the years ended December 31, 1994, 1993 and
1992, the Company's net payments pursuant to the Fixed Rate Agreements were
$26 million, $38 million and $47 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $36 million, $31
million and $7 million, respectively. After giving effect to the Company's
interest rate exchange agreements, approximately 43% of the Company's
indebtedness bears interest at fixed rates.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
-------------- ------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
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% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
----
April 1999 7.4% 100
$550 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
-------
$ 2,605
=======
</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.
(continued)
II-49
<PAGE> 107
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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
December 31, 1994, taking into consideration current interest rates and
assuming the current creditworthiness of the counterparties. The Company
would pay an estimated $195 million at December 31, 1994 to terminate the
agreements.
In order to diminish its exposure to extreme increases in variable interest
rates, the Company has entered into various interest rate hedge agreements
on notional amounts of $325 million which fix the maximum variable interest
rates at 11%. Such agreements expire during the third and fourth quarters
of 1995.
The fair value of the Company's debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The fair
value of debt, which has a carrying value of $11,162 million, was $11,065
million at December 31, 1994.
TCI and certain of its subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, TCI and certain of its 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.
TCI has not assumed any of TCIC's or Liberty's indebtedness or other
obligations that were outstanding at the time the TCI/Liberty Combination
was consummated.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1995 $1,206*
1996 890
1997 839
1998 813
1999 823
</TABLE>
* Includes $445 million of commercial paper.
(8) Redeemable Preferred Stocks
4-1/2% Convertible Preferred Stock. The 4-1/2% Convertible Preferred Stock
was stated at its redemption value of $3,000 per share, and each share was
convertible into 204 shares of TCI Class A common stock. In February of
1994, all of the shares of such convertible preferred stock were tendered
to the Company for conversion and, on March 3, 1994, 1,265,004 shares of
TCI Class A common stock were issued to the holders of such preferred
stock.
(continued)
II-50
<PAGE> 108
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Convertible Preferred Stock, Series D. Subsequent to December 31, 1994,
the Company issued 1,000,000 shares of a series of TCI Series Preferred
Stock (see note 9) designated "Convertible Preferred Stock, Series D" (the
"Series D Preferred Stock"), par value $.01 per share, as partial
consideration for the merger between TCIC and TeleCable Corporation
("TeleCable") (see note 16).
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series D Preferred
stock at the rate of 5-1/2% per annum of the liquidation value
($300 per share). Dividends are cumulative, and in the event that
dividends are not paid in full on two consecutive dividend payment dates or
in the event that TCI fails to effect any required redemption of Series D
Preferred Stock, accrue at the rate of 10% per annum of the liquidation
value. The Series D Preferred Stock ranks on parity with the Class A
Preferred Stock, the Series C Preferred Stock and the Series E Preferred
Stock.
Each share of Series D Preferred Stock is convertible into 10 shares of TCI
Class A common stock, subject to adjustment upon certain events specified
in the certificate of designation establishing Series D Preferred Stock.
To the extent any cash dividends are not paid on any dividend payment date,
the amount of such dividends will be deemed converted into shares of TCI
Class A common stock at a conversion rate equal to 95% of the then current
market price of TCI Class A common stock, and upon issuance of TCI Class A
common stock to holders of Series D Preferred Stock in respect of such
deemed conversion, such dividend will be deemed paid for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a
price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for
cash at the option of TCI after the fifth anniversary of the issue date at
such redemption price or after the third anniversary of the issue date if
the market value per share of TCI Class A common stock shall have exceeded
$37.50 for periods specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series
D Preferred Stock into TCI Class A common stock at a conversion rate of 95%
of the then current market value of TCI Class A common stock, provided that
such option may not be exercised unless the failure to redeem continues for
more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the shareholders of
TCI.
(continued)
II-51
<PAGE> 109
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(9) Stockholders' Equity
Common Stock
The Class A common stock has one vote per share and the Class B common
stock has ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A common
stock.
Employee Benefit Plans
The Company has an Employee Stock Purchase Plan ("ESPP") to provide
employees an opportunity for ownership in the Company and to create a
retirement fund. Terms of the ESPP provide for employees to contribute up
to 10% of their compensation to a trust for investment in TCI common stock.
The Company, by annual resolution of the Board of Directors, contributes up
to 100% of the amount contributed by employees. Certain of the Company's
subsidiaries have their own employee benefit plans. Contributions to all
plans aggregated $19 million, $16 million and $13 million for 1994, 1993
and 1992, respectively.
Preferred Stock
Class A Preferred Stock. The Company is authorized to issue 700,000 shares
of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI
hold all of the issued and outstanding shares of such stock, amounting to
592,797 shares. Such preferred stock is eliminated in consolidation. The
holders of the Class A Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, out of unrestricted funds legally
available therefor, cumulative dividends, in preference to dividends on any
stock that ranks junior to the Class A Preferred Stock (currently the Class
A common stock, the Class B common stock and the Class B Preferred Stock),
that accrue on each share of the Class A Preferred Stock at the rate of
9-3/8% per annum of the Stated Liquidation Value of such share ($322.84 per
share). Dividends are fully cumulative and are payable in cash. The Class
A Preferred Stock ranks on a parity basis with the Series C Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock as to
dividend rights, rights of redemption or rights on liquidation. The Class
A Preferred Stock is subject to mandatory redemption by the Company on the
twelfth anniversary of the issue date. The Class A Preferred Stock may be
redeemed at the option of the Company. The holders of the Class A
Preferred Stock have the right to vote at any annual or special meeting of
stockholders for the purpose of electing directors. Each share of Class A
Preferred Stock shall have one vote for such purpose.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The
Company is authorized to issue 1,675,096 shares of Class B Preferred Stock.
All such shares are issued and outstanding. Subsidiaries of TCIC hold
55,070 of such issued and outstanding shares.
(continued)
II-52
<PAGE> 110
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Dividends accrue cumulatively (but without compounding) at an annual rate
of 6% of the stated liquidation value of $100 per share (the "Stated
Liquidation Value"), whether or not such dividends are declared or funds
are legally available for payment of dividends. Accrued dividends will be
payable annually on March 1 of each year (or the next succeeding business
day if March 1 does not fall on a business day), commencing March 1, 1995,
and, in the sole discretion of the TCI Board, may be declared and paid in
cash, in shares of TCI Class A common stock or in any combination of the
foregoing. Accrued dividends not paid as provided above on any dividend
payment date will accumulate and such accumulated unpaid dividends may be
declared and paid in cash, shares of TCI Class A common stock or any
combination thereof at any time (subject to the rights of any senior stock
and, if applicable, to the concurrent satisfaction of any dividend
arrearages on any class or series of TCI preferred stock ranking on a
parity with the Class B Preferred Stock with respect to dividend rights)
with reference to any regular dividend payment date, to holders of record
of Class B Preferred Stock as of a special record date fixed by the TCI
Board (which date may not be more than 45 days nor less than 10 days prior
to the date fixed for the payment of such accumulated unpaid dividends).
The Class B Preferred Stock ranks junior to the Class A Preferred Stock
with respect to the declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of TCI Class A common stock, the number of
such shares to be issued and delivered will be determined by dividing the
amount of the dividend to be paid in shares of TCI Class A common stock by
the Average Market Price of the TCI Class A common stock. For this
purpose, "Average Market Price" means the average of the daily last
reported sale prices (or, if no sale price is reported on any day, the
average of the high and low bid prices on such day) of a share of TCI Class
A common stock for the period of 20 consecutive trading days ending on the
tenth trading day prior to the regular record date or special record date,
as the case may be, for the applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to the
Class B Preferred Stock with respect to liquidating distributions, to
receive from the assets of TCI available for distribution to stockholders
an amount in cash or property or a combination thereof, per share, equal to
the Stated Liquidation Value thereof, plus all accumulated and accrued but
unpaid dividends thereon to and including the redemption date. TCI does
not have any mandatory obligation to redeem the Class B Preferred Stock as
of any fixed date, at the option of the holders or otherwise.
(continued)
II-53
<PAGE> 111
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock, the Class B Preferred Stock will be exchangeable at
the option of TCI in whole but not in part at any time for junior
subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior
Exchange Notes will be issued pursuant to an indenture (the "Indenture"),
to be executed by TCI and a qualified trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal
amount of which will be equal to the aggregate Stated Liquidation Value of
the shares of Class B Preferred Stock so exchanged by such holder, plus all
accumulated and accrued but unpaid dividends thereon to and including the
exchange date. The Junior Exchange Notes will be issuable only in
principal amounts of $100 or any integral multiple thereof and a cash
adjustment will be paid to the holder for any excess principal that would
otherwise be issuable. The Junior Exchange Notes will mature on the
fifteenth anniversary of the date of issuance and will be subject to
earlier redemption at the option of TCI, in whole or in part, for a
redemption price equal to the principal amount thereof plus accrued but
unpaid interest. Interest will accrue, and be payable annually, on the
principal amount of the Junior Exchange Notes at a rate per annum to be
determined prior to issuance by adding a spread of 215 basis points to the
"Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will
accrue on overdue principal at the same rate, but will not accrue on
overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of
TCI and will be subordinated in right of payment to all Senior Debt (as
defined in the Indenture). Accordingly, holders of Class B Preferred Stock
who receive Junior Exchange Notes in exchange therefor may have difficulty
selling such Notes.
(continued)
II-54
<PAGE> 112
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
For so long as any dividends are in arrears on the Class B Preferred Stock
or any class or series of TCI preferred stock ranking pari passu with the
Class B Preferred Stock which is entitled to payment of cumulative
dividends prior to the redemption, exchange, purchase or other acquisition
of the Class B Preferred Stock, and until all dividends accrued up to the
immediately preceding dividend payment date on the Class B Preferred Stock
and such parity stock shall have been paid or declared and set apart so as
to be available for payment in full thereof and for no other purpose,
neither TCI nor any subsidiary thereof may redeem, exchange, purchase or
otherwise acquire any shares of Class B Preferred Stock, any such parity
stock or any class or series of its capital stock ranking junior to the
Class B Preferred Stock (including the TCI common stock), or set aside any
money or assets for such purpose, unless all of the outstanding shares of
Class B Preferred Stock and such parity stock are redeemed. If TCI fails
to redeem or exchange shares of Class B Preferred Stock on a date fixed for
redemption or exchange, and until such shares are redeemed or exchanged in
full, TCI may not redeem or exchange any parity stock or junior stock,
declare or pay any dividend on or make any distribution with respect to any
junior stock or set aside money or assets for such purpose and neither TCI
nor any subsidiary thereof may purchase or otherwise acquire any Class B
Preferred Stock, parity stock or junior stock or set aside money or assets
for any such purpose. The failure of TCI to pay any dividends on any class
or series of parity stock or to redeem or exchange on any date fixed for
redemption or exchange any shares of Class B Preferred Stock shall not
prevent TCI from (i) paying any dividends on junior stock solely in shares
of junior stock or the redemption purchase or other acquisition of junior
stock solely in exchange for (together with cash adjustment for fractional
shares, if any) or (but only in the case of a failure to pay dividends on
any parity stock) through the application of the proceeds from the sale of,
shares of junior stock; or (ii) the payment of dividends on any parity
stock solely in shares of parity stock and/or junior stock or the
redemption, exchange, purchase or other acquisition of Class B Preferred
Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of
failure to pay dividends on any parity stock) through the application of
the proceeds from the sale of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of directors,
will have one vote per share for such purpose and will vote as a single
class with the TCI common stock, the Class A Preferred Stock and any other
class or series of TCI preferred stock entitled to vote in any general
election of directors. The Class B Preferred Stock will have no other
voting rights except as required by the Delaware General Corporation Law
("DGCL").
Series Preferred Stock. The TCI Series Preferred Stock is issuable, from
time to time, in one or more series, with such designations, preferences
and relative participating, option or other special rights, qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of such series adopted by
the TCI Board.
(continued)
II-55
<PAGE> 113
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
All shares of any one series of the TCI Series Preferred Stock are required
to be alike for every particular and all shares are required to rank
equally and be identical in all respects, except insofar as they may vary
with respect to matters which the TCI Board is expressly authorized by the
TCI Charter to determine in the resolution or resolutions providing for the
issue of any series of the TCI Series Preferred Stock.
Convertible Preferred Stock, Series C. TCI has issued 70,559 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series C," par value $.01 per share, as partial consideration for an
acquisition by TCI .
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 100 shares of TCI Class A common stock, subject to
anti-dilution adjustments. The dividend, liquidation and redemption
features of the Series C Preferred Stock will be determined by reference to
the liquidation value of the TCI Series C Preferred Stock, which as of any
date of determination is equal, on a per share basis, to the sum of (i)
$2,375, plus (ii) all dividends accrued on such share through the dividend
payment date on or immediately preceding such date of determination to the
extent not paid on or before such date, plus (iii), for purposes of
determining liquidation and redemption payments, all unpaid dividends
accrued on the sum of clauses (i) and (ii) above, to such date of
determination.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock ranking pari passu with the Series C Preferred Stock,
the holders of Series C Preferred Stock are entitled to receive and,
subject to any prohibition or restriction contained in any instrument
evidencing indebtedness of TCI, TCI is obligated to pay preferential
cumulative cash dividends out of funds legally available therefor.
Dividends accrue cumulatively at an annual rate of 5-1/2% of the
liquidation value per share, whether or not such dividends are declared or
funds are legally or contractually available for payment of dividends,
except that if TCI fails to redeem shares of Series C Preferred Stock
required to be redeemed on a redemption date, dividends will thereafter
accrue cumulatively at an annual rate of 15% of the liquidation value per
share. Accrued dividends are payable quarterly on January 1, April 1,
July 1 and October 1 of each year, commencing on the first dividend payment
date after the issuance of the Series C Preferred Stock. Dividends not
paid on any dividend payment date will be added to the liquidation value on
such date and remain a part thereof until such dividends and all dividends
accrued thereon are paid in full. Dividends accrue on unpaid dividends at
the rate of 5-1/2% per annum, unless such dividends remain unpaid for two
consecutive quarters in which event such rate will increase to 15% per
annum. The Series C Preferred Stock ranks prior to the TCI common stock
and Class B Preferred Stock and pari passu with the Class A Preferred Stock
with respect to the declaration and payment of dividends.
(continued)
II-56
<PAGE> 114
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets of TCI
available for distribution to stockholders an amount in cash, per share,
equal to the liquidation value. The Series C Preferred Stock will rank
prior to the TCI common stock and Class B Preferred Stock and pari passu
with the Class A Preferred Stock as to any such distributions.
The Series C Preferred Stock is subject to optional redemption at any time
after the seventh anniversary of its issuance, in whole or in part, by TCI
at a redemption price, per share, equal to the then liquidation value of
the Series C Preferred Stock.
For so long as any dividends are in arrears on the Series C Preferred Stock
or any class or series of TCI preferred stock ranking pari passu (including
the Class A Preferred Stock) with the Series C Preferred Stock and until
all dividends accrued up to the immediately preceding dividend payment date
on the Series C Preferred Stock and such parity stock shall have been paid
or declared and set apart so as to be available for payment in full thereof
and for no other purpose, TCI may not redeem or otherwise acquire any
shares of Series C Preferred Stock, any such parity stock or any class or
series of its preferred stock ranking junior (including the TCI common
stock and Series C Preferred Stock) unless all then outstanding shares of
Series C Preferred Stock and such parity stock are redeemed. If TCI fails
to redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, and until all such shares are redeemed in full, TCI may
not redeem any such parity stock or junior stock, or otherwise acquire any
shares of such stock or Series C Preferred Stock. Nothing contained in the
two immediately preceding sentences shall prevent TCI from acquiring (i)
shares of Series C Preferred Stock and any such parity stock pursuant to a
purchase or exchange offer made to holders of all outstanding shares of
Series C Preferred Stock and such parity stock, if (a) as to holders of all
outstanding shares of Series C Preferred Stock, the terms of the purchase
or exchange offer for all such shares are identical, (b) as to holders for
all outstanding shares of a particular series or class of parity stock, the
terms of the purchase or exchange offer for all such shares are identical
and (c) as among holders of all outstanding shares of Series C Preferred
Stock and parity stock, the terms of each purchase or exchange offer are
substantially identical relative to the respective liquidation prices of
the shares of Series C Preferred Stock and each series or class of such
parity stock, or (ii) shares of Series C Preferred Stock, parity stock or
junior stock in exchange for, or through the application of the proceeds of
the sale of, shares of junior stock.
(continued)
II-57
<PAGE> 115
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Series C Preferred Stock is subject to restrictions on transfer
although it has certain customary registration rights with respect to the
underlying shares of TCI Class A common stock. The Series C Preferred
Stock may vote on all matters submitted to a vote of the holders of the TCI
common stock, has one vote for each share of TCI Class A common stock into
which the shares of Series C Preferred Stock are converted for such
purpose, and may vote as a single class with the TCI common stock. The
Series C Preferred Stock has no other voting rights except as required by
the DGCL and except that the consent of the holders of record of shares
representing at least two-thirds of the liquidation value of the
outstanding shares of the Series C Preferred Stock is necessary to (i)
amend the designation, rights, preferences and limitations of the Series C
Preferred Stock as set forth in the TCI Charter and (ii) to create or
designate any class or series of TCI preferred stock that would rank prior
to the Series C Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. In connection with the
Reorganization, the Board of Directors created and authorized the issuance
of the Redeemable Convertible Preferred Stock, Series E, par value $.01 per
share. The Company is authorized to issue 400,000 shares. Subsidiaries of
TCI hold all of the issued and outstanding shares of such stock, amounting
to 246,402 shares. All such preferred stock eliminates in consolidation.
The holders of the Series E Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series E Preferred Stock
(currently the Class A common stock, the Class B common stock and the Class
B Preferred Stock), that shall accrue on each share of Series E Preferred
Stock at the rate of 5.0% per annum of the Stated Liquidation Value
($22,303 per share). Dividends are fully cumulative and are payable in
cash. The Series E Preferred Stock ranks on parity with the Class A
Preferred Stock, the Series C Preferred Stock and the Series D Preferred
Stock as to dividend rights, rights of redemption or rights on liquidation.
The Series E Preferred Stock may be redeemed at the option of the Company.
The Company may elect to pay the redemption price by issuing to the holder
thereof a number of shares of Class A common stock equal to the aggregate
redemption price of such shares divided by the Average Quoted Price (as
defined) of a share of Class A common stock.
Unless previously called for redemption, shares of Series E Preferred Stock
shall be convertible, at the option of the holder thereof, into shares of
Class A common stock at any time subsequent to a duly approved amendment to
the Company's Restated Certificate of Incorporation increasing the number
of Class A shares to a number that would permit conversion of all shares of
Series E Preferred Stock then outstanding into Class A common stock. The
Series E Preferred Stock may be converted into Class A common stock at the
initial conversion rate of 1,000 shares of Class A common stock for one
share of the Series E Preferred Stock.
(continued)
II-58
<PAGE> 116
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The holders of the Series E Preferred Stock have the right to vote at any
annual or special meeting of stockholders for the purpose of electing
directors. Each share of Series E Preferred Stock shall have one vote for
such purpose.
Stock Options
The Company has adopted the Tele-Communications, Inc. 1994 Stock Incentive
Plan (the "Plan"). The Plan provides for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may be
made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof. Pursuant to the
TCI/Liberty Merger Agreement and certain assumption agreements, stock
options and/or stock appreciation rights granted (or assumed) by Old TCI
and stock options and/or stock appreciation rights granted by Liberty were
assumed by the Company and new options and/or stock appreciation rights
were substituted under the Plan. The following descriptions represent the
terms of the assumed options and/or stock appreciation rights and
additional awards under the Plan.
TCI assumed certain options which were exercisable through November 9,
1994. During the years ended December 31, 1994, 1993 and 1992, options to
acquire 203,508, 96,242 and 321,406 shares, respectively, were exercised at
prices ranging from $10.00 to $17.25 per share and options for 3,500,
25,000 and 12,000 shares, respectively, were canceled.
TCI assumed certain stock options which are currently exercisable,
representing the right, as of December 31, 1994, to acquire 162,228 shares
of TCI Class A common stock at adjusted purchase prices ranging from $8.83
to $18.63 per share. During the year ended December 31, 1994, options to
acquire 5,100 shares were exercised and no options were canceled. Options
to acquire 19,428 shares of TCI Class A common stock expire August 14,
1995. Options to acquire 142,800 shares of TCI Class A common stock expire
December 15, 1998.
Stock options in tandem with stock appreciation rights to purchase
3,963,000 shares of Class A common stock at a purchase price of $16.75 per
share were outstanding at December 31, 1994. Such options become
exercisable and vest evenly over five years, first became exercisable
beginning November 11, 1993 and expire on November 11, 2002. During the
year ended December 31, 1994, stock appreciation rights covering 7,000
shares of Class A common stock were exercised and the tandem stock options
were canceled. During the year ended December 31, 1993, stock options
covering 50,000 shares of Class A common stock were canceled upon
termination of employment of the option holder.
Stock options in tandem with stock appreciation rights to purchase
1,940,000 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at December 31, 1994. Such options become
exercisable and vest evenly over four years, first became exercisable
beginning October 12, 1994 and expire on October 12, 2003. During the year
ended December 31, 1994, stock options covering 1,875 shares of Class A
common stock were exercised and stock options covering 13,125 shares of
Class A common stock were canceled upon termination of employment of the
option holder.
(continued)
II-59
<PAGE> 117
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Stock options in tandem with stock appreciation rights to purchase
2,000,000 shares of TCI Class A common stock at a purchase price of $16.75
per share were outstanding at December 31, 1994. On November 12, 1993,
twenty percent of such options vested and became exercisable immediately
and the remainder become exercisable evenly over 4 years. The options
expire October 12, 1998.
Stock options in tandem with stock appreciation rights to acquire 54,600
shares of TCI Class A common stock at an adjusted purchase price of $19.56
were outstanding at December 31, 1994. The options vest in five equal
annual installments commencing June 3, 1994 and expire in June 2003.
Stock appreciation rights with respect to 1,423,500 shares of TCI Class A
common stock were outstanding at December 31, 1994. These rights have an
adjusted strike price of $0.82 per share, become exercisable and vest
evenly over seven years, beginning March 28, 1992. Stock appreciation
rights expire on March 28, 2001.
On November 17, 1994, stock options in tandem with stock appreciation
rights to purchase 3,214,000 shares of TCI Class A common stock were
granted pursuant to the Plan to certain officers and other key employees at
a purchase price of $22.00 per share. Such options become exercisable and
vest evenly over five years, first become exercisable beginning November
17, 1995 and expire on November 17, 2004.
The Company's Board of Directors has approved, subject to stockholder
approval of the Director Stock Option Plan, the grant effective as of
November 16, 1994, to each person that as of that date was a member of the
Board of Directors and was not an employee of the Company or any of its
subsidiaries, of options to purchase 50,000 shares of Class A common stock.
Such options have an exercise price of $22.00 per share and will vest and
become exercisable over a five-year period, commencing on November 16, 1995
and will expire on November 16, 2004.
Estimated compensation relating to stock appreciation rights has been
recorded through December 31, 1994, but is subject to future adjustment
based upon market value, and ultimately, on the final determination of
market value when the rights are exercised.
An officer of the Company received payments of $512,500 and $569,000 from
the Company (based on the then market value of Class A common stock of
$20.25 and $21.375 per share) in July and December of 1992, respectively,
in cancellation of the remainder of his option covering 100,000 shares of
TCI Class A common stock. Another officer received payment of $2,276,000
from the Company in December of 1992 upon cancellation of his option
covering 200,000 shares of TCI Class A common stock. The amount paid was
based on the then market value of Class A common stock of $21.375 per
share.
Other
In connection with the exercise of a stock option by an officer/director of
Liberty, a note was given to Liberty as partial payment of the exercise
price. This note bore interest at 7.54% per annum. At the date of the
TCI/Liberty Combination, the Company recorded the net assumed note
receivable, amounting to approximately $15 million, from such officer as a
reduction of stockholders' equity. On October 27, 1994, such officer
tendered to the Company 634,917 shares of TCI Class B common stock in full
payment of principal and interest amounting to $15 million. Such Class B
common stock is reflected as treasury stock in the accompanying
consolidated balance sheet.
(continued)
II-60
<PAGE> 118
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The shares issued by Liberty upon exercise of the aforementioned
Liberty option, together with all subsequent dividends and distributions
thereon (collectively totaling 16,000,000 shares of Liberty Class B common
stock and 200,000 shares of Liberty Class E Preferred Stock, the "Option
Units"), were subject to repurchase by Liberty under certain
circumstances. Such shares were exchanged for 15,600,000 shares of TCI
Class A common stock and 200,000 shares of Class B Preferred Stock in the
TCI/Liberty Combination. The Company's repurchase right terminates as to
20% of the Option Units per year, commencing March 28, 1992, and will
terminate as to all of the Option Units on March 28, 1996 or in the event
of death, disability or under certain other circumstances.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1994, there were 58,534,218 shares of TCI Class A
common stock reserved for issuance under exercise privileges related to
options, convertible debt securities and convertible preferred stock
described in this note 9 and in note 7. Additionally, subsequent to
December 31, 1994, the Company issued the Series D Preferred Stock (see
note 8) which is convertible into 10,000,000 shares of TCI Class A common
stock. In addition, one share of Class A common stock is reserved for
each share of outstanding Class B common stock.
(10) Transactions with Officers and Directors
On December 10, 1992, pursuant to a restricted stock award agreement,
an officer, who is also a director, of the Company was transferred the
right, title and interest in and to 124.03 shares (having a liquidation
value of $4 million) of the 12% Series B cumulative compounding preferred
stock of WestMarc Communications, Inc. (a wholly-owned subsidiary of the
Company) owned by the Company. Such preferred stock is subject to
forfeiture in the event of certain circumstances from the date of grant
through February 1, 2002, decreasing by 10% on February 1 of each year.
On December 14, 1992, an officer, who is also a director, sold 100,000
shares of Class B common stock to the Company for $2,138,000.
(11) Income Taxes
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which the Company
owns less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying consolidated financial
statements.
(continued)
II-61
<PAGE> 119
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes" ("Statement No. 109") requires the use of the asset and
liability method of accounting for income taxes. Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or
settled. Under Statement No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Income tax expense attributable to income or loss from continuing
operations for the years ended December 31, 1994, 1993 and 1992 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1994:
Federal $(69) (25) (94)
State and local (14) (8) (22)
---- ----- -----
$(83) (33) (116)
==== ===== =====
Year ended December 31, 1993:
Federal $(14) (119) (133)
State and local (15) (20) (35)
---- ----- -----
$(29) (139) (168)
==== ===== =====
Year ended December 31, 1992:
Federal $ -- (24) (24)
State and local (10) (4) (14)
---- ----- -----
$(10) (28) (38)
==== ===== =====
</TABLE>
The significant components of deferred income tax expense for the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Deferred tax expense
(exclusive of effects of other
components listed below) $ (33) (63) (28)
Adjustment to deferred tax assets
and liabilities for enacted change
in tax rates -- (76) --
----- ----- ----
$ (33) (139) (28)
===== ===== ====
</TABLE>
(continued)
II-62
<PAGE> 120
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Income tax expense attributable to income or loss from continuing
operations differs from the amounts computed by applying the Federal
income tax rate of 35% in 1994 and 1993 and 34% in 1992 as a result of
the following:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax
expense $ (60) (56) (15)
Adjustment to deferred tax assets
and liabilities for enacted change
in Federal income tax rate -- (76) --
Dividends excluded for income
tax purposes 1 4 10
Amortization not deductible for
tax purposes (13) (12) (8)
Minority interest in earnings of
consolidated subsidiaries (3) (1) (14)
Recognition of losses of
consolidated partnership (10) (8) --
State and local income taxes,
net of Federal income
tax benefit (20) (23) (9)
Valuation allowance on
foreign corporations (10) -- --
Other (1) 4 (2)
----- ---- ----
$(116) (168) (38)
===== ==== ====
</TABLE>
(continued)
II-63
<PAGE> 121
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
------ ------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 490 590
Less - valuation allowance (100) (90)
Investment tax credit carryforwards 122 140
Less - valuation allowance (36) (36)
Alternative minimum tax credit
carryforwards 90 19
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 294 266
Future deductible amounts principally
due to non-deductible accruals 52 27
Other 19 13
-------- -----
Net deferred tax assets 931 929
--------- -----
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,197 1,193
Franchise costs, principally due to
differences in amortization 2,600 2,784
Investment in affiliates, due
principally to undistributed
earnings of affiliates 556 256
Intangible assets, principally due to
differences in amortization 108 --
Other 83 6
-------- -----
Total gross deferred tax liabilities 4,544 4,239
-------- -----
Net deferred tax liability $ 3,613 3,310
======= =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994 was
$136 million. Such balance increased by $10 million from December 31, 1993
resulting from a valuation allowance established against net operating
losses of foreign corporation. Subsequently recognized tax benefits
relating to $126 million of the valuation allowance for deferred tax assets
as of December 31, 1994 will be recorded as reductions of franchise costs.
(continued)
II-64
<PAGE> 122
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
At December 31, 1994, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $927 million of which, if not
utilized to reduce taxable income in future periods, $11 million expires
through 2002, $151 million in 2003, $121 million in 2004, $364 million in
2005, $269 million in 2006, $8 million in 2008 and $3 million in 2009.
Certain subsidiaries of the Company had additional net operating loss
carryforwards for income tax purposes aggregating approximately $247
million and these net operating losses are subject to certain rules
limiting their usage.
At December 31, 1994, the Company had remaining available investment tax
credits of approximately $67 million which, if not utilized to offset
future Federal income taxes payable, expire at various dates through 2005.
Certain subsidiaries of the Company had additional investment tax credit
carryforwards aggregating approximately $55 million and these investment
tax credit carryforwards are subject to certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the
Internal Revenue Service ("IRS") for the years 1979 through 1992. In the
opinion of management, any additional tax liability, not previously
provided for, resulting from these examinations, ultimately determined to
be payable, should not have a material adverse effect on the consolidated
financial position of the Company. The Company pursued a course of action
on certain issues (primarily the deductibility of franchise cost
amortization) the IRS had raised and such issues were argued before the
United States Tax Court. During 1990, the Company received a favorable
decision regarding these issues. The IRS appealed this decision but the
Company prevailed in the appeal. The IRS elected not to further appeal the
decision to the Supreme Court. The Company has entered into a closing
agreement with the IRS which settles these matters for all open tax years.
A subsidiary of the Company has filed a petition in United States Tax Court
protesting the disallowance of certain Transitional Investment Tax Credits
and such issue should be litigated by early 1996.
Certain of the Federal income tax returns of a less than 80% owned
subsidiary of the Company (the "Subsidiary") were examined by the IRS for
the Subsidiary's 1986 through 1989 fiscal years and several adjustments
were proposed. On June 8, 1994, the Subsidiary and the IRS agreed to
settle all of the outstanding issues with the exception of the Subsidiary's
deduction of certain royalty payments to a related party. In August of
1994, the Subsidiary paid $15 million, including interest, in settlement of
all the assessments related to all the issues brought upon examination
except the royalty payments issue. The payment covered all of the
Subsidiary's tax returns through August 31, 1993. The assessments had
previously been accrued.
On September 9, 1994, the IRS issued a Statutory Notice of Deficiency for
the Subsidiary's fiscal years 1986 through 1989 related to the royalty
payments issue. In December 1994, the Subsidiary paid the assessments,
totaling $5 million, including interest. The assessments had previously
been accrued. The Subsidiary continues to maintain that it has meritorious
positions regarding the deductibility of the payments and intends to file a
refund claim with the IRS during 1995.
(continued)
II-65
<PAGE> 123
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate
from 34% to 35%. The Company has reflected the tax rate change in
its consolidated statements of operations in accordance with the
treatment prescribed by Statement No. 109. Such tax rate change
resulted in an increase of $76 million to income tax expense and
deferred income tax liability.
(12) Commitments and Contingencies
During 1994, subsidiaries of the Company, Comcast, Cox Communications,
Inc. ("Cox") and Sprint Corporation ("Sprint") formed a partnership
("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, the
partners have been participating in auctions ("PCS Auctions") of
broadband personal communications services ("PCS") licenses being
conducted by the Federal Communications Commission ("FCC"). In the
first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets,
including New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort
Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses is
approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds
a PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and has agreed to make
capital contributions to APC equal to 49/51 of the cost of APC's PCS
license. Additional capital contributions may be required in the event
APC is unable to finance the full cost of its PCS license. WirelessCo
may also be required to finance the build-out expenditures for APC's PCS
system. Cox, which holds a pioneer preference PCS license for the Los
Angeles-San Diego market, and WirelessCo have also agreed on the general
terms and conditions upon which Cox (with a 60% interest) and WirelessCo
(with a 40% interest) would form a partnership to hold and develop a PCS
system using the Los Angeles-San Diego license. APC and the Cox
partnership would affiliate their PCS systems with WirelessCo and be
part of WirelessCo's nationwide integrated network, offering wireless
communications services under the "Sprint" brand. The Company owns a 30%
interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction
for a PCS license for the Philadelphia market at a license cost of
$85 million. To the extent permitted by law, the PCS system to be
constructed by PhillieCo would also be affiliated with WirelessCo's
nationwide network.
(continued)
II-66
<PAGE> 124
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
WirelessCo may bid in subsequent rounds of the PCS Auctions and may invest
in, affiliate with or acquire licenses from other successful bidders. The
capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above,
will be substantial.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed their
respective interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("NewTelco") to engage in the business of
providing local wireline communications services to residences and
businesses on a nationwide basis. NewTelco will serve its customers
primarily through the cable television facilities of cable television
operators that affiliate with NewTelco in exchange for agreed-upon
compensation. The modification of existing regulations and laws governing
the local telephony market will be necessary in order for NewTelco to
provide its proposed services on a competitive basis in most states.
Subject to agreement upon a schedule for upgrading its cable television
facilities in selected markets and certain other matters, the Company has
agreed to affiliate certain of its cable systems with NewTelco. The
capital required for the upgrade of the Company's cable facilities for the
provision of telephony services is expected to be substantial.
Subsidiaries of the Company, Cox and Comcast, together with Continental
Cablevision, Inc. ("Continental"), own Teleport Communications Group, Inc.
and TCG Partners (collectively, "TCG"), which is one of the largest
competitive access providers in the United States in terms of route miles.
The Company, Cox and Comcast have entered into an agreement with MajorCo
and NewTelco to contribute their interests in TCG and its affiliated
entities to NewTelco. The Company currently owns an approximate 29.9%
interest in TCG. The closing of this contribution is subject to the
satisfaction of certain conditions, including the receipt of necessary
regulatory and other consents and approvals. In addition, the Company,
Comcast and Cox intend to negotiate with Continental, which owns a 20%
interest in TCG, regarding their acquisition of Continental's TCG interest.
If such agreement cannot be reached, they will need to obtain Continental's
consent to certain aspects of their agreement with Sprint.
Subject to agreement upon an initial business plan, the MajorCo partners
have committed to make cash capital contributions to MajorCo of $4.0 to
$4.4 billion in the aggregate over a three- to five-year period, which
amount includes the approximately $500 million already contributed by the
partners to WirelessCo. The partners intend for MajorCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in the
wireless and wireline telephony service businesses, subject to certain
exceptions.
At December 31, 1994, the Company was liable for a $720 million letter
of credit which guarantees contributions to WirelessCo. The Company
pledged 56,656,584 shares of TCI Class A common stock held by subsidiaries
of the Company as collateral for the letter of credit. There were no
borrowings pursuant to such letter of credit at December 31, 1994.
(continued)
II-67
<PAGE> 125
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV") and
RCS Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase Agreement
(the "Tele-Vue Agreement") pursuant to which RCS Pacific agreed to acquire
from Tele-Vue the assets of certain cable television systems for total
consideration of approximately $1,983 million, subject to adjustment in
accordance with the terms of the Tele-Vue Agreement. A subsidiary of TCI
has agreed to loan $600 million in cash to IP-IV. IP-IV will, in turn,
loan such $600 million to RCS Pacific. RCS Pacific could use the proceeds
of the aforementioned loan as a portion of the total cash consideration to
be paid to Tele-Vue, or at the option of TCI, to purchase $600 million of
TCI Class A common stock. Should TCI elect to sell such common stock, RCS
Pacific has the option to pay the consideration to Tele-Vue by delivery of
RCS Pacific's short-term note of up to $600 million of the total
consideration with the balance to be paid in cash. Such note, if it is
delivered, will be secured by RCS Pacific's pledge of shares of stock of
TCI having an aggregate market value equal to the principal amount of, and
accrued interest on, the note delivered to Tele-Vue. The consummation of
the transactions contemplated by the Tele-Vue Agreement is conditioned,
among other things, on receipt of approvals of various franchise and other
governmental authorities and receipt of "minority tax certificates" from
the FCC. Both Houses of Congress have passed legislation to repeal
previous legislation which provided for minority tax certificates. The
bills are currently in conference. There can be no assurance that the
conditions precedent to closing the asset purchase will be satisfied, or
that the parties will be able to agree on different terms, if necessary.
TCI, through an indirect wholly-owned subsidiary, would hold a 25% limited
partnership interest in IP-IV, and IP-IV would in turn hold a 79% limited
partnership interest in RCS Pacific. TCI would account for its investment
in IP-IV under the equity method of accounting.
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. Basic and tier
service rates are evaluated against competitive benchmark rates as
published by the FCC, and equipment and installation charges are based on
actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate regulations.
The rate regulations do not apply to the relatively few systems which are
subject to "effective competition" or to services offered on an individual
service basis, such as premium movie and pay-per-view services.
(continued)
II-68
<PAGE> 126
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
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 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 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 systems' rates are successfully challenged by franchising
authorities is not considered to be material.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios through December 31, 2006 (the "Film License Obligations"). The
aggregate minimum liability under certain of the license agreements is
approximately $405 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. Additionally, the
Company has guaranteed up to $70 million of similar license fee obligations
of another affiliate.
The Company has long-term sports program rights contracts which require
payments through 2006. Future payments for each of the next five years are
as follows (amounts in millions):
<TABLE>
<S> <C>
1995 $32
1996 32
1997 28
1998 25
1999 22
</TABLE>
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$234 million at December 31, 1994. 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 leases business offices, has entered into pole rental
agreements and uses certain equipment under lease arrangements. Minimum
rental expense under such arrangements, net of sublease rentals, amounted
to $70 million, $59 million and $57 million in 1994, 1993 and 1992,
respectively.
(continued)
II-69
<PAGE> 127
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1995 $48
1996 43
1997 41
1998 34
1999 31
</TABLE>
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1995.
In 1993, the President of Home Shopping Network, Inc. ("HSN") received
stock appreciation rights with respect to 984,876 shares of HSN's common
stock at an exercise price of $8.25 per share. These rights vest over a
four year period and are exercisable until February 23, 2003. The stock
appreciation rights will vest upon termination of employment other than for
cause and will be exercisable for up to one year following the termination
of employment. In the event of a change in ownership control of HSN, all
unvested stock appreciation rights will vest immediately prior to the
change in control and shall remain exercisable for a one year period.
Stock appreciation rights not exercised will expire to the extent not
exercised. These rights may be exercised for cash or, so long as HSN is a
public company, for shares of HSN's common stock equal to the excess of the
fair market value of each share of common stock over $8.25 at the exercise
date. The stock appreciation rights also will vest in the event of death
or disability. Estimated compensation related to stock appreciation rights
has been recorded through December 31, 1994, but it is subject to future
adjustment based upon market value, and ultimately on the final
determination of market value when the rights are exercised.
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.
(continued)
II-70
<PAGE> 128
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(13) Information about the Company's Operations
Subsequent to the consummation of the TCI/Liberty Combination, the
Company operates primarily in two industry segments: cable and
communications services ("Cable") and programming services. The
programming services include the production, acquisition and distribution
of globally branded entertainment, education and information programming
services and software for distribution through all available formats and
media; and home shopping via television and other interactive media,
direct marketing, advertising sales, infomercials and transaction
processing ("Programming"). Home shopping is a programming service which
includes a retail function. Separate amounts of the aforementioned home
shopping service have been provided to enhance the readers understanding
of the Company. The Technology/Venture Capital and the International
Cable and Programming portions of the Company's business have been
included in Cable due to their immateriality. Operating income is total
revenue less operating costs and expenses which includes an allocation of
corporate general and administrative expenses. Identifiable assets by
industry are those assets used in the Company's operations in each
industry. The Company has investments, accounted for under the equity
method and the cost method, which also operate in the Cable and
Programming industries. The following is selected information about the
Company's operations for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Programming
-------------------------------
Electronic Other
Cable Retailing Programming Total
----- --------- ----------- -----
amounts in millions
<S> <C> <C> <C> <C>
Revenue $ 4,247 482 207 4,936
======= === ===== ======
Operating income
(loss) $ 865 9 (86) 788
======= === ===== ======
Depreciation and
amortization $ 992 15 11 1,018
======= === ===== ======
Capital
expenditures $ 1,239 19 6 1,264
======= === ===== ======
Identifiable assets $16,959 948 1,583 19,490
======= === ===== ======
</TABLE>
(continued)
II-71
<PAGE> 129
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(14) Discontinued Operations
The Company sold its motion picture theatre business and certain
theatre-related real estate assets on May 12, 1992. The selling price
(including liabilities assumed) was approximately $680 million. In
connection with the disposition, the Company paid $92.5 million for certain
preferred stock of the buyer. No gain or loss was recognized in connection
with this transaction as the net assets of discontinued operations were
reflected at their net realizable value.
Operating results for the theatre operations for the period from January 1,
1992 through May 12, 1992 are reported separately in the consolidated
statements of operations under the caption "Loss from discontinued
operations" and include:
<TABLE>
<CAPTION>
1992
----
amounts in millions
<S> <C>
Revenue $ 211
Loss before income taxes $ (16)
Income tax benefit $ 1
Net loss $ (15)
</TABLE>
(continued)
II-72
<PAGE> 130
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(15) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
1994:
----
Revenue $ 1,060 1,081 1,286 1,509
Operating income $ 234 205 186 163
Income tax expense $ (31) (21) (33) (31)
Net earnings (loss) $ 32 6 25 (8)
Primary and fully diluted
earnings (loss) attributable to
common shareholders per
common and common
equivalent share $ .07 .01 .04 (.02)
1993:
----
Revenue $ 1,018 1,042 1,044 1,049
Operating income $ 247 246 236 187
Income tax benefit (expense) $ (38) (17) (114) 1
Net earnings (loss) $ 53 26 (65) (21)
Primary and fully diluted
earnings (loss) attributable to
common shareholders per
common and common
equivalent share $ .11 .06 (.14) (.05)
</TABLE>
(continued)
II-73
<PAGE> 131
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Consolidated Financial Statements
(16) Subsequent Events (Unaudited)
Comcast had the right, through December 31, 1994, to require TCI to
purchase or cause to be purchased from Comcast all shares of Heritage
Communications, Inc. ("Heritage") directly or indirectly owned by
Comcast for either cash or assets or, at TCI's election shares of TCI
common stock. On October 24, 1994, the Company and Comcast entered
into a purchase agreement whereby the Company would repurchase the
entire 19.9% minority interest in Heritage owned by Comcast for an
aggregate consideration of approximately $290 million, the majority
of which is payable in shares of TCI Class A common stock. Such
acquisition was consummated subsequent to December 31, 1994.
As of January 26, 1995, TCI, TCIC, a wholly-owned subsidiary of TCI,
and TeleCable consummated a transaction, whereby TeleCable was merged
into TCIC, a wholly-owned subsidiary of TCI. The aggregate $1.6
billion purchase price was satisfied by TCIC's assumption of
approximately $300 million of TeleCable's net liabilities and the
issuance to TeleCable's shareholders of approximately 42 million shares
of TCI Class A common stock and 1 million shares of Series D Preferred
Stock with an aggregate initial liquidation value of $300 million (see
note 8).
The Board of Directors of TCI has adopted a proposal which, if approved
by the stockholders, would authorize the Board to issue a new class of
stock ("Liberty Group Common Stock") which corresponds to TCI's
Programming ("Liberty Media Group")(see note 13). While the Liberty
Group Common Stock would constitute common stock of TCI, it is intended
to reflect the separate performance of such programming services. TCI
intends to distribute to its security holders one hundred percent of
the equity value of TCI attributable to Liberty Media Group.
II-74
<PAGE> 132
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
TCI Communications, Inc.:
We have audited the accompanying consolidated balance sheets of TCI
Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholder's(s') equity, and
cash flows for each of the years in the three-year period ended December 31,
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCI Communications,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
II-75
<PAGE> 133
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------------- ---------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 6 1
Trade and other receivables, net 198 232
Investment in Liberty Media Corporation
("Liberty") (note 3) -- 489
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 341 645
Investment in Turner Broadcasting System, Inc.
("TBS") (note 5) 6 491
Property and equipment, at cost:
Land 68 73
Distribution systems 7,589 6,629
Support equipment and buildings 921 818
------ ------
8,578 7,520
Less accumulated depreciation 2,999 2,585
------ ------
5,579 4,935
------ ------
Franchise costs 10,994 10,620
Less accumulated amortization 1,697 1,423
------ ------
9,297 9,197
------ ------
Other assets, at cost, net of amortization 453 530
------ ------
$15,880 16,520
======= ======
</TABLE>
(continued)
II-76
<PAGE> 134
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Balance Sheets, continued
<TABLE>
<CAPTION>
1994 1993
---------------- ---------------
Liabilities and Stockholder's(s') Equity amounts in millions
- ----------------------------------------
<S> <C> <C>
Accounts payable $ 74 124
Accrued interest 179 157
Other accrued expenses 603 500
Debt (note 6) 10,712 9,900
Deferred income taxes (note 10) 3,299 3,310
Other liabilities 96 114
-------- ------
Total liabilities 14,963 14,105
-------- ------
Minority interests in equity
of consolidated subsidiaries 271 285
Redeemable preferred stocks (note 7) -- 18
Stockholder's(s') equity (note 8):
Preferred stock, $1 par value.
Authorized 10,000,000 shares in 1993,
issued and outstanding 6,201 shares
of redeemable preferred stocks in 1993 -- --
Class A common stock, $1 par value.
Authorized 904,000 shares in 1994 and
1,000,000,000 shares in 1993; issued
811,655 shares in 1994 and
481,837,347 shares in 1993 1 482
Class B common stock, $1 par value.
Authorized 96,000 shares in 1994 and
100,000,000 shares in 1993; issued
94,447 shares in 1994 and 47,258,787
shares in 1993 -- 47
Additional paid-in capital 2,842 2,293
Cumulative foreign currency
translation adjustment, net of taxes -- (29)
Unrealized holding gains for
available-for-sale securities, net of taxes 2 --
Accumulated deficit (256) (348)
-------- ----
2,589 2,445
Treasury stock, at cost (79,335,038 shares
of Class A common stock in 1994 and 1993) -- (333)
Investment in Tele-Communications, Inc.
("TCI") (1,096) --
Due from TCI (847) --
-------- -------
Total stockholder's(s') equity 646 2,112
-------- -------
Commitments and contingencies (note 11)
$15,880 16,520
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
II-77
<PAGE> 135
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Statements of Operations
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Revenue (note 3) $ 4,318 4,153 3,574
Operating costs and expenses:
Operating (note 3) 1,315 1,190 1,028
Selling, general and administrative 1,202 1,105 909
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating to
stock appreciation rights (5) -- --
Restructuring charge -- -- 8
Depreciation 685 622 512
Amortization 303 289 252
-------- ----- -----
3,500 3,237 2,710
-------- ----- -----
Operating income 818 916 864
Other income (expense):
Interest expense (777) (731) (718)
Interest and dividend income 35 34 69
Share of earnings of Liberty (note 3) 125 4 22
Share of losses of other affiliates,
net (note 4) (114) (76) (105)
Gain on sale of stock by equity investee
(note 4) 161 -- --
Gain (loss) on disposition of assets (5) 42 9
Premium received on redemption of
preferred stock investment (note 4) -- -- 14
Loss on early extinguishment of debt (9) (17) (67)
Minority interests in losses (earnings) of
consolidated subsidiaries, net 6 (5) (41)
Other, net (17) (6) (2)
-------- ----- -----
(595) (755) (819)
-------- ----- -----
Earnings from continuing
operations before income taxes 223 161 45
Income tax expense (131) (168) (38)
-------- ----- -----
Earnings (loss) from continuing
operations 92 (7) 7
Loss from discontinued operations,
net of income taxes (note 12) -- -- (15)
-------- ----- -----
Net earnings (loss) 92 (7) (8)
Dividend requirements on preferred
stocks -- (2) (15)
-------- ----- -----
Net earnings (loss) attributable to
common stockholder(s) $ 92 (9) (23)
======== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
II-78
<PAGE> 136
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Statements of Stockholder's(s') Equity
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized
Cumulative holding
foreign gains for
Common stock Additional currency available-
------------ paid-in translation for-sale Accumulated
Class A Class B capital adjustment securities deficit
------- ------- ------- ---------- ---------- -----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $ 449 49 1,738 -- -- (333)
Net loss -- -- -- -- -- (8)
Conversion of public
debentures 7 -- 105 -- -- --
Issuance of common stock
upon exercise of options 1 -- 13 -- -- --
Issuance of Class A common
stock for acquisition and
investment 5 -- 93 -- -- --
Dividends on redeemable
preferred stock -- -- (15) -- -- --
Foreign currency translation
adjustment -- -- -- (19) -- --
Acquisition and retirement of
common stock -- (1) (25) -- -- --
----- ---- ------ ---- ---- -----
Balance at December 31, 1992 462 48 1,909 (19) -- (341)
Net loss -- -- -- -- -- (7)
Issuance of common stock
upon conversion of notes 20 -- 383 -- -- --
Issuance of common stock
upon exercise of options -- -- 7 -- -- --
Dividends on redeemable
preferred stocks -- -- (2) -- -- --
Foreign currency translation
adjustment -- -- -- (10) -- --
Acquisition and retirement of
common stock -- (1) (4) -- -- --
----- ---- ------ ---- ---- -----
Balance at December 31, 1993 $ 482 47 2,293 (29) -- (348)
----- ---- ------ ---- ---- -----
</TABLE>
<TABLE>
<CAPTION>
Investment Due Total
Treasury in from stockholder's(s)
stock TCI TCI equity
----- --- ----- ------
amount in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1992 (333) -- -- 1,570
Net loss -- -- -- (8)
Conversion of public
debentures -- -- -- 112
Issuance of common stock
upon exercise of options -- -- -- 14
Issuance of Class A common
stock for acquisition and
investment -- -- -- 98
Dividends on redeemable
preferred stock -- -- -- (15)
Foreign currency translation
adjustment -- -- -- (19)
Acquisition and retirement of
common stock -- -- -- (26)
------- ------ ------ -----
Balance at December 31, 1992 (333) -- -- 1,726
Net loss -- -- -- (7)
Issuance of common stock
upon conversion of notes -- -- -- 403
Issuance of common stock
upon exercise of options -- -- -- 7
Dividends on redeemable
preferred stocks -- -- -- (2)
Foreign currency translation
adjustment -- -- -- (10)
Acquisition and retirement of
common stock -- -- -- (5)
------- ------ ------ -----
Balance at December 31, 1993 (333) -- -- 2,112
------- ------ ------ -----
</TABLE>
(continued)
II-79
<PAGE> 137
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Statements of Stockholder's(s') Equity, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized
Cumulative holding
foreign gains for
Common stock Additional currency available-
------------ paid-in translation for-sale
Class A Class B capital adjustment securities
------- ------- ------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 482 47 2,293 (29) --
Unrealized holding gains for
available-for-sale
securities as of
January 1, 1994 -- -- -- -- 304
Net earnings -- -- -- -- --
Conversion of redeemable
preferred stock 1 -- 17 -- --
Issuance of common stock upon
conversion of notes 3 -- -- -- --
Exchange of TCIC common
stock and Liberty common
stock and preferred stock
owned by subsidiaries of
TCIC for TCI common stock
and preferred stock in the
TCI/Liberty Combination -- -- -- -- --
Reclassification and change
of common stock (note 8) (485) (47) 532 -- --
Foreign currency translation
adjustment -- -- -- 24 --
Reduction in unrealized
holding gains for
available-for-sale
securities (note 5) -- -- -- -- (141)
Change in due from TCI -- -- -- -- --
Effect of Reorganization -- -- -- 5 (161)
----- ------ ----- ------ -----
Balance at December 31, 1994 $ 1 -- 2,842 -- 2
===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Investment Due Total
Accumulated Treasury in from stockholder's(s)
deficit stock TCI TCI equity
----- --------- ----- ------ -------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 (348) (333) -- -- 2,112
Unrealized holding gains for
available-for-sale
securities as of
January 1, 1994 -- -- -- -- 304
Net earnings 92 -- -- -- 92
Conversion of redeemable
preferred stock -- -- -- -- 18
Issuance of common stock upon
conversion of notes -- -- -- -- 3
Exchange of TCIC common
stock and Liberty common
stock and preferred stock
owned by subsidiaries of
TCIC for TCI common stock
and preferred stock in the
TCI/Liberty Combination -- 333 (651) -- (318)
Reclassification and change
of common stock (note 8) -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- 24
Reduction in unrealized
holding gains for
available-for-sale
securities (note 5) -- -- -- -- (141)
Change in due from TCI -- -- -- (847) (847)
Effect of Reorganization -- -- (445) -- (601)
------ ------ ------ ------ -----
Balance at December 31, 1994 (256) -- (1,096) (847) 646
====== ====== ====== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
II-80
<PAGE> 138
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions,
(see note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 92 (7) (8)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 988 911 764
Share of earnings of Liberty (125) (4) (22)
Share of losses of other affiliates 114 76 105
Loss (gain) on disposition of assets 5 (42) (9)
Loss on early extinguishment of debt 9 17 67
Compensation relating
to stock appreciation rights -- 31 1
Adjustment to compensation relating
to stock appreciation rights (5) -- --
Payment for stock appreciation rights -- -- (80)
Minority interests in losses (earnings) (6) 5 41
Deferred income tax expense 44 139 28
Amortization of debt discount 1 27 27
Gain on sale of stock by equity investee (161) -- --
Noncash interest expense 4 -- --
Premium received on preferred stock
investment redemption -- -- (14)
Payment of premium received on preferred
stock investment redemption -- 14 --
Discontinued operations -- -- 15
Restructuring charge -- -- 8
Payment of restructuring charge -- (8) --
Noncash interest and dividend income (8) (7) (40)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 16 (32) (3)
Change in accrued interest 22 63 --
Change in other accruals and payables 152 68 77
------ ------ ------
Net cash provided by
operating activities 1,142 1,251 957
------ ------ ------
Cash flows from investing activities:
Cash paid for acquisitions (494) (158) (1,256)
Capital expended for property and equipment (1,235) (947) (526)
Cash proceeds from disposition of assets 36 149 66
Cash proceeds from disposition of
discontinued operations -- -- 220
Discontinued operations -- -- 9
Additional investments in and loans to
affiliates and others (384) (361) (205)
Payment received on preferred stock
investment redemption -- 183 --
Return of capital from affiliates 20 1 1
Repayment of loans by affiliates and others 145 62 32
Other investing activities (91) (99) (155)
------ ------ ------
Net cash used in investing activities (2,003) (1,170) (1,814)
------ ------ ------
</TABLE>
(continued)
II-81
<PAGE> 139
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Consolidated Statements of Cash Flows, continued
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
amounts in millions,
(see note 2)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt 4,409 6,305 5,354
Repayments of debt (3,348) (6,321) (4,435)
Change in due from TCI (189) -- --
Repayment of short-term notes to affiliate -- -- (22)
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends -- (2) (15)
Repurchase of preferred stock -- (92) (5)
Issuances of common stock -- 6 7
Repurchases of common stock -- (4) (19)
---- ----- -----
Net cash provided (used) by
financing activities 866 (114) 859
---- ----- -----
Net increase (decrease) in cash 5 (33) 2
Cash at beginning of year 1 34 32
---- ----- -----
Cash at end of year $ 6 1 34
==== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
II-82
<PAGE> 140
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of TCI Communications, Inc. (formerly Tele-Communications, Inc. or
"Old TCI") and those of all majority-owned subsidiaries ("TCIC"). All
significant intercompany accounts and transactions have been eliminated
in consolidation.
The TCI/Liberty Combination
As of January 27, 1994, TCI Communications, Inc. and Liberty entered
into a definitive merger agreement (the "TCI/Liberty Merger Agreement")
to combine the two companies (the "TCI/Liberty Combination"). The
transaction was consummated on August 4, 1994 and 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 a newly formed holding
company, TCI/Liberty Holding Company. In connection with the
TCI/Liberty Combination, Old TCI changed its name to TCI
Communications, Inc. and TCI/Liberty Holding Company changed its name
to Tele-Communications, Inc. ("TCI"). Old TCI 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 (see
note 3). Upon consummation of the TCI/Liberty Combination, certain
subsidiaries of TCIC exchanged the 79,335,038 shares of Old TCI Class A
common stock held by such subsidiaries for 79,335,038 shares of TCI
Class A common stock. Such ownership is reflected as treasury stock at
such subsidiaries' historical cost in the accompanying consolidated
financial statements.
Reorganization
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital
(the "Reorganization"). Upon Reorganization, certain of the assets of
TCIC were transferred to the other operating units. The most
significant transfers were as follows: (i) TBS and Discovery
Communications, Inc. were transferred to the Programming unit and
(ii) TCI/US WEST Cable Communications Group ("TeleWest UK") was
transferred to the International Cable and Programming unit. As
consideration for such transfer of assets, TCIC received 8 shares of
TCI Class A common stock and 169,155 shares of TCI Redeemable
Convertible Preferred Stock, Series E, with a liquidation value of
$22,303 per share. Such investment in TCI has been reflected at TCIC's
historical cost of the transferred assets and is included as a
reduction of stockholder's(s') equity.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1994 and 1993 was not material.
(continued)
II-83
<PAGE> 141
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Investments
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("Statement No. 115"),
effective for fiscal years beginning after December 15, 1993. Under
Statement No. 115, debt securities that the Company has both the
positive intent and ability to hold to maturity are carried at
amortized cost. Debt securities that the Company does not have the
positive intent and ability to hold to maturity and all marketable
equity securities are classified as available-for-sale or trading and
carried at fair value. Unrealized holding gains and losses on
securities classified as available-for-sale are carried net of taxes as
a separate component of shareholders' equity. Unrealized holding gains
and losses on securities classified as trading are reported in
earnings. Marketable equity securities held by the Company were
reported at the lower of cost or market prior to the adoption of
Statement No. 115, and any declines in the value which were other than
temporary were reflected as a reduction in the Company's carrying value
of such investment.
Other investments in which the ownership interest is less than 20% but
do not fall within the guidelines of Statement No. 115 are generally
carried at cost. For those investments in affiliates in which TCIC's
voting interest is 20% to 50%, the equity method of accounting is
generally used. Under this method, the investment, originally recorded
at cost, is adjusted to recognize TCIC's share of the net earning or
losses of the affiliates as they occur rather than as dividends or
other distributions are received, limited to the extent of TCIC's
investment in, advances to and limited to the extent of TCIC's
investment in, advances to and guarantees for the investee. TCIC's
share of net earnings or losses of affiliates includes the amortization
of purchase adjustments.
Changes in TCIC's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
addition equity securities by such subsidiary or equity investee, are
recognized as gains or losses in TCIC's consolidated statement of
operations.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including
interest during construction and applicable overhead, are capitalized.
During 1994, 1993 and 1992, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 15 years for distribution systems and 3 to 40
years for support equipment and buildings.
(continued)
II-84
<PAGE> 142
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales
or other dispositions of property, the original cost and cost of
removal of such property are charged to accumulated depreciation, and
salvage, if any, is credited thereto. Gains or losses are only
recognized in recognition of gains on sales of properties in their
entirety. However, recognition of gains on sales of properties to
affiliates accounted for under the equity method is deferred in
proportion to TCIC's ownership interest in such affiliates.
Franchise Costs
Franchise costs include the difference between the cost of acquiring
cable television systems and amounts assigned to their tangible assets.
Such amounts are generally amortized on a straight-line basis over 40
years. Costs incurred by TCIC in obtaining franchises are being
amortized on a straight-line basis over the life of the franchise,
generally 10 to 20 years.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments
used to manage interest rate risks arising from TCIC's financial
liabilities are recognized as interest expense. Gains and losses on
early terminations of derivatives are included in the carrying amount
of the related debt and amortized as yield adjustments over the
remaining terms of the debt. TCIC does not use such instruments for
trading purposes.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of consolidated
subsidiaries have the right to cause TCIC to repurchase such holders'
common equity.
Included in minority interests in equity of consolidated subsidiaries
is $50 million in each of 1994 and 1993 of preferred stocks (and
accumulated dividends thereon) of certain subsidiaries. The current
dividend requirements on these preferred stocks aggregate $6 million
per annum and such dividend requirements are reflected as minority
interests in the accompanying consolidated statements of operations.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period.
Statement of operations items are translated at average currency
exchange rates. The resulting translation adjustment was recorded as a
separate component of stockholder's(s') equity prior to the
Reorganization.
(continued)
II-85
<PAGE> 143
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Reclassification
Certain amounts have been reclassified for comparability with the 1994
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $754 million, $641 million and $689
million for the years ended December 31, 1994, 1993 and 1992,
respectively. Also, during these periods, cash paid for income taxes
was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
----------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 539 172 1,231
Liabilities assumed, net of
current assets (13) (7) 21
Deferred tax liability recorded
in acquisitions -- (7) 7
Minority interests in equity of
acquired entities (32) -- --
Value of TCIC common stock issued
in acquisitions -- -- (3)
----- --- -----
Cash paid for acquisitions $ 494 158 1,256
===== === =====
Common stock issued upon
conversion of redeemable preferred
stock $ 18 -- --
===== === =====
Reclassification and change of
common stock (note 8) $ 532 -- --
===== === =====
Exchange of TCIC common stock
owned by subsidiaries of TCIC for
common stock of TCI, classified as
investment in TCI $ 333 -- --
===== === =====
Exchange of Liberty common stock
and preferred stock owned by
subsidiaries of TCIC for TCI common
stock and preferred stock in the
TCI/Liberty Combination, classified
as investment in TCI $ 318 -- --
===== === =====
</TABLE>
(continued)
II-86
<PAGE> 144
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended
December 31,
----------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Reversal of deferred tax liability
recorded in TCI/Liberty
Combination $ 38 -- --
======= ======= ========
Unrealized gains, net of deferred
income taxes, on available-for-
sale securities as of
January 1, 1994 $ 304 -- --
======= ======= ========
Reduction in unrealized gains, net of
deferred income taxes, on available-
for-sale securities $ 141 -- --
======= ======= ========
Net assets of TCIC transferred in the
Reorganization in exchange for
TCI common stock and TCI
preferred stock, reflected as
investment in TCI $ 445 -- --
======= ======= ========
Net assets of TCIC transferred in
the Reorganization through due
from TCI $ 544 -- --
======= ======= ========
Unrealized holding gains, net of
deferred income taxes, on
available-for-sale securities
transferred in the
Reorganization $ 161 -- --
======= ======= ========
Foreign currency translation
transferred in the
Reorganization $ 5 -- --
======= ======= ========
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 24 10 19
======= ======= ========
Common stock issued upon
conversion of notes (with accrued
interest through conversion) $ 3 403 112
======= ======= ========
Value of TCIC Class A common stock
issued as part of purchase price of
equity investment $ -- -- 95
======= ======= ========
Note received upon disposition of
assets $ -- -- 15
======= ======= ========
Receipt of notes receivable upon
disposition of Liberty common
stock and preferred stock (note 3) $ -- 182 --
======= ======= ========
Noncash capital contribution to
Community Cable Television ("CCT")
(note 3) $ -- 22 --
======= ======= ========
Noncash exchange of equity
investment for consolidated
subsidiary and equity investments $ -- 22 --
======= ======= ========
Common stock surrendered in lieu of
cash upon exercise of stock options $ -- 1 7
======= ======= ========
</TABLE>
(continued)
II-87
<PAGE> 145
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(3) Investment in Liberty Media Corporation
TCIC owned 3,477,778 shares of Liberty Class A common stock and 55,070
shares of Liberty Class E, 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock. Upon consummation of the TCI/Liberty Combination,
TCIC received 3,390,883 shares of TCI Class A common stock and 55,070
shares of Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Class B Preferred Stock"). The holders of the Class
B Preferred Stock will be entitled to one vote per share in any general
election of directors of TCI. Upon consummation of the TCI/Liberty
Combination, the remaining classes of preferred stock of Liberty held
by TCIC were converted into shares of TCI Class A Preferred Stock which
has a substantially equivalent fair market value to that which was
given up. TCIC's ownership in TCI's common stock, Class B Preferred
Stock and TCI Class A Preferred Stock have been recorded as investment
in TCI in stockholder's(s') equity at TCIC's historical cost.
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and other
related party considerations, TCIC had accounted for its investment in
Liberty under the equity method. Accordingly, TCIC had not recognized
any income relating to dividends, including preferred stock dividends,
and TCIC recorded the earnings or losses generated by Liberty (by
recognizing 100% of Liberty's earnings or losses before deducting
preferred stock dividends) through the date the TCI/Liberty Combination
was consummated.
During 1992, TCIC and Liberty formed CCT, a general partnership created
for the purpose of acquiring and operating cable television systems
with TCIC owning a 49.999% interest and Liberty owning a 50.001%
interest. Pursuant to a cable television management agreement, a
subsidiary of TCIC provides management services for cable television
systems owned by CCT. The subsidiary receives a fee equal to 3% of the
gross cable television revenue of the Partnership.
TCIC and Liberty entered into an Option-Put Agreement (the "Option-Put
Agreement"), as amended. Under the Option-Put Agreement, between
January 1, 1996 and January 31, 1996, TCIC will have the option to
purchase all of Liberty's interest in CCT and a loan receivable (the
"Mile Hi Note") for an amount equal to $77 million plus interest
accruing at the rate of 11.6% per annum on such amount from June 3,
1993. Between April 1, 1995 and June 29, 1995, and between January 1,
1997 and January 31, 1997, Liberty will have the right to require TCIC
to purchase Liberty's interest in CCT and the Mile Hi Note for an
amount equal to $77 million plus interest on such amount accruing at
the rate of 11.6% per annum from June 3, 1993.
(continued)
II-88
<PAGE> 146
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC purchases sports and other programming from certain subsidiaries
of Liberty. Charges to TCIC (which are based upon customary rates
charged to others) for such programming were $59 million, $44 million
and $44 million for the years ended December 31, 1994 and 1993 and
1992, respectively. Such amounts are included in operating expenses in
the accompanying consolidated statements of operations. Certain
subsidiaries of Liberty purchased from TCIC, at TCIC's cost plus an
administrative fee, certain pay television and other programming
through the consummation of the TCI/Liberty Combination. In addition,
a consolidated subsidiary of Liberty pays a commission to TCIC for
merchandise sales to customers who are subscribers of TCIC's cable
systems. Aggregate commission and charges for such programming were
$16 million, $11 million and $3 million for the years ended December
31, 1994, 1993 and 1992 , respectively. Such amounts are recorded in
revenue in the accompanying consolidated statements of operations.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased
49.9% of Liberty's 50% general partnership interest in American Movie
Classics Company ("AMC"). The gain recognized by Liberty in connection
with the disposition of AMC was $183 million and is included in TCIC's
share of Liberty's earnings prior to the TCI/Liberty Combination.
(continued)
II-89
<PAGE> 147
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summarized unaudited financial information of Liberty as of December
31, 1993 and for the period from January 1, 1994 through August 4, 1994
and for the years ended December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1993
----
Consolidated Financial Position amounts in millions
-------------------------------
<S> <C>
Cash and cash equivalents $ 91
Investment in TCI common stock 104
Other investments and
related receivables 372
Other assets, net 870
------
Total assets $1,437
======
Debt $ 446
Deferred income taxes 2
Other liabilities 307
Minority interests 175
Redeemable preferred stocks 155
Stockholders' equity 352
------
Total liabilities and
stockholders' equity $1,437
======
</TABLE>
<TABLE>
<CAPTION>
Consolidated Operations 1994 1993 1992
----------------------- ---- ---- ----
amounts in millions
<S> <C> <C> <C>
Revenue $ 790 1,153 157
Operating expenses (726) (1,105) (144)
Depreciation and amortization (32) (49) (16)
----- ------ ----
Operating income (loss) 32 (1) (3)
Interest expense (22) (31) (7)
Other, net 115 36 32
----- ------ ----
Net earnings $ 125 4 22
===== ====== ====
</TABLE>
(4) Investments in Other Affiliates
TCIC has various investments accounted for under the equity method.
Some of the more significant investments held by TCIC at December 31,
1994 are Teleport Communications Group, Inc. ("TCG") (carrying value of
$126 million) and CCT (carrying value of $30 million).
(continued)
II-90
<PAGE> 148
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
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 was accounted for under the equity method
comprised $40 million, $28 million and $26 million of TCIC's share of
its affiliates' losses in 1994, 1993 and 1992, respectively. In
February 1994, TCIC acquired a consolidated investment in Flextech
p.l.c. ("Flextech"). Flextech accounted for net losses in 1994 of $21
million (before deducting the minority interests' 40% share of such
losses) in 1994. In addition, TCIC had other less significant
investments in video distribution and programming businesses located in
the UK, other parts of Europe, Asia, Latin America and certain other
foreign countries. In the aggregate, such other investments accounted
for $44 million of TCIC's share of its affiliates' losses in 1994. In
connection with the Reorganization, TCIC's ownership in the
aforementioned entities was transferred to another operating unit
effective December 1, 1994, and TCIC is no longer exposed to the risk
associated with unfavorable fluctuations in foreign currency exchange
rates nor will it continue to incur the aforementioned losses
associated with such investments.
On November 22, 1994, TCI and US WEST, Inc. each exchanged their
respective 50% ownership interest in TeleWest UK for 302,250,000
ordinary shares and 76,500,000 convertible preference shares of
TeleWest Communications (the "TeleWest Exchange"). Following the
completion of the TeleWest Exchange, TeleWest Communications conducted
an initial public offering on November 23, 1994 in which it sold
243,740,000 ordinary shares for aggregate net proceeds of 401 million
pounds (the "TeleWest IPO"). Upon completion of the TeleWest Exchange
and the TeleWest IPO, TCI and US West, Inc. each became the owners of
36% of the ordinary shares and 38% of the total outstanding ordinary
and convertible preference shares of TeleWest Communications. As a
result of the TeleWest IPO and the associated dilution of TCI's
ownership interest of TeleWest Communications, Inc., TCIC has
recognized a nonrecurring gain amounting to $161 million (before
deducting the related tax expense of $57 million). Effective December
1, 1994, such ownership of TeleWest Communications was transferred to
the International Cable and Programming unit in the Reorganization.
On December 2, 1992, SCI Holdings, Inc. ("SCI") consummated a
transaction (the "Split-Off") that resulted in the ownership of its
cable systems being split between its two stockholders, which
stockholders were Comcast Corporation ("Comcast") and TCIC. Prior to
the Split-Off, TCIC had an investment in the common stock of SCI and
the preferred stock of its wholly-owned subsidiary, Storer
Communications, Inc. ("Storer").
The Split-Off, which permitted refinancing of substantially all of the
publicly held debt of SCI and the preferred stock of Storer, was
effected by the distribution of approximately 50% of the net assets of
SCI to three holding companies formed by TCIC (the "Holding
Companies").
(continued)
II-91
<PAGE> 149
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Prior to the Split-Off, TCIC contributed its SCI common stock to the
Holding Companies in exchange for 100% of such Holding Companies'
common stock. The amount of SCI common stock contributed to each of
the Holding Companies was based upon the proportionate value of net
assets to be received by each of the Holding Companies in the
Split-Off. SCI then merged into Storer and the SCI common stock held
by the Holding Companies was converted into Storer common stock.
Also prior to the Split-Off, (i) the Holding Companies incurred
long-term debt aggregating approximately $1.1 billion and contributed
substantially all of the resulting proceeds to Storer and (ii) a
consolidated subsidiary of TCIC redeemed approximately $476 million of
its debt securities held by Storer with proceeds of its separate
financing, and an affiliate of Comcast redeemed approximately $274
million of its debt securities held by Storer. In turn, Storer
utilized substantially all of the proceeds of such contributions and
redemptions to repurchase its preferred stock and extinguish all of its
debt. TCIC's share of Storer's loss on early extinguishment of debt
was $52 million and such amount is included in loss on early
extinguishment of debt in the accompanying consolidated statements of
operations. Additionally, TCIC received a premium, amounting to $14
million, on the repurchase of the Storer preferred stock. Such amount
is reflected separately in the accompanying consolidated financial
statements.
In the Split-Off, Storer redeemed its common stock held by the Holding
Companies in exchange for 100% of the capital stock of certain
operating subsidiaries of Storer.
Immediately following the Split-Off, TCIC owned a majority of the
common stock of the Holding Companies and Comcast owned 100% of the
common stock of Storer. As such, TCIC, which previously accounted for
its investment in SCI using the equity method, now consolidates its
investment in the Holding Companies. The assets of the Holding
Companies were recorded at predecessor cost.
In connection with TCIC's 1988 acquisition of an equity interest in
SCI, a subsidiary of TCIC issued certain debt and equity securities to
Storer for $650 million. Such debt securities were redeemed and the
equity securities were received by one of the Holding Companies in the
Split-Off. Interest charges and preferred stock dividend requirements
on these debt and equity securities, prior to the Split-Off, aggregated
$81 million for the period ended December 2, 1992. TCIC's share of
losses of SCI, prior to the Split-Off for the period ended December 2,
1992 amounted to $51 million, as adjusted for the effect of interest
and dividends accounted for by Storer as capital transactions due to
their related party nature.
(continued)
II-92
<PAGE> 150
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Summarized unaudited financial information for affiliates other than
Liberty is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $ 777 1,059
Franchise costs, net 100 266
Other assets, net 313 727
-------- -----
Total assets $ 1,190 2,052
======== =====
Debt $ 635 593
Due to TCIC 2 78
Other liabilities 180 338
Owners' equity 373 1,043
-------- -----
Total liabilities and equity $ 1,190 2,052
======== =====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1993 1992
---- ---- ----
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 332 713 1,224
Operating expenses (283) (648) (786)
Depreciation and amortization (66) (127) (303)
------ ---- ----
Operating income (loss) (17) (62) 135
Interest expense (16) (37) (295)
Other, net 128 98 (234)
------ ---- ----
Net earnings (loss) $ 95 (1) (394)
====== ==== ====
</TABLE>
Certain of TCIC's affiliates are general partnerships and any
subsidiary of TCIC 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.
(continued)
II-93
<PAGE> 151
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(5) Investment in Turner Broadcasting System, Inc.
TCIC owned shares of a class of preferred stock of TBS which has 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 TCI
appoints three such representatives. However, voting control over TBS
continues to be held by its chairman of the Board and chief executive
officer. Additionally, TCIC owned common stock of TBS. Substantially
all of such ownership of TBS common stock and preferred stock was
transferred to the Programming unit in the Reorganization.
TCIC's investment in TBS common stock had an aggregate market value of
$803 million (which exceeded cost by $485 million) at December 31,
1993. In addition, TCIC's investment in TBS preferred stock, carried
at cost, had an aggregate market value of $954 million, based upon the
market value of the common stock into which it is convertible, (which
exceeded cost by $781 million) at December 31, 1993.
TCIC applied Statement No. 115 beginning in the first quarter of 1994.
Application of Statement No. 115 resulted in a net increase of $304
million to stockholders' equity on January 1, 1994, representing the
recognition of unrealized appreciation, net of taxes, for TCIC's
investment in equity securities determined to be available-for-sale
(primarily its investment in TBS common stock). Such amount was
subsequently adjusted by $141 million immediately prior to the
Reorganization. In conjunction with the Reorganization, TCIC reduced
its unrealized gain on available-for-sale securities by $161 million,
including the transfer of TBS common stock.
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ------------
December 31, 1994 1994 1993
----------------- ---- ----
amounts in millions
<S> <C> <C> <C>
Parent company debt:
Senior notes 8.5% $ 5,412 5,052
Bank credit facilities 6.9% 869 80
Commercial paper 6.6% 445 44
Other debt 2 2
-------- -----
6,728 5,178
Debt of subsidiaries:
Bank credit facilities 7.3% 2,828 3,264
Notes payable 10.2% 1,024 1,321
Convertible notes (a) 9.5% 45 47
Other debt -- 87 90
-------- -----
$ 10,712 9,900
======== =====
</TABLE>
(continued)
II-94
<PAGE> 152
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(a) These convertible notes, which are stated net of unamortized
discount of $186 million and $197 million on December 31, 1994
and 1993, respectively, mature on December 18, 2021. The notes
require (so long as conversion of the notes has not occurred)
an annual interest payment through 2003 equal to 1.85% of the
face amount of the notes. During the year ended December 31,
1993, certain of these notes were converted into 819,000 shares
of TCIC Class A common stock. During the year ended December
31, 1994, certain of these notes were converted into 2,350,000
shares of TCIC Class A common stock. In conjunction with the
TCI/Liberty Combination, these notes became convertible into
TCI Class A common stock. At December 31, 1994, the notes were
convertible at the option of the holders, into an aggregate of
38,710,990 shares of TCI Class A common stock.
On October 28, 1993, TCIC called for redemption all of its remaining
Liquid Yield Option(TM) Notes. In connection with such call for
redemption, Notes aggregating $405 million were converted into
18,694,377 shares of TCIC Class A common stock and Notes aggregating
less than $1 million were redeemed together with accrued interest to
the redemption date. Prior to the aforementioned redemption, Notes
aggregating $6 million were converted into 259,537 shares of TCIC Class
A common stock during 1993.
During the year ended December 31, 1992, TCIC called for redemption all
of its 7% convertible subordinated debentures. Debentures aggregating
$114 million were converted into 6,636,881 shares of TCIC Class A
common stock and the remaining debentures were redeemed at 104.2% of
the principal amount together with accrued interest to the redemption
date.
TCIC's bank credit facilities and various other debt instruments
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 dividend payments.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCIC 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 9.9% on notional amounts
of $550 million at December 31, 1994 and (ii) variable interest rates
(the "Variable Rate Agreements") on notional amounts of $2,605 million
at December 31, 1994. During the years ended December 31, 1994, 1993
and 1992, TCIC's net payments pursuant to the Fixed Rate Agreements
were $26 million, $38 million and $46 million, respectively; and TCIC's
net receipts pursuant to the Variable Rate Agreements were $36 million,
$31 million and $7 million, respectively. After giving effect to
TCIC's interest rate exchange agreements, approximately 45% of TCIC's
indebtedness bears interest at fixed rates.
(continued)
II-95
<PAGE> 153
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC's Fixed Rate Agreements and Variable Rate Agreements expire as
follows:
<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>
August 1995 7.2% $ 10 April 1995 6.4% $ 75
April 1996 9.9% 30 August 1995 7.7% 10
May 1996 8.3% 50 April 1996 6.8% 50
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% 60 April 1997 7.0% 200
December 1997 8.7% 230 September 1998 4.8%-5.2% 300
----
April 1999 7.4% 100
$550 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
-------
$ 2,605
=======
</TABLE>
TCIC 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,
TCIC 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 TCIC would pay or receive to terminate the
agreements at December 31, 1994, taking into consideration current
interest rates and assuming the current creditworthiness of the
counterparties. TCIC would pay an estimated $195 million at
December 31, 1994 to terminate the agreements.
In order to diminish its exposure to extreme increases in variable
interest rates, TCIC has also entered into various interest rate hedge
agreements on notional amounts of $325 million which fix the maximum
variable interest rates at 11%. Such agreements expire during the
third and fourth quarters of 1995.
The fair value of TCIC's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered
to TCIC for debt of the same remaining maturities. The fair value of
debt, which has a carrying value of $10,712 million, was $10,614
million at December 31, 1994.
TCIC is required to maintain unused availability under bank credit
facilities to the extent of outstanding commercial paper. Also, TCIC
pays 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)
II-96
<PAGE> 154
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC remains the sole obligor with respect to all indebtedness and
other obligations of Old TCI outstanding at the time the TCI/Liberty
Combination were consummated and TCI has not assumed any such
indebtedness or other obligations.
Annual maturities of debt for each of the next five years are as
follows:
<TABLE>
<CAPTION>
Parent Total
------ -----
amounts in millions
<S> <C> <C>
1995 $ 688* $ 1,155*
1996 240 870
1997 173 557
1998 480 773
1999 403 774
</TABLE>
* Includes $445 million of commercial paper.
(7) Redeemable Preferred Stocks
The 4-1/2% Convertible Preferred Stock was stated at its redemption
value of $3,000 per share, and each share was convertible into 204
shares of TCIC Class A common stock. In February of 1994, all of the
shares of such convertible preferred stock were tendered to TCIC for
conversion and, on March 3, 1994, 1,265,004 shares of TCIC Class A
common stock were issued to the holders of such preferred stock.
(8) Stockholders' Equity
Common Stock
The Class A common stock has one vote per share and the Class B common
stock has ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A
common stock.
Upon a Restated Certificate of Incorporation becoming effective in
accordance with the General Corporation Law of the State of Delaware
(the "Effective Time"), each 500.3735 shares of Class A common stock
and Class B common stock issued and outstanding immediately prior to
the Effective Time was reclassified and changed into one share of Class
A common stock and one share of Class B common stock.
(continued)
II-97
<PAGE> 155
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Employee Benefit Plans
TCIC had an Employee Stock Purchase Plan ("ESPP") to provide employees
an opportunity for ownership in the Company and to create a retirement
fund. Terms of the ESPP provided for employees to contribute up to 10%
of their compensation to a trust for investment in TCIC common stock.
TCIC, by annual resolution of the Board of Directors, contributed up to
100% of the amount contributed by employees. Certain of TCIC's
subsidiaries have their own employee benefit plans. Contributions to
all plans aggregated $19 million, $16 million and $13 million for 1994,
1993 and 1992, respectively.
Stock Options
TCIC had granted or assumed certain options and/or stock appreciation
rights. All such options and/or stock appreciation rights previously
granted by TCIC were assumed by TCI in conjunction with the TCI/Liberty
Combination. Estimates of the compensation relating to the stock
appreciation rights granted to employees of TCIC have been recorded
through December 31, 1994, but are subject to future adjustment based
upon market value and, ultimately, on the final determination of market
value when the rights are exercised.
An officer of TCIC received payments of $512,500 and $569,000 from TCIC
(based on the then market value of TCIC Class A common stock of $20.25
and $21.375 per share) in July and December of 1992, respectively, in
cancellation of the remainder of his option covering 100,000 shares of
TCIC Class A common stock. Another officer received payment of
$2,276,000 from TCIC in December of 1992 upon cancellation of his
option covering 200,000 shares of TCIC Class A common stock. The
amount paid was based on the then market value of TCIC Class A common
stock of $21.375 per share.
(9) Transactions with Officers and Directors
On December 10, 1992, pursuant to a restricted stock award agreement,
an officer, who is also a director, of TCIC was transferred the right,
title and interest in and to 124.03 shares (having a liquidation value
of $4 million) of the 12% Series B cumulative compounding preferred
stock of WestMarc Communications, Inc. (a wholly-owned subsidiary of
TCIC) owned by TCIC. Such preferred stock is subject to forfeiture in
the event of certain circumstances from the date of grant through
February 1, 2002, decreasing by 10% on February 1 of each year.
On December 14, 1992, an officer, who is also a director, sold 100,000
shares of TCIC Class B common stock to TCIC for $2,138,000.
(continued)
II-98
<PAGE> 156
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(10) Income Taxes
TCI files a consolidated Federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI
owns less than 80% each file a separate income tax return. TCIC,
subsequent to the TCI/Liberty Combination, is included in the
consolidated Federal income tax return of TCI. Income tax expense for
TCIC is based on those items in the consolidated calculation applicable
to TCIC. Intercompany tax allocation represents an apportionment of
tax expense or benefit (other than deferred taxes) among subsidiaries
of TCI in relation to their respective amounts of taxable earnings or
losses. The payable or receivable arising from the intercompany tax
allocation is recorded as an increase or decrease in amounts due from
affiliated companies included as a reduction of stockholders' equity.
The Financial Accounting Standards Board Statement No. 109 "Accounting
for Income Taxes" (Statement No. 109") requires the use of the asset
and liability method of accounting for income taxes. Under the asset
and liability method of Statement No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. Under Statement No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Income tax expense attributable to income or loss from continuing
operations for the years ended December 31, 1994, 1993 and 1992
consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1994:
Intercompany allocation $(73) (34) (107)
State and local (14) (10) (24)
---- ---- ----
$(87) (44) (131)
==== ==== ====
Year ended December 31, 1993:
Federal $(14) (119) (133)
State and local (15) (20) (35)
---- ---- ----
$(29) (139) (168)
==== ==== ====
Year ended December 31, 1992:
Federal $ -- (24) (24)
State and local (10) (4) (14)
---- ----
$(10) (28) (38)
==== ==== ====
</TABLE>
(continued)
II-99
<PAGE> 157
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The significant components of deferred income tax expense for the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Deferred tax expense
(exclusive of effects of other
components listed below) $ (44) (63) (28)
Adjustment to deferred tax assets
and liabilities for enacted change
in tax rates -- (76) --
-------- ------ ------
$ (44) (139) (28)
======== ======= ======
</TABLE>
Income tax expense attributable to income or loss from continuing
operations differs from the amounts computed by applying the Federal
income tax rate of 35% in 1994 and 1993 and 34% in 1992 as a result of
the following:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------
1994 1993 1992
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax
expense $ (78) (56) (15)
Adjustment to deferred tax assets
and liabilities for enacted change
in Federal income tax rate -- (76) --
Dividends excluded for income
tax purposes 1 4 10
Amortization not deductible for
tax purposes (12) (12) (8)
Minority interest in earnings of
consolidated subsidiaries (1) (1) (14)
Recognition of losses of
consolidated partnership (10) (8) --
State and local income taxes,
net of Federal income
tax benefit (21) (23) (9)
Valuation allowance for foreign
corporations (9) -- --
Other (1) 4 (2)
-------- ------ ------
$ (131) (168) (38)
======== ====== ======
</TABLE>
(continued)
II-100
<PAGE> 158
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
------ ------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 489 590
Less - valuation allowance (99) (90)
Investment tax credit carryforwards 122 140
Less - valuation allowance (36) (36)
Alternative minimum tax credit
carryforwards 89 19
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 171 266
Future deductible amounts principally
due to non-deductible accruals 13 27
Other 5 13
------- -----
Net deferred tax assets 754 929
------- -----
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,160 1,193
Franchise costs, principally due to
differences in amortization 2,598 2,784
Investment in affiliates, due
principally to undistributed
earnings of affiliates 210 256
Other 85 6
------- -----
Total gross deferred tax liabilities 4,053 4,239
------- -----
Net deferred tax liability $ 3,299 3,310
======= =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994
was $135 million. Such balance increased by $9 million from December
31, 1993 resulting from a valuation allowance established against net
operating losses of foreign corporations. Subsequently recognized tax
benefits relating to $126 million of the valuation allowance for
deferred tax assets as of December 31, 1994 will be recorded as reduc-
tions of franchise costs.
(continued)
II-101
<PAGE> 159
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
At December 31, 1994, TCIC had net operating loss carryforwards for
income tax purposes aggregating approximately $926 million of which, if
not utilized to reduce taxable income in future periods, $11 million
expires through 2002, $151 million in 2003, $121 million in 2004, $364
million in 2005, $269 million in 2006, $8 million in 2008 and $2
million in 2009. Certain subsidiaries of TCIC had additional net
operating loss carryforwards for income tax purposes aggregating
approximately $247 million and these net operating losses are subject
to certain rules limiting their usage.
At December 31, 1994, TCIC had remaining available investment tax
credits of approximately $67 million which, if not utilized to offset
future Federal income taxes payable, expire at various dates through
2005. Certain subsidiaries of TCIC had additional investment tax
credit carryforwards aggregating approximately $55 million and these
investment tax credit carryforwards are subject to certain rules
limiting their usage.
Certain of the Federal income tax returns of TCIC and its subsidiaries
which filed separate income tax returns are presently under examination
by the Internal Revenue Service ("IRS") for the years 1979 through
1992. In the opinion of management, any additional tax liability, not
previously provided for, resulting from these examinations, ultimately
determined to be payable, should not have a material adverse effect on
the consolidated financial position of TCIC. TCIC pursued a course of
action on certain issues (primarily the deductibility of franchise cost
amortization) the IRS had raised and such issues were argued before the
United States Tax Court. During 1990, TCIC received a favorable
decision regarding these issues. The IRS appealed this decision but
TCIC prevailed in the appeal. The IRS elected not to further appeal
the decision to the Supreme Court. TCIC has entered into a closing
agreement with the IRS which settles these matters for all open tax
years. A subsidiary of TCIC has filed a petition in United States Tax
Court protesting the disallowance of certain Transitional Investment
Tax Credits and such issue should be litigated by early 1996.
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate
from 34% to 35%. TCIC has reflected the tax rate change in its
consolidated statements of operations in accordance with the treatment
prescribed by Statement No. 109. Such tax rate change resulted in an
increase of $76 million to income tax expense and deferred income tax
liability.
(continued)
II-102
<PAGE> 160
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
During 1994, subsidiaries of TCI, Comcast, Cox Communications,
Inc. ("Cox") and Sprint Corporation ("Sprint") formed a partnership
("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, the
partner have been participating in auctions ("PCS Auctions") of
broadband personal communications services ("PCS") licenses being
conducted by the Federal Communications Commission ("FCC"). In the
first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PSC licenses for 29 markets,
including New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort
Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses is
approximately $2.1 billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which holds
a PCS license granted under the FCC's pioneer preference program for
the Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and has agreed to make
capital contributions to APC equal to 49/51 of the cost of APC's PCS
license. Additional capital contributions may be required in the event
APC is unable to finance the full cost of its PCS license. WirelessCo
may also be required to finance the build-out expenditures for APC's
PCS system. Cox, which holds a pioneer preference PCS license for the
Los Angeles-San Diego market, and WirelessCo have also agreed on the
general terms and conditions upon which Cox (with a 60% interest) and
WirelessCo (with a 40% interest) would form a partnership to hold and
develop a PCS system using the Los Angeles-San Diego license. APC and
the Cox partnership would affiliate their PCS systems with WirelessCo
and be part of WirelessCo's nationwide integrated network, offering
wireless communications services under the "Sprint" brand. TCIC owns
a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and TCIC also formed a
separate partnership ("PhillieCo"), in which TCIC owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction
for a PCS license for the Philadelphia market at a license cost of $85
million. To the extent permitted by law, the PCS system to be
constructed by PhillieCo would also be affiliated with WirelessCo's
nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful
bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
(continued)
II-103
<PAGE> 161
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
At the end of the first quarter of 1995, subsidiaries of TCIC,
Comcast, Cox and Sprint formed two new partnerships, of which the
principal partnership is MajorCo, L.P. ("MajorCo"), to which they
contributed their respective interests in WirelessCo and through which
they formed another partnership, NewTelco, L.P. ("NewTelco") to engage
in the business of providing local wireline communications services to
residences and businesses on a nationwide basis. NewTelco will serve
its customers primarily through the cable television facilities of
cable television operators that affiliate with NewTelco in exchange for
agreed-upon compensation. The modification of existing regulations and
laws governing the local telephony market will be necessary in order
for NewTelco to provide its proposed services on a competitive basis
in most states. Subject to agreement upon a schedule for upgrading
its cable television facilities in selected markets and certain other
matters, TCIC has agreed to affiliate certain of its cable
systems with NewTelco. The capital required for the upgrade
of TCIC's cable facilities for the provision of telephony
services is expected to be substantial.
Subsidiaries of TCIC, Cox and Comcast, together with Continental
Cablevision, Inc. ("Continental"), own Teleport Communications Group,
Inc. and TCG Partners (collectively, "TCG"), which is one of the
largest competitive access providers in the United States in terms of
route miles. TCIC, Cox and Comcast have entered into an agreement
with MajorCo and NewTelco to contribute their interests in TCG and its
affiliated entities to NewTelco. TCIC currently owns an approximate
29.9% interest in TCG. The closing of this contribution is subject to
the satisfaction of certain conditions, including the receipt of
necessary regulatory and other consents and approvals. In addition,
TCIC, Comcast and Cox intend to negotiate with Continental, which owns
a 20% interest in TCG, regarding their acquisition of Continental's
TCG interest. If such agreement cannot be reached, they will need to
obtain Continental's consent to certain aspects of their agreement
with Sprint.
Subject to agreement upon an initial business plan, the MajorCo
partners have committed to make cash capital contributions to MajorCo
of $4.0 to $4.4 billion in the aggregate over a three- to five-year
period, which amount includes the approximately $500 million already
contributed by the partners to WirelessCo. The partners intend for
MajorCo and its subsidiary partnerships to be the exclusive vehicles
through which they engage in the wireless and wireline telephony
service businesses, subject to certain exceptions.
At December 31, 1994, TCIC was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. TCIC pledged
56,656,584 shares of TCI Class A common stock held by subsidiaries of
TCIC as collateral for the letter of credit. There were no borrowings
pursuant to such letter of credit at December 31, 1994.
(continued)
II-104
<PAGE> 162
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
On January 20, 1995, Tele-Vue Systems, Inc. ("Tele-Vue"), Viacom
International, Inc. ("Viacom"), InterMedia Partners IV, L.P. ("IP-IV")
and RCS Pacific, L.P. ("RCS Pacific") entered into an Asset Purchase
Agreement (the "Tele-Vue Agreement") pursuant to which RCS Pacific
agreed to acquire from Tele-Vue the assets of certain cable television
systems for total consideration of approximately $1,983 million,
subject to adjustment in accordance with the terms of the Tele-Vue
Agreement. A subsidiary of TCI has agreed to loan $600 million in cash
to IP-IV. IP-IV will, in turn, loan such $600 million to RCS Pacific.
RCS Pacific could use the proceeds of the aforementioned loan as a
portion of the total cash consideration to be paid to Tele-Vue, or at
the option of TCI, to purchase $600 million of TCI Class A common
stock. Should TCI elect to sell such common stock, RCS Pacific has the
option to pay the consideration to Tele-Vue by delivery of RCS
Pacific's short-term note of up to $600 million of the total
consideration with the balance to be paid in cash. Such note, if it is
delivered, will be secured by RCS Pacific's pledge of shares of stock
of TCI having an aggregate market value equal to the principal amount
of, and accrued interest on, the note delivered to Tele-Vue. The
consummation of the transactions contemplated by the Tele-Vue Agreement
is conditioned, among other things, on receipt of approvals of various
franchise and other governmental authorities and receipt of "minority
tax certificates" from the FCC. Both Houses of Congress have passed
legislation to repeal previous legislation which provided for minority
tax certificates. The bills are currently in conference. There can be
no assurance that the conditions precedent to closing the asset
purchase will be satisfied, or that the parties will be able to agree
on different terms, if necessary.
TCIC, through an indirect wholly-owned subsidiary, would hold a 25%
limited partnership interest in IP-IV, and IP-IV would in turn hold a
79% limited partnership interest in RCS Pacific. TCIC would account for
its investment in IP-IV under the equity method of accounting.
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, TCIC's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the
FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation
charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the
relatively few systems which are subject to "effective competition" or
to services offered on an individual service basis, such as premium
movie and pay-per-view services.
(continued)
II-105
<PAGE> 163
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
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 review by the FCC, if a complaint has been filed, or 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
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 systems' rates
are successfully challenged by franchising authorities is not
considered to be material.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $173
million at December 31, 1994. Although there can be no assurance,
management of TCIC believes that it will not be required to meet
its obligations under such guarantees, or if it is required to meet
any such obligations, that they will not be material to TCIC.
TCIC leases business offices, has entered into pole rental agreements
and uses certain equipment under lease arrangements. Minimum rental
expense under such arrangements, net of sublease rentals, amounted to
$69 million, $59 million and $57 million in 1994, 1993 and 1992,
respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1995 $ 19
1996 15
1997 13
1998 11
1999 9
</TABLE>
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than
the amount shown for 1995.
(continued)
II-106
<PAGE> 164
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(12) Discontinued Operations
TCIC sold its motion picture theatre business and certain
theatre-related real estate assets on May 12, 1992. The selling price
(including liabilities assumed) was approximately $680 million. In
connection with the disposition, TCIC paid $92.5 million for certain
preferred stock of the buyer. No gain or loss was recognized in
connection with this transaction as the net assets of discontinued
operations were reflected at their net realizable value.
Operating results for the theatre operations for the period from
January 1, 1992 through May 12, 1992 are reported separately in the
consolidated statements of operations under the caption "Loss from
discontinued operations" and include:
<TABLE>
<CAPTION>
1992
------
amounts in millions
<S> <C>
Revenue $ 211
Loss before income taxes $ (16)
Income tax benefit $ 1
Net loss $ (15)
</TABLE>
(continued)
II-107
<PAGE> 165
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(13) Subsequent Events (Unaudited)
As of January 26, 1995, TCI, TCIC and TeleCable Corporation
("TeleCable") consummated a transaction, whereby TeleCable was merged
into TCIC. The aggregate $1.6 billion purchase price was satisfied by
TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of
approximately 42 million shares of TCI Class A common stock and 1
million shares of TCI Convertible Preferred Stock, Series D with an
aggregate initial liquidation value of $300 million. The amount of net
liabilities assumed by TCIC and the number of shares of TCI Class A
common stock issued to TeleCable's shareholders are subject to
post-closing adjustments.
Comcast had the right, through December 31, 1994, to require TCI to
purchase or cause to be purchased from Comcast all shares of Heritage
Communications, Inc. ("Heritage") directly or indirectly owned by
Comcast for either cash or assets or, at TCI's election shares of TCI
common stock. On October 24, 1994, TCI and Comcast entered into a
purchase agreement whereby TCI would repurchase the entire 19.9%
minority interest in Heritage owned by Comcast for an aggregate
consideration of approximately $290 million, the majority of which is
payable in shares of TCI Class A common stock. Such acquisition was
consummated subsequent to December 31, 1994.
II-108
<PAGE> 166
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The following lists the directors and executive officers of
Tele-Communications, Inc. ("TCI" or the "Company") and TCI Communications, Inc.
("TCIC"), their birth dates, a description of their business experience and
positions held with the Company as of February 10, 1995. Directors of TCI are
elected to staggered three-year terms with one-third elected annually. The date
the present term of office expires for each director is the date of the Annual
Meeting of the Company's stockholders held during the year footnoted opposite
their names. All officers are appointed for an indefinite term, serving at
the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Name Positions
- ---------------------------- ------------------------------------------------------------------
<S> <C>
Bob Magness(1) Chairman of the Board of TCI since June of 1994 and of TCIC since 1973;
Born June 3, 1924 TCIC director since 1968.
John C. Malone(2) TCI director since June of 1994; Chief Executive Officer and President
Born March 7, 1941 of TCI since January of 1994; Chief Executive Officer of TCIC from
March of 1992 to October of 1994 and President of TCIC from 1973 to
October of 1994; is President and a director of many of the Company's
subsidiaries; also a director of Turner Broadcasting System, Inc., BET
Holdings, Inc., and The Bank of New York; TCIC director since 1973.
Donne F. Fisher(3) Executive Vice President and Treasurer of TCI since January of 1994;
Born May 24, 1938 Executive Vice President of TCIC from December of 1991 to October of
1994; was previously Senior Vice President of TCIC since 1982 and
Treasurer since 1970; also a director of General Communication, Inc.;
TCI director since June of 1994; TCIC director since 1980.
John W. Gallivan(1) Chairman of the Board of Kearns-Tribune Corporation, a newspaper
Born June 28, 1915 publishing concern; also a director of Silver King Mining Company; TCI
director since June of 1994; TCIC director from 1980 to August of 1994.
Kim Magness(3) TCI director since June of 1994; TCIC director from 1985 to August of
Born May 17, 1952 1994; manages numerous personal and business investments, and is
Chairman and President of a company developing liners for irrigation
canals.
Robert A. Naify(2) TCI director since June of 1994; TCIC director from 1987 to August of
Born February 17, 1922 1994; also Co-Chairman, Co-Chief Executive Officer and a director of The
Todd-AO Corporation.
</TABLE>
(continued)
III-1
<PAGE> 167
<TABLE>
<CAPTION>
Name Positions
- ---------------------------- ------------------------------------------------------------------
<S> <C>
Jerome H. Kern(1) TCI director since June of 1994; TCIC director from December of 1993 to
Born June 1, 1937 August of 1994; also is a senior partner with the law firm of Baker &
Botts, L.L.P., since September of 1992. Prior to joining Baker &
Botts, L.L.P., was senior partner with the Law Offices of Jerome H.
Kern from January 1, 1992 to September 1, 1992 and, prior to that, was
a senior partner with the law firm of Shea & Gould from 1986 through
December 31, 1991.
R.E. Turner(3) TCI director since June of 1994; Appointed TCIC director from June of
Born November 19, 1938 1994 to August of 1994; also Chairman of the Board and President of
Turner Broadcasting System, Inc. since 1970.
Tony Coelho(2) Appointed TCIC director from March of 1994 to August of 1994; also
Born June 14, 1942 President and Chief Executive Officer of Wertheim Schroder Investment
Services; Managing Director of Wertheim Schroder & Co., Incorporated;
was formerly U.S. Representative from California from January 1979
through June 1989 and the Majority Whip of the U.S. House of Repre-
sentatives from December 1986 through June 1989; also a director of
Circus Circus Enterprises, Inc., ICF Kaiser International, Inc.,
Service Corporation International, Specialty Retail Group, Inc.,
and Tanknology Environmental, Inc.
Stephen M. Brett Executive Vice President and Secretary of TCI since January of 1994.
Born September 20, 1940 Appointed TCI Senior Vice President and General Counsel of TCIC as of
December of 1991. Vice President and Secretary and a director of most
of TCI's subsidiaries. From August of 1988 through December of 1991,
was Executive Vice President-Legal and Secretary of United Artists
Entertainment Company ("UAE") and its predecessor, United Artists
Communications, Inc. ("UACI").
Fred A. Vierra Executive Vice President of TCI since January of 1994. Chairman
Born November 9, 1931 of the Board and Chief Executive Officer of TCI International Holdings,
Inc., a wholly-owned subsidiary of TCI, since September of 1994. Executive
Vice President of TCIC from December of 1991 to October of 1994. Was
President, Chief Operating Officer and a director of UAE from May of
1989 through December of 1991.
Peter R. Barton Executive Vice President of TCI since January of 1994; President and
Born April 6, 1951 Chief Executive Officer of Liberty Media Corporation ("Liberty"), a
wholly-owned subsidiary of TCI subsequent to August 4, 1994, since June
of 1990; was Senior Vice President of TCIC from 1988 to March of 1991.
</TABLE>
(continued)
III-2
<PAGE> 168
<TABLE>
<CAPTION>
Name Positions
- ---------------------------- ------------------------------------------------------------------
<S> <C>
Brendan R. Clouston Executive Vice President of TCI since January of 1994; President and
Born April 28, 1953 Chief Executive Officer of TCIC since October of 1994; Executive Vice
President and Chief Operating Officer of TCIC from March of 1992
to October of 1994; previously Senior Vice President of TCIC since
December of 1991; from January of 1987 through December of 1991, held
various executive positions with UAE and its predecessor, UACI, most
recently Executive Vice President and Chief Financial Officer.
Larry E. Romrell Executive Vice President of TCI since January of 1994. President of TCI
Born December 30, 1939 Technology Ventures, Inc., a wholly-owned subsidiary of TCI, since
September of 1994; Senior Vice President of TCIC from 1991 to October
of 1994; previously held various executive positions with WestMarc
Communications, Inc. ("WestMarc"), a wholly-owned subsidiary of TCI.
Barry P. Marshall Executive Vice President and Chief Operating Officer of TCIC since
Born March 4, 1946 October of 1994. Executive Vice President and Chief Operating Officer
of TCI Cable Management Corporation, TCIC's primary operating
subsidiary, from March of 1992 through January 1, 1994, where he
directly oversaw all of TCIC's regional operating divisions. From
1986 to March of 1992, was Vice President and Chief Operating Officer
of TCIC's largest regional operating division.
Gary K. Bracken Controller of TCIC since 1969. Appointed Senior Vice President of TCIC
Born July 29, 1939 in December of 1991. Was named Vice President and Principal Accounting
Officer of TCIC in 1982.
Bernard W. Schotters Appointed Senior Vice President-Finance and Treasurer of TCIC in
Born November 25, 1944 December of 1991. Was appointed Vice President-Finance of TCIC in
1984. Vice President and Treasurer of most of TCI's subsidiaries.
Robert N. Thomson Appointed Senior Vice President of TCIC in February of 1995. Senior
Born December 19, 1943 Vice President of Communications and Policy Planning for TCIC from 1991
to October of 1994. Previously, Vice President of Government Affairs
for TCIC from January of 1987 to 1991.
J. C. Sparkman Executive Vice President of TCI from January of 1994 through March 10,
Born September 12, 1932 1995. Mr. Sparkman retired in March of 1995. TCIC Executive Vice
President from 1987 to October of 1994.
</TABLE>
_______________________________
(1) Director's term expires in 1995.
(2) Director's term expires in 1996.
(3) Director's term expires in 1997.
(continued)
III-3
<PAGE> 169
There are no family relations, of first cousin or closer, among the
above named individuals, by blood, marriage or adoption, except that Bob
Magness and Kim Magness are father and son, respectively.
During the past five years, none of the above persons have had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires TCI's officers and directors, and persons who own more than ten
percent of a registered class of TCI's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish TCI with copies of all Section 16(a)
forms they file.
Based solely on review of the copies of such forms furnished to TCI,
or written representations that no Forms 5 were required, TCI believes that,
during the year ended December 31, 1994, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with except that one report each, covering the initial
reporting of shareholdings, was filed late by Mr. Romrell and Mr. Barton.
Item 11. Executive Compensation.
(a) Summary Compensation Table of Tele-Communications, Inc. The
following table shows, for the years ended December 31, 1994, 1993 and 1992 all
forms of compensation for the Chief Executive Officer and each of the four most
highly compensated executive officers of TCI, whose total annual salary and
bonus exceeded $100,000 for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
--------------------------------------------- ----------------------- -------
Other Securities
Annual Restricted Underlying
Compen- Stock Options/ LTIP All Other
sation Award(s) SARs Payouts Compensation
Position Year Salary ($) Bonus ($) ($)(4) ($) (#) ($) ($)
- -------- ---- ------------ --------- --------- ----------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bob Magness 1994 $830,769 --- $ --- --- --- --- $ 2,500 (9)
Chairman of the 1993 $800,000 --- $ --- --- --- --- $ 2,500 (9)
Board 1992 $488,250 --- $ 2,355 --- 1,000,000(7) --- $ 2,000 (9)
John C. Malone 1994 $821,731 (1) --- $ 2,610 --- --- --- $17,500 (8)(9)
President and Chief 1993 $800,000 (1) --- $ 2,726 --- --- --- $17,500 (8)(9)
Executive Officer 1992 $490,385 (1) --- $ 2,595 --- 1,000,000(7) --- $17,999 (8)(9)
Fred A. Vierra 1994 $669,613 (2) --- $ 1,024 --- 200,000(5) --- $15,000 (8)
Executive Vice 1993 $623,617 (2) --- $ 263 --- 100,000(6) --- $15,000 (8)
President 1992 $422,300 (2) --- --- --- 100,000(7) --- $ 8,728 (8)
Brendan R. Clouston 1994 $525,000 --- $ 1,000 --- 200,000(5) --- $15,000 (8)
Executive Vice 1993 $519,231 --- $ 263 --- 500,000(6) --- $15,000 (8)
President 1992 $279,476 --- --- --- 500,000(7) --- $ 8,728 (8)
J. C. Sparkman 1994 $756,750 (3) --- $ 2,745 --- --- --- $15,000 (8)
Executive Vice 1993 $738,000 (3) --- $ 2,823 --- --- --- $15,000 (8)
President 1992 $431,622 (3) --- $ 2,595 --- 100,000(7) --- $15,286 (8)
</TABLE>
____________________
(1) Includes deferred compensation of $320,000 in 1994 and $150,000 in
each of 1993 and 1992.
(continued)
III-4
<PAGE> 170
(2) Includes deferred compensation of $250,000, $250,000 and $41,667 in
1994, 1993 and 1992, respectively.
(3) Includes deferred compensation of $188,000, $188,000 and $31,333 in
1994, 1993 and 1992, respectively.
(4) Consists of amounts reimbursed during the year for the payment of
taxes.
(5) For additional information regarding this award, see Option/SAR Grants
Table below.
(6) The Company has a stock incentive plan, the Tele-Communications, Inc.
1994 Stock Incentive Plan (the "Plan"). Pursuant to the Agreement and
Plan of Merger, dated as of January 26, 1994, as amended, by and among
the Company, Liberty Media Corporation, TCI Communications, Inc.
(formerly Tele-Communications, Inc.), TCI Mergerco, Inc. and Liberty
Mergerco, Inc. (the "Merger Agreement") and certain Assumption and
Amended and Restated Stock Option Agreements, holders of stock options
and/or stock appreciation rights granted (or assumed) by TCIC and
holders of stock options and/or stock appreciation rights granted by
Liberty (collectively, the "Assumed Options and SARs") surrendered the
Assumed Options and SARs to TCI following the transactions whereby
TCIC and Liberty became wholly-owned subsidiaries of TCI (the
"TCI/Liberty Combination"). The Company assumed the Assumed Options
and SARs and in place thereof substituted new stock options and stock
appreciation rights under the Plan having substantially similar
terms. On October 12, 1993 certain executive officers and
other key employees were granted 1,355,000 options in tandem with
stock appreciation rights to acquire shares of TCI Class A common
stock at a purchase price of $16.75 per share. On November 12, 1993,
an additional grant of stock options in tandem with stock appreciation
rights to purchase an aggregate of 600,000 shares of TCI Class A
common stock was made to Messrs. Clouston and Vierra at a purchase
price of $16.75 per share. Such options represent a portion of the
Assumed Options and SARs. Such options vest evenly over four years,
first became exercisable on October 12, 1994 and expire on October 12,
2003. Notwithstanding the vesting schedule as set forth in the option
agreement, the option shares shall become available for purchase if
grantee's employment with the Company (a) shall terminate by reason of
(i) termination by the Company without cause (ii) termination by the
grantee for good reason (as defined in the agreement) or (iii)
disability, (b) shall terminate pursuant to provisions of a written
employment agreement, if any, between the grantee and the Company
which expressly permits the grantee to terminate such employment upon
occurrence of specified events (other than the giving of notice and
passage of time), or (c) if grantee dies while employed by the
Company. Further, the option shares will become available for
purchase in the event of an Approved Transaction, Board Change, or
Control Purchase (each as defined in the Plan), unless in the case of
an Approved Transaction, the Compensation Committee under the
circumstances specified in the Plan determines otherwise.
(continued)
III-5
<PAGE> 171
(7) On November 11, 1992, certain executive officers and other key
employees were granted 4,020,000 options in tandem with stock
appreciation rights to acquire shares of TCI Class A common stock at a
purchase price of $16.75 per share. Such options represent a portion
of the aforementioned Assumed Options and SARs. Such options vest and
become exercisable evenly over 5 years, first became exercisable
beginning on November 11, 1993 and expire on November 11, 2002.
Notwithstanding the vesting schedule as set forth in the option
agreement, the option shares shall become available for purchase if
grantee's employment with the Company (a) shall terminate by reason of
(i) termination by the Company without cause (ii) termination by
grantee for good reason (as defined in the agreement) or (iii)
disability, (b) shall terminate pursuant to provisions of a written
employment agreement, if any, between the grantee and the Company
which expressly permits the grantee to terminate such employment upon
occurrence of specified events (other than the giving of notice and
passage of time), or (c) if grantee dies while employed by the
Company. Further, the option shares will become available for
purchase in the event of an Approved Transaction, Board Change, or
Control Purchase (each as defined in the Plan), unless in the case of
an Approved Transaction, the Compensation Committee under the
circumstances specified in the Plan determines otherwise.
(8) Includes dollar value of annual TCI contributions to the TCI Employee
Stock Purchase Plan ("ESPP") in which all named executive officers are
fully vested. Directors who are not employees of TCI are ineligible
to participate in the ESPP. The ESPP, a defined contribution plan,
enables participating employees to acquire a proprietary interest in
TCI and benefits upon retirement. Under the terms of the ESPP,
employees are eligible for participation after one year of service.
The ESPP's normal retirement age is 65 years. Participants may
contribute up to 10% of their compensation and TCI (by annual
resolution of the Board of Directors) may contribute up to 100% of the
participants' contributions. The ESPP includes a salary deferral
feature in respect of employee contributions. Forfeitures (due to
participants' withdrawal prior to full vesting) are used to reduce
TCI's otherwise determined contributions. Generally, participants
acquire a vested right in TCI contributions as follows:
<TABLE>
<CAPTION>
Years of service Vesting Percentage
---------------- ------------------
<S> <C>
Less than 1 0
1-2 20
2-3 30
3-4 45
4-5 60
5-6 80
6 or more 100
</TABLE>
Participant contributions are fully vested. Although TCI has not
expressed an intent to terminate the ESPP, it may do so at any time.
The ESPP provides for full and immediate vesting of all participants
rights upon termination. During 1994, 1993 and 1992, TCI contributed
$15,000, $15,000 and $14,999, respectively, to the ESPP for Dr. Malone.
(9) Includes fees paid to directors for attendance at each meeting of the
Board of Directors ($500 per meeting). During 1994, 1993 and 1992, a
total of $2,500, $2,500 and $3,000 of such fees, respectively,
were paid to Dr. Malone.
III-6
<PAGE> 172
(b) Option/SAR Grants Table of Tele-Communications, Inc. The
following table shows all individual grants of stock options and stock
appreciation rights ("SARs") granted to each of the named executive officers of
TCI during the year ended December 31, 1994:
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs Market
SARs Granted Exercise or Price on Grant Date
Granted to Employees Base Price Grant Date Expiration Present Value
Name (#)(1) in Fiscal Year(1) ($/Sh) ($/Sh)(2) Date ($)(3)
- ---- --------- ----------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bob Magness --- --- --- --- --- ---
John C. Malone --- --- --- --- --- ---
Fred A. Vierra 200,000 6.2% $22.00 $24.125 November 17, 2004 $ 2,828,000
Brendan R. Clouston 200,000 6.2% $22.00 $24.125 November 17, 2004 $ 2,828,000
J.C. Sparkman --- --- --- --- --- ---
</TABLE>
_________________________
(1) On November 17, 1994, pursuant to the Plan, certain executive officers
and other key employees were granted 3,214,000 options in tandem with
stock appreciation rights to acquire shares of TCI Class A common
stock at a purchase price of $22.00 per share. Such options vest
evenly over five years, become exercisable beginning on November 17,
1995 and expire on November 17, 2004. Notwithstanding the vesting
schedule as set forth in the option agreement, the option shares shall
become available for purchase if grantee's employment with the Company
(a) shall terminate by reason of (i) termination by the Company
without cause (ii) termination by the grantee for good reason (as
defined in the agreement) or (iii) disability, (b) shall terminate
pursuant to provisions of a written employment agreement, if any,
between the grantee and the Company which expressly permits the
grantee to terminate such employment upon occurrence of specified
events (other than the giving of notice and passage of time), or (c)
if grantee dies while employed by the Company. Further, the option
shares will become available for purchase in the event of an Approved
Transaction, Board Change, or Control Purchase (each as defined in the
Plan), unless in the case of an Approved Transaction, the Compensation
Committee under the circumstances specified in the Plan determines
otherwise.
(2) Represents the closing market price per share of TCI Class A common
stock on November 17, 1994.
(3) The values shown are based on the Black-Scholes model and are stated
in current annualized dollars on a present value basis. The key
assumptions used in the model for purposes of this calculation include
the following: (a) a 7.25% discount rate; (b) a volatility factor
based upon TCI's historical trading pattern; (c) the 10-year option
term; and (d) the closing price of TCI's common stock on March 1,
1995. The actual value an executive may realize will depend upon the
extent to which the stock price exceeds the exercise price on the date
the option is exercised. Accordingly, the value, if any, realized by
an executive will not necessarily be the value determined by the
model.
III-7
<PAGE> 173
(c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR
Value Table of Tele-Communications, Inc. The following table shows each
exercise of stock options and SARs during the year ended December 31, 1994 by
each of the named executive officers of TCI and the December 31, 1994 year-end
value of unexercised options and SARs on an aggregated basis:
<TABLE>
<CAPTION> Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at at
December 31, December 31,
1994 (#) 1994 ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
----- ------------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Bob Magness
Exercisable --- --- 400,000 $ 2,000,000
Unexercisable --- --- 600,000 $ 3,000,000
John C. Malone
Exercisable --- --- 400,000 $ 2,000,000
Unexercisable --- --- 600,000 $ 3,000,000
Fred A. Vierra
Exercisable --- --- 9,714 $ 111,225
Exercisable --- --- 65,000 $ 325,000
Unexercisable --- --- 335,000 $ 675,000
Brendan R. Clouston
Exercisable --- --- 325,000 $ 1,625,000
Unexercisable --- --- 875,000 $ 3,375,000
J.C. Sparkman
Exercisable --- --- 40,000 $ 200,000
Unexercisable --- --- 60,000 $ 300,000
</TABLE>
(d) Compensation of directors. The standard arrangement by which
TCI's directors are compensated for all services (including any amounts payable
for committee participation or special assignments) as a director is as
follows: each director receives a fee of $500 plus travel expenses for
attendance at each meeting of the Board of Directors and each director who is
not a full-time employee of TCI receives additional compensation of $30,000 per
year. In addition, the Company's Board of Directors has approved, subject to
stockholder approval of the Director Stock Option Plan, the grant effective as
of November 16, 1994, to each person that as of such date was a member of the
Board of Directors and was not an employee of the Company or any of its
subsidiaries, of options to purchase 50,000 shares of Class A common stock.
Such options have a purchase price of $22.00 per share and will vest and become
exercisable over a five-year period, commencing on November 16, 1995, and will
expire on November 16, 2004. If the stockholders approve the Director Stock
Option Plan, each person who thereafter becomes a director of the Company and
is not an employee of the Company or any of its subsidiaries will be
automatically granted similar options upon such person's becoming a director.
The exercise price of each such subsequently granted option will be equal to
the fair market value of the Class A common stock on the date the option is
granted. In general, such fair market value will be 95% of the last sale price
for the shares of the Class A common stock as reported on the Nasdaq Stock
Market on the date of the grant, with the price resulting from such percentage
rounded down to the nearest quarter dollar.
Effective on November 1, 1992, the Company created a deferred
compensation plan for all non-employee directors. Each director may elect to
defer receipt of all, but not less than all, of the annual compensation
(excluding meeting fees and reimbursable expenses) payable to the director for
serving on the Company's Board of Directors for each calendar year for which
such deferral is elected. An election to defer may be made as to the
compensation payable for a single calendar year or period of years. Any
compensation deferred shall be credited to the director's account on the last
day of the quarter for which compensation has accrued. Such deferred
compensation will bear interest from the date credited to the date of payment
at a rate of 8% per annum in 1993 and 120% of the applicable federal long-term
rate thereafter, compounded annually.
III-8
<PAGE> 174
A director may elect payment of deferred compensation to be made at a
specified year in the future or upon termination of the director's service as
director of the Company. Each director may elect payment in a lump sum, three
substantially equal consecutive annual installments or five substantially equal
consecutive annual installments. In the event that a director dies prior to
payment of all the amounts payable pursuant to the plan, any amounts remaining
in the director's deferred compensation account, together with accrued interest
thereon, shall be paid to the director's designated beneficiary.
There are no other arrangements whereby any of TCI's directors
received compensation for services as a director during 1994 in addition to or
in lieu of that specified by the aforedescribed standard arrangement.
(e) Employment Contracts and Termination of Employment and Change
of Control Arrangements. Effective November 1, 1992 the employment agreements
between TCIC and Mr. Magness and Dr. Malone, as amended, were further amended
and restated. Pursuant to an Assignment and Assumption Agreement, dated August
4, 1994, the payment, performance and other obligations of such employment
agreements were assumed by TCI. The term of each agreement is extended daily
so that the remainder of the employment term shall at all times on and prior to
the effective date of the termination of employment as provided by each
agreement be five years. Dr. Malone's and Mr. Magness' employment agreements
provide for annual salaries of $800,000. Additionally, these employment
agreements provide for personal use of the Company's aircraft and flight crew,
limited to an aggregate value of $35,000 per year.
Dr. Malone's employment agreement provides, among other things, for
deferral of a portion (40% in 1993 and not in excess of 40% thereafter) of the
monthly compensation payable to him. Pursuant to a letter agreement entered
into between Dr. Malone and the Company subsequent to the date of his
employment agreement, Dr. Malone deferred $150,000 in 1993 in lieu of 40% of
his compensation for such year. The deferred amounts will be payable in
monthly installments over a 20-year period commencing on the termination of Dr.
Malone's employment, together with interest thereon at the rate of 8% per annum
compounded annually from the date of deferral to the date of payment. The
amendment also provides for the payment of certain benefits, discussed below.
Mr. Magness' and Dr. Malone's agreements described above also provide
that upon termination of such executive's employment by the Company (other than
for cause, as defined in the agreement), or if Mr. Magness or Dr. Malone elects
to terminate the agreement because of a change in control of the Company, all
remaining compensation due under the agreement for the balance of the
employment term shall be immediately due and payable.
Dr. Malone's and Mr. Magness' agreements provide that during their
employment with the Company and for a period of two years following the
effective date of their termination of employment with the Company, unless
termination results from a change in control of the Company, they will not be
connected with any entity in any manner, as defined in the agreement, which
competes in a material respect with the business of the Company. However, the
agreements provide that both executives may own securities of any corporation
listed on a national securities exchange or quoted in the Nasdaq System to the
extent of an aggregate of 5% of the amount of such securities outstanding.
III-9
<PAGE> 175
Dr. Malone's agreement also provides that in the event of termination
of his employment with the Company, he will be entitled to receive 240
consecutive monthly payments of $15,000 (increased at the rate of 12% per annum
compounded annually from January 1, 1988 to the date payment commences), the
first of which will be payable on the first day of the month succeeding the
termination of Dr. Malone's employment. In the event of Dr. Malone's death,
his beneficiaries will be entitled to receive the foregoing monthly payments.
The Company currently owns a whole-life insurance policy on Dr. Malone, the
face value of which is sufficient to meet its obligation under the salary
continuation arrangement. The premiums payable by the Company on such
insurance policy are currently being funded through earnings on the policy.
Dr. Malone has no interest in this policy.
The Company pays a portion of the annual premiums (equal to the
"PS-58" costs) on three whole-life insurance policies of which Dr. Malone is
the insured and trusts for the benefit of members of his family are the owners.
The Company is the designated beneficiary of the proceeds of such policies less
an amount equal to the greater of the cash surrender value thereof at the time
of Dr. Malone's death and the amount of the premiums paid by the policy owners.
Effective November 1, 1992, TCIC entered into an employment
agreement with Mr. Vierra which will expire on December 31, 1997. Pursuant to
an Assignment and Assumption Agreement, dated August 4, 1994, the payment,
performance and other obligations of such employment agreement were assumed by
TCI. Mr. Vierra's employment agreement provides for a salary of $650,000 per
year, of which approximately 38.46% of each monthly payment shall be deferred
so as to result in the deferral of payment of Mr. Vierra's salary at the rate
of $250,000 per annum. The deferred amounts will be paid in monthly
installments over a 240-month period commencing on the later of January 1, 1998
and the termination of Mr. Vierra's full-time employment with the Company,
together with interest thereon at the rate of 8% per annum compounded annually
from the date of deferral to the payment date. Additionally, Mr. Vierra's
employment agreement provides for personal use of the Company's aircraft and
flight crew, limited to an aggregate value of $35,000 per year.
Mr. Vierra's employment agreement provides that upon termination by
the Company without cause, all remaining compensation due under such agreement
for the balance of the employment term would become immediately due and payable
to such executive. Upon the death of such executive during the employment
term, the Company will pay to such executive's beneficiaries a lump sum in an
amount equal to the lesser of (i) the compensation due under such executive's
employment agreement for the balance of the employment term or (ii) one year's
compensation. In the event of such executive's disability, the Company will
continue to pay such executive his annual salary as and when it would have
otherwise become due until the first to occur of the end of the employment term
or the date of such executive's death.
(continued)
III-10
<PAGE> 176
Mr. Vierra's agreement provides that during his employment with the
Company and for a period of two years following the effective date of his
termination of employment with the Company, he will not be connected with any
entity in any manner, as defined in the agreement, which competes in a material
respect with the business of the Company. However, the agreement provides that
such executive may own securities of any corporation listed on a national
securities exchange or quoted in the Nasdaq System to the extent of an
aggregate of 5% of the amount of such securities outstanding. If such
executive terminates employment with the Company prior to the expiration of his
employment term or if the Company terminates such executive's employment for
cause, as defined in the agreement, then the noncompetition clause of the
agreement shall apply to the longer of the previously described two year period
or the period beginning on the effective date of termination of employment
through December 31, 1997.
Effective November 1, 1992, TCIC entered into an employment
agreement with Mr. Sparkman which would have expired on December 31, 1997.
Pursuant to an Assignment and Assumption Agreement, dated August 4, 1994 the
payment, performance and other obligations of such employment agreement were
assumed by TCI. Mr. Sparkman's employment agreement provided for a salary of
$738,000 per year, of which approximately 25.47% of each monthly payment was
deferred resulting in the deferral of payment of Mr. Sparkman's salary at the
rate of $188,000 per annum. The deferred amounts will be payable in monthly
installments over a 120-month period commencing on January 1, 1998, together
with interest thereon at the rate of 8% per annum compounded annually from the
date of deferral to the payment date. Additionally, Mr. Sparkman's employment
agreement provided for personal use of the Company's aircraft and flight crew,
limited to an aggregate value of $35,000 per year.
The Company will pay Mr. Sparkman 240 consecutive monthly payments of
$6,250 (increased at the rate of 12% per annum compounded annually from January
1, 1988) commencing upon the termination of his employment. In the event Mr.
Sparkman dies prior to the payment of all monthly payments, the remainder of
such payments shall be made to Mr. Sparkman's designated beneficiaries. The
Company owns a whole-life insurance policy on Mr. Sparkman, the face value of
which is sufficient to meet its obligations under this salary continuation
arrangement. The premiums payable by the Company on such insurance policy are
currently being funded through earnings on the policies. Mr. Sparkman has no
interest in this policy.
Dr. Malone and Mr. Sparkman each deferred a portion of their monthly
compensation under their previous employment agreements. Such deferred
compensation (together with interest thereon at the rate of 13% per annum
compounded annually from the date of deferral to the date of payment) will
continue to be payable under the terms of the previous agreements. The rate at
which interest accrues on such previously deferred compensation was established
in 1983 pursuant to such earlier agreements.
(f) Additional information with respect to Compensation Committee
Interlocks and Insider Participation in Compensation Decisions.
The members of the Company's compensation committee are Messrs. Robert
A. Naify and John W. Gallivan, both directors of the Company. Neither Mr.
Naify nor Mr. Gallivan are or were officers of the Company or any of its
subsidiaries.
Mr. R.E. Turner, a director of the Company, is the Chairman of the
Board and President of Turner Broadcasting System, Inc. ("TBS") and the
beneficial owner of 65.2% of the total voting power of all outstanding TBS
stock as of December 31, 1994. Mr. Fred A. Vierra, an Executive Vice President
of the Company, serves on the compensation committee of the Board of Directors
of TBS. During the year ended December 31, 1994, the Company and its affiliates
paid approximately $108 million to purchase certain cable television
programming from TBS.
During the year ended December 31, 1994, the Company paid
approximately $1.8 million to TBS relating to the lease of a satellite
transponder. The Company is committed to pay approximately $10.8 million
through the year 2000 pursuant to such lease.
During the year ended December 31, 1994, the Company and its
affiliates paid license fees of approximately $8 million to TBS for the rights
to exhibit certain motion pictures.
The TBS SuperStation signal is retransmitted by a common carrier,
Southern Satellite Systems, Inc. ("Southern"), which is controlled by an
indirect wholly-owned subsidiary of the Company. Southern is compensated by the
local cable systems receiving the retransmission of the TBS SuperStation and
does not have a contract with, or receive compensation from, TBS with respect
to such retransmission.
TBS and the Company each own a 44% indirect interest in SportSouth
Network Ltd. ("SportSouth"), a limited partnership that operates a regional
sports network serving the Southeast United States. SportSouth's revenue is
primarily derived from the sale of advertising and the subscription sale of its
service to cable television operators.
(continued)
III-11
<PAGE> 177
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a) Security ownership of certain beneficial owners. The
following table sets forth, as of February 10, 1995, information with respect
to the ownership of TCI Class A and Class B common stock, TCI Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B Preferred
Stock" ) and Convertible Preferred Stock, Series C ("Series C Preferred
Stock"), by each person known to the Company to own beneficially more than 5%
of any such class outstanding on that date. Shares issuable upon exercise or
conversion of convertible securities are deemed to be outstanding for the
purpose of computing the percentage of ownership and overall voting power of
persons beneficially owning such convertible securities, but have not been
deemed to be outstanding for the purpose of computing the percentage ownership
or overall voting power of any other person. Voting power in the table is
computed with respect to a general election of directors and, therefore, the
TCI Class B Preferred Stock is included in the calculation. The number of
shares of Dr. Malone includes interests of such individual in shares held by
the trustee of TCI's ESPP. So far as is known to TCI, the persons indicated
below have sole voting and investment power with respect to the shares
indicated as owned by them except as otherwise stated in the notes to the table
and except for the shares held by the trustee of the ESPP for the benefit of
Dr. Malone, which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
Amount and
Title Nature of
of Name and Address Beneficial Percent Voting
Class of Beneficial Owner Ownership of Class(1) Power
----- ------------------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Class A Bob Magness, Chairman of 4,626,938 (2)(3)(4) * 26.25%
Class B the Board and a Director 37,132,076 (2)(4)(7) 43.63%
Class B Pref. 5619 DTC Parkway 125,000 7.72%
Series C Pref. Englewood, Colorado -- --
Class A John C. Malone, President 1,169,983 (5) * 18.04%
Class B and a Director 25,697,083 (6)(7)(8) 30.19%
Class B Pref. 5619 DTC Parkway 306,000 (6)(8) 18.89%
Series C Pref. Englewood, Colorado -- --
Class A Kearns-Tribune Corporation 8,792,514 (4) 1.54% 6.98%
Class B 400 Tribune Building 9,112,500 (4)(7) 10.71%
Class B Pref Salt Lake City, Utah 67,536 4.17%
Series C. Pref -- --
Class A The Associated Group, Inc. 12,479,976 2.18% 5.81%
Class B 200 Gateway Towers 7,071,852 8.31%
Class B Pref. Pittsburgh, Pennsylvania 41,598 2.57%
Series C Pref. -- --
Class A The Equitable Life Assurance 30,733,246 (9) 5.38% 2.15%
Class B Society of the United States -- --
Class B Pref 787 Seventh Avenue -- --
Series C Pref. New York, New York -- --
Class A The Capital Group Companies, 42,352,180 (10) 7.41% 2.96%
Class B Inc. -- --
Class B Pref. 333 South Hope Street -- --
Series C Pref. Los Angeles, California -- --
- --------------------
</TABLE>
* Less than one percent.
(continued)
III-12
<PAGE> 178
(1) Based on 571,690,775 shares of TCI Class A common stock, 85,114,800
shares of TCI Class B common stock, 1,620,026 shares of TCI Class B Preferred
Stock and 70,559 shares of Series C Preferred Stock outstanding on February 10,
1995 (after elimination of shares of TCI held by subsidiaries of TCI).
(2) Mr. Magness, as executor of the Estate of Betsy Magness, is the
beneficial owner of all shares of TCI Class A and Class B common stock held of
record by the Estate of Betsy Magness. The number of shares in the table
includes 2,105,332 shares of Class A and 6,346,212 shares of Class B common
stock of which Mr. Magness is beneficial owner as executor.
(3) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 1,000,000 shares of
TCI Class A common stock. Options to acquire 400,000 shares of TCI Class A
common stock are currently exercisable. See note 7 to the table in Item 11(a)
for additional information.
(4) Mr. Magness and Kearns-Tribune Corporation ("Kearns") are parties to a
buy-sell agreement, entered into in October of 1968, as amended, under which
neither party may dispose of their shares without notification of the proposed
sale to the other, who may then buy such shares at the offered price, sell all
of their shares to the other at the offered price or exchange one of their
Class A shares for each Class B share held by the other and purchase any
remaining Class B shares at the offered price. There are certain exceptions,
including transfers to specified persons or entities, certain public sales of
Class A shares and exchanges of Class A shares for Class B shares.
(5) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 1,000,000 shares of
TCI Class A common stock. Options to acquire 400,000 shares of TCI Class A
common stock are currently exercisable. See note 7 to the table in Item 11(a)
for additional information.
(6) Includes 1,173,000 shares of TCI Class B common stock and 6,900 shares
of Class B Preferred Stock held by Dr. Malone's wife, Mrs. Leslie Malone, but
Dr. Malone has disclaimed any beneficial ownership of such shares.
(7) Pursuant to a letter agreement, dated June 17, 1988, Mr. Magness and
Kearns-Tribune each agreed with Dr. Malone that prior to making a disposition
of a significant portion of their respective holdings of TCI Class B common
stock, he or it would first offer Dr. Malone the opportunity to purchase such
shares.
(8) The number of shares of TCI Class B common stock and TCI Class B
Preferred Stock in the table includes 6,240,000 and 80,000 TCI Restricted
Voting Shares, respectively, that are subject to repurchase by TCI under
certain circumstances. Until they cease to be subject to TCI's repurchase
right, such shares may not be transferred and, with respect to any matter
submitted to a vote of the stockholders of TCI, the votes represented thereby
will be cast in the same proportion as all other votes are cast with respect to
such matter. The number of shares of TCI common stock and Class B Preferred
Stock in the table which are not subject to such repurchase rights and voting
requirements represent 13.68% of the total voting power of the shares of TCI
common stock, TCI Class B Preferred Stock and Series C Preferred Stock
outstanding (excluding the 6,240,000 and 80,000 TCI Restricted Voting Shares
from such total voting power).
(continued)
III-13
<PAGE> 179
(9) The number of shares in the table is based upon a Schedule 13G, dated
February 10, 1995, filed by The Equitable Life Assurance Society of the United
States which Schedule 13G reflects that said corporation has sole voting power
over 21,927,390 shares and shared voting power over 619,318 shares of Class A
common stock of the Company. No information is given in respect to voting
power over the remaining shares.
(10) The number of shares in the table is based upon a Schedule 13G, dated
February 8 1995, filed by The Capital Group Companies, Inc. Certain operating
subsidiaries of The Capital Group Companies, Inc. exercised investment
discretion over various institutional accounts which held as of December 31,
1994, 42,352,180 shares of TCI Class A common stock. Capital Guardian Trust
Company, a bank, and one of such operating companies, exercised investment
discretion over 6,471,333 of said shares. Capital Research and Management
Company, registered investment advisor, and Capital International, Ltd. and
Capital International, S.A., other operating subsidiaries, had investment
discretion with respect to 35,655,750, 137,770 and 87,310 shares, respectively,
of the above shares.
(b) Security ownership of management. The following table sets
forth, as of February 10, 1995, information with respect to the ownership of
TCI Class A and Class B common stock (other than directors' qualifying shares),
Class B Preferred Stock and Series C Preferred Stock by all directors and each
of the named executive officers of TCI, other than those listed in the table in
Item 12(a), and by all executive officers and directors of TCI as a group.
Shares issuable upon exercise or conversion of convertible securities are
deemed to be outstanding for the purpose of computing the percentage ownership
and overall voting power of persons beneficially owning such convertible
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other person.
Voting power in the table is computed with respect to a general election of
directors and therefore the TCI Class B Preferred Stock is included in the
calculation. The number of Class A and Class B shares in the table include
interests of the named directors or executive officers or of members of the
group of directors and executive officers in shares held by the trustee of
TCI's ESPP and shares held by the trustee of UAE's Employee Stock Ownership
Plan for their respective accounts. So far as is known to TCI, the persons
indicated below have sole voting and investment power with respect to the
shares indicated as owned by them except as otherwise stated in the notes to
the table and except for the shares held by the trustee of TCI's ESPP for the
benefit of such person, which shares are voted at the discretion of the
trustee.
(continued)
III-14
<PAGE> 180
<TABLE>
<CAPTION>
Name of Amount and Nature Percent Voting
Title of Class Beneficial Owner of Beneficial Ownership of Class Power
-------------- ---------------- ----------------------- -------- ------
<S> <C> <C> <C> <C>
Class A Donne F. Fisher 543,934 (2) * *
Class B 249,072 *
Class B Pref. 3,464 *
Series C Pref. -- --
Class A John W. Gallivan 2,124 (3) * *
Class B -- --
Class B Pref. 14 *
Series C Pref. -- --
Class A Kim Magness -- -- *
Class B 518,000 *
Class B Pref. -- --
Series C Pref. -- --
Class A Jerome H. Kern 2,000,000 (4) * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A R.E. Turner 60,000 (5) * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A Tony Coehlo 800 * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A Robert A. Naify 23,638,860 (9) 3.98% 1.63%
Class B -- --
Class B Pref. 1,000 *
Series C. Pref -- --
Class A Fred A. Vierra 762,551 (6) * *
Class B -- --
Class B Pref. 200 *
Series C Pref. -- --
Class A Brendan R. Clouston 1,208,969 (8) * *
Class B 230 *
Class B Pref. -- --
Series C Pref. -- --
Class A J.C. Sparkman 247,359 (7) * *
Class B -- --
Class B Pref. -- --
Series C Pref. -- --
Class A All directors and 36,967,784 (1)(2)(3)(4)(5)(6) 6.14% 46.05%
executive officers (7)(8)(9)(10)(11)
Class B as a group 63,601,807 (1)(11) 74.72%
Class B Pref. (19 persons) 438,884 27.09%
Series C Pref. -- --
</TABLE>
_________________________
* Less than one percent.
(continued)
III-15
<PAGE> 181
(1) See notes 1 through 8 to the table in Item 12(a).
(2) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1994 to acquire 200,000 shares of TCI
Class A common stock. None of the options are exercisable until November 17,
1995. See note 1 to the table in Item 11(b) for additional information.
(3) Includes 1,524 shares of TCI Class A common stock held by Mr.
Gallivan's wife.
(4) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights to acquire 2,000,000 shares of TCI Class A common
stock at a purchase price of $16.75 per share. Options to acquire 800,000
shares are currently exercisable and the remainder vest and become exercisable
evenly over three years. The options expire on October 12, 1998.
(5) Includes 50,000 shares of TCI Class A common stock held in trust of
which Mr. Turner is the trustee and beneficiary. Includes 10,000 shares of TCI
Class A common stock held in trust of which Mr. Turner's wife is trustee.
(6) Assumes the exercise in full of stock options, granted in August of
1990, to purchase an aggregate of 9,714 shares of TCI Class A common stock at
an adjusted price of $10.30 per share. All such options are fully exercisable.
Also assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 100,000 shares of TCI Class
A common stock. Options to acquire 40,000 shares of TCI Class A common stock
are currently exercisable. See note 7 to the table in Item 11(a) for
additional information. Also assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in November of 1993 to acquire
100,000 shares of TCI Class A common stock. Options to acquire 25,000 shares
of TCI Class A common stock are currently exercisable. See note 6 to the table
in Item 11(a) for additional information. Additionally assumes the exercise in
full of stock options granted in tandem with stock appreciation rights in
November of 1994 to acquire 200,000 shares of TCI Class A common stock. None
of these options are exercisable until November 17, 1995. See note 1 to the
table in Item 11(b) for additional information.
(7) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 100,000 shares of TCI
Class A common stock. All such options became fully exercisable upon
retirement by Mr. Sparkman. See note 7 to the table in Item 11(a) for
additional information.
(8) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 500,000 shares of TCI
Class A common stock. Options to acquire 200,000 shares of TCI Class A common
stock are currently exercisable. See note 7 to the table in Item 11(a) for
additional information. Additionally, assumes the exercise in full of stock
options granted in tandem with stock appreciation rights in November of 1993 to
acquire 500,000 shares of TCI Class A common stock. Options to acquire 125,000
shares of TCI Class A common stock are currently exercisable. See note 6 to
the table in Item 11(a) for additional information. Also assumes the exercise
in full of stock options granted in tandem with stock appreciation rights in
November of 1994 to acquire 200,000 shares of TCI Class A common stock. None
of the options are exercisable until November 17, 1995. See note 1 to the
table in Item 11(b) for additional information.
(continued)
III-16
<PAGE> 182
(9) Mr. Robert Naify received notes, which are currently convertible into
22,446,926 shares of TCI Class A common stock, as partial consideration for the
sale to TCI of the stock owned by him in UACI. Mr. Naify is also a co-trustee,
along with Mr. Naify's brother, Marshall, and their sister, of a trust for the
benefit of Marshall which holds additional notes convertible into 341,606
shares of TCI Class A common stock. The number of shares in the table assumes
the conversion of these notes.
(10) Certain executive officers and directors of TCI (11 persons, including
Messrs. Magness, Malone, Sparkman, Vierra and Clouston) hold options which were
granted in tandem with stock appreciation rights in November of 1992, to
acquire 3,325,000 shares of TCI Class A common stock at a purchase price of
$16.75 per share. Options to acquire 1,390,000 of such shares are currently
exercisable. Additionally certain executive officers (8 persons including
Messrs. Vierra and Clouston) hold stock options which were granted in tandem
with stock appreciation rights in October and November of 1993, to acquire
1,225,000 shares of TCI Class A common stock at a purchase price of $16.75 per
share. Options to acquire 306,250 of such shares are currently exercisable.
Additionally, Mr. Vierra holds an option to acquire 9,714 shares of Class A
common stock as described in note 6 above and Mr. Kern holds an option to
acquire 2,000,000 shares of Class A common stock as described in note 4 above.
Also certain executive officers and directors (9 persons including Messrs.
Fisher, Vierra and Clouston) hold stock options which were granted in tandem
with stock appreciation rights in November of 1994, and become exercisable (as
to 20% of the shares covered thereby) in November of 1994 to acquire 3,214,000
shares of TCI Class A common stock at a purchase price of $22.00 per share.
The number of TCI Class A shares in the table assumes the exercise of these
options.
(11) The number of shares in the table does not include any shares held by
Kearns, of which Mr. Gallivan is an officer.
No equity securities in any subsidiary of the Company, other than
directors' qualifying shares, are owned by any of the Company's executive
officers or directors, except that Mr. Bob Magness, a director and an executive
officer of the Company, owns 944 shares of WestMarc Series B Cumulative
Compounding Redeemable Preferred Stock; Mr. Kim Magness, a director of the
Company, owns 31 shares of WestMarc Series B Cumulative Compounding Redeemable
Preferred Stock; Dr. Malone, a director and an executive officer of the
Company, owns, as trustee for his children, 68 shares of WestMarc Series B
Cumulative Compounding Redeemable Preferred Stock; Mr. Larry Romrell, an
officer of the Company, owns 103 shares of WestMarc Series B Cumulative
Compounding Redeemable Preferred Stock and Mr. Jerome Kern, a director of the
Company, owns 116 shares of WestMarc Series B Cumulative Compounding Redeemable
Preferred Stock, including 58 shares owned by his wife, Diane D. Kern, over
which Mr. Kern is deemed to have beneficial ownership. Mr. Kern has disclaimed
any beneficial ownership of such shares owned by Mrs. Kern. Mr. Donne Fisher,
a director and executive officer of the Company, pursuant to a Restricted Stock
Award Agreement dated December 10, 1992, was transferred the right, title and
interest in and to 124.03 shares (having a liquidation value of $4 million) of
WestMarc Series B Cumulative Compounding Redeemable Preferred Stock owned by
the Company. Such preferred stock held by Mr. Fisher is subject to forfeiture
in the event of certain circumstances from the date of grant through February
1, 2002, decreasing by 10% on February 1 of each year.
(c) Change of control. The Company knows of no arrangements,
including any pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control of the Company.
(continued)
III-17
<PAGE> 183
Item 13. Certain Relationships and Related Transactions.
(a) Transactions with management and others.
Mr. Bob Magness and Dr. John Malone, each of whom is a director and
executive officer of the Company, are also directors of TCIC. During 1994 and
prior to the TCI/Liberty Combination, they were also directors of Liberty, and
Dr. Malone has been an executive officer of Liberty since 1990. As of January
27, 1994, TCIC (formerly Tele-Communications, Inc. or "Old TCI") and Liberty
entered into a definitive agreement to combine the two companies. The
TCI/Liberty Combination was consummated on August 4, 1994 and 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 a newly formed holding company,
Tele-Communications, Inc. (formerly TCI/Liberty Holding Company). In
connection with the TCI/Liberty Combination, Old TCI changed its name to TCI
Communications, Inc. and TCI/Liberty Holding Company changed its name to
Tele-Communications, Inc. Old TCI common 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 shares. Holders of Liberty Class E, 6%
Cumulative Redeemable Exchangeable Junior Preferred Stock ("Liberty Class E
Preferred Stock") received shares of Class B Preferred Stock, a new preferred
stock of TCI having designations, preferences, rights and qualifications,
limitations and restrictions that are substantially identical to those of the
Liberty Class E Preferred Stock, except that the holders of the new preferred
stock are entitled to one vote per share in any general election of directors
of TCI. The other classes of preferred stock of Liberty held by Old TCI were
converted into Class A Preferred Stock, a new series of preferred stock of TCI
having a substantially equivalent fair market value to that which was given up.
During 1992, TCIC and Liberty formed Community Cable Television
("CCT"), a general partnership created for the purpose of acquiring and
operating cable television systems with Tele-Communications of Colorado, Inc.,
an indirect wholly-owned subsidiary of TCI, owning a 49.999% interest and
Liberty Cable Partner, Inc., an indirect wholly-owned subsidiary of Liberty,
owning a 50.001% interest. Pursuant to a cable management agreement, a
subsidiary of TCI provided management services for cable systems owned by CCT.
The subsidiary received a fee equal to 3% of the gross cable television revenue
of CCT through the date of the TCI/Liberty Combination. From January 1, 1994
through August 4, 1994, CCT paid $2,044,099 under the agreement.
Satellite Services, Inc. ("SSI"), a wholly-owned subsidiary of TCIC,
purchased sports and other programming from certain subsidiaries and affiliates
of Liberty through the date of the TCI/Liberty Combination. Charges to SSI
(which were based upon customary rates charged to others) for such programming
were $27,284,419 from January 1, 1994 through August 4, 1994. Certain
subsidiaries and affiliates of Liberty purchased, at TCIC's cost plus in some
cases an administrative fee of up to 10% of the rates actually charged, certain
pay television and other programming through SSI through the date of the
TCI/Liberty Combination. In addition, a consolidated subsidiary of Liberty
paid a commission to TCIC for merchandise sales to customers who are subscribers
of TCIC's cable systems. Aggregate commissions and charges for such
programming were $9,798,431 from January 1, 1994 through August 4, 1994.
TCIC and Liberty were parties to a services agreement pursuant to which
TCIC agreed to provide certain financial reporting, tax and other
administrative services to Liberty. A subsidiary of Liberty also leased office
space and satellite transponder facilities from TCIC. Charges by TCIC for such
services and leases amounted to 124,859 for the period from January 1, 1994
through August 4, 1994.
(continued)
III-18
<PAGE> 184
Encore QE Programming Corp. ("QEPC"), a wholly-owned subsidiary of
Encore Media Corporation ("EMC"), a 90% owned subsidiary of Liberty, entered
into a limited partnership agreement with TCI Starz, Inc. ("TCIS"), a
wholly-owned subsidiary of TCIC, for the purpose of developing, operating and
distributing STARZ!, a first-run movie premium programming service launched in
1994. QEPC is the general partner and TCIS is the limited partner. Losses are
allocated 1% to QEPC and 99% to TCIS. Profits are allocated 1% to QEPC and 99%
to TCIS until certain defined criteria are met. Subsequently, profits are
allocated 20% to QEPC and 80% to TCIS. TCIS has the option, exercisable at any
time and without payment of additional consideration, to convert its limited
partner interest to an 80% general partner interest with QEPC's partnership
interest simultaneously converting to a 20% limited partnership interest. In
addition, during specific periods commencing April 1999 and April 2001,
respectively, QEPC may require TCIS to purchase, or TCIS may require QEPC to
sell, the partnership interest of QEPC in the partnership for a formula-based
price. EMC is paid a management fee equal to 20% of "managed costs" as defined,
in order to manage the service. From January 1, 1994 through the TCI/Liberty
Combination, EMC earned approximately $2,145,000 in management fees. EMC has
agreed to provide the limited partnership with certain programming under a
programming agreement whereby the partnership will pay its pro rata share of
the total costs incurred by EMC for such programming.
During 1994, Peachtree Cable TV, Inc. ("Peachtree"), a Nevada
corporation wholly owned by certain employees of TCIC, including Messrs.
Thomson, Schotters, Marshall and Bracken (executive officers of TCIC), paid
$76,859 in management fees to TCIC for the operation and management of
Peachtree's cable television systems.
The Company believes that the foregoing business dealings with
management during 1994 were based upon terms no less advantageous to the
Company or TCIC, as applicable, than those which would be available in dealing
with unaffiliated persons.
(b) Certain business relationships
Mr. Jerome H. Kern, a director of TCI, is a partner with the law firm
of Baker & Botts, L.L.P., the principal outside counsel for TCI. Fees paid to
Baker & Botts, L.L.P. by TCI and TCIC were $10,069,871 for the last full
fiscal year.
See also Item 13(a) above.
(c) Indebtedness of management
On February 3, 1994, Dr. Malone, an executive officer and director of
TCIC borrowed $310,000 from TCIC. Such indebtedness bore interest at the Bank
of New York prime rate. Dr. Malone repaid such indebtedness, including accrued
interest amounting to $1,733, on March 10, 1994.
On October 24, 1991, Dr. Malone exercised certain options granted to
him by Liberty through the delivery of $100,000 in cash and a promissory note
in the amount of $25,500,000. The promissory note Dr. Malone delivered to
Liberty bore interest at the rate of 7.54% per annum, and was secured by
16,000,000 shares of Liberty Class B common stock and 200,000 shares of Liberty
Class E Preferred Stock. On October 24, 1991, Dr. Malone tendered to Liberty
in partial payment of such note 800,000 shares of TCIC's Class B common stock,
resulting in a net reduction of $12,194,877 in the amount payable under the
note.
On October 24, 1992, Dr. Malone and Liberty entered into a letter
agreement with respect to the timing and method of payment under the promissory
note and the release of the 200,000 shares of Class E Preferred Stock from the
collateral securing the promissory note. The letter agreement provided that
the $12,194,877 payment on the promissory note would be applied as follows: (1)
$10,999,436 to the principal balance; (2) $192,195 as a prepayment of interest
on the reduced principal balance accrued during calendar 1991 (after giving
effect to a discount at the rate of 7.54% per annum to reflect the time value
of money received prior to the scheduled payment date (the "Discount Rate"));
and (3) $1,003,246 as a prepayment of interest on the reduced principal balance
accrued during calendar 1992 (after giving effect to the Discount Rate). Dr.
Malone also agreed to make a payment in March 1993 in the amount of $983,823
from the proceeds of dividends received on his shares of Class E Preferred
Stock, which amount would be applied to payment of all interest accruing during
calendar 1993 (after giving effect to the Discount Rate) and not to tender
shares of the Class E Preferred Stock to Liberty to pay any of his
obligations under the promissory note without Liberty's consent.
TCI assumed such note receivable from Dr. Malone in the TCI/Liberty
Combination. On October 27, 1994, Dr. Malone tendered to the Company 634,917
shares of TCI Class B common stock as payment in full of principal amounting to
$14,500,564 and accrued interest amounting to $896,182. The market value of
the tendered shares was based on the last sales price of $24.25 for the shares
of TCI's Class A common stock on October 26, 1994.
III-19
<PAGE> 185
PART IV.
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- ----------------------------------------------------------------
(a) (1) Financial Statements
Included in Part II of this Report: Page No.
--------
<S> <C>
Tele-Communications, Inc.:
Independent Auditors' Report II-27
Consolidated Balance Sheets,
December 31, 1994 and 1993 II-28 to II-29
Consolidated Statements of Operations,
Years ended December 31, 1994, 1993 and 1992 II-30
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1994, 1993 and 1992 II-31 to II-32
Consolidated Statements of Cash Flows,
Years ended December 31, 1994, 1993 and 1992 II-33 to II-34
Notes to Consolidated Financial Statements,
December 31, 1994, 1993 and 1992 II-35 to II-75
TCI Communications, Inc.:
Independent Auditors' Report II-76
Consolidated Balance Sheets,
December 31, 1994 and 1993 II-77 to II-78
Consolidated Statements of Operations,
Years ended December 31, 1994, 1993 and 1992 II-79
Consolidated Statements of Stockholder's(s') Equity,
Years ended December 31, 1994, 1993 and 1992 II-80 to II-81
Consolidated Statements of Cash Flows,
Years ended December 31, 1994, 1993 and 1992 II-82 to II-83
Notes to Consolidated Financial Statements,
December 31, 1994, 1993 and 1992 II-84 to II-109
</TABLE>
IV-1
<PAGE> 186
(a) (2) Financial Statement Schedules
<TABLE>
<CAPTION>
Included in Part IV of this Report:
(i) Financial Statement Schedules required to be filed: Page No.
--------
<S> <C>
Tele-Communications, Inc.:
Independent Auditors' Report IV-12
Schedule I - Condensed Information as to the
Financial Position of the Registrant, December 31, 1994;
Condensed Information as to the Operations and Cash Flows
of the Registrant, Year ended December 31, 1994 IV-13 to IV-15
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1994, 1993 and 1992 IV-16
TCI Communications, Inc.:
Independent Auditors' Report IV-17
Schedule I - Condensed Information as to the
Financial Position of the Registrant, December 31, 1994
and 1993; Condensed Information as to the Operations
and Cash Flows of the Registrant, Years ended December 31, 1994,
1993 and 1992 IV-18 to IV-20
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1994, 1993 and 1992 IV-21
</TABLE>
All other schedules have been omitted because they are not required or
are not applicable, or the required information is set forth in the
applicable financial statements or notes thereto.
IV-2
<PAGE> 187
(ii) Separate financial statements for TeleWest Communications plc:
<TABLE>
<CAPTION>
Consolidated Financial Statements Page No.
--------------------------------- --------
<S> <C>
Independent Auditors' Report IV-22
Consolidated Statement of Operations IV-23 to IV-24
Consolidated Balance Sheet IV-25
Consolidated Statement of Cash Flows IV-26 to IV-27
Consolidated Statement of Shareholders' Equity IV-28
Notes to Consolidated Financial Statements IV-29 to IV-39
</TABLE>
IV-3
<PAGE> 188
(a) (3) Exhibits
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3 - Articles of Incorporation and Bylaws:
The Restated Certificate of Incorporation, dated August 4, 1994, as
amended on August 4, 1994, August 16, 1994, October 11, 1994,
October 21, 1994 and January 26, 1995.
The Bylaws as adopted June 16, 1994.
Restated Certificate of Incorporation, dated as of August 4, 1994.
Bylaws as adopted August 4, 1994.
10 - Material Contracts:
Tele-Communications, Inc. 1994 Stock Incentive Plan
Incorporated herein by reference to the Company's Form S-4
Registration Statement. (Commission File No. 33-54263)
Restated and Amended Employment Agreement, dated as of November 1,
1992, between the Company and Bob Magness.*
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, as amended
by Form 10-K (amendment #1) for the year ended December 31,
1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Bob
Magness.*
Restated and Amended Employment Agreement, dated as of November 1,
1992, between the Company and John C. Malone.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and John C.
Malone.*
Employment Agreement, dated as of November 1, 1992, between
Tele-Communications, Inc. and J. C. Sparkman.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and J. C.
Sparkman.*
Employment Agreement, dated as of January 1, 1992, between
Tele-Communications, Inc. and Donne F. Fisher.*
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, as amended
by Form 10-K/A (amendment #1) for the year ended December 31,
1992. (Commission File No. 0-5550)
(continued)
IV-4
<PAGE> 189
10 - Material contracts, continued:
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Donne F.
Fisher.*
Restricted Stock Award Agreement, made as of December 10, 1992, among
Tele-Communications, Inc., Donne F. Fisher and WestMarc
Communications, Inc.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992. (Commission File No. 0-5550)
Deferred Compensation Plan for Non-Employee Directors, effective on
November 1, 1992.*
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, as
amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992.
(Commission File No. 0-5550)
Employment Agreement, dated as of November 1, 1992, between
Tele-Communications, Inc. and Fred A. Vierra.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Fred A.
Vierra.*
Employment Agreement, dated as of January 1, 1993, between
Tele-Communications, Inc. and Larry E. Romrell.*
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Larry E.
Romrell.*
Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1993. (Commission File No. 0-5550)
Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1993. (Commission File No. 0-5550)
(continued)
IV-5
<PAGE> 190
10 - Material contracts, continued:
Non-Qualified Stock Option and Stock Appreciation Rights Agreement,
dated as of November 12, 1993, by and between Tele-Communications,
Inc. and Jerome H. Kern.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1993. (Commission File No. 0-5550)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, Liberty Media Corporation and grantee relating
to stock appreciation rights granted pursuant to letter dated
September 17, 1991.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, Liberty Media Corporation and grantee relating
to the assumption of options and related stock appreciation rights
granted under the Liberty Media Corporation 1991 Stock Incentive
Plan pursuant to letter dated July 26, 1993.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Assumption and Amended and Restated Stock Option Agreement between the
Company, TCI/Liberty Holding Company and a director of
Tele-Communications, Inc. relating to assumption of options and
related stock appreciation rights granted outside of an employee
benefit plan pursuant to Tele-Communications, Inc.'s 1993
Non-Qualified Stock Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of options and related stock appreciation
rights granted under Tele-Communications, Inc.'s 1992 Stock
Incentive Plan pursuant to Tele-Communications, Inc.'s 1993
Non-Qualified Stock Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of grants pursuant to the Agreement and Plan
of Merger dated June 6, 1991 between United Artists Entertainment
Company and Tele-Communications, Inc.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
(continued)
IV-6
<PAGE> 191
10 - Material contracts, continued:
Form of letter dated September 17, 1991 from Liberty Media Corporation
to grantee relating to grant of stock appreciation rights.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration Statement
on Form S-8 Registration Statement. (Commission File
No. 33-54263)
Form of letter dated July 26, 1993 from Liberty Media Corporation to
grantee relating to grant of options and stock appreciation rights.
Incorporated by reference to Tele-Communications, Inc.'s Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of options and related stock appreciation
rights under Tele-Communications, Inc.'s 1992 Stock Incentive Plan
pursuant to Tele-Communications, Inc.'s 1992 Non-Qualified Stock
Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-54263)
Forms of Assumption and Amended and Restated Stock Option Agreements
relating to options granted under the United Artists Entertainment
Company 1988 Incentive and Non-Qualified Stock Option Plan and
executed by employees who did not have employment agreements with
United Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Forms of Assumption and Amended and Restated Stock Option Agreements
relating to options granted under the United Artists Entertainment
Company 1988 Incentive and Non-Qualified Stock Option Plan and
executed by employees who had employment agreements with United
Artists Entertainment.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Forms of Second Assumption and Amended and Restated Stock Option
Agreements relating to options granted under the Amended and
Restated United Artists Communications, Inc. 1983 Stock Option Plan
and executed by employees who did not have employment agreements
with United Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications Inc.'s
Post-Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement. (Commission
File No. 33-43009)
(continued)
IV-7
<PAGE> 192
10 - Material contracts, continued:
Forms of Second Assumption and Amended and Restated Stock Option
Agreements relating to options granted under the Amended and
Restated United Artists Communications, Inc. 1983 Stock Option Plan
and executed by employees who had employment agreements with United
Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Form of Indemnification Agreement.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1993. (Commission File No. 0-5550)
Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Qualified Employee Stock Purchase Plan of Tele-Communications, Inc.,
as amended.*
Incorporated herein by reference to the Tele-Communications,
Inc. Registration Statement on Form S-8.
(Commission File No. No. 33-59058)
Second Amendment to Community Cable Television General Partnership
Agreement, dated March 12, 1993, between Tele-Communications of
Colorado, Inc. and Liberty Cable Partner, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Agreement to Purchase and Sell Partnership Interests, dated as of
January 29, 1993, among Mile Hi Cable Partners, L.P., Mile Hi
Cablevision, Inc., Time Warner Entertainment Company, L.P.,
Daniels & Associates Partners Limited, Daniels Communications,
Inc., Cablevision Associates, Ltd., and John Yelenick and Maria
Garcia-Berry, as agents for the limited partners.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated March 24,
1993. (Commission File No. 0-19036)
Loan and Security Agreement, dated January 28, 1993, among Community
Cable Television and Robert L. Johnson, the Paige Johnson Trust and
the Brett Johnson Trust.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated
March 24, 1993. (Commission File No. 0-19036)
Agreement of Limited Partnership, dated as of January 28, 1993 among
P & B Johnson Corp., Community Cable Television and Daniels
Communications, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated March 24,
1993. (Commission File No. 0-19036)
(continued)
IV-8
<PAGE> 193
10- Material contracts, continued:
Recapitalization Agreement, dated March 26, 1993, among Liberty Media
Corporation, TCI Liberty, Inc. and Tele-Communications of Colorado,
Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Amendment to Recapitalization Agreement, dated June 3, 1993, between
Liberty Media Corporation, TCI Liberty and Tele-Communications of
Colorado, Inc.
$18,539,442 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
$66,900,000 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
$10,052,000 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
$86,105,000 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
Pledge and Security Agreement, dated June 3, 1993, between Liberty
Cable Partner, Inc. and Tele-Communications of Colorado, Inc.
Stock Pledge and Security Agreement, dated June 3, 1993, between
Liberty Capital Corp. and Liberty Cable, Inc., and
Tele-Communications of Colorado, Inc.
Option-Put Agreement, dated June 3, 1993, between Tele-Communications
of Colorado, Inc. and Liberty Cable Partner, Inc.
Assignment and Assumption Agreement, dated June 3, 1993, between
Liberty Cable Partner, Inc. and TCI Holdings, Inc.
Option Agreement dated June 3, 1993, between TCI Holdings, Inc. and
Liberty Cable Partner, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated June 24,
1993. (Commission File No. 0-19036)
Modification of Promissory Note, dated November 30, 1993, between
Liberty Media Corporation and Tele-Communications of Colorado, Inc.
Modification of Promissory Note, dated November 30, 1993, between
Liberty Media Corporation and TCI Liberty, Inc.
Amendment to Option-Put Agreement, dated November 30, 1993, between
Tele-Communications of Colorado, Inc. and Liberty Cable Partner,
Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. (Commission File No. 0-19036)
Agreement Regarding Purchase and Sales of Partnership Interest, dated
as of March 26, 1993, between Liberty Cable Partners, Inc. and TCI
Holdings, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Agreement and Plan of Merger, dated as of January 27, 1994, by and
among Tele-Communications, Inc., Liberty Media Corporation,
TCI/Liberty Holding Company, TCI Mergeco, Inc. and Liberty Mergeco,
Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated February 15, 1994. (Commission
File No. 0-5550)
(continued)
IV-9
<PAGE> 194
10- Material contracts, continued:
Amendment No. 1, dated as of March 30, 1994, to Agreement and Plan of
Merger, dated as of January 27, 1994, by and among
Tele-Communications, Inc., Liberty Media Corporation, TCI/Liberty
Holding Company, TCI Mergeco, Inc. and Liberty Mergeco, Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated April 6, 1994. (Commission File
No. 0-5550)
Amendment No. 2, dated as of August 4, 1994, to Agreement and Plan of
Merger, dated as of January 27, 1994, by and among
Tele-Communications, Inc., Liberty Media Corporation, TCI/Liberty
Holding Company, TCI Mergeco, Inc. and Liberty Mergeco, Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated August 18, 1994. (Commission
File No. 0-20421)
Agreement and Plan of Merger, dated as of August 8, 1994, among
Tele-Communications, Inc., TCI Communications, Inc. and TeleCable
Corporation
Incorporated herein by reference to Tele-Communications,
Inc.'s Current Report on Form 8-K, dated August 18, 1994.
(Commission File No. 0-20421)
21- Subsidiaries of Tele-Communications, Inc.
23- Consents of experts and counsel
Consent of KPMG Peat Marwick LLP.
Consent of KPMG Peat Marwick LLP.
Consent of KPMG.
27- Financial data schedule
Tele-Communications, Inc.
TCI Communications, Inc.
*Constitutes management contract or compensatory arrangement.
IV-10
<PAGE> 195
(b) Reports on Form 8-K filed during the quarter ended December 31, 1994:
<TABLE>
<CAPTION>
Item
Date of Report Reported Financial Statements Filed
-------------- --------- ---------------------------
<S> <C> <C>
Tele-Communications, Inc.
October 27, 1994 Item 5 None
December 2, 1994, Item 2 TeleCable Corporation,
as amended by and Nine months ended
Form 8-K/A Item 5 September 30, 1994
(Amendment No. 1)
TCI Communications, Inc.
October 6, 1994 Item 5 None
October 27, 1994 Item 5 None
December 2, 1994, Item 2 TeleCable Corporation,
as amended by and Nine months ended
Form 8-K/A Item 5 September 30, 1994
(Amendment No. 1)
</TABLE>
IV-11
<PAGE> 196
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
Under date of March 27, 1995, we reported on the consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1994, which are included in the December 31, 1994 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we have also audited the related financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
IV-12
<PAGE> 197
Schedule I
Page 1 of 3
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to the
Financial Position of the Registrant
December 31, 1994
<TABLE>
<CAPTION>
Assets amounts in millions
------
<S> <C>
Investments in and advances to consolidated
subsidiaries - eliminated upon consolidation $ 4,530
Other assets, at cost, net of amortization 3
-------
$ 4,533
=======
Liabilities and Stockholders' Equity
Accrued liabilities $ 23
Stockholders' equity:
Class A Preferred Stock, $.01 par value --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value --
Convertible Preferred Stock,
Series C, $.01 par value --
Redeemable Convertible Preferred
Stock, Series E, $.01 par value --
Class A common stock, $1 par value 577
Class B common stock, $1 par value 89
Additional paid-in capital 4,498
Cumulative foreign currency translation
adjustment, net of taxes (4)
Unrealized holding gains for available-for-sale
securities, net of taxes 253
Accumulated deficit (293)
------
Treasury stock, at cost (610)
------
4,533
======
</TABLE>
IV-13
<PAGE> 198
Schedule I
Page 2 of 3
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to the
Operations of the Registrant
Year ended December 31, 1994
<TABLE>
<CAPTION>
amounts in millions
<S> <C>
Operating expenses (income):
Selling, general and administrative $ 10
Adjustment to compensation
relating to stock appreciation rights (1)
----
Losses from operations before
share of earnings of consolidated
subsidiaries 9
Share of earnings of consolidated subsidiaries (64)
----
Net earnings (55)
Preferred stock dividend requirements 8
----
Net earnings attributable to common stockholders $(47)
====
</TABLE>
IV-14
<PAGE> 199
Schedule I
Page 3 of 3
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to
Cash Flows of the Registrant
Year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
amounts in millions
Cash flows from operating activities:
Losses before share of earnings of
consolidated subsidiaries $ (9)
Adjustments to reconcile loss to net
cash provided by operating activities:
Adjustment to compensation
relating to stock appreciation rights (1)
Change in accrued liabilities 24
---------
Net cash provided by
operating activities 14
---------
Cash flows from investing activities:
Reduction in or additional
investments in and advances to
consolidated subsidiaries, net (8)
Capital expended for other assets, net (3)
---------
Net cash used by
investing activities (11)
---------
Cash flows from financing activities:
Preferred stock dividends (4)
Issuances of common stock 1
---------
Net cash provided by
financing activities (3)
---------
Increase in cash --
Cash at beginning of year --
---------
Cash at end of year $ --
=========
</TABLE>
See also note 2 to the consolidated financial statements.
IV-15
<PAGE> 200
Schedule II
TELE-COMMUNICATIONS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Additions Deductions
--------- ----------
Balance at Charged to Write-offs Balance
beginning profit net of at end
Description of year and loss recoveries of year
----------- ------- -------- ---------- -------
amounts in millions
<S> <C> <C> <C> <C>
Year ended
December 31, 1994:
Allowance for doubtful
receivables - trade $ 19 58 (54) 23
==== === === ===
Year ended
December 31, 1993:
Allowance for doubtful
receivables - trade $ 15 58 (54) 19
==== === === ===
Year ended
December 31, 1992:
Allowance for doubtful
receivables - trade $ 16 45 (46) 15
==== === === ==
</TABLE>
IV-16
<PAGE> 201
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
TCI Communications, Inc.:
Under date of March 27, 1995, we reported on the consolidated balance sheets of
TCI Communications, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of operations, stockholder's(s') equity,
and cash flows for each of the years in the three-year period ended December
31, 1994, which are included in the December 31, 1994 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we have also audited the related financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1995
IV-17
<PAGE> 202
Schedule I
Page 1 of 3
TCI COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to the
Financial Position of the Registrant
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
------ ---- ----
amounts in millions
<S> <C> <C>
Cash $ -- 4
Investments in and advances to consolidated
subsidiaries - eliminated upon consolidation 7,645 7,560
Property and equipment, at cost 63 40
Less accumulated depreciation 16 16
------ ------
47 24
------ ------
Other assets, at cost, net of amortization 44 44
------ ------
$7,736 7,632
====== =====
Liabilities and Stockholder's(s') Equity
----------------------------------------
Accrued liabilities $ 362 324
Debt 6,728 5,178
------ -----
Total liabilities 7,090 5,502
Redeemable preferred stocks -- 18
Stockholder's(s') equity (see detail on page II-77) 646 2,112
------ -----
$7,736 7,632
====== =====
Guarantees $ 23
======
</TABLE>
IV-18
<PAGE> 203
Schedule I
Page 2 of 3
TCI COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to the
Operations of the Registrant
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Management costs reimbursed by
subsidiaries $ 115 98 106
------ ------ ------
Operating expenses (income):
Selling, general and administrative 103 103 98
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating
to stock appreciation rights (5) -- --
Interest expense 471 369 226
Interest income, principally from
consolidated subsidiaries (472) (370) (232)
Depreciation and amortization 13 8 5
Loss (gain) on disposition of assets 5 (43) (2)
Loss on early extinguishment of debt -- -- 10
------ ------ ------
115 98 106
------ ------ ------
Earnings from operations before
share of losses (earnings) of
consolidated subsidiaries -- -- --
Share of losses (earnings) of consolidated
subsidiaries, including loss from
discontinued operations (92) 7 8
------ ------ ------
Net loss (earnings) $ (92) 7 8
====== ====== ======
</TABLE>
IV-19
<PAGE> 204
Schedule I
Page 3 of 3
TCI COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Information as to
Cash Flows of the Registrant
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings before share of losses of
consolidated subsidiaries, including
loss from discontinued operations $ -- -- --
Adjustments to reconcile loss to net
cash provided by operating activities:
Depreciation and amortization 13 8 5
Compensation relating to stock
appreciation rights -- 31 1
Adjustment to compensation relating
stock appreciation rights (5) -- --
Loss on early extinguishment of debt -- -- 10
Loss (gain) on disposition of assets 5 (43) (2)
Amortization of debt discount 1 27 26
Change in accrued liabilities 43 15 89
--------- ------- -------
Net cash provided by
operating activities 57 128 129
--------- ------- -------
Cash flows from investing activities:
Reduction in or additional
investments in and advances to
consolidated subsidiaries, net (1,565) (2,723) (1,036)
Proceeds on disposition of assets -- 111 12
Capital expended for property and
equipment and other assets, net (45) (38) (25)
--------- ------- -------
Net cash used by
investing activities (1,610) (2,650) (1,049)
--------- ------- -------
Cash flows from financing activities:
Borrowings of debt 2,227 3,274 2,327
Repayment of debt (678) (735) (1,332)
Preferred stock dividends -- (2) (15)
Repurchase of preferred stock -- (92) (5)
Issuances of common stock 6 7
Repurchases of common stock -- (4) (19)
--------- ------- -------
Net cash provided by
financing activities 1,549 2,447 963
--------- ------- -------
Increase (decrease) in cash (4) (75) 43
Cash at beginning of year 4 79 36
--------- -------- -------
Cash at end of year $ -- 4 79
========= ======= =======
Supplemental disclosure of cash flow
information -
Cash paid during the year for interest $ 448 257 177
========= ======= =======
</TABLE>
See also note 2 to the consolidated financial statements.
IV-20
<PAGE> 205
Schedule II
TCI COMMUNICATIONS, INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Additions Deductions
--------- ----------
Balance at Charged to Write-offs Balance
beginning profit net of at end
Description of year and loss recoveries of year
----------- ---------- -------- ---------- -------
amounts in millions
<S> <C> <C> <C> <C>
Year ended
December 31, 1994:
Allowance for doubtful
receivables - trade $ 19 57 (61) 15
==== === === ===
Year ended
December 31, 1993:
Allowance for doubtful
receivables - trade $ 15 58 (54) 19
==== === === ===
Year ended
December 31, 1992:
Allowance for doubtful
receivables - trade $ 16 45 (46) 15
==== === === ===
</TABLE>
IV-21
<PAGE> 206
58 TeleWest Annual Report 1994
US GAAP
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TELEWEST COMMUNICATIONS PLC
We have audited the consolidated balance sheet of TeleWest Communications plc
and subsidiaries as of 31 December 1994 and 1993, and the related consolidated
statements of operations and cash flows for each of the years in the three year
period ended 31 December 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TeleWest
Communications plc and subsidiaries as of 31 December 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three year period ended 31 December 1994, in conformity with generally accepted
accounting principles in the United States of America.
/s/ KPMG
KPMG
London, England
21 March 1995
IV-22
<PAGE> 207
TeleWest Annual Report 1994 59
US GAAP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended 31 December
----------------------------------------------------------------------------
1994 1994 1993 1992
$'000 L.'000 L.'000 L.'000
- -------------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C> <C> <C>
REVENUE
Cable television 56,198 35,875 20,729 12,600
Cable telephony - residential 36,767 23,471 11,261 3,462
Cable telephony - business 13,804 8,812 4,908 2,043
Other (L.1,481 and L.2,371 in 1994
and 1993 from related parties) 6,061 3,869 3,440 602
- -------------------------------------------------------------------------------------------------------------
112,830 72,027 40,338 18,707
- -------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Programming (24,281) (15,500) (8,403) (5,286)
Telephony (23,049) (14,714) (10,203) (3,916)
Selling, general, and administrative
(including L.2,128, L.4,451 and
L.3,597 in 1994, 1993 and 1992,
respectively, from related parties) (94,639) (60,414) (32,505) (17,411)
Depreciation (47,496) (30,320) (17,635) (9,942)
Amortisation of goodwill (2,862) (1,827) (840) (326)
- --------------------------------------------------------------------------------------------------------------
(192,327) (122,775) (69,586) (36,881)
- --------------------------------------------------------------------------------------------------------------
OPERATING LOSS (79,497) (50,748) (29,248) (18,174)
OTHER INCOME/(EXPENSE)
Interest income (including L.465,
L.1,504, and L.1,299 in 1994,
1993, and 1992, respectively,
from related parties) 3,589 2,291 1,974 1,632
Interest expense (including L.1,083
in 1994 from related parties) (15,773) (10,069) (2,537) (2,209)
Unrealised gain on interest rate swap 2,561 1,636 - -
Foreign exchange losses, net (33) (21) (72) (536)
Share of net losses of affiliates (13,262) (8,466) (7,540) (6,905)
Gain/(loss) on disposal of assets 41 26 (16) 56
Minority interest in losses of
consolidated subsidiaries 61 39 - -
Other, net (39) (25) - -
- -------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (102,352) (65,337) (37,439) (26,136)
Income tax expense (note 12) - - - -
- -------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY GAIN (102,352) (65,337) (37,439) (26,136)
Extraordinary gain (note 2) 11,415 7,287 - -
- -------------------------------------------------------------------------------------------------------------
NET LOSS (90,937) (58,050) (37,439) (26,136)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-23
<PAGE> 208
60 TeleWest Annual Report 1994
US GAAP
CONSOLIDATED STATEMENT OF OPERATIONS continued
<TABLE>
<CAPTION>
Year ended 31 December
--------------------------------------------
1994 1994
$ L.
(except number (except number
of shares) of shares)
- -------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C>
PRO FORMA LOSS PER ORDINARY SHARE
Weighted average number of ordinary shares
outstanding 630,756,392 630,756,392
Pro forma loss per ordinary share before
extraordinary gain (0.16) (0.10)
Extraordinary gain 0.02 0.01
- --------------------------------------------------------------------------------------------------------
PRO FORMA LOSS PER ORDINARY SHARE (0.14) (0.09)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-24
<PAGE> 209
TeleWest Annual Report 1994 61
US GAAP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At 31 December
-----------------------------------------------------
1994 1994 1993
$'000 L.'000 L.'000
- --------------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents 388,495 248,002 6,514
Trade receivables (net of allowance
for doubtful accounts of L.1,736 and L.577) 9,684 6,182 4,371
Other receivables (note 6) 40,922 26,124 11,219
Prepaid expenses and other assets 2,458 1,569 2,554
Investments in affiliates, accounted for under the equity
method, and related receivables (note 7) 128,307 81,907 68,838
Other investments, at cost 32,373 20,666 15,165
Property and equipment (less accumulated depreciation
of L.67,290 and L.38,280) (note 8) 712,512 454,843 269,974
Goodwill (less accumulated amortisation of L.3,904
and L.2,077) 60,879 38,863 35,230
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,375,630 878,156 413,865
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 58,528 37,362 19,740
Other liabilities (note 10) 70,915 45,270 24,892
Debt (note 11) 6,087 3,886 49,386
Capital lease obligations (note 14) 22,797 14,553 7,943
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 158,327 101,071 101,961
- --------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 237 151 209
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity (note 13):
Convertible preference shares, 10 pence par value;
authorised 204,000,000 shares; issued and
outstanding 153,000,000 shares 23,967 15,300 -
Ordinary shares, 10 pence par value;
authorised 1,293,835,000 shares;
issued and outstanding 848,244,940 shares 132,876 84,824 -
Additional paid-in capital 1,075,051 686,276 -
Joint Venturers' capital accounts - - 311,695
Accumulated deficit (3,424) (2,186) -
- --------------------------------------------------------------------------------------------------------------
1,228,470 784,214 311,695
Ordinary shares held in trust for
restricted share scheme; 4,000,000 shares (11,404) (7,280) -
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,217,066 776,934 311,695
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 14)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,375,630 878,156 413,865
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-25
<PAGE> 210
62 TeleWest Annual Report 1994
US GAAP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended 31 December
-------------------------------------------------------------------------
1994 1994 1993 1992
$'000 L.'000 L.'000 L.'000
- -------------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before extraordinary gain (102,352) (65,337) (37,439) (26,136)
Adjustments to reconcile loss
before extraordinary gain to net
cash used in operating activities:
Depreciation 47,496 30,320 17,635 9,942
Amortisation of goodwill 2,862 1,827 840 326
Unrealised gain on interest rate swap (2,561) (1,636) - -
Share of losses of affiliates 13,262 8,466 7,540 6,905
(Gain)/loss of disposal of assets (41) (26) 16 (56)
Minority interests in losses (61) (39) - -
Changes in operating assets and
liabilities, net of effect of
acquisition of subsidiaries:
Change in receivables (12,692) (8,102) (4,981) 1,583
Change in prepaid expenses
and other assets 1,573 1,004 (1,484) (590)
Change in accounts payable 23,956 15,293 6,503 4,108
Change in liability relating
to the restricted share scheme 2,426 1,549 - -
Change in other liabilities 11,777 7,518 1,530 (7,304)
- --------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (14,355) (9,163) (9,840) (11,222)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property and
equipment (317,503) (202,683) (102,962) (56,937)
Cash paid for acquisition of
subsidiaries (415) (236) (45,465) (1,187)
Additional investments in and loans
to affiliates (37,222) (23,761) (24,250) (32,763)
Proceeds from disposal of assets 461 294 166 215
Proceeds from disposal of
interest in affiliates - - 2,552 -
Other investing activities (8,578) (5,505) (908) (5,092)
- --------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (363,257) (231,891) (170,867) (95,764)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-26
<PAGE> 211
TeleWest Annual Report 1994 63
US GAAP
CONSOLIDATED STATEMENT OF CASH FLOWS CONTINUED
<TABLE>
<CAPTION>
Year ended 31 December
-------------------------------------------------------------------------
1994 1994 1993 1992
$'000 L.'000 L.'000 L.'000
- -------------------------------------------------------------------------------------------------------------
(note 1)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shares issued under
the global offering 683,072 436,050 - -
Proceeds from other share issues 118,663 75,750 - -
Cash paid for costs of share issues (44,713) (28,543) - -
Proceeds from borrowings 272,884 174,200 46,000 20,564
Repayment of borrowings (344,160) (219,700) (20,000) (12,000)
Capital element of finance lease
repayments (329) (210) 170 107
Net contributions from Joint
Venturers and minorities 70,485 44,995 160,313 97,377
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 755,902 482,542 186,483 106,048
- -------------------------------------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 378,290 241,488 5,776 (938)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,204 6,514 738 1,676
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 388,494 248,002 6,514 738
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-27
<PAGE> 212
64 TeleWest Annual Report 1994
US GAAP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net assets of
the Joint Venture
L.'000
- --------------------------------------------------------------------------------------------------------
(note 1)
<S> <C>
JOINT VENTURE:
YEAR ENDED 31 DECEMBER 1992
Balance at 1 January 1992 117,774
Capital contributions 97,377
Net loss (26,136)
- --------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1992 189,015
- --------------------------------------------------------------------------------------------------------
YEAR ENDED 31 DECEMBER 1993
Balance at 1 January 1993 189,015
Capital contributions 160,119
Net loss (37,439)
- --------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1993 311,695
- --------------------------------------------------------------------------------------------------------
PERIOD FROM 1 JANUARY 1994 TO 22 NOVEMBER 1994
Balance at 1 January 1994 311,695
Capital contributions 121,873
Repayment of the Joint Venturers' capital accounts (75,700)
Net loss (55,864)
- --------------------------------------------------------------------------------------------------------
BALANCE AT 22 NOVEMBER 1994 302,004
- --------------------------------------------------------------------------------------------------------
</TABLE>
On 22 November 1994 the net assets of the Joint Venture were contributed to the
Company, as described in note 1 to the consolidated financial statements. The
contribution appears as an increase in additional paid-in capital in the table
below. The table also details the other movements in the shareholders' equity
of the Company for the year ended 31 December 1994.
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERENCE ORDINARY SHARES HELD PAID-IN ACCUMULATED
SHARES SHARES IN TRUST CAPITAL DEFICIT TOTAL
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY:
Convertible preference shares issued
during the year 15,300 - - - - 15,300
Ordinary shares issued during
the year - 84,824 - 384,272 - 469,096
Ordinary shares held in trust for
restricted share scheme - - (7,280) - - (7,280)
Contribution of Joint Venture to the
Company on 22 November 1994 - - - 302,004 - 302,004
Net loss - - - - (2,186) (2,186)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1994 15,300 84,824 (7,280) 686,276 (2,186) 776,934
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
IV-28
<PAGE> 213
TeleWest Annual Report 1994 65
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
TeleWest Communications plc ("the Company") was incorporated on 1 January 1994,
under the laws of England and Wales. On 22 November 1994, affiliates of
Tele-Communications, Inc. ("the TCI affiliates") and affiliates of U S WEST,
Inc. ("the U S WEST affiliates") contributed their United Kingdom ("UK") cable
interest to the Company. These interests were previously held by the TCI
affiliates and the U S WEST affiliates through TCI/U S WEST Cable
Communications Group, a general partnership which was formed on 18 December
1991. The partnership and its subsidiaries collectively are referred to herein
as the "Joint Venture". The TCI affiliates and the U S WEST affiliates are
collectively referred to herein as the "Joint Venturers".
The UK cable interests held through the Joint Venture were contributed to the
Joint Venture on 30 April 1992, after the Joint Venturers received the required
regulatory approvals to make the contribution (see note 5).
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP") and as if the Company had been organised in its present form for all
years presented. The Company's historical shareholders' equity is the excess of
the Joint Venture's assets over the Joint Venture's liabilities and represents
the historical cost of the capital contributions made by the Joint Venturers
less the accumulated deficit arising from the Joint Venture's operations.
The economic environment and currency in which the Company operates is the
United Kingdom and hence its reporting currency is the UK pound sterling (L.).
Certain financial information for the year ended 31 December 1994, have also
been translated into US dollars, with such US dollar amounts being unaudited
and presented solely for the convenience of the reader, at the rate of
$1.5665=L.1.00, the Noon Buying Rate of the Federal Reserve Bank of New York on
30 December 1994.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
those of all majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
All acquisitions have been accounted for under the purchase method of
accounting. Under this method, the results of subsidiaries and affiliates
acquired in the year are included in the consolidated statement of operations
from the date of acquisition.
Goodwill arising on consolidation (representing the excess of the fair value of
the consideration given over the fair value of the identifiable net assets
acquired) is amortised over the acquisition's useful life up to a maximum of 40
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortisation of the goodwill balance over its remaining
life can be recovered. The amount of goodwill impairment, if any, is measured
based on the expected undiscounted cash flows of the acquired operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly-liquid investments with original
maturities of three months or less that are readily convertible into cash.
FINANCIAL INSTRUMENTS
The differential to be paid or received on interest rate swap agreements that
hedge the interest rate on an existing liability is accrued as interest rates
change and is recognised over the lives of the respective agreements. Interest
rate swaps which are held as trading assets are recorded on the balance sheet
at their fair value at the reporting date with gains and losses recorded in the
statement of operations.
INVESTMENTS
Investments in partnerships, joint ventures, and subsidiaries in which the
Company's voting interest is 20% to 50% and others where the Company has
significant influence are accounted for using the equity method.
Investments which do not have a readily determinable fair value, in which the
Company's voting interest is less than 20%, and in which the Company does not
have significant influence, are carried at cost and written down to the extent
that there has been an other-than-temporary diminution in value.
IV-29
<PAGE> 214
66 TeleWest Annual Report 1994
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
continued
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including the historical carryover
basis cost from the contribution of assets by the Joint Venturers. Depreciation
is computed on a straight-line basis using estimated useful lives of 5 to 30
years for systems and 4 to 50 years for support equipment and buildings.
The Company accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems under Statement of Financial
Accounting Standards ("SFAS") No. 51, "Financial Reporting by Cable Television
Companies".
FRANCHISE COSTS
Expenditure incurred on successful applications for franchise licences is
included in property and equipment and is amortised over the remaining life of
the original franchise term, generally 15 years. Costs relating to unsuccessful
applications are charged to the statement of operations.
MINORITY INTERESTS
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of exchange in
effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign curencies are translated using the rate of exchange
ruling at the balance sheet date and the gains or losses on translation are
included in the statement of operations.
REVENUE RECOGNITION
Revenue is recognised as services are delivered. Other revenues include
connection fees which are recognised in the period of connection to the extent
that the fee is offset by direct selling costs. The remainder is recognised
over the estimated average period that subscribers are expected to remain
connected to the system.
PENSION COSTS
The Company does not have a defined benefit pension plan but contributes up to
specified limits to the third-party plan of the employee's choice. The amount
charged against losses in 1994, 1993 and 1992 of L.839,000, L.482,000, and
L.274,000 respectively, represents the contributions payable to the selected
plans in respect of the accounting periods.
INCOME TAXES
Prior to 22 November 1994, no provision has been made for income tax expense or
benefit in the accompanying financial statements as the earnings or losses of
the Joint Venture are reported in the respective income tax returns of the
individual Joint Venturers.
Following the reorganisation effective on 22 November 1994, the Company became
subject to UKtaxation and adopted SFAS No. 109, "Accounting for Income Taxes".
The adoption of SFAS No. 109 does not give rise to any cumulative adjustment to
be made in the 1994 consolidated statement of operations. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognised for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered.
RESTRICTED SHARE SCHEME
The Company has established a restricted share scheme to fund a portion of the
future payments to employees under the Company's existing compensation
programmes. Shares purchased by the trustee who holds the shares for future
awards under the restricted share scheme are valued at the market price on the
date on which they are purchased and are reflected as a reduction of
shareholders' equity in the balance sheet. This equity account will be reduced
based on the original cost of the shares to the trust when the shares are used
to fund compensation obligations; the satisfaction of the compensation
liabilities will be based on the fair value of shares at the date they are
transferred to employees.
IV-30
<PAGE> 215
TeleWest Annual Report 1994 67
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
continued
The difference between the fair value of the shares and the original cost of
shares to the trust is charged or credited to additional paid-in capital.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is based on the weighted average number of
ordinary shares deemed to be outstanding during the year. Ordinary shares
issued to the Joint Venturers in return for the contribution of their UK cable
interests to the Company on 22 November 1994 have been treated as outstanding
for the entire year. Shares issued for cash in the global offering have been
treated as outstanding from that date.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 notes to the consolidated
financial statements to conform with the 1994 presentation.
2. EXTRAORDINARY GAIN
The Company had entered into interest rate swap agreements in order to manage
the interest rate risk on its bank credit facilities by swapping the interest
rate on part of its variable-rate debt for a fixed interest rate. Following the
global offering of the ordinary share capital of the Company in November 1994,
the Company used a portion of the proceeds from the offering to repay all
amounts outstanding under these credit facilities and the interest rate swap
agreements ceased to be a hedge of the interest rate liability. The interest
rate swaps are retained pending their use as hedges of interest rates on future
drawdowns of the credit facilities. They have been placed on the balance sheet
in other receivables and other liabilities at their fair value at the date upon
which the debt was repaid and an extraordinary gain equal to the aggregate fair
value of the interest rate swaps at this date was recognised in the
consolidated statement of operations. Any change in the aggregate fair value of
the swap agreements since this date has been recognised in the consolidated
statement of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following table summarises the fair value of the interest rate swap
agreements as described in note 2, at 31 December 1994. SFAS No. 107
"Disclosures about Fair Value of Financial Instruments" defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
Fair Value
Year end
L.'000
- -----------------------------------------------------------------
<S> <C>
Interest rate swap - assets 9,568
Interest rate swap - liabilities (645)
</TABLE>
The aggregate fair value of the swaps at 15 March 1995 was L.7,008,000.
The swap agreements mature in July 1997 and the aggregate notional principal
amount adjusts upwards to a maximum of L.233,000,000. The aggregate notional
principal amount at 31 December 1994 was L.117,000,000.
The Company is exposed to a market risk in that the fixed interest rates of the
swaps, which vary from 6.91% to 9.16%, may exceed three month LIBOR.
The Company is also exposed to credit risk in the event of non-performance by
the other parties to the agreement. However, the Company does not anticipate
non-performance by the counterparties.
The carrying value of the interest rate swap agreements in the balance sheet is
equal to their fair value. The carrying value reported in the balance sheet for
all other financial instruments approximates their respective fair values.
Trade receivables and temporary cash investments also potentially expose the
Company to concentrations of credit risk, as defined by SFAS No. 105
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk".
IV-31
<PAGE> 216
68 TeleWest Annual Report 1994
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
3. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
continued
The Company places its temporary cash investments with high credit quality
financial institutions and limits the amount of credit exposure to any one
financial institution. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. At 31 December 1994 the Company had no significant
concentrations of credit risk.
4. BUSINESS COMBINATIONS
On 8 September 1993, the Joint Venture acquired for cash consideration of
L.48,302,000 the entire issued share capital of certain companies, which build
and operate cable television and telephony networks in Scotland. This
acquisition has been accounted for under the purchase method of accounting. The
amount of goodwill arising as a result of the acquisition is L.25,022,000 and
is being amortised on a straight-line basis over 20 years.
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro-forma summary presents the consolidated results of operations as
if the acquisition had occurred at the beginning of 1992, after giving effect
to amortisation of goodwill incurred as a result of the acquisition:
<TABLE>
<CAPTION>
1994 1993
L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 42,955 20,861
Net loss 45,558 29,268
</TABLE>
The unaudited pro-forma financial information is presented for information
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated as of the dates
indicated above, nor is it indicative of future results.
5. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Cash paid for interest was L.8,013, L.2,417 and L.2,187 for the years ended 31
December 1994, 1993 and 1992, respectively.
Significant non-cash investing activities which represent the contribution of
UK cable interests to the Company by the Joint Venturers are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
L.'000 L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contribution of cable interests:
Assets 3,967 - 157,552
Liabilities assumed (2,744) - (24,940)
Debt assumed - - (14,823)
Minority interest in subsidiaries (44) - (15)
- ----------------------------------------------------------------------------------------------------------
NET ASSETS CONTRIBUTED 1,179 - 117,774
- ----------------------------------------------------------------------------------------------------------
</TABLE>
6. OTHER RECEIVABLES
<TABLE>
<CAPTION>
1994 1993
L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Value added tax refund 7,709 3,992
Interconnection receivables 2,624 1,421
Interest rate swaps 9,568 -
Other 6,223 5,806
- ----------------------------------------------------------------------------------------------------------
Total 26,124 11,219
- ----------------------------------------------------------------------------------------------------------
</TABLE>
IV-32
<PAGE> 217
TeleWest Annual Report 1994 69
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
7. INVESTMENTS
The Company has investments in affiliates accounted for under the equity method
at 31 December 1994 and 1993 as follows:
<TABLE>
<CAPTION>
Percentage of ownership
1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cable London plc 48.90% 48.59%
Birmingham Cable Corporation Limited 27.50% 31.78%
London Interconnect Limited 16.67% -
</TABLE>
Summarised financial information for such affiliates which operate principally
in the cable television and telephony industries is as follows:
COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
At 31 December
-------------------------------------
1994 1993
L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment, net 224,899 164,597
Intangible assets, net 16,201 15,217
Other assets, net 28,909 24,852
- ----------------------------------------------------------------------------------------------------------
Total assets 270,009 204,666
- ----------------------------------------------------------------------------------------------------------
Debt 25,500 17,955
Other liabilities 43,673 34,078
Owners' equity 200,836 152,633
- ----------------------------------------------------------------------------------------------------------
Total liabilities and equity 270,009 204,666
- ----------------------------------------------------------------------------------------------------------
</TABLE>
COMBINED OPERATIONS
<TABLE>
<CAPTION>
Year ended 31 December
-----------------------------------------------------------
1994 1993 1992
L.'000 L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 38,669 32,748 14,125
Operating expenses (58,869) (50,475) (27,002)
- ----------------------------------------------------------------------------------------------------------
Operating loss (20,200) (17,727) (12,877)
Interest expense (488) (2,544) (2,469)
- ----------------------------------------------------------------------------------------------------------
Net loss (20,688) (20,271) (15,346)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's investments in affiliates are comprised as follows:
<TABLE>
<CAPTION>
At 31 December
-------------------------------------
1994 1993
L.'000 L.'000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans 13,163 9,393
Share of net assets 68,744 59,445
- ----------------------------------------------------------------------------------------------------------
81,907 68,838
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Any excess of the purchase cost over the value of the net assets acquired is
included in goodwill and amortised over 20 years.
IV-33
<PAGE> 218
70 TeleWest Annual Report 1994
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
8. FIXED ASSETS
<TABLE>
<CAPTION>
Cable and Electronic Other
Land Buildings ducting equipment equipment Total
L.'000 L.'000 L.'000 L.'000 L.'000 L.'000
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION COSTS
Balance at 1 January 1994 2,950 6,591 208,812 71,095 18,806 308,254
Additions 1,105 10,052 113,182 78,898 12,220 215,457
Disposals - - (786) (341) (451) (1,578)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1994 4,055 16,643 321,208 149,652 30,575 522,133
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Balance at 1 January 1994 - 1,077 16,945 13,959 6,299 38,280
Charge for year - 1,029 9,767 14,386 5,138 30,320
DISPOSALS - - (786) (305) (219) (1,310)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1994 - 2,106 25,926 28,040 11,218 67,290
- -----------------------------------------------------------------------------------------------------------------------------
1994 NET BOOK VALUE 4,055 14,537 295,282 121,612 19,357 454,843
- -----------------------------------------------------------------------------------------------------------------------------
ACQUISITION COSTS
Balance at 1 January 1993 2,950 5,410 119,355 31,992 11,311 171,018
Additions - 1,181 90,096 39,103 7,841 138,221
Disposals - - (639) - (346) (985)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1993 2,950 6,591 208,812 71,095 18,806 308,254
- -----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Balance at 1 January 1993 - 658 9,839 7,532 3,418 21,447
Charge for year - 419 7,739 6,427 3,050 17,635
Disposals - - (633) - (169) (802)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT 31 DECEMBER 1993 - 1,077 16,945 13,959 6,299 38,280
- -----------------------------------------------------------------------------------------------------------------------------
1993 NET BOOK VALUE 2,950 5,514 191,867 57,136 12,507 269,974
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cable and ducting consists principally of the civil engineering and fibre optic
cable costs. In addition, cable and ducting includes net book value of
preconstruction and franchise costs of L.21,317,000, L.14,429,000 and
L.11,204,000 as of 31 December 1994, 1993 and 1992, respectively. Electronic
equipment includes the Company's switching, headend and converter equipment.
Other equipment consists principally of motor vehicles, office furniture and
fixtures, leasehold improvements.
9. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions charged to
Balance at Costs and Other Balance at
1 January expenses Accounts Deductions 31 December
L.'000 L.'000 L.'000 L.'000 L.'000
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Allowance for doubtful accounts 577 3,392 26 (2,259) 1,736
- -----------------------------------------------------------------------------------------------------------------------------
1993
Allowance for doubtful accounts 107 515 70 (115) 577
- -----------------------------------------------------------------------------------------------------------------------------
1992
Allowance for doubtful accounts 59 308 144 (404) 107
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
IV-34
<PAGE> 219
TeleWest Annual Report 1994 71
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
10. OTHER LIABILITIES
Other liabilities are summarised as follows:
<TABLE>
<CAPTION>
1994 1993
L.'000 L.'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Amount due to affiliated or other related parties 395 381
Accrued interest 1,507 617
Accrued construction costs 5,492 5,831
Accrued expenses and deferred income 25,976 13,529
Bank overdraft - 71
Other liabilities 11,900 4,463
- ---------------------------------------------------------------------------------------------------
Total 45,270 24,892
- ---------------------------------------------------------------------------------------------------
</TABLE>
11. DEBT
Debt is summarised as follows at 31 December 1994, and 1993:
<TABLE>
<CAPTION>
Weighted average
interest rate
at 31 December 1994 1993
1994 1993 L.'000 L.'000
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank credit facilities -% 7.5% - 46,000
Other debt 6.6% 7.1% 3,886 3,386
- -----------------------------------------------------------------------------------------------------------------
TOTAL 3,886 49,386
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Following the global offering of the ordinary shares of the Company in November
1994, the Company used a portion of the proceeds from the offering to repay all
amounts outstanding under the revolving credit facilities entered into by
subsidiaries of the Company operating in the London South, Avon, and Scotland
regional franchise groups. The credit facilities have been retained for future
drawdowns to finance the construction of the telecommunications network in
these regional franchise groups.
Borrowings under the credit facilities are secured by the assets and shares of
the London South, Avon, and Scotland regional franchise groups and bear
interest at a floating rate based on LIBOR. The credit facilities contain
covenants regarding financial and operating ratios and targets.
The credit facilities are divided into two tranches: a non-recourse portion
(Tranche A) and a recourse portion (Tranche B). All principal, interest and
other obligations in respect of Tranche B are guaranteed severally by TCI and U
S WEST such that each party is liable for no more than 50% of such outstanding
principal, interest and other obligations.
The total amount available for drawdown is restricted as follows:
<TABLE>
<CAPTION>
Total facility restriction
(L. million)
- ---------------------------------------------------------------------------------------------------
London/South Avon Scotland
facility facility
<S> <C> <C>
1 January 1995 to 30 June 1995 175 75
1 July 1995 to 31 December 1995 190 115
1 January 1996 190 195
</TABLE>
Any amounts outstanding under Tranche A must be repaid by 31 December, 2001
under the London South/Avon facility and by 31 December, 2003 under the
Scotland facility. Any amounts outstanding under Tranche B must be repaid by 31
March 1998 and by 31 December 1999 for the London South/Avon facility and
Scotland facility, respectively.
Other debt is represented by property loans which are secured on freehold land
and buildings held by the Company. The property loans bear interest at a rate
of 1.5% to 1.75% above LIBOR. Annual maturities of other debt at 31 December
1994, are as follows: 1995 - none; 1996 - L.938; 1997 - L.2,948.
IV-35
<PAGE> 220
72 TeleWest Annual Report 1994
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
12. INCOME TAXES
As discussed in note 1, the Company adopted SFAS No. 109 as of 22 November
1994. The adoption of this standard has no cumulative effect to be reported in
the 1994 consolidated statement of operations. Prior years' figures have not
been shown as the predecessor businesses of the Company operated as a Joint
Venture and any taxes would be paid by the Joint Venturers.
Loss before income taxes is solely attributable to the UK:
The provisions for income taxes (credit)follow:
<TABLE>
<CAPTION>
31 December
--------------------------------
1994
L.'000
<S> <C>
Currently payable (refundable) -
Deferred taxes -
- ---------------------------------------------------------------------------------------------------
-
- ---------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of income taxes determined using the statutory federal UK rate
of 33% to actual income taxes provided is as follows:
<TABLE>
<CAPTION>
Year ended 31 December
--------------------------------
1994
L.'000
- ---------------------------------------------------------------------------------------------------
<S> <C>
Corporate tax at United Kingdom federal
statutory rates (21,562)
Net operating loss carryforwards 18,540
Temporary differences, principally depreciation 512
Non-deductible expenses (347)
Other 63
Share of losses of affiliates 2,794
- ---------------------------------------------------------------------------------------------------
Provision for income taxes -
- ---------------------------------------------------------------------------------------------------
Effective rate -
- ---------------------------------------------------------------------------------------------------
</TABLE>
Deferred income tax assets and liabilities at 31 December 1994 are summarised
as follows:
<TABLE>
<CAPTION>
1994
L.'000
- ---------------------------------------------------------------------------------------------------
<S> <C>
Deferred tax assets relating to:
Fixed assets 1,031
Net operating loss carryforward 41,582
Other 1,329
- ---------------------------------------------------------------------------------------------------
43,942
Deferred tax liabilities relating to:
Liabilities and provisions (460)
Other (2,945)
- ---------------------------------------------------------------------------------------------------
Net deferred tax assets before valuation allowance 40,537
Valuation allowance (40,537)
- ---------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET PER BALANCE SHEET -
- ---------------------------------------------------------------------------------------------------
</TABLE>
Following the reorganisation effective on 22 November 1994, the Company became
subject to UK taxation.
At 31 December 1994 the Company estimates that it has, subject to Inland
Revenue agreement, net operating losses ("NOLs") of L.126 million available to
relieve against future profits.
IV-36
<PAGE> 221
TeleWest Annual Report 1994 73
US GAAP
12. INCOME TAXES CONTINUED
The NOLs have an unlimited carryforward period under UK tax law, but are
limited in their use to the type of business which has generated the loss.
13. SHAREHOLDERS' EQUITY
The authorised share capital of the Company consists of 204,000,000 convertible
preference shares with a par value of 10 pence per share, of which 153,000,000
are outstanding at 31 December 1994, and 1,293,835,000 ordinary shares with a
par value of 10 pence per share, of which 844,244,940 are outstanding at 31
December 1994 after deducting the 4,000,000 shares which are held in trust for
future awards under the Company's restricted share scheme as described below.
MOVEMENTS IN SHARE CAPITAL
The Company was incorporated on 1 January 1994 with authorised share capital of
L.50,000 divided into ordinary shares of L.1 each of which two shares were
issued at par for cash. On 19 October 1994, the Company issued a further 49,998
ordinary shares at par for cash.
On 17 November 1994, the issued share capital was sub-divided into 250,000 A
ordinary shares of 10p each and 250,000 B ordinary shares of 10p each. On the
same day, the authorised share capital was increased to L.100,000,000 by the
creation of a total of 999,500,000 A, B, C and D ordinary shares of 10p each,
of which a total of 204,000,000 were redeemable.
On 18 November 1994, 757,000,000 A, B, C and D ordinary shares were issued for
cash consideration of L.75,700,000. 153,000,000 of these shares were
redeemable. The funds raised were used to repay debt outstanding to the
partners of the former TeleWest Group. On 22 November 1994, the issued and
unissued non-redeemable A, B, C and D ordinary shares were converted into
ordinary shares of 10p each and the issued and unissued redeemable shares were
converted into convertible preference shares of 10p each. The authorised share
capital of the Company was increased by the creation of a further 497,835,000
ordinary shares of l0p each.
In connection with the global offering of the Company, a further 239,744,940
ordinary shares were issued for cash consideration of L.436,050,000 before
expenses of L.34,684,000. The funds raised were used to repay the debt of the
Group and to finance a portion of the costs of constructing the
telecommunications network, operating cash flow deficits, and additional
investments in associated undertakings. Remaining funds will be used for
similar activities.
A further 4,000,000 ordinary shares were issued during the year to an
independent corporate trustee to establish a restricted share scheme under
which certain employees of the Company will be compensated by awards of
ordinary shares. The issue was financed by an interest-free loan of L.7,280,000
made by the Company to the trustee.
CONVERTIBLE PREFERENCE SHARES
The convertible preference shares are convertible into fully paid ordinary
shares at any time on the basis of one ordinary share for every convertible
preference share provided that, immediately following the conversion, the
percentage of the issued ordinary share capital of the Company held by members
of the public, as defined by the listing rules of the London Stock Exchange,
does not fall below 25%. The ordinary shares arising on conversion will rank
pari passu in all respects with the ordinary shares then in issue.
The holders of the convertible preference shares are entitled to receive a
dividend of such amount as is declared and paid in relation to each ordinary
share, subject to the dividend to be paid not exceeding 20p per share net of
any associated tax credit.
IV-37
<PAGE> 222
74 TeleWest Annual Report 1994
US GAAP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
13. SHAREHOLDERS' EQUITY continued
In the event of a winding-up of the Company or other return of capital, the
assets of the Company available for distribution will be paid first to the
holders of the convertible preference shares up to the sum of capital paid-up
or credited as paid-up unless the right of election upon a winding-up of the
Company has been exercised in respect of the convertible preference shares
("the elected shares"). If the election has been exercised, the holders of the
ordinary shares and the elected shares will receive any surplus in accordance
with the amount paid-up or credited as paid-up on the shares held.
The holders of the convertible preference shares are not entitled to vote at
any general meeting of the Company unless the meeting includes the
consideration of a resolution for winding up the Company or a resolution
modifying the rights or privileges attaching to the convertible preference
shares.
EMPLOYEE SHARE SCHEMES
During the year, the Company established a savings-related share option scheme
("the sharesave scheme").
At 31 December 1994, 1,666,534 options were outstanding over the ordinary
shares of the Company under the sharesave scheme. The exercise price is 150p
per share and the options are exercisable in 2000.
4,000,000 shares issued during the year are held in trust by an independent
corporate trustee for release as awards to employees participating in the
restricted share scheme. On 31 December 1994, 2,613,584 shares were allocated
but not issued to employees participating in the restricted share scheme. The
scheme will not alter the amount of compensation which will be paid under the
Company's existing compensation programme, but is expected to enhance the
Company's financial flexibility.
14. COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases a number of assets under arrangements accounted for as
capital leases. Included in the net book value of electronic equipment is
L.13,024,000 for 1994 and L.7,181,000 for 1993 and in the net book value of
other equipment is L.375,000 for 1994 and L.419,000 for 1993 in respect of
these assets. Depreciation for the year on these assets was L.171,000 in 1994
and L.219,000 in 1993.
The Company leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expense under
such arrangements amounted to L.1,535,055 and L.1,229,000 and L.873,000 for the
years ended 31 December 1994, 1993 and 1992.
Future minimum lease payments under capital and operating leases are summarised
as follows as at 31 December 1994:
<TABLE>
<CAPTION>
Capital leases Operating leases
L.'000 L.'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 1,594 1,507
1996 1,617 1,579
1997 2,122 1,502
1998 2,854 1,480
1999 3,163 957
2000 and thereafter 8,916 13,323
- ---------------------------------------------------------------------------------------------------
20,266
Imputed interest (5,713)
- --------------------------------------------------------------------------------
TOTAL 14,553
- --------------------------------------------------------------------------------
</TABLE>
It is expected that, in the normal course of business, expiring leases will be
renewed or replaced by leases on other properties.
IV-38
<PAGE> 223
TeleWest Annual Report 1994 75
US GAAP
14. COMMITMENTS AND CONTINGENCIES continued
MINORITY INTERESTS
In October 1993, the Company acquired all of the outstanding minority interests
in the London South regional franchise group from various shareholders other
than the interest of one shareholder holding approximately 0.07% interest in
the London South regional franchise group. In consideration for such minority
interests, the Company made an initial payment to the sellers of approximately
L.790,000 and may be required to make an additional payment to one of the
sellers upon the occurrence of certain events (including the completion of
certain share issuances by the Company). The amount of this payment, if any, is
based upon the valuation of the London South regional franchise group and the
percentage of such franchise formerly owned by the minority shareholders. The
Company does not expect any payment to have a material effect on the liquidity
or capital resources of the Company.
In connection with the Company's acquisition of the South East regional
franchise group, the Company granted to Trans-Global (UK) Limited an option to
acquire up to 9.9% of the equity in the South East regional franchise group. If
Trans-Global elects to exercise its option in full, the Company's interest in
the South East regional franchise group would decrease to 90.1% and the Company
would be entitled to a payment from Trans-Global representing Trans-Global's
pro-rata share (9.9%) of all funding provided by the Company to the South East
regional franchise group through to the date of exercise. As of the date of
hereof, such option has not been exercised.
The Company is party to various legal proceedings in the ordinary course of
business which it does not believe will result, in aggregate, in a material
adverse effect on its financial condition.
15. RELATED-PARTY TRANSACTIONS
The Company, in the normal course of providing cable television services,
purchases certain of its programming from certain UK affiliates of TCI. Such
programming is purchased on commercially-available terms.
The Company has management agreements with TCI and U S WEST under which amounts
are paid by the Company relating to TCI and U S WEST employees who have been
seconded to the Company. For the years ended 31 December 1994, 1993 and 1992,
fees paid by the Company under the agreements were L.2,128,000 L.4,451,000 and
L.3,597,000 respectively.
The Company has entered into consulting agreements with its affiliates pursuant
to which the Company provides consulting services related to cable telephony
operations. Under the agreements, the Company receives an annual fee from each
affiliate based upon the affiliate's revenues. Fees received for the years
ended 31 December 1994 and 1993 were L.557,000 and L.1,801,000. The Company
also receives a fee for providing switching support services, comprising a
fixed element based on the number of switches, and a variable element based on
the number of lines. Fees received for the year ended 31 December 1994 were
L.822,000.
16. FOURTH QUARTER FINANCIAL INFORMATION (UNAUDITED)
In connection with the global offering of the ordinary share capital of the
Company, certain financial information for the nine months ended 30 September
1994 has been disclosed in the offer documents.
The following provides a summary of this financial information and sets out
comparative figures for the fourth quarter ended 31 December 1994.
<TABLE>
<CAPTION>
Fourth quarter 9 months ended
Total 1994 30 September 1994
L.'000 L.'000 L.'000
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue 72,027 22,727 49,300
Operating loss (50,748) (17,808) (32,940)
Unrealised gain on interest rate swap 1,636 1,636 -
Loss before extraordinary gain (65,337) (20,874) (44,463)
Extraordinary gain 7,287 7,287 -
Net loss (58,050) (13,587) (44,463)
Pro forma loss per ordinary share (9) pence
</TABLE>
IV-39
<PAGE> 224
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
3 - Articles of Incorporation and Bylaws:
The Restated Certificate of Incorporation, dated August 4, 1994, as
amended on August 4, 1994, August 16, 1994, October 11, 1994,
October 21, 1994 and January 26, 1995.
The Bylaws as adopted June 16, 1994.
Restated Certificate of Incorporation, dated as of August 4, 1994.
Bylaws as adopted August 4, 1994.
10 - Material Contracts:
Tele-Communications, Inc. 1994 Stock Incentive Plan
Incorporated herein by reference to the Company's Form S-4
Registration Statement. (Commission File No. 33-54263)
Restated and Amended Employment Agreement, dated as of November 1, 1992,
between the Company and Bob Magness.*
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, as amended
by Form 10-K (amendment #1) for the year ended December 31,
1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Bob
Magness.*
Restated and Amended Employment Agreement, dated as of November 1, 1992,
between the Company and John C. Malone.*
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992, as amended
by Form 10-K/A (amendment #1) for the year ended December
31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and John C.
Malone.*
Employment Agreement, dated as of November 1, 1992, between
Tele-Communications, Inc. and J. C. Sparkman.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and J. C.
Sparkman.*
(continued)
<PAGE> 225
10 - Material contracts, continued:
Employment Agreement, dated as of January 1, 1992, between
Tele-Communications, Inc. and Donne F. Fisher.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Donne F.
Fisher.*
Restricted Stock Award Agreement, made as of December 10, 1992, among
Tele-Communications, Inc., Donne F. Fisher and WestMarc
Communications, Inc.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992. (Commission File No. 0-5550)
Deferred Compensation Plan for Non-Employee Directors, effective on
November 1, 1992.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992,
as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1992. (Commission File No. 0-5550)
Employment Agreement, dated as of November 1, 1992, between
Tele-Communications, Inc. and Fred A. Vierra.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, as
amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1992. (Commission File No. 0-5550)
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Fred A.
Vierra.*
Employment Agreement, dated as of January 1, 1993, between
Tele-Communications, Inc. and Larry E. Romrell.*
Assignment and Assumption Agreement, dated as of August 4, 1994, among
TCI/Liberty Holding Company, Tele-Communications, Inc. and Larry E.
Romrell.*
Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1993. (Commission File No. 0-5550)
(continued)
<PAGE> 226
10 - Material contracts, continued:
Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A (amendment #1) for the year
ended December 31, 1993. (Commission File No. 0-5550)
Non-Qualified Stock Option and Stock Appreciation Rights Agreement,
dated as of November 12, 1993, by and between Tele-Communications,
Inc. and Jerome H. Kern.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1993. (Commission File No. 0-5550)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, Liberty Media Corporation and grantee relating
to stock appreciation rights granted pursuant to letter dated
September 17, 1991.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, Liberty Media Corporation and grantee relating
to the assumption of options and related stock appreciation rights
granted under the Liberty Media Corporation 1991 Stock Incentive
Plan pursuant to letter dated July 26, 1993.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Assumption and Amended and Restated Stock Option Agreement between the
Company, TCI/Liberty Holding Company and a director of
Tele-Communications, Inc. relating to assumption of options and
related stock appreciation rights granted outside of an employee
benefit plan pursuant to Tele-Communications, Inc.'s 1993
Non-Qualified Stock Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of options and related stock appreciation
rights granted under Tele-Communications, Inc.'s 1992 Stock
Incentive Plan pursuant to Tele-Communications, Inc.'s 1993
Non-Qualified Stock Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
(continued)
<PAGE> 227
10 - Material contracts, continued:
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of grants pursuant to the Agreement and Plan
of Merger dated June 6, 1991 between United Artists Entertainment
Company and Tele-Communications, Inc.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Form of letter dated September 17, 1991 from Liberty Media Corporation
to grantee relating to grant of stock appreciation rights.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration Statement
on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Form of letter dated July 26, 1993 from Liberty Media Corporation to
grantee relating to grant of options and stock appreciation rights.
Incorporated by reference to Tele-Communications, Inc.'s Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Form of Assumption and Amended and Restated Stock Option Agreement
between the Company, TCI/Liberty Holding Company and grantee
relating to assumption of options and related stock appreciation
rights under Tele-Communications, Inc.'s 1992 Stock Incentive Plan
pursuant to Tele-Communications, Inc.'s 1992 Non-Qualified Stock
Option and Stock Appreciation Rights Agreement.
Incorporated herein by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-54263)
Forms of Assumption and Amended and Restated Stock Option Agreements
relating to options granted under the United Artists Entertainment
Company 1988 Incentive and Non-Qualified Stock Option Plan and
executed by employees who did not have employment agreements with
United Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Forms of Assumption and Amended and Restated Stock Option Agreements
relating to options granted under the United Artists Entertainment
Company 1988 Incentive and Non-Qualified Stock Option Plan and
executed by employees who had employment agreements with United
Artists Entertainment.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
(continued)
<PAGE> 228
10 - Material contracts, continued:
Forms of Second Assumption and Amended and Restated Stock Option
Agreements relating to options granted under the Amended and
Restated United Artists Communications, Inc. 1983 Stock Option Plan
and executed by employees who did not have employment agreements
with United Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications Inc.'s
Post-Effective Amendment No. 1 to Form S-4 Registration
Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Forms of Second Assumption and Amended and Restated Stock Option
Agreements relating to options granted under the Amended and
Restated United Artists Communications, Inc. 1983 Stock Option Plan
and executed by employees who had employment agreements with United
Artists Entertainment Company.
Incorporated herein by reference to Tele-Communications,
Inc.'s Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 Registration Statement.
(Commission File No. 33-43009)
Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights
Agreement.*
Form of Indemnification Agreement.*
Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993,
as amended by Form 10-K/A (amendment #1) for the year ended
December 31, 1993. (Commission File No. 0-5550)
Qualified Employee Stock Purchase Plan of Tele-Communications, Inc.,
as amended.*
Incorporated herein by reference to the Tele-Communications,
Inc. Registration Statement on Form S-8.
(Commission File No. 33-59058)
Second Amendment to Community Cable Television General Partnership
Agreement, dated March 12, 1993, between Tele-Communications of
Colorado, Inc. and Liberty Cable Partner, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Agreement to Purchase and Sell Partnership Interests, dated as of
January 29, 1993, among Mile Hi Cable Partners, L.P., Mile Hi
Cablevision, Inc., Time Warner Entertainment Company, L.P.,
Daniels & Associates Partners Limited, Daniels Communications,
Inc., Cablevision Associates, Ltd., and John Yelenick and Maria
Garcia-Berry, as agents for the limited partners.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated March 24,
1993. (Commission File No. 0-19036)
Loan and Security Agreement, dated January 28, 1993, among Community
Cable Television and Robert L. Johnson, the Paige Johnson Trust and
the Brett Johnson Trust.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated March 24,
1993. (Commission File No. 0-19036)
(continued)
<PAGE> 229
10 - Material contracts, continued:
Agreement of Limited Partnership, dated as of January 28, 1993 among
P & B Johnson Corp., Community Cable Television and Daniels
Communications, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated March 24,
1993. (Commission File No. 0-19036)
Recapitalization Agreement, dated March 26, 1993, among Liberty Media
Corporation, TCI Liberty, Inc. and Tele-Communications of Colorado,
Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Amendment to Recapitalization Agreement, dated June 3, 1993, between
Liberty Media Corporation, TCI Liberty and Tele-Communications of
Colorado, Inc.
$18,539,442 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
$66,900,000 Promissory Note, dated June 3, 1993, from Liberty
Media Corporation to Tele-Communications of Colorado, Inc.
$10,052,000 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
$86,105,000 Promissory Note, dated June 3, 1993, from Liberty Media
Corporation to Tele-Communications of Colorado, Inc.
Pledge and Security Agreement, dated June 3, 1993, between
Liberty Cable Partner, Inc. and Tele-Communications of
Colorado, Inc.
Stock Pledge and Security Agreement, dated June 3, 1993, between
Liberty Capital Corp. and Liberty Cable, Inc., and
Tele-Communications of Colorado, Inc.
Option-Put Agreement, dated June 3, 1993, between Tele-Communications
of Colorado, Inc. and Liberty Cable Partner, Inc.
Assignment and Assumption Agreement, dated June 3, 1993, between
Liberty Cable Partner, Inc. and TCI Holdings, Inc.
Option Agreement dated June 3, 1993, between TCI Holdings, Inc. and
Liberty Cable Partner, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Current Report on Form 8-K, dated June 24,
1993. (Commission File No. 0-19036)
Modification of Promissory Note, dated November 30, 1993, between
Liberty Media Corporation and Tele-Communications of Colorado, Inc.
Modification of Promissory Note, dated November 30, 1993, between
Liberty Media Corporation and TCI Liberty, Inc.
Amendment to Option-Put Agreement, dated November 30, 1993, between
Tele-Communications of Colorado, Inc. and Liberty Cable Partner,
Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993. (Commission File No. 0-19036)
(continued)
<PAGE> 230
10 - Material contracts, continued:
Agreement Regarding Purchase and Sales of Partnership Interest, dated
as of March 26, 1993, between Liberty Cable Partners, Inc. and TCI
Holdings, Inc.
Incorporated herein by reference to Liberty Media
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992. (Commission File No. 0-19036)
Agreement and Plan of Merger, dated as of January 27, 1994, by and
among Tele-Communications, Inc., Liberty Media Corporation,
TCI/Liberty Holding Company, TCI Mergeco, Inc. and Liberty Mergeco,
Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated February 15, 1994.
(Commission File No. 0-5550)
Amendment No. 1, dated as of March 30, 1994, to Agreement and Plan of
Merger, dated as of January 27, 1994, by and among
Tele-Communications, Inc., Liberty Media Corporation, TCI/Liberty
Holding Company, TCI Mergeco, Inc. and Liberty Mergeco, Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated April 6, 1994.
(Commission File No. 0-5550)
Amendment No. 2, dated as of August 4, 1994, to Agreement and Plan of
Merger, dated as of January 27, 1994, by and among
Tele-Communications, Inc., Liberty Media Corporation, TCI/Liberty
Holding Company, TCI Mergeco, Inc. and Liberty Mergeco, Inc.
Incorporated herein by reference to the Company's Current
Report on Form 8-K, dated August 18, 1994.
(Commission File No. 0-20421)
Agreement and Plan of Merger, dated as of August 8, 1994, among
Tele-Communications, Inc., TCI Communications, Inc. and TeleCable
Corporation
Incorporated herein by reference to Tele-Communications,
Inc.'s Current Report on Form 8-K, dated August 18, 1994.
(Commission File No. 0-20421)
21 - Subsidiaries of Tele-Communications, Inc.
23 - Consents of experts and counsel
Consent of KPMG Peat Marwick LLP.
Consent of KPMG Peat Marwick LLP.
Consent of KPMG.
27 - Financial data schedule
Tele-Communications, Inc.
TCI Communications, Inc.
*Constitutes management contract or compensatory arrangement.
<PAGE> 1
Exhibit 10.8
NOVEMBER 1994 GRANT
TELE-COMMUNICATIONS, INC.
1994 STOCK INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION
AND STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the _____ day of ____________,
1995, by and between TELE-COMMUNICATIONS, INC., a Delaware, corporation (the
"Company"), and the person signing adjacent to the caption "Grantee" on the
signature page hereof (the "Grantee").
The Company has adopted the Tele-Communications, Inc. 1994 Stock Incentive
Plan (the "Plan"), a copy of which is appended to this Agreement as Exhibit A
and by this reference made a part hereof, for the benefit of (i) eligible
employees of the Company and its Subsidiaries and (ii) independent contractors
providing services to the Company or its Subsidiaries. Capitalized terms used
and not otherwise defined herein shall have the meaning ascribed thereto in the
Plan.
Pursuant to the Plan, the Compensation Committee of the Board (the
"Committee"), which has been assigned responsibility for adminstering the Plan,
has determined that it would be in the interest of the Company and its
stockholders to grant the options and rights provided herein in order to
provide Grantee with additional remuneration for services rendered, to
encourage Grantee to remain in the employ of the Company or its Subsidiaries
and to increase Grantee's personal interest in the continued success and
progress of the Company.
The Company and Grantee therefore agree as follows:
1. GRANT OF OPTION. Subject to the terms and conditions herein, the
Company grants to the Grantee, during the period commencing on the Grant Date
(as defined in Schedule 1 hereto) and expiring at 5:00 p.m., Denver, Colorado
time ("Close of Business"), on the day which immediately precedes the tenth
anniversary of the Grant Date (the "Option Term"), subject to earlier
termination as provided in paragraphs 8 and 12(b) below, an option to purchase
from the Company, at the price per share set forth on Schedule 1 hereto (the
"Option Price"), the number of shares of Common Stock set forth on said
Schedule 1 (the "Option Shares"). The Option Price and Option Shares are
subject to adjustment pursuant to paragraph 12 below. This option is designated
as a "Nonqualified Stock Option" in accordance with the Plan and is hereinafter
referred to as the "Option."
2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Option, the Company grants to Grantee
for the Option Term, subject to earlier termination as provided in paragraphs 8
and 12(b) below, a
-1-
<PAGE> 2
stock appreciation right with respect to each Option Share (individually, a
"Tandem SAR" and collectively, the "Tandem SARs"). Upon exercise of a Tandem
SAR in accordance with this Agreement, the Company shall, subject to paragraph
6 below, make payment as follows:
(i) the amount of payment shall equal the amount by which the Fair
Market Value of the Option Share on the date of exercise of the Tandem
SAR exceeds the Option Price; and
(ii) payment of the amount determined in accordance with clause (i)
shall be made in shares of Common Stock (valued at their Fair Market
Value as of the date of exercise of such Tandem SAR), or, in the sole
discretion of the Committee, in cash, or partly in cash and partly in
shares of Common Stock.
3. REDUCTION UPON EXERCISE. The exercise of any number of Tandem SARs
shall cause a corresponding reduction in the number of Option Shares which
shall apply against the Option Shares then available for purchase. The exercise
of the Option to purchase any number of Option Shares shall cause a
corresponding reduction in the number of Tandem SARs.
4. CONDITIONS OF EXERCISE. The Option and Tandem SARs are exercisable
only in accordance with the conditions stated in this paragraph.
(a) Except as otherwise provided in paragraph (12)below or in the last
sentence of this subparagraph (a), the Option shall not be exercisable until
the first anniversary of the Grant Date, and on such first anniversary and
thereafter the Option may only be exercised to the extent the Option Shares
have become available for purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Anniversary of Percentage of Option Shares
Grant Date Available for Purchase
----------------- ---------------------------
<S> <C>
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
</TABLE>
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if Grantee's employment with the Company and its Subsidiaries (i)
shall terminate by reason of (x) termination by the Company without cause (as
defined in Section 10.2(b) of the Plan), (y) termination by Grantee for good
reason (as defined herein) or (z) Disability, (ii) shall terminate pursuant to
provisions of a written employment agreement, if any, between the Grantee and
the Company which expressly permit the Grantee to terminate such employment
-2-
<PAGE> 3
upon the occurrence of specified events (other than the giving of notice and
passage of time), or (iii) if Grantee dies while employed by the Company or a
Subsidiary.
(b) A Tandem SAR with respect to an Option Share shall be exercisable
only if the Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Option or Tandem SARs become exercisable, such
Option or Tandem SARs may be exercised in whole or in part (at any time or from
time to time, except as otherwise provided herein) until expiration of the
Option Term or earlier termination thereof.
(d) Grantee acknowledges and agrees that the Committee may, in its
discretion and as contemplated by Section 7.5 of the Plan, adopt rules and
regulations from time to time after the date hereof with respect to the
exercise of SARs and that the exercise by Grantee of the Tandem SARs will be
subject to the further condition that such exercise is made in accordance with
all such rules and regulations as the Committee may determine are applicable
thereto.
5. MANNER OF EXERCISE. The Option or a Tandem SAR shall be considered
exercised (as to the number of Option Shares or Tandem SARs specified in the
notice referred to in subparagraph (a) below) on the latest of (i) the date of
exercise designated in the written notice referred to in subparagraph (a)
below, (ii) if the date so designated is not a business day, the first business
day following such date or (iii) the earliest business day by which the Company
has received all of the following:
(a) Written notice, in such form as the Committee may require,
designating, among other things, the date of exercise, the number of Option
Shares to be purchased and/or the number of Tandem SARs to be exercised;
(b) If the Option is to be exercised, payment of the Option Price for
each Option Share to be purchased in cash or in such other form, or combination
of forms, of payment contemplated by Section 6.6(a) of the Plan as the
Committee may permit; provided, however, that any shares of Common Stock or
Class B Stock delivered in payment of the Option Price, if such from of payment
is so permitted by the Committee, shall be shares that the Grantee has owned
for a period of at least six months prior to the date of exercise, and
provided, further, that, notwithstanding clause (v) of Section 6.6(a) of the
Plan, Option Shares may not be withheld in payment or partial payment of the
Option Price; and
(c) Any other documentation that the Committee may reasonably require.
Notwithstanding the foregoing, if in order to meet the exemptive
requirements of Rule 16b-3, the Grantee exercises Tandem SARs during a
quarterly window period determined in accordance with paragraph (e)(3) of such
Rule (including by designating in a written notice of exercise delivered prior
thereto that such exercise is to be effective during
-3-
<PAGE> 4
such window period), then the date of exercise of such Tandem SARs shall be
deemed for purposes of this paragraph 5 and for purposes of the Fair Market
Value determinations to be made pursuant to paragraph 2 hereof, to be the day
during such window period on which the highest reported last sale price of a
share of Common Stock as reported on NASDAQ occurred and the Fair Market Value
of such share shall be deemed to be such highest reported last sale price.
6. MANDATORY WITHHOLDING FOR TAXES. Grantee acknowledges and agrees that
the Company shall deduct from the cash and/or shares of Common Stock otherwise
payable or deliverable upon exercise of the Option or a Tandem SAR an amount of
cash and/or number of shares of Common Stock (valued at their Fair Market Value
on the date of exercise) that is equal to the amount of all federal, state and
local taxes required to be withheld by the Company upon such exercise, as
determined by the Committee.
7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 5, and subject to the withholding referred to in
paragraph 6, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Option Shares purchased by exercise of the
Option and for the number of shares of Common Stock to which the Grantee is
entitled by the exercise of Tandem SARs and any cash payment to which the
Grantee is entitled by the exercise of Tandem SARs. If delivery is by mail,
delivery of shares of Common Stock shall be deemed effected for all purposes
when a stock transfer agent of the Company shall have deposited the
certificates in the United States mail, addressed to the Grantee, and any cash
payment shall be deemed effected when a Company check, payable to the Grantee
and in an amount equal to the amount of the cash payment, shall have been
deposited in the United States mail, addressed to the Grantee.
8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Committee in its sole discretion, the Option and Tandem SARs
shall terminate, prior to the expiration of the Option Term, at the time
specified below:
(a) If Grantee's employment with the Company and its Subsidiaries
terminates (i) other than (x) by the Company for "cause" (as defined in Section
10.2(b) of the Plan), (y) by the Grantee with "good reason" (as defined herein)
or (z) by the Company without cause, and (ii) other than (x) by reason of death
or Disability, (y) with the written consent of the Company or the applicable
Subsidiary or (z) without such consent if such termination is pursuant to
provisions of a written employment agreement, if any, between the Grantee and
the Company which expressly permit the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of notice and
passage of time), then the Option and all Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's employment;
(b) If Grantee dies while employed by the Company or a Subsidiary, or
prior to the expiration of a period of time following termination of Grantee's
employment during
-4-
<PAGE> 5
which the Option and Tandem SARs remain exercisable as provided in paragraph
(a), the Option and all Tandem SARs shall terminate at the Close of Business
on the first business day following the expiration of the one-year period
which began on the date of death;
(c) If Grantee's employment with the Company terminates by reason of
Disability, then the Option and all Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the one-year
period which began on the date of termination of Grantee's employment;
(d) If Grantee's employment with the Company and its Subsidiaries is
terminated by the Company for "cause" (as defined in Section 10.2(b) of
the Plan), then the Option and all Tandem SARs shall terminate immeditely upon
such termination of Grantee's employment; or
(e) If Grantee's employment (i) is terminated by Grantee (x) with "good
reason" (as defined herein), (y) with the written consent of the Company or
the applicable Subsidiary or (z) pursuant to provisions of a written employment
agreement, if any, between the Grantee and the Company which expressly permit
the Grantee to terminate such employment upon the occurrence of specified
events (other than the giving of notice and passage of time), or (ii) by the
Company without "cause" (as defined in Section 10.2(b) of the Plan), then the
Option Term shall terminate early only as provided for in paragraph 8(b) or
12(b) below.
In any event in which the Option and Tandem SARs remain exercisable for a
period of time following the date of termination of Grantee's employment as
provided above, the Option and Tandem SARs may be exercised during such period
of time only to the extent the same were exercisable as provided in paragraph 4
above on such date of termination of Grantee's employment. A change of
employment is not a termination of employment within the meaning of this
paragraph 8 provided that, after giving effect to such change, the Grantee
continues to be an employee of the Company or any Subsidiary. Notwithstanding
any period of time referenced in this paragraph 8 or any other provision of
this paragraph that may be construed to the contrary, the Option and all Tandem
SARs shall in any event terminate upon the expiration of the Option Term.
"Good reason" for purposes of the Agreement shall be deemed to have
occurred upon the happening of any of the following:
(i) any reduction in Grantee's annual rate of salary;
(ii) either (x) a failure of the Company to continue in effect any
employee benefit plan in which Grantee was participating or (y) the taking
of any action by the Company that would adversely affect Grantee's
participation in, or materially reduce Grantee's benefits under, any such
employee benefit
-5-
<PAGE> 6
plan, unless such failure or such taking of any action, adversely affects
the senior members of the corporate management of the Company generally;
(iii) the assignment to Grantee of duties and responsibilities that
are materially more oppressive or onerous than those attendant to Grantee's
position immediately after the date hereof;
(iv) the relocation of the office location as assigned to Grantee by
the Company to a location more than 20 miles from Grantee's current
location without Grantee's consent; or
(v) the failure of the Company to obtain, prior to the time of any
reorganization, merger, consolidation, disposition of all or substantially
all of the assets of the Company or similar transaction effective after
the date hereof, in which the Company is not the surviving person, the
unconditional assumption in writing or by operation of law of the
Company's obligations to Grantee under this Agreement by each direct
successor to the Company in any such transaction.
9. AUTOMATIC EXERCISE OF TANDEM SARs. Immediately prior to the
termination of the Option, as provided in paragraph 8 above, or the expiration
of the Option Term, all remaining Tandem SARs shall be deemed to have been
exercised by the Grantee.
10. NONTRANSFERABILITY OF OPTION AND TANDEM SARs. During Grantee's
lifetime, the Option and Tandem SARs are not transferable (voluntarily or
involuntarily) other than pursuant to a qualified domestic relations order and,
except as otherwise required pursuant to a qualified domestic relations order,
are exercisable only by the Grantee or Grantee's court appointed legal
representative. The Grantee may designate a beneficiary or beneficiaries to
whom the Option and Tandem SARs shall pass upon Grantee's death and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Committee on the form annexed hereto as
Exhibit B or such other form as may be prescribed by the Committee, provided
that no such designation shall be effective unless so filed prior to the death
of Grantee. If no such designation is made or if the designated beneficiary
does not survive the Grantee's death, the Option and Tandem SARs shall pass by
will or the laws of descent and distribution. Following Grantee's death, the
Option and any Tandem SARs, if otherwise exercisable, may be exercised by the
person to whom such option or right passes accordingly to the foregoing and
such person shall be deemed the Grantee for purposes of any applicable
provisions of this Agreement.
11. NO SHAREHOLDER RIGHTS. The Grantee shall not be deemed for any
purpose to be, or to have any of the rights of, a stockholder of the Company
with respect to any shares of Common Stock as to which this Agreement relates
until such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any way the
right or power of the Company or its stockholders to accomplish any corporate
act, including, without limitation, the acts referred to in Section 10.18 of
the Plan.
-6-
<PAGE> 7
12. ADJUSTMENTS.
(a) The Option and Tandem SARs shall be subject to adjustment (including,
without limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Committee and in such manner as the
Committee may deem equitable and appropriate in connection with the occurrence
of any of the events described in Section 4.2 of the Plan following the Grant
Date.
(b) In the event of any Approved Transaction, Board Change or Control
Purchase, the Option and all Tandem SARs shall become exercisable in full
without regard to paragraph 4(a); provided, however, that to the extent not
theretofore exercised the Option and all Tandem SARs shall terminate upon the
first to occur of the consummation of the Approved Transaction, the expiration
of the Option Term or the earlier termination of the Option and Tandem SARs
pursuant to paragraph 8 hereof. Notwithstanding the foregoing, the Committee
may, in its discretion, determine that the Option and Tandem SARs will not
become exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to consummation of
the Approved Transaction, if the Board or the surviving or acquiring
corporation, as the case may be, shall have taken or made effective provision
for the taking of such action as in the opinion of the Committee is equitable
and appropriate to substitute a new Award for the Award evidenced by this
Agreement or to assume this Agreement and the Award evidenced hereby and in
order to make such new or assumed Award, as nearly as may be practicable,
equivalent to the Award evidenced by this Agreement as then in effect (but
before giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Committee), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into or for
which the Common Stock may be changed, converted or exchanged in connection
with the Approved Transaction.
13. RESTRICTIONS IMPOSED BY LAW. Without limiting the generality of
Section 10.9 of the Plan, the Grantee agrees that Grantee will not exercise the
Option or any Tandem SAR and that the Company will not be obligated to deliver
any shares of Common Stock or make any cash payment, if counsel to the Company
determines that such exercise, delivery or payment would violate any applicable
law or any rule or regulation of any governmental authority or any rule or
regulation of, or agreement of the Company with, any securities exchange or
association upon which the Common Stock is listed or quoted. Except as provided
in Section 10.9 of the Plan, the Company shall in no event be obligated to take
any affirmative action in order to cause the exercise of the Option or any
Tandem SAR or the resulting delivery of shares of Common Stock or other payment
to comply with any such law, rule, regulation or agreement.
14. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
-7-
<PAGE> 8
(i) delivered personally to the following address:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111-3000
and conspicuously marked "Tele-Communications, Inc. 1994 Stock
Incentive Plan, c/o General Counsel"; or
(ii) sent by first class mail, postage prepaid, and addressed as
follows:
Tele-Communications, Inc. 1994 Stock Incentive Plan
c/o General Counsel, Tele-Communications, Inc.
P.O. Box 5630
Denver, Colorado 80217
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by
first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company or the employing Subsidiary on the Grant Date, unless
the Company has received written notification from the Grantee of a change of
address.
15. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Committee as contemplated by Section 10.8(b) of the Plan. Without limiting the
generality of the foregoing, without the consent of the Grantee.
(a) this Agreement may be amended or supplemented (i) to cure any
ambiguity or to correct or supplement any provision herein which may be
defective or inconsistent with any other provision herein, or (ii) to add to
the covenants and agreements of the Company for the benefit of Grantee or
surrender any right or power reserved to or conferred upon the Company in this
Agreement, subject, however, to any required approval of the Company's
stockholders and, provided, in each case, that such changes or corrections
shall not adversely affect the rights of Grantee with respect to the Award
evidenced hereby, or (iii) to make such other changes as the Company, upon
advice of counsel, determines are necessary or advisable because of the
adoption or promulgation of, or change in or of the interpretation of, any law
or governmental rule or regulation, including any applicable federal or state
securities laws; and
(b) subject to Section 10.8(b) of the Plan and any required approval of
the Company's stockholders, the Award evidenced by this Agreement may be
cancelled by the Committee and a new Award made in substitution therefor,
provided that the Award so substituted shall satisfy all of the requirements of
the Plan as of the date such new Award is
-8-
<PAGE> 9
made and no such action shall adversely affect the Option or any Tandem SAR to
the extent then exercisable.
16. GRANTEE EMPLOYMENT. Nothing contained in this Agreement, and no
action of the Company or the Committee with respect hereto, shall confer or be
construed to confer on the Grantee any right to continue in the employ of the
Company or any of its Subsidiaries or interfere in any way with the right of
the Company or any employing Subsidiary to terminate the Grantee's employment
at any time, with or without cause; subject, however, to the provisions of any
employment agreement between the Grantee and the Company or any Subsidiary.
17. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Colorado.
18. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto, including the Plan. This Agreement is
entered into, and the Award evidenced hereby is granted, pursuant to the Plan
and shall be governed by and construed in accordance with the Plan and the
administrative interpretations adopted by the Committee thereunder. All
decisions of the Committee upon questions regarding the Plan or this Agreement
shall be conclusive. Unless otherwise expressly stated herein, in the event of
any inconsistency between the terms of the Plan and this Agreement, the terms
of the Plan shall control. The headings of the paragraphs of this Agreement
have been included for convenience of reference only, and are not to be
considered a part hereof and shall in no way modify or restrict any of the
terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number
of copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
20. RULES BY COMMITTEE. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Committee may, subject to the express provisions of the Plan, adopt from
time to time hereafter.
-9-
<PAGE> 10
21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms
and conditions of this Agreement by signing in the space provided below and
returning a signed copy to the Company.
ATTEST: TELE-COMMUNICATIONS, INC.
______________________ By: ________________________________
Assistant Secretary Name:
Title:
ACCEPTED:
____________________________________
Grantee
-10-
<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of ________________, 1994
TELE-COMMUNICATIONS, INC. 1994 STOCK INCENTIVE PLAN
Grantee:
Grant Date: ____________________, 1994
Option Price: $16.75 per share
Option Shares: ____________ shares of the Company's Class A
Common Stock, $1.00 par value per share
-11-
<PAGE> 12
Exhibit B to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of _____________________, 1994
TELE-COMMUNICATIONS, INC. 1994 STOCK INCENTIVE PLAN
DESIGNATION OF BENEFICIARY
I, _______________________________________ (the "Grantee"), hereby declare
that upon my death _____________________________________ (the "Beneficiary") of
Name
______________________________________________________________________________,
Street Address City State Zip Code
who is my ___________________________________________, shall be entitled to the
Relationship to Grantee
Option, Tandem SARs and all other rights accorded the Grantee by the
above-referenced grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the
laws of descent and distribution.
It is further understood that all prior designations of beneficiary under
the Agreement are hereby revoked and that this Designation of Beneficiary may
only be revoked in writing, signed by the Grantee, and filed with the Company
prior to the Grantee's death.
______________________________ __________________________________
Date Grantee
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Tele-Communications, Inc.
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-56271, 33-57409, 33-57469, 33-57177 and 33-57399) on Form S-3, the
Registration Statements (Nos. 33-54263, 33-57405 and 33-56135) on Form S-4, and
the Registration Statements (Nos. 33-54263 and 33-57635) on Form S-8 of
Tele-Communications, Inc. and the Registration Statement (No. 33-44532) on Form
S-8 of TCI Communications, Inc. of our reports dated March 27, 1995, relating
to the consolidated balance sheets of Tele-Communications, Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1994, and all related
schedules, which reports appear in the December 31, 1994 annual report on Form
10-K of Tele-Communications, Inc. and TCI Communications, Inc. Our reports
refer to the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Investments in Certain Debt and Equity Securities", in 1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
May 1, 1995
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TCI Communications, Inc.
We consent to the incorporation by reference in the Registration Statement (No.
33-60982) on Form S-3 and the Registration Statement (No. 33-44532) on Form
S-8 of TCI Communications, Inc. of our reports dated March 27, 1995, relating
to the consolidated balance sheets of TCI Communications, Inc. and subsidiaries
as of December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholder's(s') equity, and cash flows for each of the years in
the three-year period ended December 31, 1994, and all related schedules, which
reports appear in the December 31, 1994 annual report on Form 10-K of
Tele-Communications, Inc. and TCI Communications, Inc. Our reports refer to
the adoption of Statement of Financial Accounting Standards No. 115,
"Accounting for Investments in Certain Debt and Equity Securities" in 1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
May 1, 1995
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TeleWest Communications plc
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-56271, 33-57409, 33-57469, 33-57177 and 33-57399) on Form S-3, the
Registration Statements (Nos. 33-54263, 33-57405 and 33-56135) on Form S-4, and
the Registration Statements (Nos. 33-54263 and 33-57635) on Form S-8 of
Tele-Communications, Inc. and the Registration Statement (No. 33-44532) on Form
S-8 of TCI Communications, Inc. of our report dated March 21, 1995, relating to
the consolidated balance sheet of TeleWest Communications plc and subsidiaries
as of 31 December 1994 and 1993, and the related consolidated statements of
operations and cash flows for each of the years in the three year period ended
31 December 1994, which report appears in the December 31, 1994 annual report
on Form 10-K of Tele-Communications, Inc. and TCI Communications, Inc.
/s/ KPMG
KPMG
London, England
1 May 1995
