<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment #1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
----- -----
Commission File Numbers 0-20421 and 0-5550
TELE-COMMUNICATIONS, INC.
and
TCI COMMUNICATIONS, INC.
----------------------------------------------------------
(Exact name of Registrants as specified in their charters)
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
TCI Communications, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with
the reduced disclosure format.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of shares held in treasury) as of November 1, 1995, was:
Tele-Communications, Inc. Series A TCI Group common stock - 571,576,645 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 84,801,554 shares,
Tele-Communications, Inc. Series A Liberty Media Group common stock -
142,892,796 shares, and
Tele-Communications, Inc. Series B Liberty Media Group common stock -
21,200,336 shares.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS, INC.
Date: December 12, 1995 By: /s/ D.F. Fisher
---------------------------------
D.F. Fisher
Executive Vice President
(Principal Financial
Officer and Chief
Accounting Officer)
TCI COMMUNICATIONS, INC.
Date: December 12, 1995 By: /s/ Gary K. Bracken
---------------------------------
Gary K. Bracken, Controller
and Senior Vice President
(Principal Financial
Officer and Chief
Accounting Officer)
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 *
------------ ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 142 74
Trade and other receivables, net 310 301
Inventories, net 141 121
Prepaid expenses 63 36
Prepaid program rights 56 24
Committed film inventory 97 58
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 2,076 1,285
Investment in Turner Broadcasting System, Inc.
("TBS") (note 6) 1,000 660
Property and equipment, at cost:
Land 94 91
Distribution systems 9,393 7,705
Support equipment and buildings 1,300 1,085
Computer and broadcast equipment 62 61
---------- ----------
10,849 8,942
Less accumulated depreciation 3,696 3,066
---------- ----------
7,153 5,876
---------- ----------
Franchise costs 13,735 11,152
Less accumulated amortization 1,957 1,708
---------- ----------
11,778 9,444
---------- ----------
Other assets, at cost, net of amortization 1,785 1,438
---------- ----------
$ 24,601 19,317
========== ==========
</TABLE>
* Restated - see note 5.
(continued)
I-1
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 *
--------------- ---------------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 307 201
Accrued interest 170 183
Accrued programming expense 304 248
Other accrued expenses 513 561
Debt (note 8) 12,660 11,162
Deferred income taxes 4,636 3,524
Other liabilities 184 160
---------- -------
Total liabilities 18,774 16,039
---------- -------
Minority interests in equity
of consolidated subsidiaries 684 429
Redeemable preferred stock (note 9) 474 168
Stockholders' equity (notes 2 and 10):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Tele-Communications, Inc. Series A TCI Group
common stock, $1 par value
Authorized 1,100,000,000 shares;
issued 672,101,009 shares in 1995 672 --
Tele-Communications, Inc. Series B TCI Group
common stock, $1 par value
Authorized 150,000,000 shares;
issued 84,801,554 shares in 1995 85 --
Tele-Communications, Inc. Series A Liberty
Media Group common stock,
$1 par value. Authorized 750,000,000 shares;
issued 142,892,796 shares in 1995 143 --
Tele-Communications, Inc. Series B Liberty
Media Group common stock,
$1 par value, Authorized 75,000,000 shares;
issued 21,200,336 shares in 1995 21 --
Class A common stock, $1 par value
Issued 576,979,498 shares in 1994 -- 577
Class B common stock, $1 par value
Issued 89,287,429 shares in 1994 -- 89
Additional paid-in capital 4,025 2,791
Cumulative foreign currency
translation adjustment (3) (4)
Unrealized holding gains for
available-for-sale securities, net of taxes 420 126
Accumulated deficit (380) (288)
---------- -------
4,983 3,291
Treasury stock, at cost (100,524,364 shares
of Series A TCI Group common stock
in 1995; and 86,030,992 shares
and 4,172,629 shares of Class A common
stock and Class B common stock,
respectively, in 1994) (314) (610)
---------- -------
Total stockholders' equity 4,669 2,681
---------- -------
Commitments and contingencies (note 12)
$ 24,601 19,317
========== =======
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 * 1995 1994 *
-------- -------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 7):
From cable and programming services $ 1,521 1,107 4,215 3,248
Net sales from electronic retailing services 240 179 730 179
-------- -------- -------- --------
1,761 1,286 4,945 3,427
-------- -------- -------- --------
Operating costs and expenses:
Operating 544 368 1,517 1,012
Cost of sales from electronic retailing services 163 117 491 117
Selling, general and administrative 521 364 1,434 959
Compensation relating to stock
appreciation rights 8 10 26 --
Adjustment to compensation relating to
stock appreciation rights -- -- -- (8)
Restructuring charges 6 -- 8 --
Depreciation 226 163 655 499
Amortization 111 78 301 223
-------- -------- -------- --------
1,579 1,100 4,432 2,802
-------- -------- -------- --------
Operating income 182 186 513 625
Other income (expense):
Interest expense (262) (205) (745) (568)
Interest and dividend income 18 6 36 26
Gain on sale of subsidiary stock (note 11) 123 -- 123 --
Share of earnings of Liberty Media
Corporation ("Liberty") -- 101 -- 125
Share of losses of other affiliates,
net (note 5) (64) (26) (136) (56)
Minority interests in losses of
consolidated subsidiaries, net 19 -- 40 --
Other, net (17) (4) (27) (4)
-------- -------- -------- --------
(183) (128) (709) (477)
-------- -------- -------- --------
Earnings (loss) before income taxes (1) 58 (196) 148
Income tax benefit (expense) 37 (33) 104 (85)
-------- -------- -------- --------
Net earnings (loss) (note 7) 36 25 (92) 63
Dividend requirements on
preferred stocks (9) (3) (26) (3)
-------- -------- -------- --------
Net earnings (loss) attributable
to common shareholders (note 7) $ 27 22 (118) 60
======== ======== ======== ========
Net earnings (loss) attributable to
common shareholders (note 3):
TCI Class A and Class B common stock $ 86 22 (59) 60
TCI Group Series A and Series B
common stock (56) -- (56) --
Liberty Media Group Series A and
Series B common stock (3) -- (3) --
-------- -------- -------- --------
$ 27 22 (118) 60
======== ======== ======== ========
Primary and fully diluted net earnings (loss)
attributable to common shareholders
per common and common equivalent
share (note 3):
TCI Class A and Class B common stock $ .12 .04 (.09) .12
TCI Group Series A and Series B
common stock (.09) -- (.09) --
Liberty Media Group Series A and
Series B common stock (.02) -- (.02) --
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------------
Class B TCI TCI Group Liberty Media Group
Preferred ------------------ ------------------ --------------------
Stock Class A Class B Series A Series B Series A
----------- ------- ------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 * $ -- 577 89 -- -- --
Net loss -- -- -- -- -- --
Issuance of common stock in
public offering -- 20 -- -- -- --
Issuance of common stock in
private offering -- 1 -- -- -- --
Issuance of common stock for
acquisitions and investments (note 7) -- 59 -- -- -- --
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization -- -- -- -- -- --
Issuance of Class A common stock to
subsidiary in exchange for investment -- -- -- -- -- --
Retirement of Class A common
stock previously held by
subsidiary -- -- -- -- -- --
Exchange of common stock held
by subsidiaries of TCI for
Convertible Redeemable
Participating Preferred Stock,
Series F (note 9) -- (86) (4) -- -- --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock -- -- -- 101 -- --
Distribution of Series A and
Series B Liberty Media Group
common stock to TCI
common shareholders
(note 2) -- -- -- -- -- 143
Costs associated with Distribution to Shareholders -- -- -- -- -- --
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock (note 2) -- (571) (85) 571 85 --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- -- --
-------- -------- -------- ------ ------- -------
Balance at September 30, 1995 $ -- -- -- 672 85 143
======== ======== ======== ==== ===== ====
<CAPTION>
Unrealized
Cumulative holding
foreign gains for
Liberty Media Group Additional currency available-
------------------- paid-in translation for-sale
Series B capital adjustment securities *
-------- ---------- ------------ ------------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1995 * -- 2,791 (4) 126
Net loss -- -- -- --
Issuance of common stock in
public offering -- 381 -- --
Issuance of common stock in
private offering -- 29 -- --
Issuance of common stock for
acquisitions and investments (note 7) -- 1,329 -- --
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization -- (6) -- --
Issuance of Class A common stock to
subsidiary in exchange for investment -- (1) -- --
Retirement of Class A common
stock previously held by
subsidiary -- 29 -- --
Exchange of common stock held
by subsidiaries of TCI for
Convertible Redeemable
Participating Preferred Stock,
Series F (note 9) -- (542) -- --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock -- 213 -- --
Distribution of Series A and
Series B Liberty Media Group
common stock to TCI
common shareholders
(note 2) 21 (164) -- --
Costs associated with Distribution to Shareholders -- (6) -- --
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock (note 2) -- -- -- --
Accreted dividends on all classes of
preferred stock -- (26) -- --
Accreted dividends on all classes of
mandatory redemption requirements -- 8 -- --
Payment of preferred stock dividends -- (10) -- --
Foreign currency translation adjustment -- -- 1 --
Change in unrealized holding gains for
available-for-sale securities -- -- -- 294
----- ----- ------- -----
Balance at September 30, 1995 21 4,025 (3) 420
===== ===== ======== =====
<CAPTION>
Total
Accumulated Treasury stockholders'
deficit * stock equity *
--------------- ---------- ----------------
amounts in millions
<S> <C> <C> <C>
Balance at January 1, 1995 * (288) (610) 2,681
Net loss (92) -- (92)
Issuance of common stock in
public offering -- -- 401
Issuance of common stock in
private offering -- -- 30
Issuance of common stock for
acquisitions and investments (note 7) -- -- 1,388
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization -- 6 --
Issuance of Class A common stock to
subsidiary in exchange for investment -- 1 --
Retirement of Class A common
stock previously held by
subsidiary -- (29) --
Exchange of common stock held
by subsidiaries of TCI for
Convertible Redeemable
Participating Preferred Stock,
Series F (note 9) -- 632 --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock -- (314) --
Distribution of Series A and
Series B Liberty Media Group
common stock to TCI
common shareholders
(note 2) -- -- --
Costs associated with Distribution to Shareholders -- -- (6)
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock (note 2) -- -- --
Accreted dividends on all classes of
preferred stock -- -- (26)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements -- -- 8
Payment of preferred stock dividends -- -- (10)
Foreign currency translation adjustment -- -- 1
Change in unrealized holding gains for
available-for-sale securities -- -- 294
---- ---- -----
Balance at September 30, 1995 (380) (314) 4,669
==== ==== =====
</TABLE>
*Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1995 1994 *
-------- --------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (92) 63
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 956 722
Compensation relating to stock
appreciation rights 26 --
Adjustment to compensation relating to stock
appreciation rights -- (8)
Gain on sale of subsidiary stock (123) --
Share of earnings of Liberty -- (125)
Share of losses of other affiliates 136 56
Deferred income tax expense (benefit) (140) 42
Minority interests in losses (40) --
Noncash interest and dividend income (7) (6)
Other noncash charges (credits) 9 (3)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 14 (1)
Change in inventories (18) --
Change in prepaids (86) (87)
Change in accrued interest (18) (16)
Change in other accruals and payables 53 63
------- -------
Net cash provided by operating activities 670 700
------- -------
Cash flows from investing activities:
Cash received from (paid for) acquisitions (251) 67
Capital expended for property and equipment (1,205) (949)
Proceeds from disposition of assets 29 32
Additional investments in and
loans to affiliates and others (958) (308)
Repayment of loans by affiliates and others 20 144
Return of capital from affiliates 13 22
Other investing activities (222) (225)
------- -------
Net cash used in investing activities (2,574) (1,217)
------- -------
Cash flows from financing activities:
Borrowings of debt 7,088 3,014
Repayments of debt (5,970) (2,449)
Proceeds from sale of subsidiary stock 445 --
Preferred stock dividends of subsidiaries -- (3)
Preferred stock dividends (22) --
Issuance of common stock 431 --
------- -------
Net cash provided by financing activities 1,972 562
------- -------
Net increase in cash 68 45
Cash at beginning of period 74 1
------- -------
Cash at end of period $ 142 46
======= =======
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
(unaudited)
(1) General
The accompanying consolidated financial statements include the
accounts of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in TCI's Annual Report on Form
10-K, as amended, for the year ended December 31, 1994.
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty entered into a
definitive 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. Upon consummation of the TCI/Liberty
Combination, certain subsidiaries of TCIC exchanged their shares of
Old TCI Class A common stock for shares of TCI Class A common stock.
Additionally, subsidiaries of TCI exchanged their shares of Liberty
Class A common stock for TCI Class A common stock and Liberty
exchanged its shares of Old TCI Class A and Class B common stock for
like shares of TCI common stock. Subsidiaries of TCI also exchanged
their shares of various preferred stock issuances of Liberty for
preferred stock of TCI. (See note 2). Preferred stock of TCI, which
is owned by subsidiaries of TCI, eliminates in consolidation.
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)
I-6
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the fourth quarter of 1994, the Company was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming
("TCI International"); and Technology/Venture Capital. Upon
Reorganization, certain of the assets of TCIC and Liberty were
transferred to the other operating units. In the first quarter of
1995, TCIC transferred additional assets to TCI International.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years
beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company has not yet determined the financial
statement impact of the adoption of Statement No. 121.
Certain amounts have been reclassified for comparability with the 1995
presentation.
(2) Liberty Group Stock
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). While the Liberty Group
Stock constitutes common stock of TCI, the issuance of the Liberty
Group Stock did not result in any transfer of assets or liabilities of
TCI or any of its subsidiaries or affect the rights of holders of
TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to
the Liberty Media Group (the "Distribution") to its security holders
of record on August 4, 1995. Additionally, the stockholders of TCI
approved the redesignation of the previously authorized TCI Class A
and Class B common stock into Series A TCI Group and Series B TCI
Group common stock.
(continued)
I-7
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The subsidiaries of TCI attributed to Liberty Media Group, as well as
certain investments held by these or other subsidiaries of TCI also
attributed to Liberty Media Group at the time of the Distribution, are
as follows:
Subsidiaries
------------
Encore Media Corporation ("Encore")
TV Network Corporation
Home Shopping Network, Inc. ("HSN")
Southern Satellite Systems, Inc. ("Southern")
Netlink USA
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd.
Vision Group Incorporated
Americana Television Productions LLC
MacNeil/Lehrer Productions
Prime Ticket Networks, L.P.
Encore International, Inc.
Liberty Productions, Inc.
Prime Sports Network - Northwest
Investments
-----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network ("Court")
Discovery Communications, Inc.
DMX, Inc.
E! Entertainment Television, Inc.
International Family Entertainment, Inc.
Ingenius
International Cable Channels Partnership, Ltd.
QE+ Ltd.
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc.
TBS
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership
SportsChannel Chicago Associates
SportsChannel Pacific Associates
SportsChannel Prism Associates
Prime Sports Network - Upper Midwest
SportSouth Network, L.P. ("SportSouth")
Sunshine Network
American Movie Classics Company
Republic Pictures Television
Sillerman Communications Management Corporation
Technology Programming Ventures
Premier Sports
Silver King Communications, Inc.
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP
The National Registry
PPVN Holding Company
(continued)
I-8
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A
and Series B TCI Group common stock, the Series A and Series B TCI
Group common stock is intended to reflect the separate performance of
TCI Group, which is generally comprised of the subsidiaries and assets
not attributed to Liberty Media Group, including (i) TCI's Cable and
Communication unit, (ii) TCI International and (iii) TCI's
Technology/Venture Capital unit. Liberty Media Group includes the
businesses of TCI which distribute cable television programming
services. The businesses of TCI not attributed to Liberty Media Group
are referred to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group or to Liberty Media Group for
purposes of preparing their combined financial statements, the change
in the capital structure of TCI approved by the shareholders of TCI
does not affect the ownership or the respective legal title to assets
or responsibility for liabilities of TCI or any of its subsidiaries.
TCI and its subsidiaries will each continue to be responsible for
their respective liabilities. Holders of TCI Group common stock or
Liberty Group Stock are holders of common stock of TCI and continue to
be subject to risks associated with an investment in TCI and all of
its businesses, assets and liabilities. The issuance of Liberty Group
Stock did not affect the rights of creditors of TCI.
Dividends on the TCI Group common stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends and the available dividend amount with respect
to TCI Group, as defined. Determinations to pay dividends on TCI
Group common stock will be based primarily upon the financial
condition, results of operations and business requirements of TCI
Group and TCI as a whole.
Dividends on the Liberty Group Stock are payable at the sole
discretion of the Board out of the lesser of (i) all assets of TCI
legally available for dividends and (ii) the available dividend amount
with respect to Liberty Media Group, as defined. Determinations to
pay dividends on Liberty Group Stock will be based primarily upon the
financial condition, results of operations and business requirements
of Liberty Media Group and TCI as a whole.
(continued)
I-9
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
After the Distribution, existing preferred stock and debt securities
of TCI that were convertible into or exchangeable for shares of TCI
Class A common stock were, as a result of the operation of
antidilution provisions, adjusted so that there will be delivered upon
their conversion or exchange (in addition to the same number of shares
of redesignated Series A TCI Group Common Stock as were theretofore
issuable thereunder) the number of shares of Series A Liberty Group
Stock that would have been issuable in the Distribution with respect
to the TCI Class A common stock issuable upon conversion or exchange
had such conversion or exchange occurred prior to the record date for
the Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Distribution were adjusted by issuing
to the holders of such options separate options to purchase that
number of shares of Series A Liberty Group Stock which the holder
would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date
for the Distribution and reallocating a portion of the aggregate
exercise price of the previously outstanding options to the newly
issued options to purchase Series A Liberty Group Stock. Such
convertible or exchangeable preferred stock and debt securities and
options outstanding on the record date for the Distribution are
referred to as "Pre-Distribution Convertible Securities." The
issuance of shares of Series A Liberty Group Stock upon such
conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets
from TCI Group to Liberty Media Group or a reduction in any
Inter-Group Interest that then may exist, in consideration of such
issuance. In the case of the exercise of Pre- Distribution
Convertible Securities consisting of options to purchase Series A
Liberty Group Stock, the proceeds received upon the exercise of such
options will be attributed to Liberty Media Group. If Pre-
Distribution Convertible Securities remain outstanding at the time of
any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders
of Liberty Group Stock their proportionate interest in the net
proceeds of the disposition, the proportionate interest of the holders
of Liberty Group Stock will be determined on a basis that allocates to
the TCI Group a portion of such net proceeds, in addition to the
portion attributable to any Inter-Group Interest, sufficient to
provide for the payment of the portion of the consideration payable by
TCI on any post-Distribution conversion, exercise or exchange of
Pre-Distribution Convertible Securities that becomes so payable in
substitution for shares of Liberty Group Stock that would have been
issuable upon such conversion, exercise or exchange if it had occurred
prior to the record date for the disposition. Likewise, if
Pre-Distribution Convertible Securities remain outstanding at the time
of any redemption for all the outstanding shares of Liberty Group
Stock in exchange for stock of any one or more wholly-owned
subsidiaries of TCI which hold all of the assets and liabilities of
Liberty Media Group, the portion of the shares of such subsidiaries
deliverable in redemption of the outstanding shares of Liberty Group
Stock will be determined on a basis that allocates to TCI Group a
portion of the shares of such subsidiaries, in addition to the number
of shares so allocated in respect to any Inter-Group Interest,
sufficient to provide for the payment of the portion of the
consideration payable by TCI upon any post-redemption conversion,
exercise or exchange of Pre-Distribution Convertible Securities that
becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or
exchange if it had occurred prior to such redemption.
(continued)
I-10
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A number of wholly-owned subsidiaries of the Company which are part of
the TCI Group owned shares of Class A common stock and preferred stock
of the Company ("Subsidiary Shares"). Because the Distribution of the
Liberty Group Stock was made as a dividend to all holders of the
Company's Class A common stock and Class B common stock and, pursuant
to the anti-dilution provisions set forth therein, to the holders of
securities convertible into Class A common stock and Class B common
stock upon the conversion thereof, shares of Liberty Group Stock would
have otherwise been issued and become issuable in respect of the
Subsidiary Shares held by these subsidiaries and would have been
attributed to the TCI Group. The Liberty Group Stock issued in
connection with the Distribution was intended to constitute 100% of
the equity value thereof to the holders of the TCI Class A common
stock and TCI Class B common stock and TCI Group does not initially
have any interest in the Liberty Media Group represented by any
outstanding shares of Liberty Group Stock (an "Inter-Group Interest").
Therefore, the Company determined to exchange all of the outstanding
Subsidiary Shares for shares of a new series of Series Preferred Stock
designated Convertible Redeemable Participating Preferred Stock,
Series F (the "Series F Preferred Stock"). See note 9. The rights,
privileges and preferences of the Series F Preferred Stock did not
entitle its holders to receive Liberty Group Stock in the Distribution
or upon conversion of the Series F Preferred Stock.
(3) Earnings (Loss) Per Common and Common Equivalent Share
TCI Class A and Class B Common Stock
Primary earnings per common and common equivalent share attributable to
common shareholders was computed by dividing net earnings attributable
to common shareholders by the weighted average number of common and
common equivalent shares outstanding (628.3 million and 536.2 million
for the three months and nine months ended September 30, 1994,
respectively, and 703.9 million for the period from July 1, 1995
through the Distribution).
Fully diluted earnings per common and common equivalent share
attributable to common shareholders was computed by dividing earnings
attributable to common shareholders by the weighted average number of
common and common equivalent shares outstanding (628.3 million and
536.2 million for the three months and nine months ended September 30,
1994, respectively, and 704.0 million for the period from July 1, 1995
through the Distribution).
Loss per common share attributable to common shareholders was computed
by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding (648.2 million
for the period from January 1, 1995 through the Distribution). Common
stock equivalents were not included in the computation of weighted
average shares outstanding because their inclusion would be
anti-dilutive.
TCI Group Series A and Series B Common Stock
The loss attributable to common shareholders per common share for the
period from the Distribution to September 30, 1995 was computed by
dividing net loss attributable to TCI Group Series A and Series B
common shareholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (656.4 million). Common stock equivalents were not included in
the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
(continued)
I-11
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liberty Media Group Series A and Series B Common Stock
The loss per common share for the period from the Distribution to
September 30, 1995 was computed by dividing net loss attributable to
Liberty Media Group Series A and Series B common shareholders by the
weighted average number of common shares outstanding of Liberty Media
Group Series A and Series B common stock during the period (164.1
million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1995 1994
------ ------
amount in millions
<S> <C> <C>
Cash paid for interest $ 763 573
========== ===========
Cash paid for income taxes $ 53 27
========== ===========
</TABLE>
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid for (received from) acquisitions:
Fair value of assets acquired $ 3,394 1,398
Liabilities assumed (495) (449)
Deferred tax liability recorded
in acquisitions (1,095) (244)
Minority interests in equity of
acquired entities 62 (164)
Note receivable from related party assumed -- 15
Common stock and preferred stock issued
in acquisitions (1,615) (650)
Common stock issued to TCIC and Liberty
in the TCI/Liberty Combination reflected
as treasury stock (note 4) -- 313
Unrealized gains on available-for-sale
securities reflected on acquired entities -- (286)
------- -------
Cash paid for (received from) acquisitions $ 251 $ (67)
======= =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ 14 --
======= =======
Common stock issued to subsidiaries in
Reorganization $ 6 --
======= =======
Assets contributed for interest in limited liability
company $ 3 --
======= =======
</TABLE>
(continued)
I-12
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1995 1994
-------- --------
amounts in millions
<S> <C> <C>
Retirement of Class A common stock
previously held by subsidiary $ 29 --
======== ========
Exchange of common stock held by
subsidiaries for Series F Preferred Stock $ 632 --
======== ========
Distribution of Series A and Series B Liberty
Group common stock to TCI common
shareholders $ 164 --
======== ========
Redesignation of TCI common stock into
Series A and Series B TCI Group common
stock $ 656 --
======== ========
Conversion of Series F Preferred Stock by
subsidiary of TCI into Series A TCI Group
common stock $ 314 --
======== ========
Common stock issued in exchange for
cost investment $ 73 --
======== ========
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 1 24
======== ========
Unrealized gains, net of deferred taxes,
on available-for-sale securities
as of January 1, 1994 $ -- 304
======== ========
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities exclusive of unrealized gains
recorded in the TCI/Liberty Combination $ 294 53
======== ========
Accrued preferred stock dividends $ 4 3
======== ========
Issuance of subsidiary stock for equity
investment $ 11 --
======== ========
Common stock issued to subsidiary in
exchange for investment $ 1 --
======== ========
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
======== ========
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
======== ========
Common stock issued upon conversion
of notes $ -- 3
======== ========
</TABLE>
(continued)
I-13
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates, other than
Liberty and its affiliates through August 4, 1994, accounted for under
the equity method are as follows:
<TABLE>
<CAPTION>
Nine months
ended
Combined Operations September 30,
------------------- ---------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 3,057 1,929
Operating expenses (2,666) (1,749)
Depreciation and amortization (370) (188)
------- -------
Operating income (loss) 21 (8)
Interest expense (227) (63)
Other, net (84) (220)
------- -------
Net loss $ (290) (291)
======= =======
</TABLE>
The Company has various investments accounted for under the equity
method. Some of the more significant investments held by the Company
at September 30, 1995 were MajorCo, L.P. ("MajorCo"), a partnership
formed by the Company, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
(carrying value of $675 million) (see note 12), TeleWest
Communications plc (carrying value of $424 million), Teleport
Communications Group, Inc. and TCG Partners (collectively, "TCG")
(carrying value of $142 million) and Discovery Communications, Inc.
(carrying value of $122 million).
In August 1995, Liberty Media Group made an additional $29 million
investment in Court. Such additional investment represented unpaid
prior years' capital calls which had diluted Liberty Media Group's
ownership of Court. Upon payment of the $29 million, Liberty Media
Group restored its 1/3 ownership interest in Court. Due to the
additional investment in Court, Liberty Media Group's share of losses
of Court for the nine months ended September 30, 1995, which amounts
to $19 million, includes an $18 million adjustment to reflect the
Company's share of previously unrecognized losses of Court. These
losses were not recognized in prior periods due to the fact that
Liberty Media Group's investment in Court had been reduced to zero.
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
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.
(continued)
I-14
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The QVC Tender Offer expired 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.
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 received its ownership of QVC in the TCI/Liberty Combination.
Liberty began 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
was deemed to exercise significant influence over QVC and, as such,
adopted the equity method of accounting. As a result, TCI restated
its investment in QVC, its unrealized gain on available-for-sale
securities, its deferred taxes and accumulated deficit by $211
million, $127 million, $89 million and $5 million, respectively, at
December 31, 1994. The restatement resulted in an increase in the
Company's net earnings of $2 million for the nine months ended
September 30, 1994.
(6) Investment in Turner Broadcasting System, Inc.
The Company owns shares of a class of preferred stock of TBS which has
voting rights and is convertible into TBS common stock. The holders of
those preferred shares, as a group, are entitled to elect seven of
fifteen members of the board of directors of TBS, and the Company
appoints three such representatives. However, voting control over TBS
continues to be held by its chairman of the board and chief executive
officer. The Company's total holdings of TBS common and preferred
stocks represent an approximate 7.5% voting interest for those matters
for which preferred and common stock vote as a single class. See
note 8.
At September 30, 1995, the Company's investment in TBS preferred
stock, carried at cost, had an aggregate market value of $980 million
(which exceeded cost by $802 million), based upon the market value of
the common stock into which it is convertible.
On September 22, 1995, the boards of directors of Time Warner Inc.
("Time Warner") and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of the
agreement, TBS shareholders will receive 0.75 Time Warner common
shares for each TBS Class A and B common share. Each holder of TBS
Class C preferred stock will receive 0.80 Time Warner common shares
for each of the 6 shares of TBS Class B common stock into which each
of the shares of Class C preferred stock may be converted.
(continued)
I-15
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subject to certain conditions, The Company has agreed to vote its TBS
shares for the merger. The Time Warner shares of common stock received
by the Company will be exchanged for voting preferred stock ("Time
Warner Preferred Stock") economically equivalent to the common stock
and placed in a voting trust with Time Warner Chairman, Gerald M.
Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth, a regional sports cable network, to the
Company for approximately $60 million; and Time Warner has agreed to
issue 5 million shares of common stock to TCI in exchange for a 6-year
option to purchase Southern. Time Warner has also agreed to issue
shares of Time Warner common stock to the Company with a market value
of $160 million in the event it exercised such option. Any shares of
Time Warner common stock issuable in connection with the Southern
option will be exchanged for Time Warner Preferred Stock. Additionally,
Time Warner will grant the Company an option to purchase Time Warner's
interest in Sunshine Network, a Florida based sports cable network, for
$14 million.
The transaction is subject to, among other things, approval by the
Federal Communications Commission ("FCC") and regulatory review by
federal antitrust authorities, and approval by the shareholders of TBS
and Time Warner. It is expected to be completed in 1996.
(7) Acquisitions
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 Convertible Preferred Stock, Series D (the "Series D
Preferred Stock") with an aggregate initial liquidation value of $300
million (see note 9).
On April 25, 1995, TCI International acquired a 51% ownership interest
in Cablevision S.A. and certain affiliated companies (collectively,
"Cablevision") for a purchase price of $282 million, before liabilities
assumed. The purchase price was paid with cash consideration of $195
million (including a previously paid $20 million deposit) and TCI
International's issuance of $87 million principal amount of secured
negotiable promissory notes payable (the "Cablevision Notes") to the
selling shareholders. TCI International has an option during the
two-year period ended April 25, 1997 to increase its ownership interest
in Cablevision up to 80% at a cost per subscriber similar to the
initial purchase price, adjusted however for certain fluctuations in
applicable foreign currency exchange rates.
(continued)
I-16
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The acquisitions of TeleCable and Cablevision were accounted for by the
purchase method. Accordingly, the results of operations of such
acquired entities have been consolidated with those of the Company
since the respective dates of acquisition. On a pro forma basis, the
Company's revenue, net loss, net loss attributable to common
shareholders and net loss per share of Class A Common Stock would have
been increased by $93 million, $6 million, $7 million and $.01,
respectively, for the nine months ended September 30, 1995; and revenue
would have increased by $323 million, and net earnings, net earnings
attributable to common shareholders and net earnings per share would
have been reduced by $1 million, $13 million and $.02, respectively,
for the nine months ended September 30, 1994 had such acquired entities
been consolidated with the Company on January 1, 1994. 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 since January 1, 1994.
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 was payable in shares of TCI Class A common stock. Such
acquisition was consummated in the first quarter of 1995.
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------------ -----------------
amounts in millions
<S> <C> <C>
Senior notes $ 6,704 5,412
Bank credit facilities 3,392 4,045
Commercial paper 1,157 445
Notes payable 964 1,024
Convertible notes (a) 45 45
Cablevision Notes (b) 78 --
Other debt 320 191
--------------- -------------
$ 12,660 11,162
=============== =============
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at September 30, 1995 and December
31, 1994, mature on December 18, 2021. The notes require (so
long as conversion of the notes has not occurred) an annual
interest payment through 2003 equal to 1.85% of the face
amount of the notes. At September 30, 1995, the notes were
convertible, at the option of the holders, into an aggregate
of 38,707,574 shares of Series A TCI Group common stock and
9,676,894 shares of Series A Liberty Group Stock. See note 2.
(continued)
I-17
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) The Cablevision Notes are secured by TCI International's
pledge of stock representing its 51% interest in Cablevision.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 100,524,364 shares of Series A TCI
Group common stock held by a subsidiary of the Company. As security
for borrowings under one of the Company's credit facilities, the
Company pledged a portion of its TBS common stock (with a quoted
market value of $804 million at September 30, 1995).
In order to achieve the desired balance between variable and fixed
rate indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 6.1% to 9.9% on notional
amounts of $602 million at September 30, 1995 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,520 million at September 30, 1995. During the nine months ended
September 30, 1995 and 1994, the Company's net payments pursuant to
the Fixed Rate Agreements were $1 million and $13 million,
respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were less than $1 million and $33 million,
respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements
expire as follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
-------------- ------------- ------ -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.2% 300
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
------ February 2000 5.8%-6.6% 650
March 2000 5.8%-6.0% 675
$ 602 September 2000 5.1% 75
====== --------
$ 2,520
========
</TABLE>
(continued)
I-18
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 $225 million which fix the
maximum variable interest rates at 11% Such agreements expire during
the fourth quarter of 1995.
The fair value of the interest rate exchange agreements is the
estimated amount that the Company would pay or receive to terminate
the agreements at September 30, 1995, taking into consideration
current interest rates and the current creditworthiness of the
counterparties. The Company would be required to pay $27 million at
September 30, 1995 to terminate the agreements.
The fair value of the debt of the Company's subsidiaries is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the subsidiaries of the Company for debt
of the same remaining maturities. The fair value of debt, which has a
carrying value of $12,660 million, was $13,024 million at
September 30, 1995.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper.
(9) Redeemable Preferred Stock
Convertible Preferred Stock, Series C ("Series C Preferred Stock"). TCI
has issued 70,575 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 Series A TCI Group common stock and 25
shares of Series A Liberty Group 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 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.
(continued)
I-19
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Series F
Preferred Stock with respect to the declaration and payment of
dividends.
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 Series F 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. Subject to the
rights of any other class or series of the Company's preferred stock
ranking pari passu with the Series C Preferred Stock, the Series C
Preferred Stock is required to be redeemed by the Company at any time
after such seventh anniversary at the option of the holder, in whole or
in part (provided that the aggregate liquidation value of the shares to
be redeemed is in excess of $1 million), in each case at a redemption
price, per share, equal to the liquidation value.
(continued)
I-20
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
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.
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 Group and Liberty Media Group 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 Group and Liberty Media Group 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
Delaware General Corporation Law ("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.
Convertible Preferred Stock, Series D. The Company issued 1,000,000
shares of a series of TCI Series Preferred Stock designated
"Convertible Preferred Stock, Series D", par value $.01 per share, as
partial consideration for the merger between TCIC and TeleCable (see
note 7).
(continued)
I-21
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The holders of the Series D Preferred Stock shall be entitled to
receive, when and as declared by the Board 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 Series A TCI Group common stock, the Series B TCI
Group common stock, the Series A Liberty Media Group common stock, the
Series B Liberty Media Group 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 Series F Preferred Stock and the Series C Preferred Stock.
Prior to the Distribution, 431 shares of Series D Preferred Stock were
converted into 4,310 shares of TCI Class A common stock. Subsequent
to the Distribution, each share of Series D Preferred Stock is
convertible into 10 shares of Series A TCI Group common stock and 2.5
shares of Series A Liberty Group 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 common stock at
a conversion rate equal to 95% of the then current market price of
common stock, and upon issuance of common stock to holders of Series D
Preferred Stock in respect of such deemed conversion, such dividend
will be deemed paid for all purposes. See note 2.
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
exceeds certain defined levels 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 common stock at a conversion
rate of 95% of the then current market value of 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)
I-22
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Convertible Redeemable Participating Preferred Stock, Series F.
Immediately prior to the record date for the Distribution, the Company
caused each of its subsidiaries holding Subsidiary Shares to exchange
such shares for shares of Series F Preferred Stock having an aggregate
value of not less than that of the Subsidiary Shares so exchanged. The
Company is authorized to issue 500,000 shares of Series F Preferred
Stock, par value $.01 per share. Subsidiaries of TCI hold all the
issued and outstanding shares. Subsidiaries of TCI exchanged all of the
Subsidiary Shares for 355,141 shares of Series F Preferred Stock.
Subsequent to such exchange, a holder of 78,077 shares of Series F
Preferred Stock converted its holdings into 100,524,364 shares of
Series A TCI Group common stock. Such shares of Series A TCI Group
common stock are reflected as treasury stock in the accompanying
consolidated financial statements. Such preferred stock of TCI
eliminates in consolidation.
Each share of Series F Preferred Stock was convertible into 1,000
shares of Series A TCI Group common stock, subject to anti-dilution
adjustments, at the option of the holder at any time. The
anti-dilution provisions of the Series F Preferred Stock provide that
the conversion rate of the Series F Preferred Stock will be adjusted
by increasing the number of shares of Series A TCI Group common stock
issuable upon conversion in the event of any non-cash dividend or
distribution of the Series A TCI Group common stock to give effect to
the value of the securities, assets or other property so distributed;
however, no such adjustment shall entitle the holder to receive the
actual security, asset or other property so distributed upon the
conversion of shares of Series F Preferred Stock. Therefore, the
Distribution resulted in an adjustment to the conversion rate of the
Series F Preferred Stock such that each holder has the right to
receive upon conversion 1,287.51 shares of Series A TCI Group common
stock.
The holders of the Series F Preferred Stock are entitled to
participate, on an as-converted basis, with the holders of the Series
A TCI Group common stock, with respect to any cash dividends or
distribution declared and paid on the Series TCI Group common stock.
Dividends or distribution on the Series A TCI Group common stock which
are not paid in cash would result in the adjustment of the applicable
conversion rate as described above.
Upon the dissolution, liquidation or winding up of the Company,
holders of the Series F Preferred Stock will be entitled to receive
from the assets of the Company available for distribution to
stockholders an amount, in cash or property or a combination thereof,
per share of Series F Preferred Stock, equal to the sum of (x) $.01
and (y) the amount to be distributed per share of Series A TCI Group
common stock in such liquidation, dissolution or winding up multiplied
by the applicable conversion rate of a share of Series F Preferred
Stock.
(continued)
I-23
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in party, at a
redemption price, per share, equal to the issue price of a share of
Series F Preferred Stock (as adjusted in respect of stock splits,
reverse splits and other events affecting the shares of Series F
Preferred Stock), plus any dividends which have been declared but are
unpaid as of the date fixed for such redemption. The Company may
elect to pay the redemption price (or designated portion thereof) of
the shares of Series F Preferred Stock called for redemption by
issuing to the holder thereof, in respect of its shares to be
redeemed, a number of shares of Series A TCI Group common stock equal
to the aggregate redemption price (or designated portion thereof) of
such shares divided by the average of the last sales prices of the
Series A TCI Group common stock for a period specified, and subject to
the adjustments described, in the certificate of designation
establishing the Series F Preferred Stock.
(10) Stockholders' Equity
Common Stock
The Series A TCI Group common stock and Series A Liberty Group Stock
each have one vote per share, and the Series B TCI Group common stock
and Series B Liberty Group Stock each have ten votes per share. Each
share of Series B TCI Group common stock is convertible, at the option
of the holder, into one share of Series A TCI Group common stock, and
each share of Series B Liberty Group Stock is convertible, at the
option of the holder, into one share of Series A Liberty Group Stock.
See note 2.
The rights of holders of the TCI Group common stock upon liquidation
of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the TCI Group common stock to the
aggregate market capitalization, as defined, of the TCI Group common
stock and the Liberty Group Stock.
Similarly, the rights of holders of the Liberty Group Stock upon
liquidation of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the Liberty Group Stock to the
aggregate market capitalization, as defined, of the Liberty Group
Stock and the TCI Group common stock.
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 held all of the issued and outstanding shares of
such stock, amounting to 592,797 shares. Such preferred stock
eliminated in consolidation. The holders of the Class A Preferred
Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the
Distribution.
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)
I-24
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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 Board, may be declared and paid in cash, in shares Series A TCI
Group 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 Series A TCI Group 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 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 Series F 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 Series A TCI Group 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 Series A TCI Group common stock by the Average Market Price of the
Series A TCI Group 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 Series A TCI Group 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 distribution to stockholders an
amount in cash or property or a 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.
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.
(continued)
I-25
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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)
I-26
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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
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 Board.
(continued)
I-27
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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 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.
Redeemable Convertible Preferred Stock, Series E. In connection with
the Reorganization, the Board 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 held all of the issued and outstanding shares of
such stock, amounting to 246,402 shares. All such preferred stock
eliminated in consolidation. The holders of the Series E Preferred
Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the
Distribution.
Stock Options
The Company has adopted the Tele-Communications, Inc. 1994 Stock
Incentive Plan (the "Plan"). Awards may be made as grants of stock
options, stock appreciation rights, restricted shares, stock units or
any combination thereof.
The Plan will be adjusted to provide that the number and type of
shares subject to future awards would consist of a number of shares of
Series A TCI Group common stock equal to the number of shares of Class
A common stock subject to future awards immediately prior to the
Distribution and a number of shares of Series A Liberty Group Stock
equal to one-fourth of the number of shares of Class A common stock
subject to future awards immediately prior to Distribution. Following
the Distribution, the Compensation Committee of TCI may in its
discretion grant awards, including awards of options on, or stock
appreciation rights respecting, shares of Series A TCI Group common
stock, Series A Liberty Group Stock, or combinations thereof, in such
amounts and types as it determines in accordance with the terms of the
1994 Stock Incentive Plan, as adjusted.
In connection with the Distribution, each holder of an outstanding
option or stock appreciation right received an additional option or
stock appreciation right, as applicable, covering a number of shares
of Series A Liberty Group Stock equal to one-fourth of the number of
shares of Class A common stock theretofore subject to the outstanding
option or stock appreciation right, and the outstanding option or
stock appreciation right would continue in effect as an option or
stock appreciation right covering the same number of shares of Series
A TCI Group common stock (as redesignated) that were theretofore
subject to the option or stock appreciation right. The aggregate
pre-adjustment strike price of the outstanding options or stock
appreciation rights was allocated between the outstanding options or
stock appreciation rights and the newly issued options or stock
appreciation rights in a ratio determined by the Compensation
Committee. The following descriptions of stock options and/or stock
appreciation rights have been adjusted to reflect such change.
(continued)
I-28
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock options to acquire 142,800 shares of Series A TCI Group common
stock at an adjusted purchase price of $6.60 per share were
outstanding at September 30, 1995. Such options expire December 15,
1988. During the nine months ended September 30, 1995, 19,428 options
were exercised and no options were canceled.
Stock options in tandem with stock appreciation rights to purchase
3,600,250 shares of Series A TCI Group common stock at a purchase
price of $12.50 per share were outstanding at September 30, 1995.
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 nine months ended September 30, 1995, stock
appreciation rights covering 355,250 shares of Series A TCI Group
common stock were exercised and the tandem stock options were
canceled. In addition, 7,500 options were canceled during the nine
months ended September 30, 1995.
Stock options in tandem with stock appreciation rights to purchase
1,782,500 shares of Series A TCI Group common stock at a purchase
price of $12.50 per share were outstanding at September 30, 1995.
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 nine months ended September 30, 1995, stock
appreciation rights covering 150,000 shares of Series A TCI Group
common stock were exercised and the tandem stock options were
canceled. In addition, 7,500 options were canceled during the nine
months ended September 30, 1995.
Stock options in tandem with stock appreciation rights to purchase
2,000,000 shares of Series A TCI Group common stock at a purchase
price of $12.50 per share were outstanding at September 30, 1995. 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 purchase
3,181,000 shares of Series A TCI Group common stock at a purchase
price of $16.50 per share were outstanding at September 30, 1995.
Such options become exercisable and vest evenly over five years, first
become exercisable beginning November 17, 1995 and expire on November
17, 2004. During the nine months ended September 30, 1995, 33,000
options were canceled.
Stock options in tandem with stock appreciation rights to acquire
54,600 shares of Series A TCI Group common stock at an adjusted
purchase price of $14.65 were outstanding at September 30, 1995. The
options vest in five equal annual installments commencing June 3, 1994
and expire on June 3, 2003.
Stock appreciation rights with respect to 1,423,500 shares of Series A
TCI Group common stock were outstanding at September 30, 1995. These
rights have an adjusted strike price of $0.60 per share, become
exercisable and vest evenly over seven years, beginning March 28,
1992. Stock appreciation rights expire on March 28, 2001.
(continued)
I-29
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock options to acquire 35,700 shares of Series A Liberty Group Stock
at a purchase price of $8.83 per share were outstanding at September
30, 1995. Such options expire December 15, 1998. During the nine
months ended September 30, 1995, 2,428 options were exercised and no
options were canceled.
Stock options in tandem with stock appreciation rights to purchase
903,313 shares of Series A Liberty Group Stock at a purchase price of
$16.75 per share were outstanding at September 30, 1995. Such options
become exercisable and vest evenly over five years and expire on
November 11, 2002. During the nine months ended September 30, 1995,
stock appreciation rights covering 65,000 shares of Series A Liberty
Group Stock were exercised and the tandem stock options were canceled.
In addition, 1,875 options were canceled during the nine months ended
September 30, 1995.
Stock options in tandem with stock appreciation rights to purchase
448,750 shares of Series A Liberty Group Stock at a purchase price of
$16.75 per share were outstanding at September 30, 1995. Such options
become exercisable and vest evenly over four years and expire on
October 12, 2003. During the nine months ended September 30, 1995,
stock appreciation rights covering 34,375 shares of Series A Liberty
Group Stock were exercised and the tandem stock options were canceled.
In addition, 1,875 options were canceled during the nine months ended
September 30, 1995.
Stock options in tandem with stock appreciation rights to purchase
500,000 shares of Series A Liberty Group Stock at a purchase price of
$16.75 per share were outstanding at September 30, 1995. Such options
become exercisable and vest evenly over 4 years. The options expire
October 12, 1998.
Stock options in tandem with stock appreciation rights to purchase
795,250 shares of Series A Liberty Group Stock at a purchase price of
$22.00 per share were outstanding at September 30, 1995. Such options
become exercisable and vest evenly over five years, first become
exercisable beginning November 17, 1995 and expire on November 17,
2004. During the nine months ended September 30, 1995, 8,250 options
were canceled.
Stock options in tandem with stock appreciation rights to acquire
13,651 shares of Series A Liberty Group Stock at an adjusted purchase
price of $19.56 were outstanding at September 30, 1995. The options
vest in five equal annual installments and expire on June 3, 2003.
Stock appreciation rights with respect to 355,875 shares of Series A
Liberty Group Stock were outstanding at September 30, 1995. These
rights have an adjusted strike price of $0.82 per share, become
exercisable and vest evenly over seven years. Stock appreciation
rights expire on March 28, 2001.
(continued)
I-30
<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On August 3, 1995, shareholders of the Company approved the Director
Stock Option Plan including the grant, effective as of November 16,
1994, to each person that as of that date was a member of the Board
and was not an employee of the Company or any of its subsidiaries, of
options to purchase 50,000 shares of TCI Class A common stock.
Pursuant to the Director Stock Option Plan, options to purchase
300,000 shares of Series A TCI Group common stock were granted at an
exercise price of $16.50 per share and options to purchase 75,000
shares of Series A Liberty Group Stock were granted at 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 During the nine months ended September 30, 1995,
options to purchase 50,000 shares of Series A TCI Group Stock and
options to purchase 12,500 shares of Series A Liberty Media Group
Stock were canceled.
Estimated compensation relating to stock appreciation rights has been
recorded through September 30, 1995, but is subject to future
adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised.
Other
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 September 30, 1995, there were 68,295,414 shares of Series A TCI
Group common stock and 17,080,230 shares of Series A Liberty Group
Stock reserved for issuance under exercise privileges related to
options, convertible debt securities and convertible preferred stock.
In addition, one share of Series A TCI Group common stock is reserved
for each share of Series B TCI Group common stock, and one share of
Series A Liberty Group Stock is reserved for each share of Series B
Liberty Group Stock. See note 2 for the effect of the Distribution on
the conversion rights of holders of convertible securities.
(11) Sale of Subsidiary Stock
On July 18, 1995, TCI International completed an initial public
offering (the "IPO") in which it sold 20 million shares of TCI
International Series A common stock to the public for consideration of
$16.00 per share aggregating $320 million, before deducting related
expenses (approximately $19 million). The shares sold to the public
represented 17% of TCI International's total issued and outstanding
common stock and 9% of the aggregate voting interest represented by
such issued and outstanding common stock. Also in July 1995, TCI
International issued 687,500 shares of TCI International Series A
common stock as partial consideration for a 35% ownership interest in
Torneos Y Competencias S.A., an Argentine sports programming company
(the "TYC Acquisition"). As a result of the IPO and the TYC
Acquisition, the Company has recognized a nonrecurring gain amounting
to $123 million (before deducting the related deferred income tax
expense of $50 million). Subsequent to the IPO and the TYC
Acquisition, TCI owns 82% of the issued and outstanding stock of TCI
International.
(continued)
I-31
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Commitments and Contingencies
During 1994, subsidiaries of the Company, Comcast, Cox and Sprint
formed WirelessCo to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, of
which the Company owns a 30% interest, 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 PCS 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.
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.
(continued)
I-32
<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March 1995, subsidiaries of the Company, Comcast, Cox and Sprint
formed two new partnerships, of which the principal partnership is
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 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. 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.
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)
I-33
<PAGE> 36
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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.
On October 30, 1995, the FCC accepted for comment a proposed
resolution of all complaints against the cable programming services
tier ("CPST") currently pending against cable systems owned by the
Company. If the proposed resolution is accepted by the FCC, the
Company will settle all pending complaints by a one-time credit to
each subscriber in CPST regulated franchises of $1.90 (aggregating
approximately $9 million). Such amount had previously been accrued by
the Company. In addition, the FCC will find that the CPST rates in
CPST regulated franchises on September 15, 1995 comply with federal
regulations. The Company has committed not to file any additional
cost-of-service filings until May 15, 1996 in franchises that were
subject to CPST regulation prior to September 15, 1995. However, the
Company will be able to avail itself of the other mechanisms under FCC
rules to recover costs, including abbreviated cost-of-service filings
covering system rebuilds and upgrades. In the proposed resolution,
the Company does not admit any violation of, or any failure to conform
to, the 1992 Cable Act or the rules promulgated thereunder. The
comment period will end 30 days from October 30, 1995.
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 February 28, 2009 (the "Film Licensing
Obligations"). The aggregate minimum liability under certain of the
license agreements is approximately $454 million. The aggregate
amount of the Film Licensing Obligations under other license
agreements is not currently estimable because such amount is dependent
upon certain variable factors. Nevertheless, the Company's aggregate
payments under the Film Licensing Obligations could prove to be
significant.
The Company also has guaranteed the obligation of an Australian
affiliate to pay similar fees for the license to exhibit certain films
through the year 2000. If the Company failed to fulfill its
obligation under this guarantee, the beneficiaries have the right to
demand an aggregate payment from the Company of $67 million. Although
the aggregate amount of the Australian affiliate's film license fee
obligations is not currently estimable, the Company believes that the
aggregate payments pursuant to such affiliate's obligations could be
significant.
(continued)
I-34
<PAGE> 37
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company also 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 September
30, 1995 was $469 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 has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $241 million at September 30, 1995. Although there can
be no assurance, management of the Company believes that it will not
be required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
The Company has also committed to provide additional debt or equity
funding to certain of its affiliates. At September 30, 1995, such
commitments aggregated $124 million.
TCIC and its sole shareholder, TCI, have entered into certain
agreements with Viacom Inc. ("Viacom") and certain subsidiaries of
Viacom regarding the purchase by TCIC of all of the common stock of a
subsidiary of Viacom ("Cable Sub") which, at the time of purchase,
will own Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets,
as well as all of its liabilities other than current liabilities, to a
new subsidiary of Viacom ("New Viacom Sub"). Cable Sub will also
transfer to New Viacom Sub the proceeds (the "Loan Proceeds") of a
$1.7 billion loan facility (the "Loan Facility") to be arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub will
retain cable assets with an estimated value at closing of
approximately $2.25 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan
Proceeds will be non-recourse to Viacom and New Viacom Sub.
(continued)
I-35
<PAGE> 38
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Viacom will offer to the holders of shares of Viacom Class A Common
Stock and Viacom Class B Common Stock (collectively, "Viacom Common
Stock") the opportunity to exchange (the "Exchange Offer") a portion
of their shares of Viacom Common Stock for shares of Class A Common
Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). The Exchange Offer will be subject to a number of
conditions, including a condition (the "Minimum Condition") that
sufficient tenders are made of Viacom Common Stock that permit the
number of shares of Cable Sub Class A Stock issued pursuant to the
Exchange Offer to equal the total number of shares of Cable Sub Class
A Stock issuable in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B Common Stock in
exchange for a capital contribution of $350 million (which will be
used to reduce Cable Sub's obligations under the Loan Facility). At
the time of such contribution, the Cable Sub Class A Stock received by
Viacom stockholders pursuant to the Exchange Offer will automatically
convert into a series of senior cumulative exchangeable preferred
stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated
value of $100 per share (the "Stated Value"). The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and
exchange features, will be designed to cause the Exchangeable
Preferred Stock to initially trade at the Stated Value. The
Exchangeable Preferred Stock will be exchangeable, at the option of
the holder commencing after the fifth anniversary of the date of
issuance, for shares of TCI Group common stock ("Parent Common
Stock"). The Exchangeable Preferred Stock will also be redeemable, at
the option of Cable Sub, after the fifth anniversary of the date of
issuance, and will be subject to mandatory redemption on the tenth
anniversary of the date of issuance at a price equal to the Stated
Value per share plus accrued and unpaid dividends, payable in cash or,
at the election of Cable Sub, in shares of Parent Common Stock. If
insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom will
extend the Exchange Offer for up to 15 business days and, during such
extension, TCI and Viacom are to negotiate in good faith to determine
mutually acceptable terms and conditions for the Exchangeable
Preferred Stock and the Exchange Offer that each believes in good
faith will cause the Minimum Condition to be fulfilled and that would
cause the Exchangeable Preferred Stock to trade at a price equal to
the Stated Value immediately following the expiration of the Exchange
Offer. In the event the Minimum Condition is not thereafter met, TCI
and Viacom will each have the right to terminate the transaction.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction, the expiration or early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
receipt of necessary consents of the FCC and local cable franchise
authorities, and the satisfaction or waiver of all of the conditions
of the Exchange Offer. A request for a letter ruling from the
Internal Revenue Service has been filed by Viacom. The Company believes
that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling
will be obtained. In light of the foregoing, management of the Company
has concluded that consummation of the transaction is not yet
probable. Accordingly, no assurance can be given that the transaction
will be consummated.
The Company has contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
I-36
<PAGE> 39
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Material changes in financial condition:
As of January 27, 1994, Old TCI and Liberty entered into a definitive
merger agreement to combine the two companies. 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. 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. Upon consummation of the TCI/Liberty
Combination, certain subsidiaries of TCIC exchanged their shares of Old TCI
Class A common stock for shares of TCI Class A common stock. Additionally,
subsidiaries of TCI exchanged their shares of Liberty Class A common stock for
TCI Class A common stock and Liberty exchanged its shares of Old TCI Class A
and Class B common stock for like shares of TCI common stock. Subsidiaries of
TCI also exchanged their shares of various preferred stock issuances of Liberty
for preferred stock of TCI. Preferred stock of TCI, which is owned by
subsidiaries of TCI, eliminates in consolidation.
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.
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;
TCI International; and Technology/Venture Capital. 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 TCI International nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in
nature to warrant separate focus.
On July 18, 1995, TCI International completed the IPO in which it sold
20 million shares of TCI International Series A common stock to the public for
consideration of $16.00 per share aggregating $320 million, before deducting
related expenses (approximately $19 million). The shares sold to the public
represented 17% of TCI International's total issued and outstanding common
stock and 9% of the aggregate voting interest represented by such issued and
outstanding common stock.
(continued)
I-37
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
On August 3, 1995, the stockholders of TCI authorized the Board to
issue the Liberty Group Stock which corresponds to Liberty Media Group. 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. While the Liberty
Group Stock constitutes common stock of TCI, it is intended to reflect the
separate performance of such programming services. On August 10, 1995, TCI
distributed to its security holders of record on August 4, 1995, one hundred
percent of the equity value of TCI attributable to Liberty Media Group.
During 1994, subsidiaries of the Company, Comcast, Cox and Sprint
formed WirelessCo to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, of which,
the Company owns a 30% interest, the partners have been participating in PCS
Auctions of 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 PCS 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 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.
During 1994, subsidiaries of Cox, Sprint and the Company also formed
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.
(continued)
I-38
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In March of 1995, subsidiaries of the Company, Comcast, Cox and Sprint
formed two new partnerships, of which the principal partnership is MajorCo, to
which they contributed their respective interests in WirelessCo and through
which they formed another partnership, 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, own 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. 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.
As of January 26, 1995, TCI, TCIC and TeleCable consummated 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 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 Series A TCI Group common stock and
2,500,000 shares of Series A Liberty Group 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.
(continued)
I-39
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Pursuant to the QVC Merger Agreement, the Purchaser, a corporation
which is jointly owned by Comcast and Liberty, commenced the QVC Tender Offer
to purchase all outstanding shares of common stock and preferred stock of QVC.
The QVC Tender Offer expired 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.
Upon consummation of the aforementioned QVC transactions, the Company
was deemed to exercise significant influence over QVC and, as such, adopted the
equity method of accounting. As a result, TCI restated its investment in QVC,
its unrealized gain on available-for-sale securities, its deferred taxes and
accumulated deficit by $211 million, $127 million, $89 million and $5 million,
respectively, at December 31, 1994. The restatement resulted in an increase in
the Company's net earnings of $2 million for the nine months ended September
30, 1994.
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.
TCIC and its sole shareholder, TCI, have entered into certain
agreements with Viacom and certain subsidiaries of Viacom regarding the
purchase by TCIC of all of the common stock of Cable Sub which, at the time of
purchase, will own Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub.
Cable Sub will also transfer to New Viacom Sub the Loan Proceeds of a $1.7
billion loan facility to be arranged by TCIC, TCI and Cable Sub. Following
these transfers, Cable Sub will retain cable assets with an estimated value at
closing of approximately $2.25 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Common Stock the
opportunity to exchange a portion of their shares of Viacom Common Stock for
shares of Cable Sub Class A Stock. The Exchange Offer will be subject to a
number of conditions, including a condition that sufficient tenders are made of
Viacom Common Stock that permit the number of shares of Cable Sub Class A Stock
issued pursuant to the Exchange Offer to equal the total number of shares of
Cable Sub Class A Stock issuable in the Exchange Offer.
(continued)
I-40
<PAGE> 43
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B Common Stock in exchange for
a capital contribution of $350 million (which will be used to reduce Cable
Sub's obligations under the Loan Facility). At the time of such contribution,
the Cable Sub Class A Stock received by Viacom stockholders pursuant to the
Exchange Offer will automatically convert into the Exchangeable Preferred Stock
of Cable Sub with a stated value of $100 per share. The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and exchange
features, will be designed to cause the Exchangeable Preferred Stock to
initially trade at the Stated Value. The Exchangeable Preferred Stock will be
exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Parent Common Stock. The
Exchangeable Preferred Stock will also be redeemable, at the option of Cable
Sub, after the fifth anniversary of the date of issuance, and will be subject
to mandatory redemption on the tenth anniversary of the date of issuance at a
price equal to the Stated Value per share plus accrued and unpaid dividends,
payable in cash or, at the election of Cable Sub, in shares of Parent Common
Stock. If insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom will extend the
Exchange Offer for up to 15 business days and, during such extension, TCI and
Viacom are to negotiate in good faith to determine mutually acceptable terms
and conditions for the Exchangeable Preferred Stock and the Exchange Offer that
each believes in good faith will cause the Minimum Condition to be fulfilled
and that would cause the Exchangeable Preferred Stock to trade at a price equal
to the Stated Value immediately following the expiration of the Exchange Offer.
In the event the Minimum Condition is not thereafter met, TCI and Viacom will
each have the right to terminate the transaction.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue
Service that the transaction qualifies as a tax-free transaction, the
expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, receipt of necessary
consents of the FCC and local cable franchise authorities, and the satisfaction
or waiver of all of the conditions of the Exchange Offer. A request for a
letter ruling from the Internal Revenue Service has been filed by Viacom. The
Company believes that, based upon the unique and complex structure of the
transaction, there exists significant uncertainty as to whether a favorable
ruling will be obtained. In light of the foregoing, management of the Company
has concluded that consummation of the transaction is not yet probable.
Accordingly, no assurance can be given that the transaction will be consummated.
At September 30, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,054 million. For the nine
months ended September 30, 1995, Cable Sub had revenues of $329 million and net
earnings of $28 million. It is expected that if the transaction were to be
consummated, the Company would account for such acquisition under the purchase
method of accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and
the estimated aggregate Stated Value of the Exchangeable Preferred Stock of
$500 million) will be allocated to the assets and liabilities acquired
according to their respective fair values, with any excess being treated as
intangible assets. As such, the Company will, if such transaction is
consummated, reflect additional interest expense, depreciation, amortization
and minority share of losses of consolidated subsidiaries. On a pro forma
basis, if the transaction had been consummated under its current terms on or
before January 1, 1994, Cable Sub would have reflected loss before taxes of
approximately $40 million for the nine months ended September 30, 1995 and of
approximately $71 million for the year ended December 31, 1994. On a pro forma
basis, Cable Sub would reflect an approximate $23 million of preferred stock
dividend requirements on an annual basis assuming, solely for the purpose of
this presentation, a dividend rate of 4.5% per annum on the Exchangeable
Preferred Stock. On a pro forma basis, the Company would reflect the foregoing
financial impacts of Cable Sub in its consolidated results of operations
except that the preferred stock dividend requirement of Cable Sub would be
reflected as minority interest in the Company's statement of operations and the
Company would incur an additional approximately $27 million of interest expense
per year arising from the assumed borrowing by the Company for its $350 million
capital contribution to Cable Sub.
On September 22, 1995, the boards of directors of Time Warner and TBS
approved plans to merge their respective companies. Under the terms of the
agreement, TBS shareholders will receive 0.75 Time Warner common shares for each
TBS Class A and B common share. Each holder of TBS Class C preferred stock will
receive 0.80 Time Warner common shares for each of the 6 shares of TBS Class B
common stock into which each of the shares of Class C preferred stock may be
converted.
Subject to certain conditions, the Company has agreed to vote its TBS
shares for the merger. The Time Warner shares of common stock received by the
Company will be exchanged for Time Warner Preferred Stock economically
equivalent to the common stock and placed in a voting trust with Time Warner
Chairman, Gerald M. Levin, as the trustee.
(continued)
I-41
<PAGE> 44
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in Sport South, a regional sports cable network, to the Company for
approximately $60 million; and Time Warner has agreed to issue 5 million shares
of common stock to TCI in exchange for a 6-year option to purchase Southern.
Time Warner has also agreed to issue shares of Time Warner common stock to the
Company with a market value of $160 million in the event it exercises such
option. Any shares of Time Warner common stock issuable in connection with the
Southern option will be exchanged for Time Warner Preferred Stock. Additionally,
Time Warner will grant the Company an option to purchase Time Warner's interest
in Sunshine Network, a Florida based sports cable network, for $14 million.
The transaction is subject to, among other things, approval by the
Federal Communications Commission ("FCC") and regulatory review by federal
antitrust authorities, and approval by the shareholders of TBS and Time Warner.
It is expected to be completed in 1996.
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. The
Company's satellite carrier of WTBS, 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.
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 $401 million. Such proceeds were immediately used to
reduce outstanding indebtedness under credit facilities.
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 class 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.
Dividends on the TCI Group common stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available
for dividends and the available dividend amount with respect to TCI Group, as
defined. Determinations to pay dividends on TCI Group common stock will be
based primarily upon the financial condition, results of operations and
business requirements of TCI Group and TCI as a whole.
(continued)
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<PAGE> 45
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Dividends on the Liberty Group Stock are payable at the sole
discretion of the Board out of the lesser of (i) all assets of TCI legally
available for dividends and (ii) the available dividend amount with respect to
Liberty Media Group, as defined. Determinations to pay dividends on Liberty
Group Stock will be based primarily upon the financial condition, results of
operations and business requirements of Liberty Media Group and TCI as a whole.
During the nine months ended September 30, 1995, TCIC sold $1.5
billion of publicly-placed fixed rate senior and medium term notes with
interest rates ranging from 6.8% to 8.8% and maturity dates ranging through
2015. The proceeds from the sale of these notes were used primarily to repay
variable-rate bank debt.
Subsidiaries of the Company had $2.8 billion in unused lines of credit
at September 30, 1995, excluding amounts related to lines of credit which
provide availability to support commercial paper. Although such subsidiaries
of the Company were in compliance with the restrictive covenants contained in
their credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with the
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings. See
note 8 to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,503 million and $1,339 million for the nine
months ended September 30, 1995 and 1994, respectively) to interest expense
($745 million and $568 million for the nine months ended September 30, 1995 and
1994, respectively), is determined by reference to the consolidated statements
of operations. The Company's interest coverage ratio was 2.02% and 2.36% for
the nine months ended September 30, 1995 and 1994, respectively. The decrease
in the Company's interest coverage for the nine months ended September 30, 1995
is due to increased interest expense due to higher debt levels in 1995.
Management of the Company believes that the foregoing interest coverage ratio is
adequate in light of the consistent and nonseasonal nature of its cable
television operations and the relative predictability of the Company's interest
expense, over half of which results from fixed rate indebtedness. Operating
Cash Flow is a measure of value and borrowing capacity within the cable
television industry and is not intended to be a substitute for cash flows
provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
(continued)
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<PAGE> 46
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 ($670 million and $700
million for the nine months ended September 30, 1995 and 1994, respectively)
reflects net cash from the operations of the Company available for the
Company's liquidity needs after taking into consideration the aforementioned
additional substantial costs of doing business not reflected in Operating Cash
Flow. Amounts expended by the Company for its investing activities exceed net
cash provided by operating activities. However, management believes that net
cash provided by operating activities, the ability of the Company and its
subsidiaries to obtain additional financing (including the subsidiaries
available lines of credit and access to public debt markets), issuances and
sales of the Company's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See the Company's consolidated statements of cash
flows included in the accompanying consolidated financial statements.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the Company pays (i) fixed interest rates ranging from
6.1% to 9.9% on notional amounts of $602 million at September 30, 1995 and (ii)
variable interest rates on notional amounts of $2,520 million at September 30,
1995. During the nine months ended September 30, 1995 and 1994, the Company's
net payments pursuant to the Fixed Rate Agreements were $1 million and $13
million, respectively. During the nine months ended September 30, 1995 and
1994, the Company's net receipts pursuant to the Variable Rate Agreements were
less than $1 million and $33 million, respectively. The Company's interest
rate hedge agreements fix the maximum variable interest rates on notional
amounts of $225 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.
(continued)
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<PAGE> 47
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 ("HSDs") that vary in size depending upon the
power of the satellite. The Company has an interest in an entity, Primestar
Partners ("Primestar"), that distributes a multichannel programming service via
a medium power communications satellite to HSDs of approximately three feet in
size. Two other DBS operators offer 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.
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 companies' 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 Company's entertainment and information programming services
subsidiaries and 50% owned affiliates lease satellite transponders on full time
leases and shared leases on a "protected" or "transponder protected" basis, and
full time "unprotected" leases on domestic and 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.
(continued)
I-45
<PAGE> 48
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 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, among other things, 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 has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $241
million at September 30, 1995. 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.
(continued)
I-46
<PAGE> 49
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 February 29, 2009. The aggregate minimum liability
under certain of the license agreements is approximately $454 million. The
aggregate amount of the Film License Obligations under other license agreements
is not currently estimable because such amount is dependent upon certain
variable factors. Nevertheless, the Company's aggregate payments under the
Film License Obligations could prove to be significant.
The Company also has guaranteed the obligation of an Australian
affiliate to pay similar fees for the license to exhibit certain films through
the year 2000. If the Company failed to fulfill its obligation under this
guarantee, the beneficiaries have the right to demand an aggregate payment from
the Company of $67 million. Although the aggregate amount of the Australian
affiliate's film license fee obligations is not currently estimable, the
Company believes that the aggregate payments pursuant to such affiliate's
obligation could be significant.
The Company has committed to provide additional debt or equity funding
to certain of its affiliates. At September 30, 1995, such commitments
aggregated $124 million.
The Company also 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 September 30, 1995 was $469
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 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 June 2, 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 below, such regulations have
resulted in expanded cable distribution of HSN, which is carried by a number of
full-power commercial broadcast television stations.
(continued)
I-47
<PAGE> 50
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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.
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.
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. For example, Congress presently is considering
telecommunications legislation which, if enacted into law, would substantially
change existing law, including among other things, the rate regulation of cable
television systems and the restrictions on telephone companies in the provision
of cable television service. The Senate approved the Telecommunications
Competition and Deregulation Act of 1995 on June 15, 1995. The House approved
the Communications Act of 1995 on August 4, 1995. The differences between the
two bills must be reconciled in Conference Committee, and the resulting
compromise must be voted on by the House and Senate and signed by the
President. 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 affected adversely by future legislation, new regulation or
deregulation.
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.
(continued)
I-48
<PAGE> 51
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, the Company's Regulated Services are subject to the jurisdiction of
local franchising authorities and the FCC.
Cable operators may justify rates higher than the benchmark rates
established by the FCC by 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. Such regulations allow an increase of either (i) the sum of a
prescribed channel addition factor, the license fee expense and a 7.5% markup,
or (ii) a flat fee increase per added channel and an aggregate limit on such
increases with an additional license fee reserve. For systems with more than
one tier of cable service, the methodology described in (ii) is not available
for the basic level of service. 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. On
September 22, 1995, the FCC released its Thirteenth Order on Reconsideration of
its rate regulations, which provides cable operators with an optional annual
methodology for adjusting rates for Regulated Services.
The Company believes that it has complied, in all material respects,
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are subject to
adjustment upon review, as described above. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of
the excess portion of all other Regulated Service rates would be retroactive to
one year prior to the implementation of the rate reductions.
(continued)
I-49
<PAGE> 52
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
On October 30, 1995, the FCC accepted for comment a proposed
resolution of all complaints against the CPST currently pending against cable
systems owned by the Company. If the proposed resolution is accepted by the
FCC, the Company will settle all pending complaints by a one-time credit to
each subscriber in CPST regulated franchises of $1.90 (aggregating
approximately $9 million). Such amount had previously been accrued by the
Company. In addition, the FCC will find that the CPST rates in CPST regulated
franchises on September 15, 1995 comply with federal regulations. The Company
has committed not to file any additional cost-of-service filings until May 15,
1996 in franchises that were subject to CPST regulation prior to September 15,
1995. However, the Company will be able to avail itself of the other
mechanisms under FCC rules to recover costs, including abbreviated
cost-of-service filings covering system rebuilds and upgrades. In the proposed
resolution, the Company does not admit any violation of, or any failure to
conform to, the 1992 Cable Act or the rules promulgated thereunder. The
comment period will end 30 days from October 30, 1995.
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.
During 1995, TCIC's revenue and expenses related to its Primestar
operations have increased significantly as the number of TCIC's Primestar
subscribers increased from approximately 100,000 subscribers at January 1, 1995
to approximately 370,000 subscribers at September 30, 1995. During the nine
months ended September 30, 1995, revenue increased from $13 million to $118
million and operating, selling, general and administrative expenses increased
from $10 million to $107 million, as compared to the nine months ended September
30, 1994. Primestar incurs significant sales commission and installation
expenses when customers initially subscribe. Therefore, as long as Primestar
continues to increase its subscriber base at such a rapid pace, management
expects that operating costs and expenses will increase as well.
Revenue increased 37% and 44% for the three months and nine months
ended September 30, 1995, respectively, as compared to the corresponding
periods of 1994. The three month increase is due to the effect of certain
acquisitions (11%), the TCI/Liberty Combination (9%), growth in subscriber
levels within the Company's cable television systems (4%), growth in the
Company's Primestar subscribers (4%) and various other individually
insignificant increases (9%). The nine month increase is due to the
TCI/Liberty Combination (22%), the effect of certain acquisitions (10%), growth
in subscriber levels within the Company's cable television systems (4%), growth
in the Company's Primestar subscribers (3%) and various other individually
insignificant increases (5%).
Included in the Company's cable revenue of $1,307 million and $3,734
million for the three months and nine months ended September 30, 1995,
respectively, is $1,290 million and $3,684 million attributable to TCIC, and
$17 million and $50 million attributable to other cable operations.
(continued)
I-50
<PAGE> 53
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
During the three months and nine months ended September 30, 1995,
advertising sales accounted for $74 million or 4% and $220 million or 4%,
respectively, of the Company's total revenue. Such amounts represent increases
of 42% and 53% (including increases due to acquisitions) over the comparable
periods in 1994.
Net sales from electronic retailing services reflects the results of
HSN which became a consolidated subsidiary of the Company in the TCI/Liberty
Combination. Net sales from HSN represented $61 million (5%) and $551 million
(16%) of the increase in the Company's revenue due to the TCI/Liberty
Combination for the three months and nine months ended September 30, 1995,
respectively. HSN believes that future levels of net sales 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 HSN programming. Market penetration
represents the level of active purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSN programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSN programming while evaluating
the expected profitability of each contract.
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.
Operating expenses increased 48% and 50%, and selling, general and
administrative expenses increased 43% and 50% for the three months and nine
months ended September 30, 1995, respectively. Such increases are slightly
higher than the increases in revenue discussed above and are primarily
attributable to the TCI/Liberty Combination and certain acquisitions. As a
percent of revenue, operating expenses and selling, general and administrative
expenses were relatively comparable over the 1995 and 1994 periods.
Programming expenses represented $913 million or 23% of total
operating costs and expenses (excluding cost of sales) for the nine months
ended September 30, 1995. The Company cannot determine whether and to what
extent increases in the cost of programming will affect its operating costs.
However, such programming costs have increased at a greater percentage than
increases in revenue of Regulated Services.
(continued)
I-51
<PAGE> 54
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Cost of sales of HSN represented 68% and 67% of HSN revenue for the
three months and nine months ended September 30, 1995, respectively, as
compared to 65% for the comparable periods in 1994. 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 (i) increase the number of cable systems carrying HSC
programming, (ii) increase market penetration and (iii) 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.
Due to the aforementioned program to upgrade and install optical fiber
in its cable systems, the Company's capital expenditures and depreciation
expense have increased.
The Company incurred $11 million of programming and marketing costs
associated with the launch in February of 1994 of a new premium programming
service to its subscribers. Although there can be no assurance, as the
Domestic 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.
As a result of the IPO and the TYC Acquisition, the Company recognized
a nonrecurring gain amounting to $123 million (before deducting the related
deferred income tax expense of $50 million) during the three months ended
September 30, 1995.
At September 30, 1995, the Company had an effective ownership interest
of approximately 36% in TeleWest Communications plc ("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 September 30,
1995 of $424 million and comprised $43 million of the Company's share of its
affiliates' losses during the nine months ended September 30, 1995. 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 $223
million at September 30, 1995 and accounted for $38 million of the Company's
share of its affiliates' losses in 1995.
TeleWest Communications, which is currently constructing broadband
cable television and telephony networks in the UK, has incurred net losses
since its inception. Although there is no assurance, the Company believes (i)
that the continued expansion of TeleWest Communications' networks ultimately
will provide TeleWest Communications with a revenue base that will exceed its
expenses, (ii) that TeleWest Communications' present and future sources of
liquidity (including the net proceeds from TeleWest Communications' November
23, 1994 initial public offering and certain bank credit facilities) will be
sufficient to meet TeleWest Communications' liquidity requirements. The
Company has no present intention to make significant loans to or investments in
TeleWest Communications.
Subsequent to September 30, 1995, TeleWest Communications completed a
merger (the "TeleWest Merger") with SBC (CableComms)(UK) the result of which
was the formation of a new company. TeleWest plc ("New TeleWest"). Subsequent
to the TeleWest Merger, the Company has an effective ownership interest in New
TeleWest of approximately 27%. As a result of the TeleWest Merger, the Company
currently estimates that it will recognize a nonrecurring gain of approximately
$164 million (before deducting deferred income taxes of $57 million) during the
fourth quarter of 1995. Such gain represents the difference between the
Company's recorded cost for TeleWest Communications and the Company's 27%
effective proportionate share of New TeleWest's net assets.
(continued)
I-52
<PAGE> 55
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
In connection with its investments in the above-described foreign
entities, the Company is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar against the UK pound sterling ("L."), the
Japanese yen ("Y."), and various other foreign currencies that are the
functional currencies of the Company's foreign subsidiaries and affiliates.
Any increase (decrease) in the value of the U.S. dollar against any foreign
currency that is the functional currency of an operating subsidiary or
affiliate of TCI International will cause the Company to experience unrealized
foreign currency translation losses (gains) with respect to amounts already
invested in such foreign currencies. The Company is also exposed to foreign
currency risk to the extent that the Company or its foreign subsidiaries and
affiliates enter into transactions denominated in currencies other than their
respective functional currencies. Because the Company generally views its
foreign operating subsidiaries and affiliates as long-term investments, the
Company generally does not attempt to hedge existing investments in its foreign
affiliates and subsidiaries. With respect to funding commitments that are
denominated in currencies other than the U.S. dollar, the Company historically
has sought to reduce its exposure to short-term (generally no more than 90
days) movements in the applicable exchange rates once the timing and amount of
such funding commitments becomes fixed. Although the Company monitors foreign
currency exchange rates with the objective of mitigating its exposure to
unfavorable fluctuations in such rates, the Company believes that it is not
possible or practical to completely eliminate the Company's exposure to
unfavorable fluctuations in foreign currency exchange rates.
The Company's net earnings (before preferred stock dividends) of $36
million for the three months ended September 30, 1995 represents an increase of
$11 million, as compared to the Company's net earnings of $25 million for the
three months ended September 30, 1994. Such increase is the net result of the
recognition of the aforementioned nonrecurring gain recognized as a result of
the IPO and the TYC Acquisition offset by higher interest expense, increased
share of losses of affiliates and the decrease in share of earnings of Liberty,
principally resulting from the gain recognized by Liberty ($183 million) upon
the sale of its investment in American Movie Classics Company ("AMC") in 1994.
The Company's net loss (before preferred stock dividends) of $92
million for the nine months ended September 30, 1995 represents a decrease of
$155 million, as compared to the Company's net earnings of $63 million for the
nine months ended September 30, 1994. Such decrease is the net result of an
increase in interest expense due to higher debt levels, a decrease in share of
earnings of Liberty due to the gain recognized by Liberty upon the sale of its
investment in AMC, a decrease in operating income and an increase in share of
losses of affiliates offset by the recognition of the aforementioned
nonrecurring gain recognized as a result of the IPO and TYC Acquisition.
In March of 1995, the Financial Accounting Standards Board issued
Statement No. 121, effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long- lived assets that are expected to be disposed of. The
Company has not yet determined the financial statement impact of the adoption
of Statement No. 121.
I-53
<PAGE> 56
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ -- 6
Trade and other receivables, net 196 198
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 3) 1,024 341
Property and equipment, at cost:
Land 69 68
Distribution systems 9,152 7,589
Support equipment and buildings 1,069 921
---------- ---------
10,290 8,578
Less accumulated depreciation 3,583 2,999
---------- ---------
6,707 5,579
---------- ---------
Franchise costs 13,015 10,994
Less accumulated amortization 1,929 1,697
---------- ---------
11,086 9,297
---------- ---------
Other assets, at cost, net of amortization 516 459
---------- ---------
$ 19,529 15,880
========== =========
</TABLE>
(continued)
I-54
<PAGE> 57
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------------ -----------------
Liabilities and Stockholder's Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 158 74
Accrued interest 164 179
Accrued programming expense 203 178
Other accrued expenses 377 425
Debt (note 5) 12,143 10,712
Deferred income taxes 4,267 3,299
Other liabilities 88 96
-------- ------
Total liabilities 17,400 14,963
-------- ------
Minority interests in equity
of consolidated subsidiaries 216 271
Stockholder's equity (note 6):
Class A common stock, $1 par value.
Authorized 904,000 shares;
issued 811,655 shares 1 1
Class B common stock, $1 par value.
Authorized 96,000 shares;
issued 94,447 shares -- --
Additional paid-in capital 3,114 2,842
Unrealized holding gains for
available-for-sale securities, net of taxes 19 2
Accumulated deficit (306) (256)
-------- ------
2,828 2,589
Investment in Tele-Communications, Inc.
("TCI") (note 1) (1,146) (1,096)
Due to (from) TCI 231 (847)
-------- ------
Total stockholder's equity 1,913 646
-------- ------
Commitments and contingencies (note 7)
$ 19,529 15,880
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-55
<PAGE> 58
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
----------------- -----------------
1995 1994 1995 1994
-------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C>
Revenue (note 4) $ 1,310 1,072 3,741 3,213
Operating costs and expenses:
Operating 406 336 1,155 980
Selling, general and administrative 378 313 1,045 908
Compensation relating to stock
appreciation rights 2 12 7 --
Adjustment to compensation relating
to stock appreciation rights -- -- -- (6)
Depreciation 211 158 620 494
Amortization 91 72 254 217
------ ------ ------ ------
1,088 891 3,081 2,593
------ ------ ------ ------
Operating income 222 181 660 620
Other income (expense):
Interest expense (249) (203) (713) (566)
`
Interest and dividend income 8 6 25 26
Share of earnings of Liberty Media
Corporation ("Liberty") -- 101 -- 125
Share of losses of other affiliates,
net (note 3) (10) (29) (34) (59)
Minority interests in losses
of consolidated subsidiaries, net (1) 1 4 1
Other, net (11) (5) (17) (5)
------ ------ ------ ------
(263) (129) (735) (478)
------ ------ ------ ------
Earnings (loss) before income taxes (41) 52 (75) 142
Income tax benefit (expense) 15 (29) 25 (81)
--------- ------ -------- ------
Net earnings (loss) (note 4) $ (26) 23 $ (50) 61
========= ====== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-56
<PAGE> 59
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Nine months ended September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding
gains for
Common stock Additional available-
------------ paid-in for-sale Accumulated
Class A Class B capital securities deficit
------- ------- ------- ---------- -------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1 -- 2,842 2 (256)
Net loss -- -- -- -- (50)
Effect of Reorganization (note 1) -- -- -- -- --
Effect of implementation of tax
sharing agreement (note 1) -- -- -- -- --
Retirement of TCI Class A common
stock received in Reorganization -- -- 38 -- --
TCI Class A common stock issued in
acquisition of remaining minority
interest of Heritage
Communications, Inc. contributed
to TCI Communications, Inc.
("TCIC") (note 4) -- -- 234 -- --
Issuance of TCI Class A common
stock and TCI preferred stock
in acquisition (note 4) -- -- -- -- --
Turner Broadcasting System, Inc.
stock received in acquisition
transferred to Liberty Media
Group -- -- -- -- --
Proceeds from issuance of TCI
Class A common stock to public
utilized to repay TCIC
indebtedness -- -- -- -- --
Proceeds from issuance of TCI
Class A common stock in
private offering -- -- -- -- --
Change in unrealized holding gains
for available-for-sale securities -- -- -- 17 --
Change in due to TCI -- -- -- -- --
----- ------ ----- ---- ------
Balance at September 30, 1995 $ 1 -- 3,114 19 (306)
===== ====== ===== ==== ======
<CAPTION>
Investment Due Total
in to (from) stockholder's
TCI TCI equity
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Balance at January 1, 1995 (1,096) (847) 646
Net loss -- -- (50)
Effect of Reorganization (note 1) (12) (68) (80)
Effect of implementation of tax
sharing agreement (note 1) -- (71) (71)
Retirement of TCI Class A common
stock received in Reorganization (38) -- --
TCI Class A common stock issued in
acquisition of remaining minority
interest of Heritage
Communications, Inc. contributed
to TCI Communications, Inc.
("TCIC") (note 4) -- 58 292
Issuance of TCI Class A common
stock and TCI preferred stock
in acquisition (note 4) -- 1,313 1,313
Turner Broadcasting System, Inc.
stock received in acquisition
transferred to Liberty Media
Group -- (7) (7)
Proceeds from issuance of TCI
Class A common stock to public
utilized to repay TCIC
indebtedness -- 401 401
Proceeds from issuance of TCI
Class A common stock in
private offering -- 30 30
Change in unrealized holding gains
for available-for-sale securities -- -- 17
Change in due to TCI -- (578) (578)
------- ------- -------
Balance at September 30, 1995 (1,146) 231 1,913
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-57
<PAGE> 60
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1995 1994
------ ------
amounts in millions
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (50) 61
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 874 711
Compensation relating to stock appreciation rights 7 --
Adjustment to compensation relating to stock
appreciation rights -- (6)
Share of earnings of Liberty -- (125)
Share of losses of other affiliates 34 59
Deferred income tax expense (benefit) (32) 37
Minority interests in losses (4) (1)
Noncash interest and dividend income (7) (6)
Other noncash charges (credits) 3 (3)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 14 16
Change in accrued interest (20) (6)
Change in other accruals and payables 35 85
---------- ---------
Net cash provided by operating activities 854 822
---------- ---------
Cash flows from investing activities:
Cash paid for acquisitions (40) (260)
Capital expended for property and equipment (1,123) (944)
Proceeds from disposition of assets 25 32
Additional investments in and
loans to affiliates and others (736) (312)
Repayment of loans by affiliates and others 8 194
Return of capital from affiliates 1 22
Other investing activities (63) (118)
---------- ---------
Net cash used in investing activities (1,928) (1,386)
---------- ---------
Cash flows from financing activities:
Borrowings of debt 6,738 3,014
Repayments of debt (5,523) (2,448)
Change in due from TCI (147) --
Preferred stock dividends of subsidiaries -- (3)
---------- ---------
Net cash provided by financing activities 1,068 563
---------- ---------
Net decrease in cash (6) (1)
Cash at beginning of period 6 1
---------- ---------
Cash at end of period $ -- --
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-58
<PAGE> 61
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
(unaudited)
(1) General
The accompanying consolidated financial statements include the
accounts of TCIC (formerly Tele-Communications, Inc. or "Old TCI") and
those of all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in TCIC's Annual Report on Form
10-K, as amended, for the year ended December 31, 1994.
As of January 27, 1994, Old TCI and Liberty entered into a definitive
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. 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. Upon consummation of the TCI/Liberty Combination, certain
subsidiaries of TCIC exchanged their shares of Old TCI Class A common
stock for shares of TCI Class A common stock. Additionally,
subsidiaries of TCI exchanged their shares of Liberty Class A common
stock for TCI Class A common stock. Subsidiaries of TCI also
exchanged their shares of various preferred stock issuances of Liberty
for preferred stock of TCI. Such preferred stock of TCI is reflected
as investment in TCI at such entities' historical cost in the
accompanying consolidated financial statements.
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)
I-59
<PAGE> 62
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the fourth quarter of 1994, TCI was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable
and Communications; Programming ("Liberty Media Group"); International
Cable and Programming ("TCI International"); and Technology/Venture
Capital. The assets of TCI not included in Liberty Media Group are
referred to as TCI Group. Upon Reorganization, certain of the assets
of TCIC were transferred to the other operating units. The most
significant transfers were as follows: (i) Turner Broadcasting
System, Inc. ("TBS") and Discovery Communications, Inc. were
transferred to the Programming unit and (ii) TCI/US WEST Cable
Communications Group ("TeleWest UK") was transferred to TCI
International. In the first quarter of 1995, TCIC transferred certain
additional assets to TCI International.
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
Liberty Media Group. While the Liberty Group Stock constitutes common
stock of TCI, the issuance of the Liberty Group Stock did not result
in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed one hundred
percent of the equity value attributable to the Liberty Media Group
(the "Distribution") to its security holders of record on August 4,
1995. Additionally, the stockholders of TCI approved the
redesignation of the previously authorized TCI Class A and Class B
common stock into Series A TCI Group and Series B TCI Group common
stock.
In connection with the Distribution, subsidiaries of TCIC exchanged all
of the TCI Class A common stock and TCI preferred stock owned by such
subsidiaries for 267,944 shares of a new series of TCI Series Preferred
Stock designated Convertible Redeemable Participating Preferred Stock
Series F (the "Series F Preferred Stock"). Subsequent to such exchange
a holder of 78,077 shares of Series F Preferred Stock converted its
holdings into 100,524,364 shares of Series A TCI Group Common stock.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and
certain other subsidiaries of TCI was implemented effective July 1,
1995. The Tax Sharing Agreement formalizes certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes
and the settlement procedures with respect to the intercompany
allocation of current tax attributes. The Tax Sharing Agreement
encompasses U.S. federal, state, local and foreign tax consequences and
relies upon the U.S. Internal Revenue Code of 1986 as amended, and any
applicable state, local and foreign tax law and related regulations.
Beginning on the July 1, 1995 effective date, TCIC will be responsible
to TCI for its share of current consolidated income tax liabilities.
TCI will be responsible to TCIC to the extent that TCIC's income tax
attributes generated after the effective date are utilized by TCI to
reduce its consolidated income tax liabilities. Accordingly, all tax
attributes generated by TCIC's operations after the effective date
including, but not limited to, net operating losses, tax credits,
deferred intercompany gains and the tax basis of assets are inventoried
and tracked for the entities comprising TCIC. In connection with the
implementation of the Tax Sharing Agreement, TCIC recorded an increase
to its deferred income tax liability and a decrease to its amounts due
to TCI of $7.1 million.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years
beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. TCIC has not yet determined the financial statement
impact of the adoption of Statement No. 121.
Certain amounts have been reclassified for comparability with the 1995
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1995 1994
------- -------
amounts in millions
<S> <C> <C>
Cash paid for interest $ 733 573
========= =========
Cash paid for income taxes $ 8 23
========= =========
</TABLE>
(continued)
I-60
<PAGE> 63
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 2,784 312
Liabilities assumed (266) (21)
Deferred tax liability recorded in
acquisitions (920) --
Minority interests in equity of
acquired entities 47 (31)
Common stock of TCI issued in
acquisition contributed to TCIC (234) --
Increase in amounts due to TCI resulting
from common stock of TCI issued in
acquisition (1,371) --
------ ----
Cash paid for acquisitions $ 40 260
========== ====
Unrealized gains, net of deferred taxes,
on available-for-sale securities as of
January 1, 1994 $ -- 304
========== ====
Change in unrealized gains, net of
deferred taxes, on available-for-sale
securities $ 17 135
========== ====
TBS stock received in acquisition
transferred to Liberty Media Group $ 7 --
========== ====
Net assets of TCIC transferred in the
Reorganization in exchange for TCI
common stock reflected as investment
in TCI $ 12 --
========== ====
Net assets of TCIC transferred in the
Reorganization through due to TCI $ 68 --
========== ====
Retirement of TCI Class A common stock
received in Reorganization $ 38 --
========== ====
Increase in deferred tax liability due to
implementation of tax sharing agreement $ 71 --
========== ====
Common stock issued upon conversion
of redeemable preferred stock $ -- 18
========== ====
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ -- 24
========== ====
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 TCI/Liberty Combination
classified as Investment in TCI $ -- 356
========== ====
</TABLE>
(continued)
I-61
<PAGE> 64
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30,
-----------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Reversal of deferred tax liability recorded
in TCI/Liberty Combination $ -- 38
======== ========
Common stock issued upon conversion
of notes $ -- 3
======== ========
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
======== ========
Reclassification and change of common stock $ -- 532
======== ========
</TABLE>
3) Investments in Other Affiliates
-------------------------------
Summarized unaudited results of operations for affiliates, other than
Liberty, accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months
ended
Combined Operations September 30,
------------------- -----------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 329 829
Operating expenses (292) (830)
Depreciation and amortization (61) (130)
-------- --------
Operating loss (24) (131)
Interest expense (22) (46)
Other, net 2 (158)
-------- --------
Net loss $ (44) (335)
======== ========
</TABLE>
TCIC has various investments accounted for under the equity method.
The most significant investment held by TCIC at September 30, 1995 was
its investment in MajorCo, L.P. ("MajorCo"), a partnership formed by
TCIC, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $675
million). See note 7. Additionally, TCIC has an investment in
TelePort Communications Group, Inc. and TCG Partners (collectively,
"TCG") (carrying value of $142 million).
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 of
that partnership in the event liabilities of that partnership were to
exceed its assets.
(continued)
I-62
<PAGE> 65
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Acquisitions
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 acquisition of TeleCable was accounted for by the purchase method.
Accordingly, TeleCable's results of operations have been consolidated
with those of TCIC since its date of acquisition. On a pro forma
basis, TCIC's revenue would have been increased by $25 million and
$219 million for the nine months ended September 30, 1995 and 1994,
respectively, and net loss for the nine months ended September 30,
1995 would have been decreased by $1 million and net earnings for the
nine months ended September 30, 1994 would have been increased by $6
million, had TeleCable been consolidated with TCIC on January 1, 1994.
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 TCIC operated TeleCable since January 1, 1994.
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 was
payable in shares of TCI Class A common stock. Such acquisition was
consummated in the first quarter of 1995.
(5) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
amounts in millions
<S> <C> <C>
Parent company debt:
Senior notes $ 6,704 5,412
Bank credit facilities 79 869
Commercial paper 1,157 445
Other debt 2 2
--------- --------
7,942 6,728
Debt of subsidiaries:
Bank credit facilities 3,167 2,828
Notes payable 964 1,024
Convertible notes (a) 45 45
Other debt 25 87
--------- --------
$ 12,143 10,712
========= ========
</TABLE>
(continued)
I-63
<PAGE> 66
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at September 30, 1995 and December
31, 1994, 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. The notes are convertible, at the option
of the holders, into shares of Series A TCI Group common stock
and Series A Liberty Media Group common stock.
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/or dividend payments.
As security for borrowings under one of TCIC's bank credit facilities,
TCIC has pledged 100,524,364 shares of Series A TCI Group common stock
held by a subsidiary of TCIC.
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 6.1% to 9.9% on notional
amounts of $602 million at September 30, 1995 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,520 million at September 30, 1995. During the nine months ended
September 30, 1995 and 1994, TCIC's net payments pursuant to the Fixed
Rate Agreements were $1 million and $13 million, respectively; and
TCIC's net receipts pursuant to the Variable Rate Agreements were less
than $1 million and $33 million, respectively.
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>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.2% 300
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
---- February 2000 5.8%-6.6% 650
March 2000 5.8%-6.0% 675
$602 September 2000 5.1% 75
==== -------
$ 2,520
=======
</TABLE>
(continued)
I-64
<PAGE> 67
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 September 30, 1995, taking into consideration current
interest rates and assuming the current creditworthiness of the
counterparties. TCIC would pay an estimated $27 million at September
30, 1995 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 $225 million which fix the maximum
variable interest rates at 11%. Such agreements expire during the
fourth quarter 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 $12,143 million, was $12,507
million at September 30, 1995.
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.
(6) Stockholder's 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.
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 September 30, 1995, but are subject to future
adjustment based upon market value and, ultimately, on the final
determination of market value when the rights are exercised.
(continued)
I-65
<PAGE> 68
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Commitments and Contingencies
During 1994, TCIC, Comcast, Cox and Sprint formed WirelessCo to engage
in the business of providing wireless communications services on a
nationwide basis. Through WirelessCo, of which TCIC owns a 30%
interest, 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 PCS 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.
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)
I-66
<PAGE> 69
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March of 1995, TCIC, Comcast, Cox and Sprint formed two new
partnerships, of which the principal partnership is 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.
TCIC, Cox and Comcast, together with Continental Cablevision, Inc.
("Continental"), own 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. 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.
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)
I-67
<PAGE> 70
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
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.
On October 30, 1995, the FCC accepted for comment a proposed resolution
of all complaints against the cable programming services tier ("CPST")
currently pending against cable systems owned by TCIC. If the proposed
resolution is accepted by the FCC, TCIC will settle all pending
complaints by a one-time credit to each subscriber in CPST regulated
franchises of $1.90 (aggregating approximately $9 million). Such amount
had previously been accrued by TCIC. In addition, the FCC will find
that the CPST rates in CPST regulated franchises on September 15, 1995
comply with federal regulations. TCIC has committed not to file any
additional cost-of-service filings until May 15, 1996 in franchises
that were subject to CPST regulation prior to September 15, 1995.
However, TCIC will be able to avail itself of the other mechanisms
under FCC rules to recover costs, including abbreviated cost-of-service
filings covering system rebuilds and upgrades. In the proposed
resolution, TCIC does not admit any violation of, or any failure to
conform to, the 1992 Cable Act or the rules promulgated thereunder.
The comment period will end 30 days from October 30, 1995.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $192
million at September 30, 1995. 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 of
such obligations, that they will not be material to TCIC.
TCIC has also committed to provide additional debt or equity funding
to certain of its affiliates. At September 30, 1995, such commitments
aggregated $47 million.
In connection with the launch of a premium service in 1994, TCIC
became a direct obligor or guarantor of the payment of certain amounts
that may be due pursuant to motion picture output, distribution, and
license agreements. As of September 30, 1995, the maximum amount of
such obligations or guarantees was approximately $149 million. The
future obligations of TCIC with respect to these agreements is not
currently determinable because such amount is dependent upon certain
variable factors.
TCIC and its sole shareholder, TCI, have entered into certain
agreements with Viacom Inc. ("Viacom") and certain subsidiaries of
Viacom regarding the purchase by TCIC of all of the common stock of a
subsidiary of Viacom ("Cable Sub") which, at the time of purchase,
will own Viacom's cable systems and related assets.
(continued)
I-68
<PAGE> 71
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets,
as well as all of its liabilities other than current liabilities, to a
new subsidiary of Viacom ("New Viacom Sub"). Cable Sub will also
transfer to New Viacom Sub the proceeds (the "Loan Proceeds") of a
$1.7 billion loan facility (the "Loan Facility") to be arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub will
retain cable assets with an estimated value at closing of
approximately $2.25 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan
Proceeds will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common
Stock and Viacom Class B Common Stock (collectively, "Viacom Common
Stock") the opportunity to exchange (the "Exchange Offer") a portion
of their shares of Viacom Common Stock for shares of Class A Common
Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). The Exchange Offer will be subject to a number of
conditions, including a condition (the "Minimum Condition") that
sufficient tenders are made of Viacom Common Stock that permit the
number of shares of Cable Sub Class A Stock issued pursuant to the
Exchange Offer to equal the total number of shares of Cable Sub Class
A Stock issuable in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B Common Stock in
exchange for a capital contribution of $350 million (which will be
used to reduce Cable Sub's obligations under the Loan Facility). At
the time of such contribution, the Cable Sub Class A Stock received by
Viacom stockholders pursuant to the Exchange Offer will automatically
convert into a series of senior cumulative exchangeable preferred
stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated
value of $100 per share (the "Stated Value"). The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and
exchange features, will be designed to cause the Exchangeable
Preferred Stock to initially trade at the Stated Value. The
Exchangeable Preferred Stock will be exchangeable, at the option of
the holder commencing after the fifth anniversary of the date of
issuance, for shares of TCI Group common stock ("Parent Common
Stock"). The Exchangeable Preferred Stock will also be redeemable, at
the option of Cable Sub, after the fifth anniversary of the date of
issuance, and will be subject to mandatory redemption on the tenth
anniversary of the date of issuance at a price equal to the Stated
Value per share plus accrued and unpaid dividends, payable in cash or,
at the election of Cable Sub, in shares of Parent Common Stock. If
insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom will
extend the Exchange Offer for up to 15 business days and, during such
extension, TCI and Viacom are to negotiate in good faith to determine
mutually acceptable terms and conditions for the Exchangeable
Preferred Stock and the Exchange Offer that each believes in good
faith will cause the Minimum Condition to be fulfilled and that would
cause the Exchangeable Preferred Stock to trade at a price equal to
the Stated Value immediately following the expiration of the Exchange
Offer. In the event the Minimum Condition is not thereafter met, TCI
and Viacom will each have the right to terminate the transaction.
(continued)
I-69
<PAGE> 72
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction, the expiration or early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
receipt of necessary consents of the FCC and local cable franchise
authorities, and the satisfaction or waiver of all of the conditions
of the Exchange Offer. A request for a letter ruling from the
Internal Revenue Service has been filed by Viacom. TCIC believes that,
based upon the unique and complex structure of the transaction, there
exists significant uncertainty as to whether a favorable ruling will
be obtained. In light of the foregoing, management of TCIC has
concluded that consummation of the transaction is not yet probable.
Accordingly, no assurance can be given that the transaction will be
consummated.
TCIC has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required
to satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
I-70
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 *
------------------ -----------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 124 11
Trade and other receivables, net 201 206
Prepaid expenses 45 22
Prepaid program rights 30 13
Committed film inventory 68 36
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 4) 1,777 1,019
Property and equipment, at cost:
Land 72 69
Distribution systems 9,385 7,705
Support equipment and buildings 1,130 935
----------- -------
10,587 8,709
Less accumulated depreciation 3,644 3,027
----------- -------
6,943 5,682
----------- -------
Franchise costs 13,735 11,152
Less accumulated amortization 1,957 1,708
----------- -------
11,778 9,444
----------- -------
Other assets, at cost, net of amortization 934 688
----------- -------
$ 21,900 17,121
=========== =======
</TABLE>
* Restated - see note 9.
(continued)
I-116
<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 *
--------------- ---------------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 138 90
Accrued interest 166 183
Accrued programming expense 256 207
Other accrued expenses 366 408
Debt (note 6) 12,437 11,068
Deferred income taxes 4,363 3,363
Other liabilities (note 9) 174 170
---------- ---------
Total liabilities 17,900 15,489
---------- ---------
Minority interests in equity
of consolidated subsidiaries 582 314
Redeemable preferred stock (note 7) 474 168
Combined equity (note 8):
Combined equity, including preferred
stocks 2,884 2,559
Cumulative foreign currency
translation adjustment (3) (4)
TCI Group unrealized holding gains (losses)
for available-for-sale securities, net of taxes 71 (5)
Due from Liberty Media Group (8) (29)
Liberty Media Group unrealized holding
gains for available-for-sale securities,
net of taxes -- 131
Interest in Liberty Media Group -- (1,502)
---------- ---------
Combined equity 2,944 1,150
---------- ---------
Commitments and contingencies (note 11)
$ 21,900 17,121
========== =========
</TABLE>
* Restated - see note 9.
See accompanying notes to combined financial statements.
I-117
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------------ ------------------
1995 1994 * 1995 1994 *
------ ----- ------ -----
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,404 1,043 3,897 3,144
Operating costs and expenses:
Operating 446 300 1,219 881
Programming charges from Liberty
Media Group (note 9) 18 8 53 34
Selling, general and administrative 436 312 1,157 902
Charges to Liberty Media Group (note 9) (6) (3) (18) (8)
Compensation relating to stock
appreciation rights 6 12 22 --
Adjustment to compensation relating to
stock appreciation rights -- -- -- (6)
Depreciation 220 159 637 499
Amortization 97 74 267 221
-------- -------- --------- --------
1,217 862 3,337 2,523
-------- -------- --------- --------
Operating income 187 181 560 621
Other income (expense):
Interest expense (258) (207) (735) (572)
Interest and dividend income 15 7 28 15
Interest income from Liberty Media
Group (note 9) -- 1 2 2
Gain on sale of subsidiary stock (note 10) 123 -- 123 --
Share of losses of other affiliates,
net (note 4) (47) (23) (120) (54)
Minority interests in losses of
consolidated subsidiaries, net 10 2 20 2
Other, net (19) (5) (27) (4)
-------- --------- --------- --------
(176) (225) (709) (611)
-------- -------- --------- --------
Earnings (loss) before income taxes 11 (44) (149) 10
Income tax benefit (expense) 31 (24) 77 (80)
-------- -------- --------- --------
Earnings (loss) before earnings
(loss) of Liberty Media Group
through the date of Distribution (note 1) 42 (68) (72) (70)
Earnings (loss) of Liberty Media Group
through the date of Distribution (note 1) (3) 107 (17) 133
-------- -------- --------- --------
Net earnings (loss) 39 39 (89) 63
Dividend requirements on
preferred stocks (9) (3) (26) (3)
-------- -------- --------- --------
Net earnings (loss) attributable to
common shareholders $ 30 36 (115) 60
======== ======== ========= ========
Loss attributable to common shareholders
per common share (note 2) $ (.09) (.09)
======== =========
</TABLE>
* Restated - see note 9.
See accompanying notes to combined financial statements.
I-118
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1995
(unaudited)
<TABLE>
<CAPTION>
TCI
Group Liberty
unrealized Media
holding Group
Combined Cumulative gains unrealized
equity, foreign (losses) for Due From gains for
including currency available- Liberty available-
preferred translation for-sale Media for-sale
stocks adjustment securities Group securities *
------ ---------- ---------- --------- ------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 * $ 2,559 (4) (5) (29) 131
Net loss (89) -- -- -- --
Purchase of programming from
Liberty Media Group -- -- -- 13 --
Cost allocations to Liberty
Media Group -- -- -- (4) --
Allocation of compensation
relating to stock
appreciation rights -- -- -- 3 --
Interest income from Liberty
Media Group -- -- -- -- --
Intergroup tax allocation
to Liberty Media Group -- -- -- (5) --
Turner Broadcasting System,
Inc. ("TBS") stock received in
acquisition transferred to
Liberty Media Group -- -- -- -- --
Net cash transfers to Liberty
Media Group -- -- -- 14 --
Change in unrealized gains
for available-for-sale
securities -- -- 76 -- 116
Foreign currency translation
adjustment -- 1 -- -- --
Accreted dividends on TCI
preferred stock subject to
mandatory redemption
requirements (18) -- -- -- --
Payment of TCI preferred stock
dividends (10) -- -- -- --
Issuance of TCI Class A
common stock for
acquisitions and investments 1,378 -- -- -- --
Issuance of TCI Class A
common stock for acquisition
by Liberty Media Group 10 -- -- -- --
Cash paid by TCI Group for
investment by Liberty Media
Group contributed to Liberty
Media Group's combined equity -- -- -- -- --
Proceeds from issuances of
TCI Class A common stock
in public and private
offerings 431 -- -- -- --
Distribution of TCI Series A
and Series B Liberty Media
Group common stock to
TCI common shareholders (1,371) -- -- -- (247)
Costs associated with
Distribution to shareholders (6) -- -- -- --
------- -------- -------- ------- --------
Balance at September 30, 1995 $ 2,884 (3) 71 (8) --
======= ======== ========= ======= ========
<CAPTION>
Interest
in
Liberty
Media Combined
Group * equity
------- -------
amounts in millions
<S> <C> <C>
Balance at January 1, 1995 * (1,502) 1,150
Net loss 17 (72)
Purchase of programming from
Liberty Media Group 40 53
Cost allocations to Liberty
Media Group (14) (18)
Allocation of compensation
relating to stock
appreciation rights (7) (4)
Interest income from Liberty
Media Group (2) (2)
Intergroup tax allocation
to Liberty Media Group -- (5)
Turner Broadcasting System,
Inc. ("TBS") stock received in
acquisition transferred to
Liberty Media Group (7) (7)
Net cash transfers to Liberty
Media Group (15) (1)
Change in unrealized gains
for available-for-sale
securities (116) 76
Foreign currency translation
adjustment -- 1
Accreted dividends on TCI
preferred stock subject to
mandatory redemption
requirements -- (18)
Payment of TCI preferred stock
dividends -- (10)
Issuance of TCI Class A
common stock for
acquisitions and investments -- 1,378
Issuance of TCI Class A
common stock for acquisition
by Liberty Media Group (10) --
Cash paid by TCI Group for
investment by Liberty Media
Group contributed to Liberty
Media Group's combined equity (2) (2)
Proceeds from issuances of
TCI Class A common stock
in public and private
offerings -- 431
Distribution of TCI Series A
and Series B Liberty Media
Group common stock to
TCI common shareholders 1,618 --
Costs associated with
Distribution to shareholders -- (6)
---------- --------
Balance at September 30, 1995 -- 2,944
========== ========
</TABLE>
* Restated - see note 9.
See accompanying notes to combined financial statements.
I-119
<PAGE> 77
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1995 1994
------ ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss before net earnings
or loss of Liberty Media Group* (72) (70)
Adjustments to reconcile net loss before
net earnings or loss of Liberty Media Group to
net cash provided by operating activities:
Depreciation and amortization 904 720
Compensation relating to stock
appreciation rights 22 --
Adjustment to compensation relating to stock
appreciation rights -- (6)
Share of losses of other affiliates 120 54
Gain on sale of subsidiary stock (123) --
Deferred income tax expense (benefit) (111) 64
Minority interests in losses (20) (2)
Noncash interest and dividend income (9) (7)
Other noncash charges (credits) 8 --
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 28 (14)
Change in prepaids (60) (36)
Change in accruals and payables 14 29
Change in accrued interest (22) (14)
------ ------
Net cash provided by operating activities 679 718
------ ------
Cash flows from investing activities:
Cash paid for acquisitions (213) (116)
Capital expended for property and equipment (1,170) (947)
Proceeds from disposition of assets 29 34
Additional investments in and
loans to affiliates and others (900) (306)
Change in due from Liberty Media Group 21 --
Change in interest in Liberty Media Group 16 247
Repayment of loans by affiliates and others 18 33
Return of capital from affiliates 1 22
Other investing activities (196) (257)
------ ------
Net cash used in investing activities (2,394) (1,290)
------ ------
Cash flows from financing activities:
Change in cash overdraft -- 10
Borrowings of debt 6,926 3,015
Repayments of debt (5,952) (2,459)
Preceeds from sale of subsidiary stock 445 --
Preferred stock dividends of subsidiaries -- (3)
Preferred stock dividends (22) --
Issuance of common stock 431 --
------ -------
Net cash provided by financing activities 1,828 563
------ -------
Net increase (decrease) in cash 113 (9)
Cash at beginning of period 11 9
------ -------
Cash at end of period $ 124 --
====== =======
</TABLE>
* Net earnings or loss of Liberty Media Group does not provide or use funds.
See accompanying notes to combined financial statements.
I-120
<PAGE> 78
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1995
(unaudited)
(1) Liberty Group Stock
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). While the Liberty Group
Stock constitutes common stock of TCI, issuance of the Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI
or any of its subsidiaries or affect the rights of holders of TCI's or
any of its subsidiaries' debt. On August 10, 1995, TCI distributed
one hundred percent of the equity value attributable to the Liberty
Media Group (the "Distribution") to its security holders of record on
August 4, 1995. Additionally, the stockholders, of TCI approved the
redesignation of the previously authorized Class A and Class B common
stock into Series A TCI Group and Series B TCI Group common stock.
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A
and Series B TCI Group common stock, the Series A and Series B TCI
Group common stock is intended to reflect the separate performance of
TCI Group, which is generally comprised of the subsidiaries and assets
not attributed to Liberty Media Group, including (i) TCI's Cable and
Communication unit, (ii) TCI's International Cable and Programming
unit ("TCI International") and (iii) TCI's Technology/Venture Capital
unit. Liberty Media Group includes the businesses of
Tele-Communications, Inc. and Liberty Media Corporation which
distribute cable television programming services. The businesses of
TCI not attributed to Liberty Media Group are referred to as "TCI
Group".
(continued)
I-121
<PAGE> 79
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "TCIC") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the
two companies (the "TCI/Liberty Combination"). The transaction was
consummated on August 4, 1994. 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 prior
to the consummation of the TCI/Liberty Combination. Accordingly, TCIC
had recognized 100% of Liberty's earnings or losses before deducting
preferred stock dividends. The TCI/Liberty Combination was accounted
for using predecessor cost due to related party considerations.
Accordingly, the accompanying combined financial statements of TCI
Group reflect the combination of the historical financial information
of the assets of TCI and Liberty which have not been attributed to
Liberty Media Group. For periods prior to the TCI/Liberty
Combination, the combined financial statements of TCI Group and
Liberty Media Group comprise all the accounts included in the
consolidated financial statements of TCI and subsidiaries and the
separate consolidated financial statements of Liberty and
subsidiaries. For periods subsequent to the TCI/Liberty Combination,
the combined financial statements of TCI Group and Liberty Media Group
comprise all the accounts included in the corresponding consolidated
financial statements of TCI and subsidiaries.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its
combined financial statements, the change in the capital structure of
TCI approved by the shareholders of TCI does not affect the ownership
or the respective legal title to assets or responsibility for
liabilities of TCI or any of its subsidiaries. TCI and its
subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group common stock are holders of common
stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
The issuance of Liberty Group Stock did not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
TCI Group and the market price of shares of the TCI Group common
stock. In addition, net losses of any portion of TCI, dividends or
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of preferred stock would reduce
the funds of TCI legally available for dividends on all series of
common stock. Accordingly, TCI Group financial information should be
read in conjunction with the TCI and Liberty Media Group financial
information.
Dividends on the TCI Group common stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends and the available dividend amount with respect
to TCI Group, as defined. Determinations to pay dividends on TCI
Group common stock are based primarily upon the financial condition,
results of operations and business requirements of TCI Group and TCI
as a whole.
(continued)
I-122
<PAGE> 80
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
After the Distribution, existing preferred stock and debt securities
of TCI that were convertible into or exchangeable for shares of TCI
Class A common stock were, as a result of the operation of
antidilution provisions, adjusted so that there will be delivered upon
their conversion or exchange (in addition to the same number of shares
of redesignated Series A TCI Group common stock as were theretofore
issuable thereunder) the number of shares of Series A Liberty Group
Stock that would have been issuable in the Distribution with respect
to the TCI Class A common stock issuable upon conversion or exchange
had such conversion or exchange occurred prior to the record date for
the Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Distribution were adjusted by issuing
to the holders of such options separate options to purchase that
number of shares of Series A Liberty Group Stock which the holder
would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date
for the Distribution and reallocating a portion of the aggregate
exercise price of the previously outstanding options to the newly
issued options to purchase Series A Liberty Group Stock. Such
convertible or exchangeable preferred stock and debt securities and
options outstanding on the record date for the Distribution are
referred to as "Pre-Distribution Convertible Securities." The
issuance of shares of Series A Liberty Group Stock upon such
conversion, exchange or exercise of Pre-Distribution Convertible
Securities will not result in any transfer of funds or other assets
from TCI Group to Liberty Media Group or a reduction in any
Inter-Group Interest that then may exist, in consideration of such
issuance. In the case of the exercise of Pre- Distribution
Convertible Securities consisting of options to purchase Series A
Liberty Group Stock, the proceeds received upon the exercise of such
options will be attributed to Liberty Media Group. If Pre-
Distribution Convertible Securities remain outstanding at the time of
any disposition of all or substantially all of the properties and
assets of Liberty Media Group and TCI elects to distribute to holders
of Liberty Group Stock their proportionate interest in the net
proceeds of the disposition, the proportionate interest of the holders
of Liberty Group Stock will be determined on a basis that allocates to
the TCI Group a portion of such net proceeds, in addition to the
portion attributable to any Inter-Group Interest, sufficient to
provide for the payment of the portion of the consideration payable by
TCI on any post-Distribution conversion, exercise or exchange of
Pre-Distribution Convertible Securities that becomes so payable in
substitution for shares of Liberty Group Stock that would have been
issuable upon such conversion, exercise or exchange if it had occurred
prior to the record date for the disposition. Likewise, if
Pre-Distribution Convertible Securities remain outstanding at the time
of any redemption for all the outstanding shares of Liberty Group
Stock in exchange for stock of any one or more wholly-owned
subsidiaries of TCI which hold all of the assets and liabilities of
Liberty Media Group, the portion of the shares of such subsidiaries
deliverable in redemption of the outstanding shares of Liberty Group
Stock will be determined on a basis that allocates to TCI Group a
portion of the shares of such subsidiaries, in addition to the number
of shares so allocated in respect to any Inter-Group Interest,
sufficient to provide for the payment of the portion of the
consideration payable by TCI upon any post-redemption conversion,
exercise or exchange of Pre-Distribution Convertible Securities that
becomes so payable in substitution for shares of Liberty Group Stock
that would have been issuable upon such conversion, exercise or
exchange if it had occurred prior to such redemption.
(continued)
I-123
<PAGE> 81
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A number of wholly-owned subsidiaries which are part of TCI Group
owned shares of TCI Class A common stock and TCI preferred stock
("Subsidiary Shares"). Because the Distribution of the Liberty Group
Stock was made as a dividend to all holders of TCI's Class A common
stock and Class B common stock and, pursuant to the anti- dilution
provisions set forth therein, to the holders of securities convertible
into TCI Class A common stock and TCI Class B common stock upon the
conversion thereof, shares of Liberty Group Stock would otherwise have
been issued and become issuable in respect of the Subsidiary Shares
held by these subsidiaries and would be attributed to TCI Group. The
Liberty Group Stock issued in connection with the Distribution is
intended to constitute 100% of the equity value thereof to the holders
of TCI Class A common stock and TCI Class B common stock, and TCI
Group does not initially have any interest in Liberty Media Group
represented by any outstanding shares of Liberty Group Stock (an
"Inter-Group Interest"). Therefore, TCI determined to exchange all of
the outstanding Subsidiary Shares for shares of a new series of Series
Preferred Stock designated Convertible Redeemable Participating
Preferred Stock, Series F (the "Series F Preferred Stock"). See note
7. The rights, privileges and preferences of the Series F Preferred
Stock did not entitle its holders to receive Liberty Group Stock in
the Distribution or upon conversion of the Series F Preferred Stock.
Prior to the Distribution of Liberty Group Stock, TCI Group had a 100%
Inter-Group Interest in Liberty Media Group. Following the
Distribution of Liberty Group Stock, TCI Group has no Inter-Group
Interest in Liberty Media Group. For periods in which an Inter-Group
Interest exists, TCI Group would account for its Inter-Group Interest
in a manner similar to the equity method of accounting. For periods
after the Distribution and before the creation of an Inter-Group
Interest, TCI Group would not reflect any interest in Liberty Media
Group. An Inter-Group Interest would be created only if a subsequent
transfer of cash or other property from the TCI Group to the Liberty
Media Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to the TCI Group.
However, Liberty Media Group is under the sole control of TCI.
Management of TCI believes that generally accepted accounting
principles require that Liberty Media Group be consolidated with the
TCI Group. If Liberty Media Group were consolidated with TCI Group,
the combined financial position, combined results of operations, and
combined cash flows of TCI Group would equal the consolidated
financial position, consolidated results of operations and
consolidated cash flows of TCI and subsidiaries, which financial
statements are included separately herein. Management of TCI has
elected to present the accompanying combined financial statements in a
manner that does not comply with generally accepted accounting
principles.
(continued)
I-124
<PAGE> 82
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1994, TCI was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable
and Communications; Programming; TCI International and
Technology/Venture Capital. Upon Reorganization, certain of the
assets of TCIC and Liberty were transferred to the other operating
units. In the first quarter of 1995, TCIC transferred additional
assets to TCI International.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of TCI Group for the year
ended December 31, 1994.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years
beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. TCI Group has not yet determined the financial statement
impact of the adoption of Statement No. 121.
(continued)
I-125
<PAGE> 83
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Loss Per Common Share
The loss attributable to common shareholders per common share for the
period from the Distribution to September 30, 1995 was computed by
dividing net loss attributable to TCI Group Series A and Series B
common shareholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (656.4 million). Common stock equivalents were not included in
the computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1995 1994
----- -----
amount in millions
--------------------
<S> <C> <C>
Cash paid for interest $ 757 575
======= =======
Cash paid for income taxes $ 53 27
======= =======
</TABLE>
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid in acquisitions:
Fair value of assets acquired $ 3,365 123
Liabilities assumed (494) (18)
Deferred tax liability recorded
in acquisitions (1,095) (33)
Minority interests in equity of
acquired entities 42 (7)
Common stock issued in acquisitions (1,305) --
Redeemable preferred stock issued
in acquisition (300) --
Fees incurred in the TCI/Liberty Combination -- 8
Increase in due from Libery Media Group -- 43
------- -------
Cash paid in acquisitions $ 213 116
======= =======
TBS stock received in acquisition transferred
to Liberty Media Group $ 7 --
======= =======
</TABLE>
(continued)
I-126
<PAGE> 84
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Common stock issued in exchange for
cost investment $ 73 --
======== ========
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 1 24
======== ========
Unrealized gains, net of deferred income
taxes, on available-for-sale securities
as of January 1, 1994 $ -- 356
======== ========
Change in unrealized gains, net of deferred
income taxes, on available-for-sale
securities exclusive of unrealized
gains recorded in the TCI/Liberty
Combination $ 192 105
======== ========
Accrued preferred stock dividends $ 4 3
======== ========
Issuance of TCI Class A common stock
for acquisition by Liberty Media Group $ 10 --
======== ========
Distribution of TCI Series A and Series B
Liberty Group Stock to TCI common
shareholders $ 1,618 --
======== ========
Change in deferred income taxes due to
implementation of tax sharing agreement $ 2 --
======== ========
Issuance of subsidiary stock for
equity investment $ 11 --
======== ========
Common stock issued to subsidiary in
exchange for investment $ 1 --
======== ========
Deferred tax assets transferred to
Liberty Media Group $ 2 --
======== ========
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
======== ========
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
======== ========
Common stock issued upon conversion
of notes $ -- 3
======== ========
Issuance of convertible preferred stock
for acquisition by Liberty Media Group $ -- 168
======== ========
</TABLE>
(continued)
I-127
<PAGE> 85
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- ---------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 1,352 986
Operating expenses (1,140) (835)
Depreciation and amortization (289) (235)
-------- --------
Operating loss (77) (84)
Interest expense (159) (109)
Other, net (15) (104)
-------- --------
Net loss $ (251) (297)
======== ========
</TABLE>
TCI Group has various investments accounted for under the equity
method. Some of the more significant investments held by TCI Group at
September 30, 1995 were MajorCo, L.P. ("MajorCo"), a partnership
formed by TCI Group, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
(carrying value of $675 million) (see note 10), TeleWest
Communications plc (carrying value of $424 million) and Teleport
Communications Group, Inc. and TCG Partners (collectively, "TCG")
(carrying value of $142 million).
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(5) Acquisitions
As of January 26, 1995, TCI Group and TeleCable Corporation
("TeleCable") consummated a transaction, whereby TeleCable was merged
into TCI Group. 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") with an aggregate initial liquidation
value of $300 million (see note 7).
(continued)
I-128
<PAGE> 86
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On April 25, 1995, TCI International acquired a 51% ownership interest
in Cablevision S.A. and certain affiliated companies (collectively,
"Cablevision") for a purchase price of $282 million, before
liabilities assumed. The purchase price was paid with cash
consideration of $195 million (including a previously paid $20 million
deposit) and TCI International's issuance of $87 million principal
amount of secured negotiable promissory notes payable (the
"Cablevision Notes") to the selling shareholders. TCI International
has an option during the two-year period ended April 25, 1997 to
increase its ownership interest in Cablevision up to 80% at a cost per
subscriber similar to the initial purchase price, adjusted however for
certain fluctuations in applicable foreign currency exchange rates.
The acquisitions of TeleCable and Cablevision were accounted for by
the purchase method. Accordingly, the results of operations of such
acquired entities have been consolidated with those of TCI Group since
their respective dates of acquisition. On a pro forma basis, TCI
Group's revenue, net loss and net loss attributable to common
shareholders would have been increased by $93 million, $6 million and
$7 million, respectively, for the nine months ended September 30,
1995; and revenue would have increased by $323 million, and net
earnings and earnings attributable to common shareholders would have
been reduced by $1 million and $13 million, respectively, for the nine
months ended September 30, 1994 had such acquired entities been
combined with TCI Group on January 1, 1994. 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 TCI Group
operated the acquired entities since January 1, 1994.
Comcast had the right, through December 31, 1994, to require TCI Group
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 Group's election
shares of TCI common stock. On October 24, 1994, TCI Group and
Comcast entered into a purchase agreement whereby TCI Group 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 was payable in shares of TCI Class A common
stock. Such acquisition was consummated in the first quarter of 1995.
(continued)
I-129
<PAGE> 87
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------------- ---------------
amounts in millions
<S> <C> <C>
Senior notes $ 6,704 5,387
Bank credit facilities 3,294 4,011
Commercial paper 1,157 445
Notes payable 964 1,024
Convertible notes (a) 45 45
Cablevision Notes (b) 78 --
Other debt 195 156
--------- --------
$ 12,437 11,068
========= ========
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at September 30, 1995 and December
31, 1994, mature on December 18, 2021. The notes require (so
long as conversion of the notes has not occurred) an annual
interest payment through 2003 equal to 1.85% of the face
amount of the notes. At September 30, 1995, the notes were
convertible, at the option of the holders, into an aggregate
of 38,707,574 shares of Series A TCI Group common stock and
9,676,894 shares of Series A Liberty Group Stock. See note 1.
(b) The Cablevision Notes are secured by TCI International's
pledge of stock representing its 51% interest in Cablevision.
The bank credit facilities and various other debt instruments
attributable to the TCI Group generally contain restrictive covenants
which require, among other things, the maintenance of certain
earnings, specified cash flow and financial ratios (primarily the
ratios of cash flow to total debt and cash flow to debt service, as
defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or
dividend payments.
As security for borrowings under one of TCI Group's bank credit
facilities, TCI Group as pledged 100,524,364 shares of Series A TCI
Group common stock held by a subsidiary of TCI Group.
(continued)
I-130
<PAGE> 88
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In order to achieve the desired balance between variable and fixed
rate indebtedness, the TCI Group has entered into various interest
rate exchange agreements pursuant to which it pays (i) fixed interest
rates (the "Fixed Rate Agreements") ranging from 6.1% to 9.9% on
notional amounts of $602 million at September 30, 1995 and (ii)
variable interest rates (the "Variable Rate Agreements") on notional
amounts of $2,520 million at September 30, 1995. During the nine
months ended September 30, 1995 and 1994, the TCI Group's net payments
pursuant to the Fixed Rate Agreements were $1 million and $13 million,
respectively; and TCI Group's net receipts pursuant to the Variable
Rate Agreements were less than $1 million and $33 million,
respectively.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
-------------- ------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.2% 300
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
------ February 2000 5.8%-6.6% 650
$ 602 March 2000 5.8%-6.0% 675
==== September 2000 5.1% 75
-------
$ 2,520
=======
</TABLE>
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However,
TCI Group does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties.
In order to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate hedge
agreements on notional amounts of $225 million which fix the maximum
variable interest rates at 11%. Such agreements expire during the
fourth quarter of 1995.
The fair value of the interest rate exchange agreements is the
estimated amount that TCI Group would pay or receive to terminate the
agreements at September 30, 1995, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
TCI Group would be required to pay $27 million at September 30, 1995
to terminate the agreements.
(continued)
I-131
<PAGE> 89
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The fair value of the debt attributable to the TCI Group is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the TCI Group for debt of the same
remaining maturities. The fair value of debt, which has a carrying
value of $12,437 million, was $12,801 million at September 30, 1995.
Certain subsidiaries attributed to the TCI Group are required to
maintain unused availability under bank credit facilities to the
extent of outstanding commercial paper.
(7) Redeemable Preferred Stock
Convertible Preferred Stock,"Series C Preferred Stock". TCI has
issued 70,575 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 Series A TCI Group common stock and
25 shares of Series A Liberty Group 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 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 Series F Preferred Stock with
respect to the declaration and payment of dividends.
(continued)
I-132
<PAGE> 90
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 Series F 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. Subject to the
rights of any other class or series of TCI's preferred stock ranking
pari passu with the Series C Preferred Stock, the series C Preferred
Stock is required to be redeemed by TCI at any time after such seventh
anniversary at the option of the holder, in whole or in part (provided
that the aggregate liquidation value of the shares to be redeemed is in
excess of $1 million), in each case at a redemption price, per share,
equal to the liquidation value.
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
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)
I-133
<PAGE> 91
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 Group and Liberty Media Group 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 Group and Liberty Media Group 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
Delaware General Corporation Law ("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.
Convertible Preferred Stock, Series D. TCI issued 1,000,000 shares of
a series of TCI Series Preferred Stock designated "Convertible
Preferred Stock, Series D", par value $.01 per share, as partial
consideration for the merger between TCIC and TeleCable (see note 4).
The holders of the Series D Preferred Stock shall be entitled to
receive, when and as declared by the Board 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 Series A TCI Group common stock, the Series B TCI
Group common stock, the Series A Liberty Media Group common Stock, the
Series B Liberty Media Group 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 Series F Preferred Stock and the Series C Preferred Stock.
Prior to the Distribution, 431 shares of Series D Preferred Stock were
converted into 4,310 shares of TCI Class A common stock. Subsequent
to the Distribution, each share of Series D Preferred Stock is
convertible into 10 shares of Series A TCI Group common stock and 2.5
shares of Series A Liberty Group 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 common stock at
a conversion rate equal to 95% of the then current market price of
common stock, and upon issuance of common stock to holders of Series D
Preferred Stock in respect of such deemed conversion, such dividend
will be deemed paid for all purposes. See note 1.
(continued)
I-134
<PAGE> 92
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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
exceeds certain defined levels 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 common stock at a conversion
rate of 95% of the then current market value of 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.
Convertible Redeemable Participating Preferred Stock, Series F.
Immediately prior to the record date for the Distribution, TCI Group
caused each of its subsidiaries holding Subsidiary Shares to exchange
such shares for shares of Series F Preferred Stock having an aggregate
value of not less than that of the Subsidiary Shares so exchanged. TCI
Group is authorized to issue 500,000 shares of Series F Preferred
Stock, par value $.01 per share. Subsidiaries of TCI hold all the
issued and outstanding shares. Subsidiaries of TCI exchanged all of
the Subsidiary Shares for 355,141 shares of Series F Preferred Stock.
Subsequent to such exchange, a holder of 78,077 shares of Series F
Preferred Stock converted its holdings into 100,524,364 shares of
Series A TCI Group common stock. Such shares of Series A TCI Group
common stock are reflected as treasury stock in the accompanying
consolidated financial statements.
Each share of Series F Preferred Stock was convertible into 1,000
shares of Series A TCI Group common stock, subject to antidilution
adjustments, at the option of the holder at any time. The
anti-dilution provisions of the Series F Preferred Stock provide that
the conversion rate of the Series F Preferred Stock will be adjusted
by increasing the number of shares of Series A TCI Group common stock
issuable upon conversion in the event of any non-cash dividend or
distribution of the Series A TCI Group common stock to give effect to
the value of the securities, assets or other property so distributed;
however, no such adjustment shall entitle the holder to receive the
actual security, asset or other property so distributed upon the
conversion of shares of Series F Preferred Stock. Therefore, the
Distribution resulted in an adjustment to the conversion rate of the
Series F Preferred Stock such that each holder has the right to
receive upon conversion 1,287.51 shares of Series A TCI Group common
stock.
(continued)
I-135
<PAGE> 93
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The holders of the Series F Preferred Stock are entitled to
participate, on an as-converted basis, with the holders of the Series
A TCI Group common stock, with respect to any cash dividends or
distribution declared and paid on the Series TCI Group common stock.
Dividends or distribution on the Series A TCI Group common stock which
are not paid in cash would result in the adjustment of the applicable
conversion rate as described above.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series F Preferred Stock will be entitled to receive from the assets
of TCI available for distribution to stockholders an amount, in cash
or property or a combination thereof, per share of Series F Preferred
Stock, equal to the sum of (x) $.01 and (y) the amount to be
distributed per share of Series A TCI Group common stock in such
liquidation, dissolution or winding up multiplied by the applicable
conversion rate of a share of Series F Preferred Stock.
The Series F Preferred Stock is subject to optional redemption by TCI
at any time after its issuance, in whole or in party, at a redemption
price, per share, equal to the issue price of a share of Series F
Preferred Stock (as adjusted in respect of stock splits, reverse
splits and other events affecting the shares of Series F Preferred
Stock), plus any dividends which have been declared but are unpaid as
of the date fixed for such redemption. TCI may elect to pay the
redemption price (or designated portion thereof) of the shares of
Series F Preferred Stock called for redemption by issuing to the
holder thereof, in respect of its shares to be redeemed, a number of
shares of Series A TCI Group common stock equal to the aggregate
redemption price (or designated portion thereof) of such shares
divided by the average of the last sales prices of the Series A TCI
Group common stock for a period specified, and subject to the
adjustments described, in the certificate of designation establishing
the Series F Preferred Stock.
(8) Combined Equity
General
The rights of holders of the TCI Group common stock upon liquidation
of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the TCI Group common stock to the
aggregate market capitalization, as defined, of the TCI Group common
stock and the Liberty Group Stock.
(continued)
I-136
<PAGE> 94
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Preferred Stock
Class A Preferred Stock. TCI is authorized to issue 700,000
shares of Class A Preferred Stock, par value $.01 per share.
Subsidiaries of TCI held all of the issued and outstanding shares of
such stock, amounting to 592,797 shares. Such preferred stock
eliminated in consolidation. The holders of the Class A Preferred
Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the
Distribution.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
TCI 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.
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 Board, may be declared and paid in cash, in shares Series A TCI
Group 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 Series A TCI Group 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 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 Series F 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 Series A TCI Group 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 Series A TCI Group common stock by the Average Market Price of the
Series A TCI Group 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 Series A TCI Group 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.
(continued)
I-137
<PAGE> 95
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 distribution to stockholders an
amount in cash or property or a 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.
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)
I-138
<PAGE> 96
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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
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 Board.
(continued)
I-139
<PAGE> 97
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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 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.
Redeemable Convertible Preferred Stock, Series E. In connection with
the Reorganization, the Board created and authorized the issuance of
the Redeemable Convertible Preferred Stock, Series E, par value $.01
per share. TCI is authorized to issue 400,000 shares. Subsidiaries of
TCI held all of the issued and outstanding shares of such stock,
amounting to 246,402 shares. All such preferred stock eliminated in
consolidation. The holders of the Series E Preferred Stock exchanged
such Subsidiary Shares for shares of Series F Preferred Stock
immediately prior to the record date of the Distribution.
Stock Options and Stock Appreciation Rights
Certain key employees of the TCI Group hold options with tandem stock
appreciation rights to acquire TCI Group Series A common stock and
Liberty Media Group Series A common stock. Estimates of the
compensation relating to the options and/or stock appreciation rights
granted to such employees have been recorded in the accompanying
combined financial statements, but are subject to future adjustment
based upon the market value of TCI Group Series A common stock and
Liberty Media Group Series A common stock (see note 1) and, ultimately,
on the final determination of market value when the rights are
exercised.
(continued)
I-140
<PAGE> 98
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Transactions with Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges
are set at levels that management believes to be reasonable and that
approximate the costs Liberty Media Group would incur for comparable
services on a stand alone basis. The accompanying combined statements
of operations do not reflect the allocation of corporate general and
administrative costs through the date of the TCI/Liberty Combination
in the aforementioned manner because the majority of the entities
attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty Media Corporation for the majority of the
periods presented herein. During the nine months ended September 30,
1995, Liberty Media was allocated $2,300,000 in corporate general and
administrative costs by TCI Group.
Prior to the determination by the Board to seek approval of
shareholders to distribute the Liberty Group Stock, TCI did not have
formalized intercompany allocation methodologies. In connection with
such determination, management of TCI determined that TCI general
corporate expenses should be allocated to Liberty Media Group based on
the amount of time TCI corporate employees (e.g. legal, corporate,
payroll, etc.) expend on Liberty Media Group matters. TCI management
evaluated several alternative allocation methods including assets,
revenue, operating income, and employees. Management did not believe
that any of these methods would reflect an appropriate allocation of
corporate expenses given the diverse nature of TCI's operating
subsidiaries, the relative maturity of certain of the operating
subsidiaries, and the way in which corporate resources are utilized.
Liberty Media Group has a 49.9% partnership interest in QE+Ltd Limited
Partnership ("QE+"), which distributes STARZ!, a first-run movie
premium programming service launched in 1994. Entities attributed to
TCI Group hold the remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through 2005, up
to a maximum amount of $350 million, $90 million of which is required
in 1995. QE+ is obligated to pay TCI Group a preferred return of 10%
per annum on its special capital contributions of up to $200 million
beginning five years from the date of the contribution or January 1,
1996, whichever is later. Any TCI Group special capital contributions
in excess of $200 million will be entitled to a preferred return of
10% per annum from the date of the contribution. QE+ is required to
apply 75% of its available cash flow, as defined, to repay TCI Group
special capital contributions and any preferred return payable
thereon. To the extent such special capital contributions are
insufficient to fund the cash requirements of QE+, TCI Group and
Liberty Media Group will each be obligated to fund such cash
requirements in proportion to their respective ownership percentages.
(continued)
I-141
<PAGE> 99
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group has also entered into a long-term affiliation agreement with
QE+ in respect to the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for 1995 are
anticipated to aggregate approximately $30 million to $40 million.
The affiliation agreement also provides that QE+ will not grant
materially more favorable terms and conditions to other cable system
operators unless such more favorable terms and conditions are made
available to TCI Group. The affiliation agreement also requires TCI
Group to make payments to QE+ with respect to a guaranteed minimum
number of subscribers totaling approximately $339 million for the
years 1996, 1997 and 1998.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of the interest. Such right is exercisable
for a period of ten years beginning January 1, 1999 after QE+ has had
positive cash flow for two consecutive calendar quarters. The right
is exercisable only after all special capital contributions from TCI
Group have been repaid, including the preferred return thereon.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined.
Payment of such fees is subordinated to the repayment of the TCI Group
special capital contributions and the preferred return thereon. In
addition, effective July 1, 1995, Liberty Media Group will earn a
"Content Fee" for certain services provided to QE+ equal to 4% of the
gross revenue of QE+, estimated to be approximately $1.2 million for
the six months ended December 31, 1995. The Content Fee agreement
expires on June 30, 2001, subject to renewal on an annual basis
thereafter. Payment of the Content Fee will be subordinated to the
repayment of the contributions made by TCI Group and the preferred
return thereon.
Subsidiaries of Liberty Media Group lease office space and satellite
transponder facilities from TCI Group. Charges by TCI Group for such
arrangements for the nine months ended September 30, 1995 and 1994,
aggregated $11 million, and $4 million, respectively.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers
who are subscribers of TCI Group's cable systems. Aggregate
commissions and charges to TCI Group were $5 million and $4 million
for the nine months ended September 30, 1995 and 1994, respectively.
(continued)
I-142
<PAGE> 100
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the first quarter of 1995, Liberty Media Group acquired an
additional interest in an investment previously accounted for under
the cost method. Upon consummation of such transaction, Liberty Media
Group is deemed to exercise significant influence over such entity
and, as such, adopted the equity method of accounting. As a result,
TCI Group restated its Interest in Liberty Media Group, its unrealized
gain on available-for-sale securities and accumulated deficit by $122
million, $127 million and $5 million, respectively, at December 31,
1994. The restatement resulted in an increase in the earnings from
Liberty Media Group of $2 million for the nine months ended September
30, 1994.
Subsequent to the TCI/Liberty Combination, TCI Group manages certain
treasury activities for Liberty Media Group on a centralized basis.
Cash receipts of certain businesses attributed to Liberty Media Group
are remitted to TCI Group and certain cash disbursements of Liberty
Media Group are funded by TCI Group on a daily basis. Prior to the
Distribution of the Liberty Group Stock, but subsequent to the
TCI/Liberty Combination, the net amounts of such cash activities are
included in investment in Liberty Media Group in the accompanying
combined financial statements. Prior to the TCI/Liberty Combination,
Liberty Media Corporation separately managed the treasury activities
of its subsidiaries. Subsequent to the Distribution of the Liberty
Group Stock, such cash activities are included in borrowings from
or loans to TCI Group or, if determined by the Board, as an equity
contribution to be reflected as an Inter-Group Interest to Liberty
Media Group.
The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to the Liberty Media Group or
preferred stock and the proceeds thereof should be specifically
attributed to and reflected on the combined financial statements of
Liberty Media Group to the extent that the debt is incurred or the
preferred stock is issued for the benefit of Liberty Media Group.
For all periods prior to the Distribution, all financial impacts of
equity offerings are attributed entirely to TCI Group. After the
Distribution, all financial impacts of issuances of additional shares
of Series A TCI Group common stock and Series B TCI Group common stock
will be attributed entirely to TCI Group, all financial impacts of
issuances of additional shares of Liberty Group Stock the proceeds of
which are attributed to the Liberty Media Group will be reflected
entirely in the combined financial statements of the Liberty Media
Group. Financial impacts of dividends or other distributions on, and
purchases of, Series A TCI Group common stock and Series B TCI Group
common stock will be attributed entirely to TCI Group, and financial
impacts of dividends or other distributions on Liberty Group Stock
will be attributed entirely to Liberty Media Group. Financial impacts
of repurchases of Liberty Group Stock, the consideration for which is
charged to Liberty Media Group, will be reflected entirely in the
combined financial statements of Liberty Media Group, and the
financial impacts of repurchases of Liberty Group Stock the
consideration for which is charged to TCI Group, will be attributed
entirely to TCI Group.
(continued)
I-143
<PAGE> 101
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the Distribution of the Liberty Group Stock, borrowings
from or loans to TCI Group will bear interest at such rates and have
repayment schedules and other terms as are established by the Board.
The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans
and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
A tax sharing agreement (the "Tax Sharing Agreement") among TCI Group
and certain other subsidiaries of TCI was implemented effective July 1,
1995. The Tax Sharing Agreement formalizes certain of the elements of a
pre-exisiting tax sharing arrangement and contains additional
provisions regarding the allocation of certain consolidated income tax
attributes and the settlement procedures with respect to the
intercompany allocation of current tax attributes. The Tax Sharing
Agreement encompasses U.S. federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as
amended, and any applicable state, local and foreign tax law and
related regulations. Beginning on the July 1, 1995 effective date, TCI
Group will be responsible to TCI for its share of current consolidated
income tax liabilities. TCI will be responsible to TCI Group to the
extent that TCI Group's income tax attributes generated after the
effective date are utilized by TCI to reduce its consolidated income
tax liabilities. Accordingly, all tax attributes generated by TCI
Group's operations after the effective date including, but not limited
to, net operating losses, tax credits, deferred intercompany gains and
the tax basis of assets are inventoried and tracked for the entities
comprising TCI Group. In connection with the implementation of the Tax
Sharing Agreement, TCI Group recorded an increase to its deferred
income tax liability and a decrease to its combined equity of
$2 million.
(10) Sale of Subsidiary Stock
On July 18, 1995, TCI International completed an initial public
offering (the "IPO") in which it sold 20 million shares of TCI
International Series A common stock to the public for consideration of
$16.00 per share aggregating $320 million, before deducting related
expenses (approximately $19 million). The shares sold to the public
represented 17% of TCI International's total issued and outstanding
common stock and 9% of the aggregate voting interest represented by
such issued and outstanding common stock. Also in July 1995, TCI
International issued 687,500 Shares of TCI International Series A
common stock as partial consideration for a 35% ownership interest in
Torneos Y Competencias S.A., an Argentine sports programming company
(the "TYC Acquisition"). As a result of the IPO and the TYC
Acquisition, TCI Group has recognized a nonrecurring gain amounting to
$123 million (before deducting the related deferred income tax expense
of $50 million). Subsequent to the IPO and the TYC Acquisition, TCI
owns 82% of the issued and outstanding stock of TCI International.
(11) Commitments and Contingencies
During 1994, TCI Group, Comcast, Cox and Sprint formed WirelessCo to
engage in the business of providing wireless communications services
on a nationwide basis. Through WirelessCo, of which TCI Group owns a
30% interest, 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.
(continued)
I-144
<PAGE> 102
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
During 1994, subsidiaries of Cox, Sprint and TCI Group also formed a
separate partnership ("PhillieCo"), in which TCI Group 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.
In March of 1995, TCI Group, Comcast, Cox and Sprint formed two new
partnerships, of which the principal partnership is 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, TCI Group has agreed to
affiliate certain of its cable systems with NewTelco. The capital
required for the upgrade of TCI Group's cable facilities for the
provision of telephony services is expected to be substantial.
(continued)
I-145
<PAGE> 103
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group, Cox and Comcast, together with Continental Cablevision,
Inc. ("Continental"), own TCG, which is one of the largest competitive
access providers in the United States in terms of route miles. TCI
Group, Cox and Comcast have entered into an agreement with MajorCo and
NewTelco to contribute their interests in TCG and its affiliated
entities to NewTelco. TCI Group 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, TCI Group,
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. 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.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In
1993 and 1994, the FCC adopted certain rate regulations required by
the 1992 Cable Act and imposed a moratorium on certain rate increases.
As a result of such actions, TCI Group's basic and tier service rates
and its equipment and installation charges (the "Regulated Services")
are subject to the jurisdiction of local franchising authorities and
the FCC. 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.
TCI Group believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCI Group's rates for regulated services are
subject to 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.
(continued)
I-146
<PAGE> 104
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On October 30, 1995, the FCC accepted for comment a proposed
resolution of all complaints against the cable programming services
tier ("CPST") currently pending against cable systems owned by the
Company. If the proposed resolution is accepted by the FCC, the
Company will settle all pending complaints by a one-time credit to
each subscriber in CPST regulated franchises of $1.90 (aggregating
approximately $9 million). Such amount had previously been accrued by
the Company. In addition, the FCC will find that the CPST rates in
CPST regulated franchises on September 15, 1995 comply with federal
regulations. The Company has committed not to file any additional
cost-of-service filings until May 15, 1996 in franchises that were
subject to CPST regulation prior to September 15, 1995. However, the
Company will be able to avail itself of the other mechanisms under FCC
rules to recover costs, including abbreviated cost-of-service filings
covering system rebuilds and upgrades. In the proposed resolution,
the Company does not admit any violation of, or any failure to conform
to, the 1992 Cable Act or the rules promulgated thereunder. The
comment period will end 30 days from October 30, 1995.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $229 million at September 30, 1995. Although there can
be no assurance, management of TCI Group believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to TCI Group.
TCI Group is obligated to pay fees for the license to exhibit certain
films that are released theatrically by various motion picture studios
through December 31, 2005 (the "Film Licensing Obligations"). As of
September 30, 1995, these agreements require minimum payments
aggregating approximately $290 million. The aggregate amount of the
Film Licensing Obligations is not currently estimable because such
amount is dependent upon certain variable factors. Nevertheless, TCI
Group's required aggregate payments under the Film Licensing
Obligations could prove to be significant.
TCI Group has also committed to provide additional debt or equity
funding to certain of its affiliates. At September 30, 1995, such
commitments aggregated $124 million.
TCI Group has entered into certain agreements with Viacom Inc.
("Viacom") and certain subsidiaries of Viacom regarding the purchase
by TCI Group of all of the common stock of a subsidiary of Viacom
("Cable Sub") which, at the time of purchase, will own Viacom's cable
systems and related assets.
(continued)
I-147
<PAGE> 105
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets,
as well as all of its liabilities other than current liabilities, to a
new subsidiary of Viacom ("New Viacom Sub"). Cable Sub will also
transfer to New Viacom Sub the proceeds (the "Loan Proceeds") of a
$1.7 billion loan facility (the "Loan Facility") to be arranged by TCI
Group and Cable Sub. Following these transfers, Cable Sub will retain
cable assets with an estimated value at closing of approximately $2.25
billion and the obligation to repay the Loan Proceeds borrowed under
the Loan Facility. Repayment of the Loan Proceeds will be
non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common
Stock and Viacom Class B Common Stock (collectively, "Viacom Common
Stock") the opportunity to exchange (the "Exchange Offer") a portion
of their shares of Viacom Common Stock for shares of Class A Common
Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). The Exchange Offer will be subject to a number of
conditions, including a condition (the "Minimum Condition") that
sufficient tenders are made of Viacom Common Stock that permit the
number of shares of Cable Sub Class A Stock issued pursuant to the
Exchange Offer to equal the total number of shares of Cable Sub Class
A Stock issuable in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCI Group
will acquire from Cable Sub shares of Cable Sub Class B Common Stock
in exchange for a capital contribution of $350 million (which will be
used to reduce Cable Sub's obligations under the Loan Facility). At
the time of such contribution, the Cable Sub Class A Stock received by
Viacom stockholders pursuant to the Exchange Offer will automatically
convert into a series of senior cumulative exchangeable preferred
stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated
value of $100 per share (the "Stated Value"). The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and
exchange features, will be designed to cause the Exchangeable
Preferred Stock to initially trade at the Stated Value. The
Exchangeable Preferred Stock will be exchangeable, at the option of
the holder commencing after the fifth anniversary of the date of
issuance, for shares of TCI Group common stock ("Parent Common
Stock"). The Exchangeable Preferred Stock will also be redeemable, at
the option of Cable Sub, after the fifth anniversary of the date of
issuance, and will be subject to mandatory redemption on the tenth
anniversary of the date of issuance at a price equal to the Stated
Value per share plus accrued and unpaid dividends, payable in cash or,
at the election of Cable Sub, in shares of Parent Common Stock. If
insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom will
extend the Exchange Offer for up to 15 business days and, during such
extension, TCI Group and Viacom are to negotiate in good faith to
determine mutually acceptable terms and conditions for the
Exchangeable Preferred Stock and the Exchange Offer that each believes
in good faith will cause the Minimum Condition to be fulfilled and
that would cause the Exchangeable Preferred Stock to trade at a price
equal to the Stated Value immediately following the expiration of the
Exchange Offer. In the event the Minimum Condition is not thereafter
met, TCI and Viacom will each have the right to terminate the
transaction.
(continued)
I-148
<PAGE> 106
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction, the expiration or early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
receipt of necessary consents of the FCC and local cable franchise
authorities, and the satisfaction or waiver of all of the conditions
of the Exchange Offer. A request for a letter ruling from the
Internal Revenue Service has been filed by Viacom. TCI Group believes
that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling
will be obtained. In light of the foregoing, managment of TCI Group
has concluded that consummation of the transaction is not yet
probable. Accordingly, no assurance can be given that the transaction
will be consummated.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying combined financial statements.
I-149
<PAGE> 107
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Material changes in financial condition:
On August 3, 1995, the shareholders of TCI authorized the Board to issue a
new class of stock which is intended to reflect the separate performance of
Liberty Media Group. While the Liberty Group Stock constitutes common stock of
TCI, the issuance of the Liberty Group Stock will not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to Liberty
Media Group to its security holders of record on August 4, 1995. Additionally,
shareholders of TCI approved the redesignation of the previously authorized
Class A and Class B common stock of TCI into Series A TCI Group and Series B
TCI Group common stock.
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A and Series
B TCI Group common stock, the Series A and Series B TCI Group common stock is
intended to reflect the separate performance of TCI Group, which is generally
comprised of the subsidiaries and assets not attributed to Liberty Media Group,
including (i) TCI's Cable and Communications unit, (ii) TCI International and
(iii) TCI's Technology/Venture Capital unit. The businesses of TCI not
attributed to Liberty Media Group are referred to as "TCI Group".
On January 27, 1994, TCIC and Liberty entered into a definitive merger
agreement to combine the two companies. The transaction was consummated on
August 4, 1994. 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 prior to the consummation of the TCI/Liberty
Combination. Accordingly, TCIC had recognized 100% of Liberty's earnings or
losses before deducting preferred stock dividends. The TCI/Liberty Combination
was accounted for using predecessor cost due to related party considerations.
Accordingly, the accompanying combined financial statements of TCI Group
reflect the combination of the historical financial information of the assets
of TCI and Liberty which have not been attributed to Liberty Media Group. For
periods prior to the TCI/Liberty Combination, the combined financial statements
of TCI Group and Liberty Media Group comprise all the accounts included in the
corresponding consolidated financial statements of TCI and subsidiaries and
Liberty and subsidiaries. For periods subsequent to the TCI/Liberty
Combination, the combined financial statements of TCI Group and Liberty Media
Group comprise all the accounts included in the corresponding consolidated
financial statements of TCI and subsidiaries.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group for purposes of preparing its combined
financial statements, the change in the capital structure of TCI approved by
the shareholders of TCI does not affect the ownership or the respective legal
title to assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries each continue to be responsible for
their respective liabilities. Holders of TCI Group common stock are holders of
common stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty Group Stock did not affect the rights of creditors of TCI.
(continued)
I-150
<PAGE> 108
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition and TCI could affect
the combined results of operations or financial condition of TCI Group and the
market price of shares of the TCI Group common stock. In addition, net losses
of any portion of TCI, dividends or distributions on, or repurchases of, any
series of common stock, and dividends on, or certain repurchases of preferred
stock would reduce the funds of TCI legally available for dividends on all
series of common stock. Accordingly, TCI Group financial information should be
read in conjunction with the TCI and Liberty Media Group financial information.
Dividends on the TCI Group common stock are payable at the sole discretion
of the Board out of the lesser of assets of TCI legally available for dividends
and the available dividend amount with respect to TCI Group, as defined.
Determinations to pay dividends on TCI Group common stock would be based
primarily upon the financial condition, results of operations and business
requirements of TCI Group and TCI as a whole.
(continued)
I-151
<PAGE> 109
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
After the Distribution, existing preferred stock and debt securities of TCI
that were convertible into or exchangeable for shares of TCI Class A common
stock were, as a result of the operation of antidilution provisions, adjusted
so that there will be delivered upon their conversion or exchange (in addition
to the same number of shares of redesignated Series A TCI Group common stock as
were theretofore issuable thereunder) the number of shares of Series A Liberty
Group Stock that would have been issuable in the Distribution with respect to
the TCI Class A common stock issuable upon conversion or exchange had such
conversion or exchange occurred prior to the record date for the Distribution.
Options to purchase TCI Class A common stock outstanding at the time of the
Distribution were adjusted by issuing to the holders of such options separate
options to purchase that number of shares of Series A Liberty Group Stock which
the holder would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date for the
Distribution and reallocating a portion of the aggregate exercise price of the
previously outstanding options to the newly issued options to purchase Series A
Liberty Group Stock. Such convertible or exchangeable preferred stock and debt
securities and options outstanding on the record date for the Distribution are
referred to as "Pre-Distribution Convertible Securities." The issuance of
shares of Series A Liberty Group Stock upon such conversion, exchange or
exercise of Pre-Distribution Convertible Securities will not result in any
transfer of funds or other assets from TCI Group to Liberty Media Group or a
reduction in any Inter-Group Interest that then may exist, in consideration of
such issuance. In the case of the exercise of Pre-Distribution Convertible
Securities consisting of options to purchase Series A Liberty Group Stock, the
proceeds received upon the exercise of such options will be attributed to
Liberty Media Group. If Pre-Distribution Convertible Securities remain
outstanding at the time of any disposition of all or substantially all of the
properties and assets of Liberty Media Group and TCI elects to distribute to
holders of Liberty Group Stock their proportionate interest in the net proceeds
of the disposition the proportionate interest of the holders of Liberty Group
Stock will be determined on a basis that allocates to TCI Group a portion of
such net proceeds, in addition to the portion attributable to any Inter-Group
Interest, sufficient to provide for the payment of the portion of the
consideration payable by TCI on any post- Distribution conversion, exercise or
exchange of Pre-Distribution Convertible Securities that becomes so payable in
substitution for shares of Liberty Group Stock that would have been issuable
upon such conversion, exercise or exchange if it had occurred prior to the
record date for the disposition. Likewise, if Pre-Distribution Convertible
Securities remain outstanding at the time of any redemption for all the
outstanding shares of Liberty Group Stock in exchange for stock of any one or
more wholly-owned subsidiaries of TCI which hold all of the assets and
liabilities of the Liberty Media Group, the portion of the shares of such
subsidiaries deliverable in redemption of the outstanding shares of Liberty
Group Stock will be determined on a basis that allocates to the TCI Group a
portion of the shares of such subsidiaries, in addition to the number of shares
so allocated in respect to any Inter-Group Interest, sufficient to provide for
the payment of the portion of the consideration payable by TCI upon any
post-redemption conversion, exercise or exchange of Pre-Distribution
Convertible Securities that becomes so payable in substitution for shares of
Liberty Group Stock that would have been issuable upon such conversion,
exercise or exchange if it had occurred prior to such redemption.
(continued)
I-152
<PAGE> 110
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
A number of wholly-owned subsidiaries which are part of TCI Group owned
shares of Class A common stock and preferred stock of TCI. Because the
Distribution of the Liberty Group Stock was made as a dividend to all holders of
TCI's Class A common stock and Class B common stock and, pursuant to the
anti-dilution provisions set forth therein, to the holders of securities
convertible into Class A common stock and Class B common stock upon the
conversion thereof, shares of Liberty Group Stock would otherwise have been
issued and become issuable in respect of the Subsidiary Shares held by these
subsidiaries and would be attributed to TCI Group. The Liberty Group Stock
issued in connection with the Distribution is intended to constitute 100% of the
equity value thereof to the holders of the TCI Class A common stock and TCI
Class B common stock, and TCI Group does not initially have any interest in
Liberty Media Group represented by any outstanding shares of Liberty Group
Stock. Therefore, TCI has determined to exchange all of the outstanding
Subsidiary Shares for shares of a new series of Series Preferred Stock
designated Convertible Redeemable Participating Preferred Stock, Series F. See
note 7. The rights, privileges and preferences of the Series F Preferred Stock
did not entitle its holders to receive Liberty Group Stock in the Distribution
or upon conversion of the Series F Preferred Stock.
Immediately prior to the record date for the Distribution, TCI Group caused
each of its subsidiaries holding Subsidiary Shares to exchange such shares for
shares of Series F Preferred Stock having an aggregate value of not less than
that of the Subsidiary Shares so exchanged. TCI Group is authorized to issue
500,000 shares of Series F Preferred Stock, par value $.01 per share.
Subsidiaries of TCI hold all the issued and outstanding shares. Subsidiaries
of TCI exchanged all of the Subsidiary Shares for 355,141 shares of Series F
Preferred Stock. Subsequent to such exchange, a holder of 78,077 shares of
Series F Preferred Stock converted its holdings into 100,524,364 shares of
Series A TCI Group common stock.
I-153
<PAGE> 111
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Prior to the Distribution of Liberty Group Stock, TCI Group had a 100%
Inter-Group Interest in Liberty Media Group. Following the Distribution of
Liberty Group Stock, TCI Group has no Inter-Group Interest in Liberty Media
Group. For periods in which an Inter-Group Interest exists, TCI Group would
account for its Inter-Group Interest in a manner similar to the equity method
of accounting. For periods after the Distribution and before the creation of
an Inter- Group Interest, TCI Group would not reflect any interest in Liberty
Media Group. An Inter-Group Interest would be created only if a subsequent
transfer of cash or other property from TCI Group to Liberty Media Group is
specifically designated by the Board as being made to create an Inter-Group
Interest or if outstanding shares of Liberty Group Stock are purchased with
funds attributable to TCI Group. However, Liberty Media Group is under the
sole control of TCI. Management of TCI believes that generally accepted
accounting principles require that Liberty Media Group be consolidated with TCI
Group. If Liberty Media Group were consolidated with TCI Group, the financial
position, results of operations, and cash flows of TCI Group would equal the
financial position, results of operations and cash flows of TCI and
subsidiaries, which financial statements are included separately herein.
Management of TCI has elected to present the accompanying combined financial
statements in a manner that does not comply with generally accepted accounting
principles.
Subsequent to the TCI/Liberty Combination, TCI Group manages certain
treasury activities for Liberty Media Group on a centralized basis. Cash
receipts of certain businesses attributed to Liberty Media Group are remitted
to TCI Group and certain cash disbursements of Liberty Media Group are funded
by TCI Group on a daily basis. Prior to the Distribution of the Liberty Group
Stock, but subsequent to the TCI/Liberty Combination, the net amounts of such
cash activities are included in investment in Liberty Media Group in the
accompanying combined financial statements. Prior to the TCI/Liberty
Combination, Liberty Media Corporation separately managed the treasury
activities of its subsidiaries. Subsequent to the Distribution of the Liberty
Group Stock, such cash activities are included in borrowings from or loans
to TCI Group or, if determined by the Board, as an equity contribution to be
reflected as an Inter-Group Interest to Liberty Media Group.
The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to the Liberty Media Group or preferred stock
and the proceeds thereof should be specifically attributed to and reflected on
the combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of Liberty
Media Group.
(continued)
I-154
<PAGE> 112
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI Group. After the Distribution, all
financial impacts of issuances of additional shares of Series A TCI Group
common stock and Series B TCI Group common stock will be attributed entirely to
TCI Group, all financial impacts of issuances of additional shares of Liberty
Group Stock, the proceeds of which are attributed to Liberty Media Group, will
be reflected entirely in the combined financial statements of Liberty Media
Group. Financial impacts of dividends or other distributions on, and purchases
of, Series A TCI Group common stock and Series B TCI Group common stock will be
attributed entirely to TCI Group, and financial impacts of dividends or other
distributions on Liberty Group Stock will be attributed entirely to Liberty
Media Group. Financial impacts of repurchases of Liberty Group Stock the
consideration for which is charged to Liberty Media Group will be reflected
entirely in the combined financial statements of Liberty Media Group, the
financial impacts of repurchases of Liberty Group Stock the consideration for
which is charged to TCI Group will be attributed entirely to TCI Group.
Subsequent to the Distribution of the Liberty Group Stock, borrowings from
or loans to TCI Group will bear interest at such rates and have repayment
schedules and other terms as are established by the Board. The Board expects
to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing sources.
On July 18, 1995, TCI International completed the IPO in which it sold 20
million shares of TCI International Series A common stock to the public for
aggregate consideration of $16.00 per share aggregating $320 million, before
deducting related expenses ( approximately $19 million). The shares sold to
the public represented 17% of TCI International's total issued and outstanding
common stock and 9% of the aggregate voting interest represented by such issued
and outstanding common stock.
During 1994, TCI Group, Comcast, Cox and Sprint formed WirelessCo to engage
in the business of providing wireless communications services on a nationwide
basis. Through WirelessCo, of which TCI Group owns a 30% interest, the
partners have been participating in PCS Auctions of broadband 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.
(continued)
I-155
<PAGE> 113
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
WirelessCo has also invested in 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.
During 1994, subsidiaries of Cox, Sprint and TCI Group also formed
PhillieCo, in which the TCI Group 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. TCI Group anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
In March of 1995, TCI Group, Comcast, Cox and Sprint formed two new
partnerships, of which the principal partnership is MajorCo, to which they
contributed their respective interests in WirelessCo and through which they
formed 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, TCI Group
has agreed to affiliate certain of its cable systems with NewTelco. The
capital required for the upgrade of TCI Group's cable facilities for the
provision of telephony services is expected to be substantial.
(continued)
I-156
<PAGE> 114
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
TCI Group, Cox and Comcast, together with Continental, own TCG, which is
one of the largest competitive access providers in the United States in terms
of route miles. TCI Group, Cox and Comcast have entered into an agreement with
MajorCo and NewTelco to contribute their interests in TCG and its affiliated
entities to NewTelco. TCI Group 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, TCI Group, 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. 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.
During the fourth quarter of 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming; TCI
International; and Technology/Venture Capital. Upon Reorganization, certain of
the assets of TCIC and Liberty were transferred to the other operating units.
In the first quarter of 1995, TCIC transferred additional assets to TCI
International.
As of January 26, 1995, TCI Group and TeleCable consummated the TeleCable
Merger. The aggregate $1.6 billion purchase price was satisfied by TCI Group'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. The Series D Preferred
Stock, which accrues dividends at a rate of 5.5% per annum, is convertible into
10 million shares of Series A TCI Group common stock and 2,500,000 shares of
Series A Liberty Group 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.
During the first quarter of 1995, Liberty Media Group acquired an
additional interest in an investment previously accounted for under the cost
method. Upon consummation of such transaction, Liberty Media Group is deemed
to exercise significant influence over such entity and, as such, adopted the
equity method of accounting. As a result, TCI Group restated its Inter-Group
Interest in Liberty Media Group, its unrealized gain on available-for-sale
securities and accumulated deficit by $122 million, $127 million and $5
million, respectively, at December 31, 1994. The restatement resulted in an
increase in earnings from Liberty Media Group of $2 million for the nine months
ended September 30, 1994.
TCI Group has entered into certain agreements with Viacom and certain
subsidiaries of Viacom regarding the purchase by TCI Group of all of the common
stock of Cable Sub which, at the time of purchase, will own Viacom's cable
systems and related assets.
(continued)
I-157
<PAGE> 115
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
The transaction has been structured as a tax-free reorganization in which
Cable Sub will initially transfer all of its non-cable assets, as well as all
of its liabilities other than current liabilities, to New Viacom Sub. Cable
Sub will also transfer to New Viacom Sub the Loan Proceeds of a $1.7 billion
loan facility to be arranged by TCI Group and Cable Sub. Following these
transfers, Cable Sub will retain cable assets with an estimated value at
closing of approximately $2.25 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Common Stock the
opportunity to exchange a portion of their shares of Viacom Common Stock for
shares Cable Sub Class A Stock. The Exchange Offer will be subject to a number
of conditions, including a condition that sufficient tenders are made of Viacom
Common Stock that permit the number of shares of Cable Sub Class A Stock issued
pursuant to the Exchange Offer to equal the total number of shares of Cable Sub
Class A Stock issuable in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCI Group will
acquire from Cable Sub shares of Cable Sub Class B Common Stock in exchange for
a capital contribution of $350 million (which will be used to reduce Cable
Sub's obligations under the Loan Facility). At the time of such contribution,
the Cable Sub Class A Stock received by Viacom stockholders pursuant to the
Exchange Offer will automatically convert into the Exchangeable Preferred Stock
of Cable Sub with a stated value of $100 per share. The terms of the
Exchangeable Preferred Stock, including its dividend, redemption and exchange
features, will be designed to cause the Exchangeable Preferred Stock to
initially trade at the Stated Value. The Exchangeable Preferred Stock will be
exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Parent Common Stock. The
Exchangeable Preferred Stock will also be redeemable, at the option of Cable
Sub, after the fifth anniversary of the date of issuance, and will be subject
to mandatory redemption on the tenth anniversary of the date of issuance at a
price equal to the Stated Value per share plus accrued and unpaid dividends,
payable in cash or, at the election of Cable Sub, in shares of Parent Common
Stock. If insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom will extend the
Exchange Offer for up to 15 business days and, during such extension, TCI Group
and Viacom are to negotiate in good faith to determine mutually acceptable
terms and conditions for the Exchangeable Preferred Stock and the Exchange
Offer that each believes in good faith will cause the Minimum Condition to be
fulfilled and that would cause the Exchangeable Preferred Stock to trade at a
price equal to the Stated Value immediately following the expiration of the
Exchange Offer. In the event the Minimum Condition is not thereafter met, TCI
and Viacom will each have the right to terminate the transaction.
(continued)
I-158
<PAGE> 116
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue
Service that the transaction qualifies as a tax-free transaction, the
expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, receipt of necessary
consents of the FCC and local cable franchise authorities, and the satisfaction
or waiver of all of the conditions of the Exchange Offer. A request for a
letter ruling from the Internal Revenue Service has been filed by Viacom. TCI
Group believes that, based upon the unique and complex structure of the
transaction, there exists significant uncertainty as to whether a favorable
ruling will be obtained. In light of the foregoing, management of TCI Group has
concluded that consummation of the transaction is not yet probable. Accordingly,
no assurance can be given that the transaction will be consummated.
At September 30, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,054 million. For the nine
months ended September 30, 1995, Cable Sub had revenues of $329 million and net
earnings of $28 million. It is expected that if the transaction were to be
consummated, TCI Group would account for such acquisition under the purchase
method of accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and
the estimated aggregate Stated Value of the Exchangeable Preferred Stock of
$500 million) will be allocated to the assets and liabilities acquired
according to their respective fair values, with any excess being treated as
intangible assets. As such, TCI Group will, if such transaction is consummated,
reflect additional interest expense, depreciation, amortization and minority
share of losses of consolidated subsidiaries. On a pro forma basis, if the
transaction had been consummated under its current terms on or before January
1, 1994, Cable Sub would have reflected loss before taxes of approximately $40
million for the nine months ended September 30, 1995 and of approximately $71
million for the year ended December 31, 1994. On a pro forma basis, Cable Sub
would reflect an approximate $23 million of preferred stock dividend
requirements on an annual basis assuming, solely for the purpose of this
presentation, a dividend rate of 4.5% per annum on the Exchangeable Preferred
Stock. On a pro forma basis, TCI Group would reflect the foregoing financial
inmpacts of Cable Sub in its combined results of operations except that the
preferred stock dividend requirement of Cable Sub would be reflected as
minority interest in TCI Group's statement of operations and TCI Group would
incur an additonal approximately $27 million of interest expense per year
arising from the assumed borrowing by TCI Group for its $350 million capital
contribution to Cable Sub.
Pursuant to an underwritten public offering, TCI sold 19,550,000 shares of
TCI Class A common stock in February of 1995. TCI Group received net proceeds
of approximately $401 million. Such proceeds were immediately used to reduce
outstanding indebtedness under credit facilities.
TCI's ability to pay dividends on any classes or series of preferred stock
attributable to TCI Group is dependent upon the ability of subsidiaries
attributable to TCI Group to distribute amounts to TCI in the form of
dividends, loans or advances or in the form of repayment of loans and advances
from TCI. 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 TCI 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 TCI Group's subsidiaries are subject to loan agreements that
prohibit or limit the transfer of funds by such subsidiaries to TCI in the form
of dividends, loans, or advances and require that such subsidiaries'
indebtedness to TCI be subordinate to the indebtedness under such loan
agreements. The amount of net assets of subsidiaries subject to such
restrictions exceeds TCI's consolidated net assets. TCI Group's subsidiaries
currently have the ability to transfer funds to TCI in amounts exceeding TCI'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.
TCI Group had approximately $2.5 billion in unused lines of credit at
September 30, 1995, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although TCI Group was in compliance
with the restrictive covenants contained in its credit facilities at said date,
additional borrowings under the credit facilities are subject to the
subsidiaries' continuing compliance with the restrictive covenants (which
relate primarily to the maintenance of certain ratios of cash flow to total
debt and cash flow to debt service, as defined in the credit facilities) after
giving effect to such additional borrowings. See note 5 to the accompanying
combined financial statements for additional information regarding the material
terms of the lines of credit.
During the nine months ended September 30, 1995, TCI Group sold $1.5
billion of publicly-placed fixed-rate senior and medium term notes with
interest rates ranging from 6.8% to 8.8% and maturity dates ranging through
2015. The proceeds from the sale of these notes were used primarily to repay
variable-rate bank debt.
(continued)
I-159
<PAGE> 117
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash
operating credits or charges) $1,486 million and $1,335 million for the nine
months ended September 30, 1995 and 1994, respectively) to interest expense
($735 million and $572 million for the nine months ended September 30, 1995 and
1994, respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 2.02% and 2.33% for the
nine months ended September 30, 1995 and 1994, respectively. The decrease in
TCI Group's interest coverage in 1995 is due to an increase in interest expense
due to higher debt balances. Management of TCI Group believes that the
foregoing interest coverage ratio is adequate in light of the consistency and
nonseasonal nature of its cable television operations and the relative
predictability of TCI Group's interest expense, over half of which results
from fixed rate indebtedness. Operating Cash Flow is a measure of value and
borrowing capacity within the cable television industry and is not intended to
be a substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying combined statements of cash flows. Net cash
provided by operating activities ($679 million and $718 million for the nine
months ended September 30, 1995 and 1994, respectively) reflects net cash from
the operations of the TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by TCI
Group for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of TCI Group to obtain additional financing (including
the available lines of credit and access to public debt markets), issuances and
sales of TCI's equity or equity of its subsidiaries, proceeds from disposition
of assets will provide adequate sources of short-term and long-term liquidity
in the future. See TCI Group's combined statements of cash flows included in
the accompanying combined financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, TCI Group pays (i) fixed interest rates ranging from 6.1%
to 9.9% on notional amounts of $602 million at September 30, 1995 and (ii)
variable interest rates on notional amounts of $2,520 million at September 30,
1995. During the nine months ended September 30, 1995 and 1994, TCI Group's
net payments pursuant to the Fixed Rate Agreements were $1 million and $13
million, respectively. During the nine months ended September 30, 1995 and
1994, TCI Group's net receipts pursuant to the Variable Rate Agreements were
less than $1 million and $33 million, respectively. TCI Group's interest rate
hedge agreements fix the maximum variable interest rates on notional amounts of
$225 million at 11%. TCI Group is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, TCI
Group does not anticipate that it will incur any material credit losses because
it does not anticipate nonperformance by the counterparties.
(continued)
I-160
<PAGE> 118
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Approximately thirty-five percent of the franchises held by TCI Group,
involving approximately 3.8 million basic subscribers, expire within five
years. There can be no assurance that the franchises for TCI Group's systems
will be renewed as they expire although TCI Group 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, TCI Group
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.
TCI Group competes with operators who provide, via alternative methods of
distribution, the same or similar video programming as that offered by TCI
Group'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 ("HSDs") that vary in size depending upon the
power of the satellite. TCI Group has an interest in an entity, Primestar
Partners ("Primestar"), that distributes a multichannel programming service via
a medium power communications satellite to HSDs of approximately three feet in
size. Two other DBS operators offer 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 TCI Group's
cable systems. As the cost of equipment needed to receive these transmissions
declines, TCI Group expects that it will experience increased and substantial
competition from DBS operators.
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, TCI Group will face increased competition from
telephone companies which, in most cases, have greater financial resources than
TCI Group. All major telephone companies have announced plans to acquire cable
television systems or provide video services to the home through fiber optic
technology.
TCI Group is upgrading and installing optical fiber in its cable systems at
a rate such that in two years TCI Group anticipates that it will be serving the
majority of its customers with state-of-the-art fiber optic cable systems. TCI
Group made capital expenditures of $1,249 million in 1994 and TCI Group expects
to expend similar amounts in 1995, among other things, to provide for the
continued rebuilding of its cable systems. However, such proposed expenditures
are subject to reevaluation based upon changes in TCI Group's liquidity,
including those resulting from rate regulation.
(continued)
I-161
<PAGE> 119
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
TCI Group has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $229 million at
September 30, 1995. Although there can be no assurance, management of TCI
Group believes that it will not be required to meet any of such obligations,
that they will not be material to TCI Group.
TCI Group is obligated to pay fees for the license to exhibit certain films
that are released theatrically by various motion picture studios through
December 31, 2005. As of September 30, 1995, these agreements require minimum
payments aggregating approximately $290 million. The aggregate amount of the
Film Licensing Obligations is not currently estimable because such amount is
dependent upon certain variable factors. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant.
TCI Group has guaranteed the obligation of an Australian affiliate to pay
fees for the license to exhibit certain films through the year 2000. If TCI
Group failed to fulfill its obligation under this guarantee, the beneficiaries
have the right to demand an aggregate payment from TCI Group of $67 million.
Although the aggregate amount of the Australian affiliate's film license fee
obligations is not currently estimable, TCI Group believes that the aggregate
payments pursuant to such affiliate's obligation could be significant.
TCI Group has committed to provide additional debt or equity funding to
certain of its affiliates. At September 30, 1995, such commitments aggregated
$124 million.
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 Group's future ability to acquire
interests in additional cable systems.
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. For example, Congress presently is considering
telecommunications legislation which, if enacted into law, would substantially
change existing law, including among other things, the rate regulation of cable
television systems and the restrictions on telephone companies in the provision
of cable television service. The Senate approved the Telecommunications
Competition and Deregulation Act of 1995 on June 15, 1995. The House approved
the Communications Act of 1995 on August 4, 1995. The differences between the
two bills must be reconciled in Conference Committee, and the resulting
compromise must be voted on by the House and Senate and signed by the
President. Further material changes in the law and regulatory requirements
must be anticipated and there can be no assurance that TCI Group's business
will not be affected adversely by future legislation, new regulation or
deregulation.
(continued)
I-162
<PAGE> 120
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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. TCI Group 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.
TCI Group's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group) and through
net cash provided by their own operating activities.
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions,
TCI Group's Regulated Services are subject to the jurisdiction of local
franchising authorities and the FCC.
Cable operators may justify rates higher than the benchmark rates
established by the FCC by 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.
Such regulations allow an increase of either (i) the sum of a prescribed
channel addition factor, the license fee expense and a 7.5% markup, or (ii) a
flat fee increase per added channel and an aggregate limit on such increases
with an additional license fee reserve. For systems with more than one tier of
cable service, the methodology described in (ii) is not available for the basic
level of service. 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. On September 22,
1995, the FCC released its Thirteenth Order on Reconsideration of its rate
regulations, which provides cable operators with an optional annual methodology
for adjusting the rates for Regulated Services.
(continued)
I-163
<PAGE> 121
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
TCI Group believes that it has complied, in all material respects, with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, TCI Group's rates for Regulated Services are subject to adjustment
upon review, as described above. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received. Any refunds of the excess portion of tier service rates would
be retroactive to the date of complaint. Any refunds of the excess portion of
all other Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
On October 30, 1995, the FCC accepted for comment a proposed resolution of
all complaints against the cable programming services tier currently pending
against cable systems owned by TCI Group. If the proposed resolution is
accepted by the FCC, TCI Group will settle all pending complaints by a one-time
credit to each subscriber in CPST regulated franchises of $1.90 - the aggregate
amount will be approximately $8.7 million. In addition, the FCC will find that
the CPST rates in CPST regulated franchises on September 15, 1995 comply with
federal regulations. TCI Group has committed not to file any additional
cost-of-service filings until May 15, 1996 in franchises that were subject to
CPST regulation prior to September 15, 1995. However, TCI Group will be able
to avail itself of the other mechanisms under FCC rules to recover costs,
including abbreviated cost-of-service filings covering system rebuilds and
upgrades. In the proposed resolution, TCI Group does not admit any violation
of, or any failure to conform to, the 1992 Cable Act or the rules promulgated
thereunder. The comment period will end 30 days from October 30, 1995.
Based on the foregoing, TCI Group believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse effect on its
results of operations.
During 1995, TCI Group's revenue and expenses related to its Primestar
operations have increased significantly as the number of TCI Group's Primestar
subscribers increased from approximately 100,000 subscribers at January 1, 1995
to approximately 370,000 subscribers at September 30, 1995. During the nine
months ended September 30, 1995, revenue increased from $13 million to $118
million and operating, selling, general and administrative expenses increased
from $10 million to $107 million, as compared to the nine months ended
September 30, 1994. Primestar incurs significant sales commission and
installation expenses when customers initially subscribe. Therefore, as long
as Primestar continues to increase its subscriber base at such a rapid pace,
management expects that operating costs and expenses will increase as well.
Revenue increased 35% and 24% for the three months and nine months ended
September 30, 1995, respectively, as compared to the corresponding periods of
1994. The three months increase is the result of the effect of certain
acquisitions (16%), an increase in TCI Group's Primestar subscribers (5%),
growth in subscriber levels within TCI Group's cable television systems (4%),
and various other individually insignificant increases (10%). The nine month
increase is the result of the effect of certain acquisitions (12%), growth in
subscriber levels within TCI Group's cable television systems (4%), an increase
in TCI Group's Primestar subscribers (3%), and various other individually
insignificant increases (5%).
(continued)
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<PAGE> 122
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating and programming expenses increased 51% and 39%, and selling,
general and administrative expenses increassed 40% and 28% for the three months
and nine months ended September 30, 1995, respectively, as compared to the
corresponding periods of 1994. Such increases are primarily the result of
certain acquisitions and the increases in Primestar expenses described above.
Due to the aforementioned program to upgrade and install optical fiber in its
cable systems, TCI Group's capital expenditures and depreciation expense have
increased. TCI Group cannot determine whether and to what extent increases in
the cost of programming will affect its operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue of Regulated Services.
Certain corporate general and administrative costs are charged to Liberty
Media Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels
that management believes to be reasonable and that would approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
The accompanying combined statements of operations do not reflect the
allocation of corporate general and administrative costs through the date of
the TCI/Liberty Combination in the aforementioned manner because the majority
of the entities attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty Media Corporation for the majority of the periods
presented herein. During the nine months ended September 30, 1995, Liberty
Media was allocated $2 million in corporate general and administrative costs by
TCI Group.
Prior to the determination of the Board to seek approval of shareholders to
distribute the Liberty Group Stock, TCI did not have formalized intercompany
allocation methodologies. In connection with such determination, management of
TCI has determined that TCI general corporate expenses should be allocated to
Liberty Media Group based on the amount of time TCI corporate employees (e.g.
legal, corporate, payroll, etc.) expend on Liberty Media Group matters. TCI
management evaluated several alternative allocation methods including assets,
revenue, operating income, and employees. Management did not believe that any
of these methods would reflect an appropriate allocation of corporate expenses
given the diverse nature of TCI's operating subsidiaries, the relative maturity
of certain of the operating subsidiaries, and the way in which corporate
resources are utilized.
As a result of the IPO and TYC Acquisition, TCI Group recognized a
nonrecurring gain amounting to $123 million (before deducting the related
deferred income tax expense of $50 million) during the three months ended
September 30, 1995.
At September 30, 1995, TCI Group had an effective ownership interest of
approximately 36% in TeleWest Communications plc ("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 September 30,
1995 of $424 million and comprised $43 million of TCI Group's share of its
affiliates' losses during the nine months ended September 30, 1995. In
addition, TCI Group has other less significant equity method investments in
video distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $223
million at September 30, 1995 and accounted for $38 million of TCI Group's share
of its affiliates' losses in 1995.
(continued)
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<PAGE> 123
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
TeleWest Communications, which is currently constructing broadband cable
television and telephony networks in the UK, has incurred net losses since its
inception. Although there is no assurance, TCI Group believes (i) that the
continued expansion of TeleWest Communications' networks ultimately will
provide TeleWest Communications with a revenue base that will exceed its
expenses, (ii) that TeleWest Communications' present and future sources of
liquidity (including the net proceeds from TeleWest Communications' November
23, 1994 initial public offering and certain bank credit facilities) will be
sufficient to meet TeleWest Communications' liquidity requirements. TCI Group
has no present intention to make significant loans to or investments in
TeleWest Communications.
Subsequent to September 30, 1995, TeleWest Communications completed a merger
( the "TeleWest Merger") with SBC (CableComms) (UK) the result of which was the
formation of a new company, TeleWest plc ("New TeleWest). Subsequent to the
TeleWest Merger, TCI Group has an effective ownership interest in New TeleWest
of approximately 27%. As a result of the TeleWest Merger, TCI Group currently
estimates that it will recognize a nonrecurring gain of approximately $164
million (before deducting deferred income taxes of $57 million) during the
fourth quarter of 1995. Such gain represents the difference between TCI Group's
recorded cost for TeleWest Communications and TCI Group's 27% effective
proportionate share of New TeleWest's net assets.
In connection with its investments in the above-described foreign entities,
TCI Group is exposed to unfavorable and potentially volatile fluctuations of
the U.S. dollar against the UK pound sterling ("L."), the Japanese yen ("Y."),
and various other foreign currencies that are the functional currencies of TCI
Group's foreign subsidiaries and affiliates. Any increase (decrease) in the
value of the U.S. dollar against any foreign currency that is the functional
currency of an operating subsidiary or affiliate of International will cause
TCI Group to experience unrealized foreign currency translation losses (gains)
with respect to amounts already invested in such foreign currencies. TCI Group
is also exposed to foreign currency risk to the extent that TCI Group or its
foreign subsidiaries and affiliates enter into transactions denominated in
currencies other than their respective functional currencies. Because TCI
Group generally views its foreign operating subsidiaries and affiliates as
long-term investments, TCI Group generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. With respect to
funding commitments that are denominated in currencies other than the U.S.
dollar, TCI Group historically has sought to reduce its exposure to short- term
(generally no more than 90 days) movements in the applicable exchange rates
once the timing and amount of such funding commitments becomes fixed. Although
TCI Group monitors foreign currency exchange rates with the objective of
mitigating its exposure to unfavorable fluctuations in such rates, TCI Group
believes that it is not possible or practical to completely eliminate TCI
Group's exposure to unfavorable fluctuations in foreign currency exchange
rates.
TCI Group's net earnings (before earnings of Liberty Media Group and
preferred stock dividends) of $42 million for the three months ended September
30, 1995 represents an increase of $110 million, as compared to TCI Group's net
loss of $68 million for the three months ended September 30, 1994. Such
increase is primarily the result of the recognition of the aforementioned
nonrecurring gain recognized as a result of the IPO and the TYC Acquisition.
TCI Group's net loss (before earnings of Liberty Media Group and preferred
stock dividends) of $72 million for the nine months ended September 30, 1995
represents a decrease of $2 million, as compared to TCI Group's net loss of $70
million for the nine months ended Septmeber 30, 1994. Such decrease is the net
result of the nonrecurring gain recognized as a result of the IPO and the TYC
Acquisition, offset by an increase in interest expense as a result of higher
debt balances and an increase in share of losses of affiliates.
In March of 1995, the Financial Accounting Standards Board issued Statement
No. 121, effective for fiscal years beginning after December 15, 1995.
Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting
for long- lived assets that are expected to be disposed of. TCI Group has not
yet determined the financial statement impact of the adoption of Statement No.
121.
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