<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
incorporation or organization) Identification Nos.)
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 August 1, 1995, was:
Class A common stock - 571,549,241 shares; and
Class B common stock - 84,857,650 shares.
<PAGE> 2
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994 *
---------- -------------
Assets amounts in millions
------
<S> <C> <C>
Cash $ 94 74
Trade and other receivables, net 312 301
Inventories, net 110 121
Prepaid expenses 59 36
Prepaid program rights 40 24
Committed film inventory 56 47
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 2,031 1,285
Investment in Turner Broadcasting System, Inc.
("TBS") (note 6) 790 660
Property and equipment, at cost:
Land 96 91
Distribution systems 9,072 7,705
Support equipment and buildings 1,236 1,085
Computer and broadcast equipment 62 61
-------- -------
10,466 8,942
Less accumulated depreciation 3,485 3,066
-------- -------
6,981 5,876
-------- -------
Franchise costs 13,709 11,152
Less accumulated amortization 1,868 1,708
-------- -------
11,841 9,444
-------- -------
Other assets, at cost, net of amortization 1,587 1,449
-------- -------
$ 23,901 19,317
======== =======
</TABLE>
* Restated - see note 5.
(continued)
I-1
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994 *
------------- --------------
Liabilities and Stockholders' Equity amounts in millions
------------------------------------
<S> <C> <C>
Accounts payable $ 334 201
Accrued interest 198 183
Other accrued expenses 788 809
Debt (note 8) 12,520 11,162
Deferred income taxes 4,587 3,524
Other liabilities 178 160
-------- -------
Total liabilities 18,605 16,039
-------- -------
Minority interests in equity
of consolidated subsidiaries 369 429
Redeemable preferred stock (note 9) 307 --
Stockholders' equity (notes 2 and 10):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Convertible Preferred Stock, Series C,
$.01 par value -- --
Class A common stock, $1 par value
Authorized 1,100,000,000 shares;
issued 657,263,136 shares in 1995
and 576,979,498 shares in 1994 657 577
Class B common stock, $1 par value
Authorized 150,000,000 shares;
issued 89,030,279 shares in 1995
and 89,287,429 shares in 1994 89 89
Additional paid-in capital 4,668 2,959
Cumulative foreign currency
translation adjustment 6 (4)
Unrealized holding gains for
available-for-sale securities, net of taxes 215 126
Accumulated deficit (416) (288)
-------- -------
5,219 3,459
Treasury stock, at cost (85,713,895 and
86,030,992 shares of Class A common
stock in 1995 and 1994 and 4,172,629 shares
of Class B common stock in 1995 and 1994) (599) (610)
-------- -------
Total stockholders' equity 4,620 2,849
-------- -------
Commitments and contingencies (note 11)
$ 23,901 19,317
======== =======
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 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 $ 1,406 1,081 2,687 2,141
Net sales from home shopping services 247 -- 490 --
Other 7 -- 7 --
------- ------- ------- -------
1,660 1,081 3,184 2,141
------- ------- ------- -------
Operating costs and expenses:
Operating 503 329 968 644
Cost of sales 172 -- 333 --
Selling, general and administrative 481 300 915 595
Compensation relating to stock
appreciation rights 21 1 18 --
Adjustment to compensation relating to
stock appreciation rights -- -- -- (18)
Depreciation 228 173 429 336
Amortization 104 73 190 145
------- ------- ------- -------
1,509 876 2,853 1,702
------- ------- ------- -------
Operating income 151 205 331 439
Other income (expense):
Interest expense (243) (185) (483) (363)
Interest and dividend income 11 10 18 20
Share of earnings of Liberty Media
Corporation ("Liberty") -- 10 -- 24
Share of losses of other affiliates,
net (note 5) (43) (21) (72) (30)
Loss on early extinguishment of debt -- -- -- (2)
Minority interests in losses of
consolidated subsidiaries, net 10 2 21 --
Other, net (17) 6 (10) 2
------- ------- ------- -------
(282) (178) (526) (349)
------- ------- ------- -------
Earnings (loss) before income taxes (131) 27 (195) 90
Income tax benefit (expense) 48 (21) 67 (52)
------- ------- ------- -------
Net earnings (loss) (note 7) (83) 6 (128) 38
Dividend requirements on
preferred stocks (9) -- (17) --
------- ------- ------- -------
Net earnings (loss) attributable
to common shareholders (note 7) $ (92) 6 (145) 38
------- ------- ------- -------
Primary and fully diluted earnings (loss)
attributable to common shareholders
per common and common equivalent
share (notes 3 and 7) $ (.14) .01 (.22) .08
======= ======= ======= =======
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Cumulative holding
foreign gains for
Class B Series C Additional currency available
Preferred Preferred Common stock paid-in translation for-sale
Stock Stock Class A Class B capital adjustment securities *
--------- --------- ------- ------- ---------- ----------- ------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- -- 577 89 2,959 (4) 126
Net loss -- -- -- -- -- -- --
Issuance of common stock in
public offering -- -- 20 -- 381 -- --
Issuance of common stock in
private offering -- -- 1 -- 29 -- --
Issuance of common stock for
acquisitions and investments
(note 7) -- -- 59 -- 1,329 -- --
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization -- -- -- -- (1) -- --
Retirement of Class A common
stock previously held by
subsidiary -- -- -- -- (10) -- --
Accreted dividends on all
classes of
preferred stock -- -- -- -- (17) -- --
Accreted dividends on all
classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- 10 -- --
Payment of preferred stock
dividends -- -- -- -- (12) -- --
Foreign currency translation
adjustment -- -- -- -- -- 10 --
Change in unrealized holding
gains for
available-for-sale
securities -- -- -- -- -- -- 89
---- ---- ---- ---- ----- ---- ----
Balance at June 30, 1995 $ -- -- 657 89 4,668 6 215
==== ==== ==== ==== ===== ==== ====
</TABLE>
<TABLE>
Total
Accumulated Treasury stockholders'
deficit * stock equity
----------- -------- -------------
<S> <C> <C> <C>
Balance at January 1, 1995 (288) (610) 2,849
Net loss (128) -- (128)
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 -- 1 --
Retirement of Class A common
stock previously held by
subsidiary -- 10 --
Accreted dividends on all
classes of
preferred stock -- -- (17)
Accreted dividends on all
classes of
preferred stock not subject
to mandatory redemption
requirements -- -- 10
Payment of preferred stock
dividends -- -- (12)
Foreign currency translation
adjustment -- -- 10
Change in unrealized holding
gains for
available-for-sale
securities -- -- 89
----- ----- -----
Balance at June 30, 1995 (416) (599) 4,620
===== ===== =====
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1995 1994 *
------ ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (128) 38
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 619 481
Compensation relating to stock
appreciation rights 18 --
Adjustment to compensation relating to stock
appreciation rights -- (18)
Share of earnings of Liberty -- (24)
Share of losses of other affiliates 72 30
Deferred income tax expense (benefit) (62) 21
Minority interests in losses (21) --
Loss on early extinguishment of debt -- 2
Noncash interest and dividend income (5) (4)
Other noncash charges (credits) 6 (5)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 14 28
Change in inventories 12 --
Change in prepaids (37) (20)
Change in accrued interest 10 12
Change in other accruals and payables 38 52
------- -------
Net cash provided by operating activities 536 593
------- -------
Cash flows from investing activities:
Cash paid for acquisitions (239) (6)
Capital expended for property and equipment (780) (599)
Proceeds from disposition of assets 21 30
Additional investments in and
loans to affiliates and others (837) (212)
Repayment of loans by affiliates and others 7 32
Return of capital from affiliates 9 --
Other investing activities (94) (31)
------- -------
Net cash used in investing activities (1,913) (786)
------- -------
Cash flows from financing activities:
Borrowings of debt 4,636 1,564
Repayments of debt (3,658) (1,365)
Preferred stock dividends of subsidiaries -- (3)
Preferred stock dividends (12) --
Issuance of common stock 431 --
------- -------
Net cash provided by financing activities 1,397 196
------- -------
Net increase in cash 20 3
Cash at beginning of period 74 1
------- -------
Cash at end of period $ 94 4
======= =======
</TABLE>
* Restated - see note 5.
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 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. Such ownership is reflected as treasury stock at
such entities' historical cost in the accompanying consolidated
financial statements. Also, subsidiaries of TCI exchanged their shares
of various preferred stock issuances of Liberty for preferred stock of
TCI. Such preferred stock 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> 8
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.
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 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
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.
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, 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 Sports-West (formerly Prime Ticket Networks, L.P.)
Encore International, Inc.
Liberty Productions, Inc.
Prime Sports Network - Northwest
(continued)
I-7
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investments
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
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.
Sunshine Network
American Movie Classics Company
Republic Pictures Television
Sillerman Communications Management Corporation
Technology Programming Ventures
Prime Sports Australia
Silver King Communications, Inc.
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP
Upon the distribution of the Liberty Group Stock, the existing
TCI Class A and Class B common stock is intended to reflect the
separate performance of the TCI Group, which is generally comprised of
the subsidiaries and assets not attributed to the 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 the Liberty Media Group are referred to as the "TCI Group".
(continued)
I-8
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 will be holders of common stock of
TCI and will continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
The issuance of Liberty Group Stock does not affect the rights of
creditors of TCI.
Dividends on the TCI Group common stock will be 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 the 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 will be 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 the 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> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
After the Distribution, existing preferred stock and debt
securities of TCI that are convertible into or exchangeable for shares
of TCI Class A common stock will, as a result of the operation of
antidilution provisions, be 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 will be
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 the TCI Group
to the 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 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-10
<PAGE> 12
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 own 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
otherwise be issued and become issued in respect of the subsidiary
shares held by these subsidiaries and would be attributed to the 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 the Liberty
Media Group represented by any outstanding shares of Liberty Group
Stock (an "Inter-Group Interest"). Therefore, the Company 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 (the "Series F
Preferred Stock"). The rights, privileges and preferences of the
Series F Preferred Stock do not entitle its holders to receive Liberty
Group in the Distribution or upon conversion of the Series F Preferred
Stock.
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. Each share of Series F Preferred Stock is convertible into
1,000 shares of TCI Class A 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 will provides
that the conversion rate of the Series F Preferred Stock will be
adjusted by increasing the number of shares of Class A common stock
issuable upon conversion in the event of any non-cash dividend or
distribution of the Class A 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 giving such holder the right to receive upon conversion
additional shares of Class A common stock having a fair value (as
determined by the Board) equal to the number of shares of Series A
Liberty Group Stock which it would have received had such shares of
Series F Preferred Stock been converted immediately prior to the record
date for the Distribution rather than such number of shares of Liberty
Group Stock.
(continued)
I-11
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated 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 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 Class A 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 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 Class A common stock for
a period specified, and subject to the adjustments described, in the
certificate of designation establishing the Series F Preferred Stock.
(3) Earnings (Loss) Per Common and Common Equivalent Share
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 (451.4
million and 492.1 million for the three months and six months ended
June 30, 1994, respectively).
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 (451.4 million and
492.1 million for the three months and six months ended June 30, 1994,
respectively).
The loss per common share for the three months and six months
ended June 30, 1995 was computed by dividing net loss by the weighted
average number of common shares outstanding during the period (656.4
million and 645.4 million, respectively). Common stock equivalents
were not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
(continued)
I-12
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $473 million and $351 million for
the six months ended June 30, 1995 and 1994, respectively. Also,
during these periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as
follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 3,076 48
Liabilities assumed (221) (7)
Deferred tax liability recorded
in acquisitions (1,067) --
Minority interests in equity of
acquired entities 66 (35)
Common stock issued in acquisitions (1,315) --
Redeemable preferred stock issued
in acquisition (300) --
-------- -------
Cash paid for acquisitions $ 239 6
======== =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ 14 --
======== =======
Common stock issued to subsidiaries in
reorganization reflected as
treasury stock $ 1 --
======== =======
Retirement of Class A common stock
previously held by subsidiary $ 10 --
======== =======
Common stock issued in exchange for
cost investment $ 73 --
======== =======
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 10 15
======== =======
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 $ 89 176
======== =======
Accrued preferred stock dividends $ 7 --
======== =======
</TABLE>
(continued)
I-13
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1995 1994
---- ----
amounts in millions
<S> <C> <C>
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
====== ======
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
====== ======
</TABLE>
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates,
other than Liberty, accounted for under the equity method are as
follows:
<TABLE>
<CAPTION>
Six months ended
Combined Operations June 30,
------------------- ------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 1,985 525
Operating expenses (1,656) (466)
Depreciation and amortization (271) (59)
------- ------
Operating income 58 --
Interest expense (157) (22)
Other, net (86) (23)
------- ------
Net loss $ (185) (45)
======== ======
</TABLE>
The Company has various investments accounted for under the
equity method. Some of the more significant investments held by the
Company at June 30, 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 $666 million) (see note 11), Telewest Communications
plc (carrying value of $444 million), Discovery Communications, Inc.
(carrying value of $123 million) and Teleport Communications Group,
Inc. and TCG Partners (collectively, "TCG") (carrying value of $143
million).
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.
(continued)
I-14
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 effect of the restatement was
less than $1 million to the Company's net earnings for the six months
ended June 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.
At June 30, 1995, the Company's investment in TBS preferred stock,
carried at cost, had an aggregate market value of $730 million (which
exceeded cost by $552 million), based upon the market value of the
common stock into which it is convertible.
(continued)
I-15
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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") 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 $286 million,
before liabilities assumed and subject to adjustment as further
described below. The purchase price was paid with cash consideration
of $199 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. The purchase price is subject to adjustment upon
final determination of the actual number of Cablevision's equivalent
basic subscribers and liabilities at April 25, 1995. 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 the Company
since the respective dates of acquisition. On a pro forma basis, the
Company's revenue would have been increased by $93 million, net
loss, loss attributable to common shareholders and loss per share would
have been increased by $6 million, $7 million and $.01,
respectively, for the six months ended June 30, 1995 had such
acquired entities been consolidated with the Company on January 1,
1994. On a pro forma basis, revenue would have increased by $208
million, net earnings would have been reduced by $3 million, earnings
attributable to common shareholders would have been reduced by $11
million and earnings per share would have been reduced by $.02 for the
six months ended June 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.
(continued)
I-16
<PAGE> 18
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comcast had the right, through December 31, 1994, to require
TCI to purchase or cause to be purchased from Comcast all shares of
Heritage Communications, Inc. ("Heritage") directly or indirectly owned
by Comcast for either cash or assets or, at TCI's election shares of
TCI common stock. On October 24, 1994, the Company and Comcast entered
into a purchase agreement whereby the Company would repurchase the
entire 19.9% minority interest in Heritage owned by Comcast for an
aggregate consideration of approximately $290 million, the majority of
which is payable in shares of TCI Class A common stock. Such
acquisition was consummated in the first quarter of 1995.
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- ------------
amounts in millions
<S> <C> <C>
Senior notes $ 5,337 5,412
Bank credit facilities 4,560 4,045
Commercial paper 1,242 445
Notes payable 986 1,024
Convertible notes (A) 45 45
Cablevision Notes (B) 87 --
Other debt 263 191
--------- -------
$ 12,520 11,162
========= =======
</TABLE>
(A) These convertible notes, which are stated net of unamortized
discount of $186 million at June 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 June 30, 1995, the notes were
convertible, at the option of the holders, into an aggregate
of 38,707,574 shares of Class A common stock. See note 2.
(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.
(continued)
I-17
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As security for borrowings under one of TCIC's credit
facilities, Liberty pledged a portion of its TBS common stock (with a
quoted market value of approximately $599 million at June 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 $612 million at June 30, 1995 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,530 million at June 30, 1995. During the six months ended June 30,
1995 and 1994, the Company's net payments pursuant to the Fixed Rate
Agreements were $6.3 million and $13.2 million, respectively; and the
Company's net receipts pursuant to the Variable Rate Agreements were
$2.0 million and $26.6 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>
August 1995 7.7% $ 10 August 1995 7.7% $ 10
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
$ 612 March 2000 5.8%-6.0% 675
===== September 2000 5.1% 75
------
$2,530
======
</TABLE>
The Company is exposed to credit losses for the periodic
settlements of amounts due under these interest rate exchange
agreements in the event of nonperformance by the other parties to the
agreements. However, the Company does not anticipate that it will
incur any material credit losses because it does not anticipate
nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that the Company would pay or receive to terminate the
agreements at June 30, 1995, taking into consideration current interest
rates and the current creditworthiness of the counterparties. The
Company would be required to pay $29 million at June 30, 1995 to
terminate the agreements.
(continued)
I-18
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In order to diminish its exposure to extreme increases in
variable interest rates, the Company has entered into various interest
rate hedge agreements on notional amounts of $325 million which fix the
maximum variable interest rates at 11%. Such agreements expire during
the third and fourth quarters of 1995.
The fair value of the 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 $12,520 million, was $12,662
million at June 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 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).
The holders of the Series D Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of
unrestricted funds legally available therefor, cumulative dividends, in
preference to dividends on any stock that ranks junior to the Series D
Preferred Stock (currently the Class A common stock, the Class B common
stock and the Class B Preferred Stock), that shall accrue on each share
of Series D Preferred stock at the rate of 5-1/2% per annum of the
liquidation value ($300 per share). Dividends are cumulative, and in
the event that dividends are not paid in full on two consecutive
dividend payment dates or in the event that TCI fails to effect any
required redemption of Series D Preferred Stock, accrue at the rate of
10% per annum of the liquidation value. The Series D Preferred Stock
ranks on parity with the Class A Preferred Stock, the Series C
Preferred Stock and the Series E Preferred Stock.
Each share of Series D Preferred Stock is convertible into 10
shares of TCI Class A common stock, subject to adjustment upon certain
events specified in the certificate of designation establishing Series
D Preferred Stock. To the extent any cash dividends are not paid on
any dividend payment date, the amount of such dividends will be deemed
converted into shares of TCI Class A common stock at a conversion rate
equal to 95% of the then current market price of TCI Class A common
stock, and upon issuance of TCI Class A common stock to holders of
Series D Preferred Stock in respect of such deemed conversion, such
dividend will be deemed paid for all purposes. See note 2.
(continued)
I-19
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated 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 of
TCI Class A common stock shall have exceeded $37.50 for periods
specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D
Preferred Stock, the holders thereof will have the option to convert
their shares of Series D Preferred Stock into TCI Class A common stock
at a conversion rate of 95% of the then current market value of TCI
Class A common stock, provided that such option may not be exercised
unless the failure to redeem continues for more than a year.
Except as required by law, holders of Series D Preferred Stock
are not entitled to vote on any matters submitted to a vote of the
shareholders of TCI.
(10) Stockholders' Equity
Common Stock
The Class A common stock has one vote per share and the Class B
common stock has ten votes per share. Each share of Class B common
stock is convertible, at the option of the holder, into one share of
Class A common stock. See note 2.
Subsequent to the Distribution of the Liberty Group Stock, the
rights of holders of the TCI Group common stock upon liquidation of TCI
will be 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, subsequent to the Distribution of the Liberty Group Stock,
the rights of the holders of the Liberty Group Stock upon liquidation
of TCI will be 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.
Stock Options
The Company has adopted the Tele-Communications, Inc. 1994
Stock Incentive Plan (the "Plan"). The Plan provides for awards to be
made in respect of a maximum of 16 million shares of TCI Class A common
stock. Awards may be made as grants of stock options, stock
appreciation rights, restricted shares, stock units or any combination
thereof. The following descriptions represent the terms of certain
awards under the Plan (see note 2).
(continued)
I-20
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock options to acquire 152,514 shares of TCI Class A common
stock at adjusted purchase prices ranging from $8.83 to $18.63 per
share were outstanding at June 30, 1995. During the six months ended
June 30, 1995, 9,714 options were exercised and no options were
canceled. Options to acquire 9,714 shares of TCI Class A common stock
expire August 14, 1995. Options to acquire 142,800 shares of TCI Class
A common stock expire December 15, 1998.
Stock options in tandem with stock appreciation rights to
purchase 3,880,750 shares of Class A common stock at a purchase price
of $16.75 per share were outstanding at June 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 six months ended June 30, 1995, stock appreciation
rights covering 82,250 shares of Class A common stock were exercised
and the tandem stock options were canceled.
Stock options in tandem with stock appreciation rights to
purchase 1,940,000 shares of TCI Class A common stock at a purchase
price of $16.75 per share were outstanding at June 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.
Stock options in tandem with stock appreciation rights to
purchase 2,000,000 shares of TCI Class A common stock at a purchase
price of $16.75 per share were outstanding at June 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.
On November 17, 1994, stock options in tandem with stock
appreciation rights to purchase 3,214,000 shares of TCI Class A common
stock were granted to certain officers and other key employees at a
purchase price of $22.00 per share. Such options become exercisable
and vest evenly over five years, first become exercisable beginning
November 17, 1995 and expire on November 17, 2004.
Stock options in tandem with stock appreciation rights to
acquire 54,600 share of TCI Class A common stock at an adjusted
purchase price of $19.56 were outstanding at June 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
TCI Class A common stock were outstanding at June 30, 1995. These
rights have an adjusted strike price of $0.82 per share, become
exercisable and vest evenly over seven years, beginning March 28, 1992.
Stock appreciation rights expire on March 28, 2001.
(continued)
I-21
<PAGE> 23
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 of Directors and was not an employee of the Company or any of
its subsidiaries, of options to purchase 50,000 shares of Class A
common stock. Pursuant to the Director Stock Option Plan, options to
purchase 300,000 shares 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.
Estimated compensation relating to stock appreciation rights
has been recorded through June 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 June 30, 1995, there were 68,428,838 shares of TCI Class A
common stock reserved for issuance under exercise privileges related to
options and convertible debt securities. In addition, one share of
Class A common stock is reserved for each share of Class B common
stock. See note 2 for the effect of the Distribution on the conversion
rights of holders of convertible securities.
(11) 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.
(continued)
I-22
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated 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 the Company also
formed a separate partnership ("PhillieCo"), in which the Company owns
a 35.3% interest. PhillieCo was the winning bidder in the first round
auction for a PCS license for the Philadelphia market at a license cost
of $85 million. To the extent permitted by law, the PCS system to be
constructed by PhillieCo would also be affiliated with WirelessCo's
nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and
may invest in, affiliate with or acquire licenses from other successful
bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
At the end of the first quarter of 1995, subsidiaries of the
Company, Comcast, Cox and Sprint formed two new partnerships, of which
the principal partnership is MajorCo, 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.
(continued)
I-23
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
At June 30, 1995, the Company was liable for a $720 million
letter of credit which guarantees contributions to WirelessCo. The
Company has pledged 76,295,092 shares of TCI Class A common stock held
by subsidiaries of the Company as collateral for the letter of credit.
During the first half of 1995, borrowings aggregating $602 million were
made pursuant to the letter of credit.
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-24
<PAGE> 26
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. The amount
of refunds, if any, which could be payable by the Company in the event
that systems' rates are successfully challenged by franchising
authorities is not considered to be material.
The Company is obligated to pay fees for the license to exhibit
certain qualifying films that are released theatrically by various
motion picture studios through December 31, 2006 (the "Film License
Obligations"). The aggregate minimum liability under certain of the
license agreements is approximately $466 million. The aggregate amount
of the Film License Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films produced by the motion picture studios, the amount of
United States theatrical film rentals for such qualifying films, and
certain other factors. Nevertheless, the Company's aggregate payments
under the Film License Obligations could prove to be significant. 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.
The Company has guaranteed notes payable and other obligations
of affiliated and other companies with outstanding balances of
approximately $241 million at June 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 June 30, 1995, such
commitments aggregated $162 million.
(continued)
I-25
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1993, the President of HSN received stock appreciation
rights with respect to 984,876 shares of HSN's common stock at an
exercise price of $8.25 per share. These rights vest over a four year
period and are exercisable until February 23, 2003. The stock
appreciation rights will vest upon termination of employment other than
for cause and will be exercisable for up to one year following the
termination of employment. In the event of a change in ownership
control of HSN, all unvested stock appreciation rights will vest
immediately prior to the change in control and shall remain exercisable
for a one year period. Stock appreciation rights not exercised will
expire to the extent not exercised. These rights may be exercised for
cash or, so long as HSN is a public company, for shares of HSN's common
stock equal to the excess of the fair market value of each share of
common stock over $8.25 at the exercise date. The stock appreciation
rights also will vest in the event of death or disability. Estimated
compensation related to stock appreciation rights has been recorded
through June 30, 1995, but it is subject to future adjustment based
upon market value, and ultimately on the final determination of market
value when the rights are exercised.
The Company has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. In the opinion of management, it is expected that amounts,
if any, which may be required to satisfy such contingencies will not be
material in relation to the accompanying consolidated financial
statements.
(12) Subsequent Event
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 aggregate
consideration of $320 million, before deducting related expenses
(currently estimated to be approximately $18 million). The shares sold
to the public represent 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. TCI continues
to own 83% of the issued and outstanding stock of TCI International.
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-26
<PAGE> 28
TELE-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.
(continued)
I-27
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. Accordingly, no assurance can be given that the
transaction will be consummated.
I-28
<PAGE> 30
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. Such ownership
is reflected as treasury stock at such entities' historical cost in the
accompanying consolidated financial statements. Also, subsidiaries of TCI
exchanged their shares of various preferred stock issuances of Liberty for
preferred stock of TCI. Such preferred stock 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.
(continued)
I-29
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 $320 million, before deducting related expenses
(currently estimated to be approximately $18 million). The shares sold to the
public represent 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. TCI continues to own 83% of the issued and
outstanding stock of TCI International.
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.
(continued)
I-30
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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.
At the end of the first quarter of 1995, subsidiaries of the Company,
Comcast, Cox and Sprint formed two new partnerships, of which the principal
partnership is MajorCo, 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.
(continued)
I-31
<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
At June 30, 1995, the Company was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. The Company has pledged
76,295,092 shares of TCI Class A common stock held by subsidiaries of the
Company as collateral for the letter of credit. During 1995, borrowings
aggregating $602 million were made pursuant to the letter of credit.
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 TCI Class A common stock. The Series D
Preferred Stock is redeemable for cash at the option of TCI after five years
and at the option of either TCI or the holder after ten years.
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 effect of the restatement was less
than $1 million to the Company's net earnings for the six months ended June 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.
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. Accordingly, no
assurance can be given that the transaction will be consummated.
(continued)
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<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 will be 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 the 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 will be 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
the 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)
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<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Subsidiaries of the Company had $1.8 billion in unused lines of credit
at June 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.
Subsequent to June 30, 1995, TCIC sold $350 million principal amount of
its 8% Senior Notes due August 1, 2005 and $750 million principal amount of its
8-3/4% Senior Debentures due August 1, 2015 in an underwritten public offering.
The net proceeds of approximately $1,085 million were utilized to repay
variable rate indebtedness.
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) ($968 million and $902 million for the six months
ended June 30, 1995 and 1994, respectively) to interest expense ($483 million
and $363 million for the six months ended June 30, 1995 and 1994,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 200% and 248% for the
six months ended June 30, 1995 and 1994, respectively. Management of the
Company believes that the foregoing interest coverage ratio is adequate in
light of the consistent and nonseasonal nature of its cable television
operations and the relative predictability of the Company's interest expense,
almost half of which results from fixed rate indebtedness. Operating Cash Flow
is a measure of value and borrowing capacity within the cable television
industry and is not intended to be a substitute for cash flows provided by
operating activities, a measure of performance prepared in accordance with
generally accepted accounting principles, and should not be relied upon as
such. Operating Cash Flow, as defined, does not take into consideration
substantial costs of doing business, such as interest expense, and should not
be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($520 million and $593
million for the six months ended June 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, proceeds from
disposition of assets will provide adequate sources of short- term and
long-term liquidity in the future. See the Company's consolidated statements
of cash flows included in the accompanying consolidated financial statements.
(continued)
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<PAGE> 36
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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 $612 million at June 30, 1995 and (ii)
variable interest rates on notional amounts of $2,530 million at June 30, 1995.
During the six months ended June 30, 1995 and 1994, the Company's net payments
pursuant to the Fixed Rate Agreements were $6.3 million and $13.2 million,
respectively. During the six months ended June 30, 1995 and 1994, the
Company's net receipts pursuant to the Variable Rate Agreements were $2.0
million and $26.6 million, respectively. The Company's interest rate hedge
agreements fix the maximum variable interest rates on notional amounts of $325
million at 11%. The Company is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
Approximately thirty-five percent of the franchises held by the
Company, involving approximately 3.8 million basic subscribers, expire within
five years. There can be no assurance that the franchises for the Company's
systems will be renewed as they expire although the Company believes that its
cable television systems generally have been operated in a manner which
satisfies the standards established by the Cable Communications Policy Act of
1984 (the "1984 Cable Act"), as supplemented by the renewal provisions of the
1992 Cable Act, for franchise renewal. However, in the event they are renewed,
the Company cannot predict the impact of any new or different conditions that
might be imposed by the franchising authorities in connection with the
renewals. To date they have not varied significantly from the original terms.
The Company competes with operators who provide, via alternative
methods of distribution, the same or similar video programming as that offered
by the Company's cable systems. Technologies competitive with cable television
have been encouraged by Congress and the FCC. One such technology is direct
broadcast satellite ("DBS"). DBS services are offered directly to subscribers
owning home satellite dishes that vary in size depending upon the power of the
satellite; two DBS operators offer nationwide video services that can be
received by a satellite that measures approximately eighteen inches in
diameter. DBS operators can acquire the right to distribute over satellite all
of the significant cable television programming currently available on the
Company's cable systems. As the cost of equipment needed to receive these
transmissions declines, the Company expects that it will experience increased
and substantial competition from DBS operators.
(continued)
I-35
<PAGE> 37
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The 1984 Cable Act and FCC rules prohibit telephone companies from
offering video programming directly to subscribers in their telephone service
areas (except in limited circumstances in rural areas). However, a number of
Federal Court decisions have held that the cross-entry prohibition in the 1984
Cable Act is unconstitutional as a violation of the telephone company's First
Amendment right to free expression. In addition, certain proposals are also
pending before the FCC and Congress which would eliminate or relax these
restrictions on telephone companies. As the current cross-entry restrictions
are removed or relaxed, the Company will face increased competition from
telephone companies which, in most cases, have greater financial resources than
the Company. All major telephone companies have announced plans to acquire
cable television systems or provide video services to the home through fiber
optic technology.
The Company's entertainment and information programming services
subsidiaries and 50% owned affiliates lease satellite transponders as follows:
6 full time leases and one shared lease on a "protected" or "transponder
protected" basis, and 15 full time "unprotected" leases for an aggregate of 21
transponders on 10 domestic and 2 international communications satellites.
Domestic communications satellite transponders may be leased full or part time
on a "protected", "transponder protected" or "unprotected" basis. When the
carrier provides services to a customer on a "protected" basis, replacement
transponders are reserved on board the satellite for use in the event the
"protected" transponder fails. Should there be no reserve transponders
available, the "protected" customer will displace an "unprotected" transponder
customer on the same satellite. In certain cases, the carrier also maintains a
protection satellite and should a satellite fail completely, all lessors'
"protected" transponders would be moved to the protection satellite. The
customer who leases an "unprotected" transponder has no reserve transponders
available, and may have its service interrupted for an indefinite period when
its transponder is required to restore a "protected" service.
Although the Company believes it has taken reasonable steps to ensure
its continued satellite transmission capability, there can be no assurance that
termination or interruption of satellite transmissions will not occur. Such a
termination or interruption of service by one or more of these satellites could
have a material adverse effect on the results of operations and financial
condition of the programming group.
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.
(continued)
I-36
<PAGE> 38
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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.
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 is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios through December 31, 2006. The aggregate minimum liability under
certain of the license agreements is approximately $466 million. The aggregate
amount of the Film License Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films produced by the motion picture studios, the amount of United
States theatrical film rentals for such qualifying films, and certain other
factors. Nevertheless, the Company's aggregate payments under the Film License
Obligations could prove to be significant.
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.
(continued)
I-37
<PAGE> 39
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The Company has committed to provide additional debt or equity funding
to certain of its affiliates. At June 30, 1995, such commitments aggregated
$162 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 June 30, 1995 was $338 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 above, such regulations have
resulted in expanded cable distribution of HSN, which is carried by a number of
full-power commercial broadcast television stations.
The FCC has adopted regulations limiting carriage by a cable operator
of national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels
or a 45 percent limit, whichever is greater, provided that the additional
channels carry minority controlled programming services. The regulations
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations. Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services. These rules, which
currently are subject to pending petitions for reconsideration before the FCC,
may limit carriage of the Company's programming services on certain cable
systems of cable operators in which TCI has ownership interests.
(continued)
I-38
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
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.
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.
The Company estimates that the FCC's 1993 and 1994 rate regulations
will result in an aggregate annualized reduction of revenue and operating
income ranging from $280 million to $300 million based upon rates charged prior
to implementation of such rate regulations. The estimated annualized reduction
in revenue assumes that the FCC will not require further reductions beyond the
current regulations and is prior to any possible mitigating factors (none of
which is assured) such as (i) the provision of alternate service offerings (ii)
the implementation of rate adjustments to non-regulated services and (iii) the
utilization of cost- of-service methodologies, as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a
cost-of-service showing. Under this methodology, cable operators may be
allowed to recover through the rates they charge for Regulated Services, their
normal operating expenses plus an interim rate of return of 11.25% on the rate
base, as defined, which rate may be subject to change in the future.
(continued)
I-39
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
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.
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. The amount of
refunds, if any, which could be payable by the Company in the event that any
system's rates were to be successfully challenged, is not considered to be
material.
Based on the foregoing, the Company believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect
on its results of operations.
Revenue increased 54% and 49% for the three months and six months ended
June 30, 1995, respectively, as compared to the corresponding periods of 1994.
The three month increase is due to the TCI/Liberty Combination (29%), growth in
subscriber levels within the Company's cable television systems (7%), the
effect of certain acquisitions, including TeleCable and Cablevision (12%), and
various other individually insignificant increases (10%), net of a decrease in
revenue (4%) due to rate reductions required by rate regulation implemented
pursuant to the 1992 Cable Act. The six month increase is due to the
TCI/Liberty Combination (29%), growth in subscriber levels within the Company's
cable television systems (7%), the effect of certain acquisitions, including
TeleCable and Cablevision (9%), and various other individually insignificant
increases (8%), net of a decrease in revenue (4%) due to rate regulation.
Included in the Company's Cable revenue of 1,260 million and 2,424 million for
this three months and six months ended June 30, 1995, respectively is 1,244
million and 2,394 million attributable to TCIC and $16 million and $33 million
attributable to other cable operations.
(continued)
I-40
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Net sales from home shopping services reflects the results of HSN which
became a consolidated subsidiary of the Company in the TCI/Liberty Combination.
Net sales from HSN represented $247 million (23%) and $490 million (23%) of the
increase in revenue from the TCI/Liberty Combination for the three months and
six months ended June 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 costs and expenses have increased by 72% and 68% for the
three months and six months ended June 30, 1995, respectively, as compared to
the corresponding periods of 1994. The TCI/Liberty Combination resulted in an
increase of $678 million or 55% in operating, selling, general and
administrative expenses. Due to the aforementioned program to upgrade and
install optical fiber in its cable systems, the Company's capital expenditures
and depreciation expense have increased. 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-41
<PAGE> 43
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Cost of sales of HSN represented $328 million or 26% of the increase
resulting from the TCI/Liberty Combination. HSN expects that certain of its
costs will increase in the future. Management believes that selling and
marketing expenses will be at higher levels in future periods as HSN maintains
its efforts to increase the number of cable systems carrying HSC programming,
increase market penetration and develop new electronic opportunities. In
addition, these expenses will increase if program carriage increases. Broadcast
expenses are expected to increase in future periods. "Must carry" legislation,
as discussed above, is expected to result in increases in certain operating
expenses related to cable and broadcast carriage in dollars. However, as a
percentage of sales, the effect is not currently determinable.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
Programming expenses represented $585 million or 23% of total operating
expenses (excluding cost of sales) for the six months ended June 30, 1995.
Additionally, 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. The Company's Other Programming
Services will continue to reflect losses associated with the new premium
service as the Company's programming costs are reflected in the operations of
the Programming group and the revenue from the subscribers of such service are
reflected in the Company's Domestic Cable and Communications group. However,
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.
The Company has an ownership interest of approximately 38% 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 June 30, 1995 of $444 million and
comprised $26 million of the Company's share of its affiliates' losses during
the six months ended June 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 $175 million at June 30, 1995 and accounted
for $19 million of the Company's share of its affiliates' losses in 1995.
(continued)
I-42
<PAGE> 44
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(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. At December 31, 1994, TeleWest Communications had
completed approximately 37% of its network construction and, it is expected
that TeleWest Communications' network construction will be substantially
complete within the next five years. 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.
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 loss (before preferred stock dividends) of $83
million and $128 million for the three months and six months ended June 30,
1995, respectively, represents a decrease of $89 million and $166 million, as
compared to the Company's net earnings of $6 million and $38 million for the
corresponding periods of 1994. Such decreases are principally the result of
the effect of the aforementioned reduction in rates charged for Regulated
Services, operating losses incurred by certain programming services including a
new premium programming service launched in 1994, an increase in interest
expense due to an increase in interest rates, net of the increase in operating
income from the acquisition of TeleCable.
I-43
<PAGE> 45
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------------ -----------------
Assets amounts in millions
------
<S> <C> <C>
Cash $ 54 6
Trade and other receivables, net 198 198
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 3) 1,035 341
Property and equipment, at cost:
Land 71 68
Distribution systems 8,849 7,589
Support equipment and buildings 1,024 921
-------- -------
9,944 8,578
Less accumulated depreciation 3,382 2,999
-------- -------
6,562 5,579
-------- -------
Franchise costs 12,982 10,994
Less accumulated amortization 1,843 1,697
-------- -------
11,139 9,297
-------- -------
Other assets, at cost, net of amortization 470 459
-------- -------
$ 19,458 15,880
======== =======
</TABLE>
(continued)
I-44
<PAGE> 46
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------------ -----------------
Liabilities and Stockholder's Equity amounts in millions
------------------------------------
<S> <C> <C>
Accounts payable $ 163 74
Accrued interest 187 179
Other accrued expenses 590 603
Debt (note 5) 11,983 10,712
Deferred income taxes 4,163 3,299
Other liabilities 106 96
--------- -------
Total liabilities 17,192 14,963
--------- -------
Minority interests in equity
of consolidated subsidiaries 217 271
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 3,076 2,842
Unrealized holding gains for
available-for-sale securities, net of taxes 3 2
Accumulated deficit (280) (256)
--------- -------
2,800 2,589
Investment in Tele-Communications, Inc.
("TCI") (note 1) (1,107) (1,096)
Due to (from) TCI 356 (847)
--------- -------
Total stockholder's equity 2,049 646
--------- -------
Commitments and contingencies (note 7)
$ 19,458 15,880
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-45
<PAGE> 47
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C>
Revenue (note 4) $ 1,262 1,081 2,431 2,141
Operating costs and expenses:
Operating 394 329 749 644
Selling, general and administrative 350 300 667 595
Compensation relating to stock
appreciation rights 6 1 5 --
Adjustment to compensation relating
to stock appreciation rights -- -- -- (18)
Depreciation 217 173 409 336
Amortization 87 73 163 145
------- ------- ------- -------
1,054 876 1,993 1,702
------- ------- ------- -------
Operating income 208 205 438 439
Other income (expense):
Interest expense (232) (185) (464) (363)
Interest and dividend income 9 10 17 20
Share of earnings of Liberty Media
Corporation ("Liberty") -- 10 -- 24
Share of losses of other affiliates,
net (note 3) (15) (21) (24) (30)
Loss on early extinguishment of debt -- -- -- (2)
Minority interests in losses
of consolidated subsidiaries, net 2 2 5 --
Other, net (14) 6 (6) 2
------- ------- ------- -------
(250) (178) (472) (349)
------- ------- ------- -------
Earnings (loss) before income taxes (42) 27 (34) 90
Income tax benefit (expense) 14 (21) 10 (52)
------- ------- ------- -------
Net earnings (loss) (note 4) $ (28) 6 $ (24) 38
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-46
<PAGE> 48
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholder's Equity
Six months ended June 30, 1995
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding
gains for
Common stock Additional available- Investment
------------ paid-in for-sale Accumulated in
Class A Class B capital securities deficit TCI
------- ------- ------- ---------- ------- ---
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 1 -- 2,842 2 (256) (1,096)
Net loss -- -- -- -- (24) --
Effect of Reorganization (note 1) -- -- -- -- -- (11)
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 -- -- -- 1 -- --
Change in due to TCI -- -- -- -- -- --
----- ------- --------- --------- ---------- ----------
Balance at June 30, 1995 $ 1 -- 3,076 3 (280) (1,107)
===== ======= ========= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Due Total
to (from) stockholder's
TCI equity
--- ------
amounts in millions
<S> <C> <C>
Balance at January 1, 1995 (847) 646
Net loss -- (24)
Effect of Reorganization (note 1) (53) (64)
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 -- 1
Change in due to TCI (553) (553)
--------- ----------
Balance at June 30, 1995 356 2,049
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-47
<PAGE> 49
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1994
------ ------
amounts in millions
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (24) 38
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 572 481
Compensation relating to stock appreciation rights 5 --
Adjustment to compensation relating to stock
appreciation rights -- (18)
Share of earnings of Liberty -- (24)
Share of losses of other affiliates 24 30
Deferred income tax expense (benefit) (41) 21
Minority interests in losses (5) --
Loss on early extinguishment of debt -- 2
Noncash interest and dividend income (4) (4)
Other noncash credits -- (5)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 12 28
Change in accrued interest 3 12
Change in other accruals and payables 39 52
--------- ------
Net cash provided by operating activities 581 613
--------- ------
Cash flows from investing activities:
Cash paid for acquisitions (10) (6)
Capital expended for property and equipment (748) (599)
Proceeds from disposition of assets 19 30
Additional investments in and
loans to affiliates and others (728) (212)
Repayment of loans by affiliates and others 2 32
Other investing activities (25) (51)
--------- ------
Net cash used in investing activities (1,490) (806)
--------- ------
Cash flows from financing activities:
Borrowings of debt 4,424 1,564
Repayments of debt (3,369) (1,365)
Change in due from TCI (98) --
Preferred stock dividends of subsidiaries -- (3)
--------- ------
Net cash provided by financing activities 957 196
--------- ------
Net increase in cash 48 3
Cash at beginning of period 6 1
--------- ------
Cash at end of period $ 54 4
========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-48
<PAGE> 50
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months ended June 30, 1995
(unaudited)
(1) General
The accompanying consolidated financial statements include the
accounts of TCI Communications, Inc. (formerly Tele-Communications,
Inc. or "Old TCI") and those of all majority-owned subsidiaries. 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. Also, subsidiaries of TCI
exchanged their shares of various preferred stock issuances of Liberty
for preferred stock of TCI. Such common stock and preferred stock of
TCI is reflected as investment in TCI at such entities' historical
cost in the accompanying consolidated financial statements.
(continued)
I-49
<PAGE> 51
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to 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.
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. 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.
Certain amounts have been reclassified for comparability with the 1995
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $461 million and $351 million for the six
months ended June 30, 1995 and 1994, respectively. Also, during these
periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 2,708 48
Liabilities assumed (221) (7)
Deferred tax liability recorded in
acquisitions (919) --
Minority interests in equity of
acquired entities 47 (35)
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 $ 10 6
========== =====
</TABLE>
(continued)
I-50
<PAGE> 52
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Common stock issued upon conversion
of redeemable preferred stock $ -- 18
========= ===
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ -- 15
========= ===
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 $ 1 176
========= ===
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 $ 11 --
========= ===
Net assets of TCIC transferred in the
Reorganization through due to TCI $ 53 --
========= ===
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
========= ===
</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>
Six months
ended
Combined Operations June 30,
------------------- ------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 222 525
Operating expenses (199) (466)
Depreciation and amortization (41) (59)
-------- -----
Operating loss (18) --
Interest expense (15) (22)
Other, net (14) (23)
-------- -----
Net loss $ (47) (45)
===== =====
</TABLE>
(continued)
I-51
<PAGE> 53
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCIC has various investments accounted for under the equity method.
The most significant investment held by TCIC at June 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 $666
million). See note 7. Additionally, TCIC has an investment in
TelePort Communications Group, Inc. and TCG Partners (collectively,
"TCG") (carrying value of $143 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.
(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, the results of operations of such acquired entity 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 $146 million for the six months ended June 30, 1995 and
1994, respectively, and net loss for the six months ended June 30,
1995 would have been decreased by $1 million and net earnings
for the six months ended June 30, 1994 would have been increased by
$4 million had such acquired entity 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 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, TCI and Comcast entered into a
purchase agreement whereby TCI would repurchase the entire 19.9%
minority interest in Heritage owned by Comcast for an aggregate
consideration of approximately $290 million, the majority of which is
payable in shares of TCI Class A common stock. Such acquisition was
consummated in the first quarter of 1995.
(continued)
I-52
<PAGE> 54
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- -----------------
amounts in millions
<S> <C> <C>
Parent company debt:
Senior notes $ 5,337 5,412
Bank credit facilities 1,077 869
Commercial paper 1,216 445
Other debt 2 2
-------- ------
7,632 6,728
Debt of subsidiaries:
Bank credit facilities 3,266 2,828
Commercial paper 26 --
Notes payable 986 1,024
Convertible notes (a) 45 45
Other debt 28 87
-------- ------
$ 11,983 10,712
======== ======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at June 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 TCI Class A 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.
(continued)
I-53
<PAGE> 55
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $612 million at June 30, 1995 and (ii) variable interest
rates (the "Variable Rate Agreements") on notional amounts of $2,530
million at June 30, 1995. During the six months ended June 30, 1995
and 1994, TCIC's net payments pursuant to the Fixed Rate Agreements
were $6.3 million and $13.2 million, respectively; and TCIC's net
receipts pursuant to the Variable Rate Agreements were $2.0 million
and $26.6 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>
August 1995 7.7% $ 10 August 1995 7.7% 10
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
$612 March 2000 5.8%-6.0% 675
====
September 2000 5.1% 75
-------
$ 2,530
=======
</TABLE>
TCIC is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event
of nonperformance by the other parties to the agreements. However,
TCIC does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that TCIC would pay or receive to terminate the
agreements at June 30, 1995, taking into consideration current
interest rates and assuming the current creditworthiness of the
counterparties. TCIC would pay an estimated $29 million at June 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 $325 million which fix the maximum
variable interest rates at 11%. Such agreements expire during the
third and fourth quarters of 1995.
(continued)
I-54
<PAGE> 56
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $11,983 million, was $12,125
million at June 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 June 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.
(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.
(continued)
I-55
<PAGE> 57
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated 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 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.
At the end of the first quarter 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.
(continued)
I-56
<PAGE> 58
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. 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.
At June 30, 1995, TCIC was liable for a $720 million letter of credit
which guarantees contributions to WirelessCo. TCIC has pledged
76,295,092 shares of TCI Class A common stock held by subsidiaries of
TCIC as collateral for the letter of credit. During 1995, borrowings
aggregating $602 million were made pursuant to the letter of credit.
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-57
<PAGE> 59
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. The amount
of refunds, if any, which could be payable by TCIC in the event that
systems' rates are successfully challenged by franchising authorities
is not considered to be material.
TCIC has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $192
million at June 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.
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 June 30, 1995, the maximum amount of such
obligations or guarantees was approximately $152 million. The future
obligations of TCIC with respect to these agreements is not currently
determinable because such amount is dependent on the number of
qualifying films produced by the motion pictures studios, the amount
of United States theatrical film rentals for such qualifying films,
and certain other factors.
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.
(8) Subsequent Event
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-58
<PAGE> 60
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.
(continued)
I-59
<PAGE> 61
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. Accordingly, no assurance can be given that
the transaction will be consummated.
I-60
<PAGE> 62
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in results of operations:
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 TCIC exchanged their shares of Liberty
Class A common stock for TCI Class A common stock. Also, subsidiaries
of TCIC exchanged their shares of various preferred stock issuances of
Liberty for preferred stock of TCI. Such common stock and 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.
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 were transferred to the
other operating units. The most significant transfers were as
follows: (i) TBS and Discovery Communications, Inc. were transferred
to the Programming unit and (ii) TeleWest UK was transferred to TCI
International. In the first quarter of 1995, TCIC transferred certain
additional assets to TCI International.
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992
Cable Act and imposed a moratorium on certain rate increases. As a
result of such actions, TCIC's Regulated Services are subject to the
jurisdiction of local franchising authorities and the FCC.
(continued)
I-61
<PAGE> 63
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in results of operations (continued):
TCIC estimates that the FCC's 1993 and 1994 rate regulations will
result in an aggregate annualized reduction of revenue and operating
income ranging from $280 million to $300 million based upon rates
charged prior to implementation of such rate regulations. The
estimated annualized reduction in revenue assumes that the FCC will
not require further reductions beyond the current regulations and is
prior to any possible mitigating factors (none of which is assured)
such as (i) the provision of alternate service offerings (ii) the
implementation of rate adjustments to non-regulated services and (iii)
the utilization of cost-of-service methodologies, as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a
cost-of-service showing. Under this methodology, cable operators may
be allowed to recover through the rates they charge for Regulated
Services, their normal operating expenses plus an interim rate of
return of 11.25% on the rate base, as defined, which rate may be
subject to change in the future.
The FCC rate regulations govern changes in the rates which cable
operators may charge when adding or deleting a service from a
regulated tier of service. Such regulations allow an increase of
either (i) the sum of a prescribed channel addition factor, the
license fee expense and a 7.5% mark-up, 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.
TCIC believes that it has complied, in all material respects, with the
provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCIC's rates for Regulated Services are subject
to adjustment upon review, as described above. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Any refunds of the excess
portion of all other Regulated Service rates would be retroactive to
one year prior to the implementation of the rate reductions. The
amount of refunds, if any, which could be payable by TCIC in the event
that any system's rates were to be successfully challenged, is not
considered to be material.
Based on the foregoing, TCIC believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse
effect on its results of operations.
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 TCIC's business will
not be affected adversely by future legislation, new regulation or
deregulation.
(continued)
I-62
<PAGE> 64
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in results of operations (continued):
Revenue increased 17% and 13% for the three months and six months
ended June 30, 1995, respectively, as compared to the corresponding
periods of 1994. The three month increase is the result of growth in
subscriber levels within TCIC's cable television systems (7%), the
effect of certain acquisitions, including the acquisition of TeleCable
(10%), and various other individually insignificant increases (7%), net
of a decrease in revenue due to rate reductions required by rate
regulation implemented pursuant to the 1992 Cable Act (4%), and a
decrease due to the transfer of Netlink USA to the Programming unit
in the Reorganization (3%). The six month increase is the result of
growth in subscriber levels within TCIC's cable television systems
(7%) and the effect of certain acquisitions, including the
acquisition of TeleCable (8%), and various other individually
insignificant increases (5%), net of a decrease in revenue due to
rate regulation (4%) and a decrease due to the transfer of Netlink
USA (3%).
Operating costs and expenses increased 20% and 17% for the three
months and six months ended June 30, 1995, respectively, as compared
to the corresponding periods in 1994. Due to the aforementioned
program to upgrade and install optical fiber in its cable systems,
TCIC's capital expenditures and depreciation expense have increased.
Additionally, TCIC incurred $11 million of programming and marketing
costs associated with the launch in February 1994 of a new premium
programming service to its subscribers. TCIC cannot determine whether
and to what extent increases in the cost of programming will affect
its operating costs. Additionally, TCIC cannot predict how these
increases in the cost of programming will affect its revenue but
intends to recover additional costs to the extent allowed by the
aforementioned FCC rate regulations.
TCIC had an investment in TeleWest UK in 1994, a company that is
currently operating and constructing cable television and telephone
systems in the UK. TeleWest UK, which was accounted for under the
equity method, comprised $43 million of TCIC's share of its
affiliates' losses in 1994. In addition, TCIC had other less
significant investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin
America and certain other foreign countries. In the aggregate, such
other investments accounted for $36 million of TCIC's share of its
affiliates' losses in 1994. In connection with the Reorganization,
TCIC's ownership in the aforementioned entities was transferred to TCI
International effective December 1, 1994, and TCIC is no longer
exposed to the risk associated with unfavorable fluctuations in
foreign currency exchange rates nor will it continue to incur the
aforementioned losses associated with such investments.
TCIC's net loss of $28 million and $24 million for the three months
and six months ended June 30, 1995, respectively, represent changes of
$34 million and $62 million as compared to TCIC's net earnings of $6
million and $38 million for the corresponding periods of 1994. Such
decreases are principally the result of the effect of the
aforementioned reduction in rates charged for Regulated Services, an
increase in interest expense due to an increase in interest rates, net
of the increase in operating income from the acquisition of TeleCable.
I-63
<PAGE> 65
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
June 30, December 31,*
1995 1994
-------- ----------
Assets amounts in thousands
Cash and cash equivalents $ 15,427 62,963
Trade and other receivables, net 111,089 95,081
Inventories, net 108,758 119,814
Prepaid expenses 15,781 14,560
Prepaid program rights 19,245 11,257
Committed film inventory 24,346 22,097
Investments in affiliates, accounted for under the
equity method, and related receivables (note 3) 280,132 268,292
Investment in Turner Broadcasting System, Inc.
("TBS") (note 4) 782,894 653,691
Other investments, at cost, and related
receivables (note 5) 175,171 158,846
Property and equipment, at cost:
Land 21,994 21,934
Support equipment and buildings 164,958 150,165
Computer and broadcast equipment 62,328 60,525
----------- ---------
249,280 232,624
Less accumulated depreciation 47,644 38,313
----------- ---------
201,636 194,311
----------- ---------
Excess cost over acquired net assets 573,405 549,770
Less accumulated amortization 31,146 22,217
----------- ---------
542,259 527,553
----------- ---------
Other intangibles 78,897 77,925
Less accumulated amortization 56,921 54,936
----------- ---------
21,976 22,989
----------- ---------
Cable distribution fees 104,199 71,871
Less accumulated amortization 9,440 3,893
----------- ---------
94,759 67,978
----------- ---------
Other assets, at cost, net of amortization 14,309 12,279
----------- ---------
$ 2,407,782 2,231,711
=========== =========
* Restated -- see note 3.
(continued)
I-64
<PAGE> 66
"LIBERTY MEDIA GROUP"
(a combination of certian assets, as defined in note 1)
Combined Balance Sheets, Continued
(unaudited)
June 30, December 31,*
1995 1994
-------- -----------
Liabilities and Combined Equity amounts in thousands
-------------------------------
Accounts payable $ 147,827 111,239
Accrued liabilities 76,466 111,990
Film licenses payable 30,581 26,719
Accrued litigation settlements 4,850 27,450
Accrued compensation relating to stock
appreciation rights 30,249 28,422
Deferred revenue 51,311 46,845
Due to Tele-Communications, Inc. ("TCI")
from Home Shopping Network, Inc. ("HSN") 16,262 28,724
Debt (note 6) 135,059 92,944
Deferred tax liability 202,831 150,601
Other liabilities 7,363 4,320
----------- ---------
Total liabilities 702,799 629,254
----------- ---------
Minority interests in equity of consolidated
subsidiaries 111,040 115,165
Combined equity (note 7):
Combined equity 1,384,035 1,356,840
Unrealized gains on available-for-sale
securities, net of taxes 209,908 130,452
----------- ---------
1,593,943 1,487,292
Commitments and contingencies (note 8) ----------- ---------
$ 2,407,782 2,231,711
=========== =========
* Restated -- see note 3.
See accompanying notes to combined financial statements.
I-65
<PAGE> 67
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 30,
-------------- --------------
1995 1994 * 1995 1994 *
---- ----- ---- ------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
Net sales from home shopping services $ 246,572 274,005 490,269 548,220
Programming services:
From TCI (note 7) 15,314 13,091 34,633 25,678
From others 106,449 70,693 201,390 134,746
------- ------- ------- -------
368,335 357,789 726,292 708,644
------- ------- ------- -------
Cost of sales, operating costs and expenses:
Cost of sales 168,084 178,803 328,091 354,418
Operating 93,865 72,256 199,448 142,973
Selling, general and administrative 96,680 83,269 194,856 161,152
Charges by TCI (note 7) 6,643 3,718 12,548 5,357
Compensation relating to stock
appreciation rights (note 7) 4,057 -- 1,961 --
Adjustment to compensation relating to stock
appreciation rights (note 7) -- (425) -- (10,727)
Depreciation 5,701 5,764 11,915 11,239
Amortization 10,552 5,214 20,258 9,750
------- ------- ------- -------
385,582 348,599 769,077 674,162
------- ------- ------- -------
Operating income (loss) (17,247) 9,190 (42,785) 34,482
Other income (expense):
Interest expense (3,173) (2,988) (5,896) (5,355)
Interest expense to TCI (note 7) (783) (571) (1,526) (1,051)
Dividend and interest income,
primarily from affiliates 1,827 6,263 3,939 12,430
Share of earnings of affiliates, net (note 3) 3,386 15,374 1,535 22,688
Minority interests in losses (earnings) of
consolidated subsidiaries 5,377 (1,621) 11,318 (5,800)
Loss on disposition of assets -- -- -- (2,233)
Other, net 934 (2,474) 1,687 (2,306)
-------- ------ ------ ------
7,568 13,983 11,057 18,373
-------- ------ ------ ------
Earnings (loss) before income taxes (9,679) 23,173 (31,728) 52,855
Income tax benefit (expense) 9,620 (12,437) 20,978 (26,675)
-------- ------ ------ ------
Net earnings (loss) $ (59) 10,736 (10,750) 26,180
======== ====== ====== ======
</TABLE>
* Restated -- see note 3.
See accompanying notes to combined financial statements.
I-66
<PAGE> 68
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Six months ended June 30, 1995
(unaudited)
Unrealized
holding gains Total
Combined on available-for combined
equity* sale securities* equity*
-------- ---------------- -------
amounts in thousands
Balance at January 1, 1995* $1,356,840 130,452 1,487,292
Net loss (10,750) -- (10,750)
Sale of programming to TCI (34,633) -- (34,633)
Cost allocations from TCI 12,548 -- 12,548
Interest expense allocation from TCI 1,526 -- 1,526
Intergroup tax allocation (17,446) -- (17,446)
Net cash transfers from TCI 56,835 -- 56,835
Contribution to combined equity for
acquisitions 19,115 -- 19,115
Change in unrealized holding gains
for available-for-sale securities -- 79,456 79,456
----------- ------- ---------
Balance at June 30, 1995 $ 1,384,035 209,908 1,593,943
=========== ======= =========
* Restated -- see note 3.
See accompanying notes to combined financial statements
I-67
<PAGE> 69
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1995 1994 *
---- -----
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (10,750) 26,180
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 32,173 20,989
Compensation relating to stock appreciation rights 1,961 --
Adjustment to compensation relating to stock
appreciation rights -- (10,727)
Share of earnings of affiliates, net (1,535) (22,688)
Deferred income tax (benefit) expense (3,532) 17,653
Minority interests in earnings (losses) (11,318) 5,800
Payments of litigation settlements (22,600) (3,100)
Loss on disposition of assets -- 2,233
Changes in operating assets and liabilities, net of
acquisitions:
Change in receivables (15,897) (4,645)
Change in inventories 8,807 5,178
Change in prepaid expenses (9,196) (4,959)
Change in payables, accruals, due to TCI from
HSN and deferred revenue 9,147 32,885
------- -------
Net cash provided (used) by operating activities (22,740) 64,799
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions (33,739) --
Capital expended for property and equipment (19,485) (11,855)
Additional investments in and loans to
affiliates and others (23,255) (11,820)
Return of capital from affiliates 9,220 4,960
Collections on loans to affiliates and others 1,449 12,366
Cash paid for cable distribution fees (32,328) (33,180)
Other investing activities (1,911) 4,690
------- -------
Net cash used in investing activities (100,049) (34,839)
------- -------
Cash flows from financing activities:
Borrowings of debt 68,300 18,000
Repayments of debt (12,138) (45,314)
Change in cash transfers from TCI 19,367 (23,108)
Contributions by minority shareholders of subsidiaries -- 7,003
Distributions to minority shareholders of subsidiaries (276) (400)
------- -------
Net cash provided (used) by financing activities 75,253 (43,819)
------- -------
Net decrease in cash and
cash equivalents (47,536) (13,859)
Cash and cash equivalents at
beginning of period 62,963 82,544
-------- ------
Cash and cash equivalents at end of period $ 15,427 68,685
======== ======
</TABLE>
* Restated -- see note 3.
See accompanying notes to combined financial statements.
I-68
<PAGE> 70
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
June 30, 1995
(unaudited)
(1) Basis of Presentation
---------------------
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"). However, the Liberty Group Stock constitutes common stock of TCI. The
issuance of 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
to its security holders of record on August 4, 1995, Liberty Group Stock
representing one hundred percent of the equity value attributable to the
Liberty Media Group (the "Distribution") .
As of January 27, 1994, TCI Communications, Inc. (formerly TeleCommunications,
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 Liberty Media Group reflect the
combination of the historical financial information of the assets of TCI and
Liberty which produce and distribute cable television programming attributed to
the Liberty Media Group.
(continued)
I-69
<PAGE> 71
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The subsidiaries of TCI and Liberty attributed to Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless otherwise
denoted, such subsidiaries and investments were held separately by Liberty
through August 4, 1994, the date the TCI/Liberty Combination was consummated):
Subsidiaries
------------
Encore Media Corporation ("Encore")
TV Network Corporation (formed in 1994)
HSN
Southern Satellite Systems, Inc. ("Southern")
Netlink USA (owned by TCIC prior to the TCI/Liberty
Combination)
Liberty Sports, Inc.
Affiliated Regional Communications, Ltd. ("ARC")
Vision Group Incorporated (owned by TCIC prior to the
TCI/Liberty Combination)
Americana Television Productions LLC (acquired in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports-West (formerly Prime Ticket Networks, L.P.)
(acquired in 1994)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network -- Northwest
(continued)
I-70
<PAGE> 72
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Investments
-----------
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery Communications, Inc. ("Discovery") (owned by TCIC
prior to the TCI/Liberty Combination)
DMX, Inc. (owned by TCIC prior to the TCI/Liberty Combination)
E! Entertainment Television, Inc. (owned by TCIC prior to the
TCI/Liberty Combination)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
International Cable Channels Partnership, Ltd. ("ICCP") (acquired
in 1994)
QE+ Ltd. ("QE+") (formed in 1994) (owned by TCIC prior to the
TCI/Liberty Combination)
QVC, Inc. ("QVC")
Reiss Media Enterprises, Inc. (owned by TCIC prior to the
TCI/Liberty Combination)
TBS (owned by TCIC prior to the TCI/Liberty Combination)
Prime SportsChannel Networks Associates
Home Team Sports Limited Partnership ("HTS")
SportsChannel Chicago Associates ("Sports")
SportsChannel Pacific Associates
SportsChannel Prism Associates
Prime Sports Network -- Upper Midwest
SportSouth Network, L.P.
Sunshine Network ("Sunshine")
American Movie Classics Company ("AMC")
Republic Pictures Television (owned by TCIC prior to the
TCI/Liberty Combination)
Sillerman Communications Management Corporation (owned by
TCIC prior to the TCI/Liberty Combination)
Technology Programming Ventures (formed in 1994)
Prime Sports Australia ("Australia") (launched in 1995)
Silver King Communications, Inc.
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
(continued)
I-71
<PAGE> 73
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Upon the Distribution of the Liberty Group Stock, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of the subsidiaries
and assets not attributed to the Liberty Media Group, including (i) TCI's
Domestic Cable and Communications unit, (ii) TCI's International Cable and
Programming unit and (iii) TCI's Technology/Venture Capital unit. The
businesses of TCI not attributed to the Liberty Media Group are referred to as
the "TCI Group". Intercompany balances resulting from transactions with such
units are reflected as borrowings from or loans to TCI and, prior to the
Distribution of the Liberty Group Stock, are included in combined equity in the
accompanying combined financial statements. See note 7.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
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 Liberty Group Stock
will be holders of common stock of TCI and will continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities. The issuance of Liberty Group Stock does not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the Liberty Media
Group and the market price of shares of the Liberty Group Stock. In addition,
net losses of any portion of TCI, dividends and distributions on, or repurchases
of, any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce funds of TCI legally available for dividends on all
series of common stock. Accordingly, Liberty Media Group financial information
should be read in conjunction with the TCI consolidated financial information.
Dividends on the Liberty Group Stock will be 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 the 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-72
<PAGE> 74
"LIBERTY MEDIA 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 are convertible into or exchangeable for shares of TCI Class A common stock
will, as a result of the operation of antidilution provisions, be adjusted so
that there will be delivered upon their conversion or exchange 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 will be 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 "PreDistribution
Convertible Securities." The issuance of shares of Series A Liberty Group Stock
upon such conversion, exchange or exercise of PreDistribution Convertible
Securities will not result in any transfer of funds or other assets from TCI to
Liberty Media Group 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
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, 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, 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-73
<PAGE> 75
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The accompanying interim combined financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These combined financial statements
should be read in conjunction with the audited combined financial statements of
Liberty Media Group for the year ended December 31, 1994.
(2) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $3,987,000 and $5,086,000 for the six months
ended June 30, 1995 and 1994, respectively. Cash paid for income taxes during
the six months ended June 30, 1995 and 1994 was $385,000 and $5,820,000,
respectively. In addition, Liberty Media Group received an income tax refund
amounting to $10,725,000 during the six months ended June 30, 1995.
Significant noncash investing and financing activities are as follows:
Six months ended
June 30,
1995 1994
amounts in thousands
Cash paid for acquisitions:
Fair value of assets acquired $ 33,554 --
Net liabilities assumed (926) --
Contribution to combined equity from
TCI for acquisition (19,115) --
Deferred tax liability recorded
in acquisition (11) --
Minority interests in equity of
acquired entities 20,237 --
-------- -------
$ 33,739 --
======== =======
Unrealized gains, net of deferred income taxes,
on available-for-sale securities as of
January 1, 1994 $ -- 335,177
Change in unrealized gains, net of deferred ======== =======
income taxes, on available-for-sale securities $ 79,456 (120,308)
Conversion of debt into additional minority ======== ========
interest in consolidated subsidiary $ 14,215 --
======== ========
(continued)
I-74
<PAGE> 76
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
Six months ended
June 30,
1995 1994
amounts in thousands
Combined Operations
Revenue $ 1,066,597 898,465
Operating expenses (869,885) (737,793)
Depreciation and amortization (77,997) (57,405)
----------- --------
Operating income 118,715 103,267
Interest expense (47,824) (5,166)
Other, net (67,350) (58,114)
----------- --------
Net earnings $ 3,541 39,987
=========== ========
The following table reflects the carrying value of Liberty Media Group's
investments, accounted for under the equity method, including related
receivables:
June 30, December 31,
1995 1994
amounts in thousands
Discovery $ 122,877 113,182
QVC 79,562 72,100
Sunshine 7,739 7,174
Sports 30,215 30,163
HTS 4,456 4,292
ICCP 13,353 13,686
Australia (185) --
Other 22,115 27,695
--------- -------
$ 280,132 268,292
========= =======
(continued)
I-75
<PAGE> 77
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statments
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
Six months ended
June 30,
1995 1994
amounts in thousands
Discovery $ 9,695 6,069
QVC (2,691) 3,841
Sunshine 565 (42)
Sports 3,552 4,116
HTS 164 (342)
ICCP (213) --
AMC -- 8,545
Australia (6,592) --
Other (2,945) 501
------- ------
$ 1,535 22,688
======= ======
Liberty Media Group has a 49.9% partnership interest in QE+, a limited
partnership which distributes STARZ!, a first-run movie premium programming
service launched in 1994. Entities attributed to the TCI Group hold the
remaining 50.1% partnership interest.
The QE+ limited partnership agreement provides that the TCI Group will be
required to make special capital contributions to QE+ through July 1, 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 the
first $200 million of its special capital contributions beginning five years
from the date of the contribution or five years from January 1, 1996, whichever
is later. Any TCI Group special capital contributions in excess of $200 million
will be entitled to a preferred return of 10% per annum from the date of the
contribution. QE+ is required to apply 75% of its available cash flow, as
defined, to repay the TCI Group special capital contributions and any preferred
return payable thereon. To the extent such special capital contributions are
insufficient to fund the cash requirements of QE+, the TCI Group and the
Liberty Media Group will each have the option to fund such cash requirements in
proportion to their respective ownership percentages.
(continued)
I-76
<PAGE> 78
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The TCI Group has also entered into a long-term affiliation agreement with
QE+ with respect to the distribution of the STARZ! service. Rates per subscriber
specified in the agreement are based upon customary rates charged to other cable
system operators. Payments to QE+ for 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 major cable system operators unless such more favorable terms and
conditions are made available to the TCI Group. The affiliation agreement also
requires the 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.
In connection with the launch of the STARZ! service, the TCI Group became a
direct obligor or guarantor of the payment of certain amounts that may be due
pursuant to certain film output, distribution, and license agreements. As of
June 30, 1995, the maximum amount of such obligations or guarantees was
approximately $289 million. The future obligations of the TCI Group with respect
to these agreements is not currently determinable because such amount is
dependent on the number of qualifying films produced by the motion pictures
studios, the amount of United States theatrical film rentals for such qualifying
films, and certain other factors.
Liberty Media Group also has the right to acquire an additional 10.1%
partnership interest in QE+ based on a formula designed to approximate the fair
value of such interest. Such right is exercisable for a period of ten years
beginning January 1, 1999 after QE+ has had positive cash flow for two
consecutive calendar quarters. The right is exercisable only after all special
capital contributions from the TCI Group have been repaid, including any
preferred return as discussed above.
Encore (90% owned by Liberty Media Group) earns management fees from QE+
equal to 20% of managed costs, as defined. In addition, effective July 1, 1995,
Liberty Media Group will earn a "Content Fee" for certain services provided to
QE+ equal to 4% of the gross revenue of QE+, estimated to be $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
the TCI Group and the preferred return thereon.
Liberty Media Group accounts for its interest in QE+ under the equity
method of accounting.
(continued)
I-77
<PAGE> 79
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On November 11, 1993, Liberty Media Group entered into an agreement with
the staff of the Federal Trade Commission pursuant to which Liberty Media Group
agreed to divest all of its equity investments in QVC during an 18 month time
period if QVC was successful in its offer to buy Paramount Communications, Inc.
("Paramount") and not to vote or otherwise exercise influence over QVC until
such time as QVC withdrew its offer for Paramount. Simultaneously, Liberty Media
Group agreed to withdraw from a stockholders agreement pursuant to which Liberty
Media Group and certain other stockholders exercised control over QVC (the
"Previous Stockholders' Agreement"). On February 15, 1994, QVC terminated its
offer for Paramount. Upon termination of such offer, Liberty Media Group had the
right to be reinstated as a party to the Previous Stockholders' Agreement so
long as such option was exercised within 90 days after such termination.
On November 16, 1993, Liberty Media Group sold shares of common stock of
QVC to Comcast Corporation ("Comcast"). The sale to Comcast reduced Liberty
Media Group's interest in QVC common stock (on a fully diluted basis) from 21.9%
to 18.8%. Liberty Media Group continued to account for its investment in QVC
under the equity method, although it no longer exercised significant influence
over such affiliate, due to the pending determination of whether it would rejoin
the control group under the Previous Stockholders' Agreement. As a result of the
election on May 13, 1994 by Liberty Media Group to forego the exercise of its
option to be reinstated as a party to the Previous Stockholders' Agreement,
Liberty Media Group began, as of that date, to account for its investment in QVC
under the cost method of accounting.
Pursuant to an Agreement and Plan of Merger dated 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 Media
Group, commenced an offer (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.
Liberty Media Group owns an approximate 43% interest in 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 Media Group have
pledged their shares of QVC pursuant to such credit facility.
(continued)
I-78
<PAGE> 80
"LIBERTY MEDIA GROUP"
(a combined of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Upon consummation of the aforementioned QVC transactions, Liberty Media
Group is deemed to exercise significant influence over QVC and, as such, has
adopted the equity method of accounting. As a result, Liberty Media Group
restated its investment in QVC, its unrealized gain on available-for-sale
securities, its deferred taxes and accumulated deficit by $208 million, $127
million, $86 million and $5 million, respectively, at December 31, 1994. The
restatement resulted in an increase in Liberty Media Group's net earnings of
$483,000 for the six months ended June 30, 1994.
Certain of Liberty Media Group's affiliates are general partnerships and
any subsidiary of Liberty Media Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all debts
(other than non-recourse debts) of that partnership in the event liabilities of
that partnership were to exceed its assets.
(4) Investment in Turner Broadcasting System, Inc.
Liberty Media Group 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 Liberty Media Group appoints three such
representatives. However, voting control over TBS continues to be held by its
chairman and the board and chief executive officer. Liberty Media Group's total
holdings of TBS common and preferred stocks represent an approximate 7.5% voting
interest for those matters for which preferred and common stock vote as a single
class.
At June 30, 1995, Liberty Media Group's investment in TBS preferred stock,
carried at cost, had an aggregate market value of $730 million (which exceeded
cost by $552 million), based upon the market value of the common stock into
which it is convertible.
As security for borrowings under one of TCI Group's credit facilities,
Liberty Media Group pledged a portion of its TBS common stock (with a quoted
market value of approximately $599 million at June 30, 1995).
(continued)
I-79
<PAGE> 81
"LIBERTY MEDIA GROUP"
(a combined of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Other Investments
Other investments, accounted for under the cost method, and related
receivables, are summarized as follows:
June 30, December 31,
1995 1994
amounts in thousands
Marketable equity securities $ 104,231 87,276
Convertible debt, accrued interest
and preferred stock investments 45,344 46,109
Other investments and related receivables 25,596 25,461
--------- -------
$ 175,171 158,846
========= =======
Management of Liberty Media Group estimates that the market value,
calculated utilizing a variety of approaches including multiple of cash flow,
per subscriber value, a value of comparable public or private businesses or
publicly quoted market prices, of all of Liberty Media Group's other investments
aggregated $261 million and $225 million at June 30, 1995 and December 31, 1994,
respectively, including amounts previously disclosed for marketable equity
securities. No independent external appraisals were conducted for these assets.
(6) Debt
Debt is summarized as follows:
June 30, December 31,
1995 1994
amounts in thousands
Convertible note payable (a) $ -- 14,141
Notes payable to bank (b) 75,000 25,000
Note payable to bank (c) 27,000 18,000
Note payable to bank (d) 16,900 16,400
Note payable to partnership (e) 8,355 11,253
Other debt, with varying rates and maturities 7,804 8,150
--------- ------
$ 135,059 92,944
========= ======
(continued)
I-80
<PAGE> 82
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) Payable by ARC.
These notes were converted in January 1995 into partnership units held by
minority holders.
(b) Payable by HSN.
On March 29, 1995, this revolving credit facility, was amended and the
availability under such facility was increased from $100 million to $150
million. The facility was further amended on June 28, 1995 with respect to
certain covenants and borrowing limits. This revolving credit facility expires
on August 30, 1997. Borrowings under the credit facility may be used for general
corporate purposes. The interest rate on borrowings under the credit facility
(8.3% at June 30, 1995) is tied to the London Interbank Offered Rate
("LIBOR") plus an applicable margin.
(c) Payable by ARC Holding, Ltd.
In 1994, ARC Holding, Ltd., a wholly-owned subsidiary of ARC, entered into
a credit agreement, as amended, with a group of banks providing for up to $45
million of borrowings. Borrowings bear interest (7.5% at June 30, 1995) at the
agent bank's base rate, LIBOR, a CD rate or a combination thereof, as selected
by ARC Holding, Ltd., plus a margin depending on ARC Holding, Ltd.'s ratio of
total debt to cash flow (as defined). Beginning June 30, 1995 and quarterly
thereafter through December 31, 2000, the commitment amount will be reduced in
equal quarterly amounts to achieve annual reductions in the credit facility
ranging from a 10% reduction in 1995 to the final 17% in 2000. As of June 30,
1995, the outstanding commitment was reduced to $43.5 million. Liberty Media
Group must pay an annual commitment fee of .375% of the unfunded portion of the
commitment. Borrowings under the credit agreement are secured by the assets of
ARC Holding, Ltd., including joint venture interests, and the stock and assets
of its existing and future subsidiaries.
The credit agreement contains certain provisions which limit ARC Holding,
Ltd. as to additional indebtedness, sale of assets, liens, guarantees and
distributions. Additionally, ARC Holding, Ltd. must attain certain specified
financial ratios.
(d) Payable by Prime Sports-West
Prime Sports-West had a credit agreement (the "Agreement") with a bank that
provided for borrowings in the form of revolving term loans aggregating up to a
maximum commitment of $24 million at December 31, 1994. On June 1, 1995, the
Agreement was amended to allow for borrowings up to $65.0 million. Prime
Sports-West may specify the interest rate on the loans under various prime and
Eurodollar rate options plus an applicable margin, as defined (7.0% at June 30,
1995). Borrowings under the credit agreement are secured by the assets of Prime
Sports-West.
(continued)
I-81
<PAGE> 83
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Finacial Statements
The Agreement contains, among other things, requirements as to indebtedness
obligations, restrictions on distributions and capital expenditures, as well as
maintenance of certain specified financial ratios.
(e) Payable by Encore ICCP, Inc.
Encore ICCP, Inc. acquired a 50% general partner interest in ICCP in exchange
for a note payable to the partnership with an initial principal amount of
$15 million. The note payable accrues interest at 10% per annum and is
guaranteed by Encore.
Certain of Liberty Media Group's subsidiaries are subject to loan
agreements that prohibit or limit the transfer of funds of such subsidiaries to
the parent company in the form of loans, advances or cash dividends.
The fair value of Liberty Media Group's debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to Liberty Media Group for debt of the same remaining maturities. The
fair market value of such debt approximated its carrying value at June 30, 1995.
(7) Combined Equity
Stock Options and Stock Appreciation Rights
Liberty had granted certain stock options and/or stock appreciation rights
prior to the TCI/Liberty Combination. All such options and/or stock appreciation
rights were assumed by TCI in conjunction with the TCI/Liberty Combination.
Additionally, subsequent to the TCI/Liberty Combination, certain key employees
of Liberty were granted additional options with tandem stock appreciation
rights. Estimates of the compensation relating to the options and/or stock
appreciation rights granted to employees of Liberty Media Group have been
recorded in the accompanying combined financial statements, but are subject to
future adjustment based upon the market value of TCI Class A common stock and
the Liberty Group Stock (see note 1) and, ultimately, on the final determination
of market value when the rights are exercised.
(continued)
I-82
<PAGE> 84
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In 1993, the President of HSN received stock appreciation rights with
respect to 984,876 shares of HSN's common stock at an exercise price of $8.25
per share. These rights vest over a four year period and are exercisable until
February 23, 2003. The stock appreciation rights will vest upon termination of
employment other than for cause and will be exercisable for up to one year
following the termination of employment. In the event of a change in ownership
control of HSN, all unvested stock appreciation rights will vest immediately
prior to the change in control and shall remain exercisable for a one year
period. Stock appreciation rights not exercised will expire to the extent not
exercised. These rights may be exercised for cash or, so long as HSN is a public
company, for shares of HSN's common stock equal to the excess of the fair market
value of each share of common stock over $8.25 at the exercise date. The stock
appreciation rights also will vest in the event of death or disability.
Estimated compensation relating to these stock appreciation rights has been
recorded in the accompanying combined financial statements, but is subject to
future adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised.
Transactions with TCI and Other Related Parties
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 approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
The accompanying combined statements of operations through the date of the
TCI/Liberty Combination do not reflect the allocation of corporate general and
administrative costs in the aforementioned manner because the majority of the
entities attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty through such dates. During the six months ended June 30,
1995, Liberty Media Group was allocated $1,533,000 in corporate general and
administrative costs by TCI.
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 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.
Entities included in Liberty Media Group lease office space and satellite
transponder facilities from TCI. Charges by TCI for such arrangements for the
six months ended June 30, 1995 and 1994, aggregated $7,914,000 and $2,577,000,
respectively.
(continued)
I-83
<PAGE> 85
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators (including
TCI) and others. Charges to TCI are based upon customary rates charged to
others.
HSN paid a commission to TCI for merchandise sales to customers who are
subscribers of TCI's cable systems. Aggregate commissions and charges by TCI
were approximately $3,101,000 and $2,780,000 for the six months ended June 30,
1995 and 1994, respectively.
Subsequent to the TCI/Liberty Combination, TCI 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 and
certain cash disbursements of Liberty Media Group are funded by TCI 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 combined equity in the accompanying combined financial statements.
Prior to the TCI/Liberty Combination, Liberty separately managed the treasury
activities of its subsidiaries. Subsequent to the Distribution of the Liberty
Group Stock, such cash activities will be included in borrowings from and loans
to TCI or, if determined by the Board, as an equity contribution to the Liberty
Media Group.
The Board could determine from time to time that debt of TCI 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. After the Distribution, all financial
impacts of issuances of additional shares of TCI Class A common stock and TCI
Class B common stock will be attributed entirely to TCI, all financial impacts
of issuances of additional shares of Liberty Media Group Stock the proceeds of
which are attributed to the Liberty Media Group will to such extent be reflected
entirely in the combined financial statements of the Liberty Media Group.
Financial impacts of dividends or other distributions on, and purchases of, TCI
Class A common stock and TCI Class B common stock will be attributed entirely to
TCI, and financial impacts of dividends or other distributions of Liberty Media
Group will be attributed entirely to the Liberty Media Group. Financial impacts
of repurchases of Liberty Group Stock the consideration for which is charged to
the Liberty Media Group will be reflected entirely in the combined financial
statements of the Liberty Media Group, and financial impacts of repurchases of
Liberty Group Stock the consideration for which is charged to TCI will be
attributed entirely to TCI.
(continued)
I-84
<PAGE> 86
"LIBERTY MEDIA 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 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.
(8) Commitments and Contingencies
Liberty Media Group 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"). As
of June 30, 1995, the aggregate minimum liability under certain of the license
agreements is approximately $177 million. The aggregate amount of the Film
Licensing Obligations under these license agreements is not currently estimable
because such amount is dependent upon certain variable factors. Nevertheless,
required aggregate payments under the Film Licensing Obligations could prove to
be significant.
Liberty Media Group leases business offices, has entered into transponder
lease agreements, and uses certain equipment under lease arrangements. In
addition, as of June 30, 1995, Liberty Media Group has long-term sports program
rights contracts which require payments through 1999 aggregating approximately
$338 million.
I-85
<PAGE> 87
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(1) Material Changes in Financial Condition
Liquidity and Capital Resources
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 the Liberty Media Group. However, the Liberty Group Stock would
constitute common stock of TCI. The issuance 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 to its security holders
of record on August 4, 1995, Liberty Group Stock representing one hundred
percent of the equity value attributable to the Liberty Media Group.
As of 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 Liberty Media Group reflect the
combination of the historical financial information of the assets of TCI and
Liberty which produce and distribute cable television programming attributed to
the Liberty Media Group.
I-86
<PAGE> 88
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
The subsidiaries of TCI and Liberty attributed to Liberty Media Group, as
well as certain investments held by these or other subsidiaries of TCI and
Liberty also attributed to Liberty Media Group, are as follows (unless otherwise
denoted, such subsidiaries and investments were held separately by Liberty
through August 4, 1994, the date the TCI/Liberty Combination were consummated):
Subsidiaries
Encore
TV Network Corporation ("tv!") (formed in 1994)
HSN
Netlink USA ("Netlink") (owned by TCIC prior to the TCI/Liberty
Combination)
Southern
Liberty Sports, Inc.
ARC
Vision Group Incorporated (owned by TCIC prior to the
TCI/Liberty Combination)
Americana Television Productions LLC (acquired in 1995)
MacNeil/Lehrer Productions (acquired in 1995)
Prime Sports-West (formerly Prime Ticket Networks, L.P.)
(acquired in 1994)
Encore International, Inc.
Liberty Productions, Inc. (formed in 1995)
Prime Sports Network -- Northwest
I-87
<PAGE> 89
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
Investments
BET Holdings, Inc.
Video Jukebox Network, Inc.
Courtroom Television Network
Discovery (owned by TCIC prior to the TCI/Liberty Combination)
DMX, Inc. (owned by TCIC prior to the TCI/Liberty Combination)
E! Entertainment Television, Inc. (owned by TCIC prior to the
TCI/Liberty Combination)
International Family Entertainment, Inc.
Ingenius (formed in 1994)
ICCP (acquired in 1994)
QE+ (formed in 1994) (owned by TCIC prior to the TCI/Liberty
Combination)
QVC
Reiss Media Enterprises, Inc. (owned by TCIC prior to the
TCI/Liberty Combination)
Turner Broadcasting Systems, Inc. (owned by TCIC prior to the
TCI/Liberty Combination)
Prime SportsChannel Networks Associates
HTS
Sports
SportsChannel Pacific Associates
SportsChannel Prism Associates Prime
Sports Network -- Upper Midwest
SportSouth Network, L.P.
Sunshine
AMC
Republic Pictures Television (owned by TCIC prior to the
TCI/Liberty Combination)
Sillerman Communications Management Corporation (owned by
TCIC prior to the TCI/Liberty Combination)
Technology Programming Ventures (formed in 1994)
Australia (launched in 1995)
Silver King Communications, Inc.
Asian Television and Communications LLC
Mountain Mobile Television LLC
Cutthroat Productions, LP (formed in 1994)
I-88
<PAGE> 90
"LIBERTY MEDIA GROUP"
(a combination of assets, as defined in notes 1)
(1) Material Changes in Financial Condition, continued
Upon the Distribution of the Liberty Group Stock, the existing TCI Class A
and Class B common stock is intended to reflect the separate performance of the
TCI Group, which is generally comprised of the subsidiaries and assets not
attributed to the Liberty Media Group, including (i) TCI's Domestic Cable and
Communications unit, (ii) TCI's International Cable and Programming unit and
(iii) TCI's Technology/Venture Capital unit. The businesses of TCI not
attributed to the Liberty Media Group is referred to as the "TCI Group".
Intercompany balances resulting from transactions with such units are reflected
as borrowings from or loans to TCI and, prior to the Distribution of the Liberty
Group Stock, are included in combined equity in the accompanying combined
financial statements. See note 7.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
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 Liberty Group Stock
will be holders of common stock of TCI and will continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities. The issuance of the Liberty Group Stock does not affect the rights
of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could affect
the combined results of operations or financial condition of the Liberty Media
Group and the market price of shares of the Liberty Group Stock. In addition,
net losses of any portion of TCI, dividends and distributions on, or repurchases
of, any series of common stock, and dividends on, or certain repurchases of
preferred stock would reduce funds of TCI legally available for dividends on all
series of common stock. Accordingly, Liberty Media Group financial information
should be read in conjunction with the TCI consolidated financial information.
Dividends on the Liberty Group Stock will be 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 the 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.
I-89
<PAGE> 91
"LIBERTY MEDIA 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 are convertible into or exchangeable for shares of TCI Class A common stock
will, as a result of the operation of antidilution provisions, be adjusted so
that there will be delivered upon their conversion or exchange 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 will be 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 "PreDistribution
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 to
Liberty Media Group 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
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, 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, 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.
I-90
<PAGE> 92
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
Subsequent to the TCI/Liberty Combination, TCI 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 and
certain cash disbursements of Liberty Media Group are funded by TCI 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 combined equity in the accompanying combined financial statements.
Prior to the TCI/Liberty Combination, Liberty separately managed the treasury
activities of its subsidiaries. Subsequent to the Distribution of the Liberty
Group Stock, such cash activities will be included in borrowings from and loans
to TCI or, if determined by the Board, as an equity contribution to the Liberty
Media Group.
The Board could determine from time to time that debt of TCI not incurred
by entities attributed to Liberty Media Group or preferred stock and the
proceeds thereof should be specifically attributed to and reflected on the
combined financial statements of Liberty Media Group to the extent that the debt
is incurred or the preferred stock is issued for the benefit of Liberty Media
Group.
For all periods prior to the Distribution, all financial impacts of equity
offerings are attributed entirely to TCI. After the Distribution, all financial
impacts of issuances of additional shares of TCI Class A common stock and TCI
Class B common stock will be attributed entirely to TCI, all financial impacts
of issuances of additional shares of Liberty Group Stock the proceeds of which
are attributed to the Liberty Media Group will to such extent be reflected
entirely in the combined financial statements of the Liberty Media Group.
Financial impacts of dividends or other distributions on, and purchases of, TCI
Class A common stock and TCI Class B common stock will be attributed entirely to
TCI, and financial impacts of dividends or other distributions of Liberty Media
Group will be attributed entirely to Liberty Media Group. Financial impacts of
repurchases of Liberty Group Stock the consideration for which is charged to
Liberty Media Group will be reflected entirely in the combined financial
statements of Liberty Media Group, and financial impacts of repurchases of
Liberty Group Stock the consideration for which is charged to TCI will be
attributed entirely to TCI.
Subsequent to the Distribution of the Liberty Group Stock, borrowings from
or loans to TCI 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.
I-91
<PAGE> 93
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
Pursuant to the QVC Merger Agreement, the Purchaser commenced the QVC
Tender Offer. 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
into 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. Liberty Media Group 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 Media Group have pledged their shares of QVC
pursuant to such credit facility.
Upon consummation of the aforementioned QVC transactions, Liberty Media
Group was deemed to exercise significant influence over QVC and, as such,
accounts for its investment in QVC under the equity method. The December 31,
1994 combined balance sheet included herein has been restated to reflect the
equity method of accounting in the first quarter of 1995.
Liberty Media Group's sources of funds include its available cash balances,
cash generated from operating activities, cash distributions from affiliates,
dividend and interest payments, asset sales, availability under certain credit
facilities, and loans and/or equity contributions from TCI. To the extent cash
needs of the Liberty Media Group exceed cash provided by the Liberty Media
Group, TCI may transfer funds to the Liberty Media Group. Conversely, to the
extent cash provided by the Liberty Media Group exceeds cash needs of the
Liberty Media Group, the Liberty Media Group may transfer funds to TCI.
Many of Liberty Media Group's subsidiaries' loan agreements contain
restrictions regarding transfers of funds to other members of Liberty Media
Group in the form of loans, advances or cash dividends. However, other
subsidiaries, principally Southern (which is the satellite carrier for the
signal of WTBS, a 24-hour independent UHF television station originated by
TBS), Netlink and certain of the regional Sports businesses are not restricted
from making transfers of funds to other members of the group. The cash provided
by operating activities of Southern, is a primary source of cash available for
distribution to Liberty Media Group. However, Southern does not have an
agreement with WTBS with respect to the retransmission of its signal and there
are no specific statutory restrictions per se which would prevent any other
satellite carriers from retransmitting such signal to cable operators and
others. If the business of Southern is adversely affected by competitive or
other factors, it may have an adverse effect on the ability of Liberty Media
Group to generate adequate cash to meet its obligations.
I-92
<PAGE> 94
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
Several entities included in Liberty Media Group have credit facilities.
HSN has a revolving credit facility for $150 million, $75 million of which was
outstanding on June 30, 1995. ARC Holding, Ltd. ("ARCH"), a wholly-owned
subsidiary of ARC, has a $43.5 million revolving credit facility with a group of
banks, $27 million of which was outstanding at June 30, 1995. Another
subsidiary, Prime Sports-West, has a $65 million credit facility with a bank,
$16.9 million of which was outstanding at June 30, 1995. The HSN, ARCH and Prime
Sports-West facilities restrict the transfer of funds to affiliated companies,
and include various financial covenants, including maintenance of certain
financial ratios.
Various partnerships and other affiliates of Liberty Media Group accounted
for under the equity method finance a substantial portion of their acquisitions
and capital expenditures through borrowings under their own credit facilities
and net cash provided by their operating activities.
Liberty Media Group intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of June 30, 1995, Liberty Media
Group's future minimum obligation related to certain film licensing agreements
was $177 million. The amount of the total obligation is not currently estimable
because such amount is dependent upon the number of qualifying films produced by
the motion picture studios, the amount of United States theatrical film rentals
for such qualifying films, and certain other factors. Liberty Media Group's
obligations for certain sports program rights contracts as of June 30, 1995 was
$338 million. It is expected that sufficient cash will be generated by the
programming services to satisfy these commitments. However, continued
development may require additional financing and it cannot be predicted whether
Liberty Media Group will obtain such financing. If additional financing cannot
be obtained, Liberty Media Group could attempt to sell assets but there can be
no assurance that asset sales, if any, can be consummated at a price and on
terms acceptable to Liberty Media Group. Further, Liberty Media Group and/or TCI
could attempt to sell equity securities but, again, there can be no certainty
that such a sale could be accomplished on acceptable terms.
HSN has significant working capital needs for inventory and accounts
receivable. However, HSN expects to meet its recurring working capital needs
primarily through internally generated funds and its existing credit facilities.
I-93
<PAGE> 95
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") provides for comprehensive federal and local regulation of the
cable television industry, including Liberty Media Group's programming
operations. The Federal Communications Commission ("FCC") has adopted extensive
rate regulations governing cable systems not subject to "effective competition".
The FCC has established standards and procedures governing regulation of rates
for basic cable service and equipment to be implemented by state and local cable
franchising authorities and for the FCC's review of the "reasonableness" of
rates for additional tiers of cable service upon complaint from a franchising
authority or a cable subscriber. The FCC also has adopted interim
"cost-of-service" rules governing attempts by cable operators to justify higher
than benchmark rates based on unusually high costs. Separately offered services,
such as pay television and payper-view services, are not currently subject to
rate regulation although packages or collective offerings of such services may
be subject to rate regulation. The FCC also has identified and established
regulations for New Product Tiers, which are tiers of services not subject to
rate regulation.
The FCC's rate regulations also govern changes in the rates which cable
operators may charge when adding or deleting a service from a regulated tier of
service. The FCC substantially revised its rules for adding and deleting
services in November 1994 and has provided an alternative methodology for adding
services to cable programming service tiers which includes a flat fee increase
per added channel and an aggregate limit on such increases with an additional
license fee reserve. The FCC's rate regulations also permit cable operators to
"pass through" increases in programming costs and certain other external costs
which exceed the rate of inflation. However, a cable operator may pass through
increases in the cost of programming services affiliated with such cable
operator to the extent such costs exceed the rate of inflation only if the
price charged by the programmer to the affiliated cable operator reflects
prevailing prices offered in the marketplace by the programmer to unaffiliated
third parties or the fair market value of the programming.
Liberty Media Group 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, has had and will continue to
have an adverse effect on the programming services in which Liberty Media Group
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.
I-94
<PAGE> 96
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
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 homeshopping programming after October 6, 1993, and between
one and three non-commercial television broadcast signals, depending upon the
cable system's channel capacity. Alternatively, after October 6, 1993,
commercial broadcasters have the right to deny such carriage unless they grant
retransmission consent. 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 ongoing judicial proceedings before the District Court. Liberty
Media Group believes that, by requiring such carriage of broadcast signals,
these regulations may adversely affect the ability of Liberty Media Group'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 Liberty Media Group's programming services
also will be limited. However, such regulations have resulted in expanded cable
distribution of HSN, which is carried by a number of full-power commercial
broadcast television stations.
The FCC has adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40 percent of the first 75 activated channels on each of the
operator's systems. The rules provide for the use of two additional channels or
a 45 percent limit, whichever is greater, provided that the additional channels
carry minority controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services. These rules may limit carriage
of Liberty Media Group's programming services on certain cable systems of TCI
and its affiliates.
The 1992 Cable Act directed the FCC to promulgate regulations regarding
the sale and acquisition of cable programming between multichannel video
program distributors (including cable operators) and programming services in
which a cable operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude virtually all exclusive
programming contracts with cable operators (unless the FCC first determines the
contract serves the public interest) and generally prohibit a cable operator
which has an attributable interest in a programmer from improperly influencing
the terms and conditions of sale to unaffiliated multichannel video
distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as multichannel multipoint distribution
systems and direct broadcast satellite services on terms and conditions that do
not unfairly discriminate among such technologies.
In response to numerous petitions for review of the FCC's rate regulations,
the United States Court of Appeals for the District of Columbia upheld the
material provisions of those regulations in Time Warner Entertainment Co., L.P.
v. F.C.C. on June 6, 1995. The Court upheld the constitutionality of the FCC's
regulations and generally ruled that they were authorized by the 1992 Cable Act.
I-95
<PAGE> 97
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material Changes in Financial Condition, continued
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 Liberty Media Group'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. Liberty Media 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.
I-96
<PAGE> 98
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations
Liberty Media Group is engaged in two principal lines of business: (i)
production, acquisition and distribution through all available formats and media
of branded entertainment, educational and informational programming and
software, including multimedia products, ("Entertainment and Information
Programming Services") and (ii) electronic retailing, direct marketing,
advertising sales relating to programming services, infomercials and transaction
processing ("Electronic Retailing Services"). To enhance the reader's
understanding, separate financial data have been provided below for Electronic
Retailing Services, which include a retail function, and other Entertainment and
Information Programming Services. The table below sets forth, for the periods
indicated, certain financial information and the percentage relationship that
certain items bear to revenue. This summary provides trend data related to the
normal recurring operations of the Liberty Media Group. Corporate expenses have
not been reflected in the following table but are included in the following
discussion. Liberty Media Group holds significant equity investments the results
of which are not a component of operating income, but are discussed below under
"Other Income and Expense". Other items of significance are discussed separately
under their own captions below.
Six months ended June 30,
1995 1994
dollar amounts in thousands
Entertainment and Information
Programming Services
Revenue 100% $ 236,023 100% $ 160,424
Operating, selling, general &
administrative 97% 228,221 87% 139,369
Depreciation and amortization 5% 12,278 4% 6,250
---- --------- --- --------
Operating income (loss) (2%) $ (4,476) 9% $ 14,805
==== ========= === ========
Electronic Retailing Services
Revenue 100% $ 490,269 100% $ 548,220
Cost of sales 67% 328,091 65% 354,418
Operating, selling, general and
administrative 36% 174,690 30% 167,245
Depreciation and amortization 4% 19,870 3% 14,698
---- --------- --- --------
Operating income (loss) (7%) $ (32,382) 2% $ 11,859
==== ========= === ========
I-97
<PAGE> 99
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
Entertainment and Information Programming Services
Revenue from Entertainment and Information Programming Services
increased by 45% and 47%, or $38.0 million and $75.6 million, in the three and
six month periods ended June 30, 1995, respectively, over the corresponding
periods of 1994. Liberty Media Group's regional sports programming businesses
had increased revenue of $23.9 million and $49.3 million for the respective two
periods. Prime Sports-West was acquired by Liberty Media Group in August 1994,
and was responsible for $16.7 million and $35.6 million of the increase in the
second quarter and the first six months of 1995 revenue from Liberty Media
Group's regional sports programming businesses, respectively. The remaining
increase in the regional sports programming businesses is primarily due to
subscriber growth and rate increases. Encore's six new thematic multiplex
services (three launched in July 1994 and three launched in September 1994) and
tv! (launched in July 1994) accounted for a combined increase in revenue of
$4.3 million and $12.1 million for the quarter and the six months ended June
30, 1995, respectively, over the quarter and the six months ended June 30,
1994. The remaining increase in revenue of Liberty Media Group's. Entertainment
and Information Programming Services is primarily a result of growth in
subscribers.
Operating expenses, exclusive of depreciation and amortization, increased
by 55% and 64%, or $40.2 million and $88.9 million, in the 1995 second quarter
and six month period ended June 30, 1995, respectively. The new services
launched during 1994 were responsible for $6.0 million of the increase for the
quarter and $14.5 million of the increase for the six months ended June 30, 1995
compared to the respective periods of 1994. Prime Sports-West was responsible
for $11.8 million and $27.8 million of the increase for the two periods in
expenses of Liberty Media Group's sports programming businesses. Other new
businesses in the regional sports programming businesses increased expenses by
$13.3 million and $25.4 million for the three month and six month periods ending
June 30, 1995, respectively, compared to the respective periods of 1994.
Expenses at Liberty Media Group's regional sports programming businesses,
excluding the impact of new businesses increased $3.2 million and $9.4 million
for the quarter and six months ended June 30, 1995, respectively, compared to
the respective periods of 1994. This increase was caused by programming rights
fees for increased subscribers, new rights fees, and increased production costs
due to a larger number of events. Higher programming costs caused by additional
subscribers is the primary reason for the remaining increase in expenses.
I-98
<PAGE> 100
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
Operating income for Entertainment and Information Programming Services was
$1.8 million for the quarter and a loss of $4.5 million for the six months ended
June 30, 1995, respectively. This compared with earnings of $7.3 million in the
1994 second quarter and $14.8 million for the six months ended June 30, 1994.
The increased loss was primarily a result of the startup of several new sports
programming services.
Electronic Retailing Services
This information reflects the results of HSN, which became a consolidated
subsidiary of Liberty Media Group in February 1993. HSN's primary business is
electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a
wholly-owned subsidiary of HSN.
For the quarter and six months ended June 30, 1995, revenue for HSN
decreased $27.4 million, or 10%, to $246.6 million from $274.0 million and $58.0
million, or 10.6%, to $490.3 million from $548.2 million, respectively, compared
to the same periods in 1994. Net sales of HSC decreased $34.7 million or 14.1%,
and $81.0 million or 16.3%, for the quarter and six months ended June 30, 1995.
HSC's sales reflect decreases of 17.9% and 17.2% in the number of packages
shipped while the average price per unit sold increased 6.6% and 2.3% for the
quarter and six months ended June 30, 1995, respectively, compared to the same
periods in 1994. The decreases in HSC sales for the quarter and six months ended
June 30, 1995, were primarily offset by sales of $5.3 million and $17.1 million,
respectively, by HSN's infomercial joint venture, HSN Direct Joint Venture
("HSND"), which commenced operations during the third quarter of 1994. The
remaining increases in sales are attributable to HSN's other subsidiary
operations.
Management attributes the decline in net sales for the quarter and six
months ended June 30, 1995, to the initial impact of HSN's new merchandising and
programming strategies. Since September 1994, HSN has appointed new senior
management personnel with expertise in merchandising and has also instituted
procedures intended to improve purchasing and other merchandising practices.
Management's strategies include offering a greater variety of products,
developing strong private label lines, selling higher margin items and offering
name brand and other high quality merchandise.
As of June 5, 1995, HSN operates two full-time networks renamed HSN, the
primary network, and Spree!. On August 5, 1995, HSN relaunched the HSN network
with more scheduled programs and theme related shows and the roll-out of a new
look, including new sets, graphics and music. During the third quarter of 1995,
HSN will relaunch the Spree! network with a casual, fun format, including new
graphics, music and less scheduled programming. These changes, which are
ongoing, are designed to eliminate programming redundancies and to distinguish
the networks.
I-99
<PAGE> 101
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
HSN has made significant progress in executing these strategies, which are
aimed at long-term improvements in sales by attempting to attract new customers
and increase the frequency of repeat purchases. However, sales and operating
results through the third quarter of 1995, when compared to the prior year, are
expected to continue to be negatively affected by these changes. While
management believes HSN's new merchandising and programming strategies will
improve results, it estimates the earliest that sales and operating results will
be positively affected, when compared to the prior year, will be the fourth
quarter of 1995. There can be no assurance that these changes will achieve
management's intended results.
For the quarter and six months ended June 30, 1995, cost of sales decreased
$12.6 million, or 7.1%, to $166.2 million from $178.8 million and $26.3 million,
or 7.4% to $328.1 million from $354.4 million, respectively, compared with the
same periods in 1994. As a percentage of net sales, cost of sales increased to
67.4% from 65.3%, and 66.9% from 64.6% for the quarter and six months ended June
30, 1995, respectively, compared to the same periods in 1994. The dollar
decreases in cost of sales relate to the lower sales volumes, and the increases
in cost of sales percentages compared with the second quarter and first six
months of 1994 relate primarily to promotional price discounts.
Cost of sales of HSC decreased $18.0 million and $39.8 million,
respectively, for the quarter and six months ended June 30, 1995, which was
somewhat offset by increases in cost of sales for HSND of $2.4 million and $7.1
million, respectively. The remaining increases in cost of sales is attributable
to HSN's other subsidiary operations. As a percentage of HSC's net sales, cost
of sales increased to 69.7% from 67.1% and to 69.7% from 66.4%, for the quarter
and six months ended June 30, 1995, compared to the same periods in 1994.
Operating expenses, exclusive of depreciation and amortization, increased
by $0.3 million, to 34% of sales in the 1995 second quarter, compared with
30% of sales in the 1994 second quarter. Expenses increased $7.4 million
to 36% of sales for the six months ended June 30, 1995, compared with 30% of
sales for the same period in 1994. Most of this increase was a result of
selling, marketing, engineering and programming expenses related to HSND. These
costs are expected to remain at this level for the remainder of 1995. In
addition, HSN incurred a $2.0 million restructuring charge associated with the
anticipated consolidation of its distribution facilities.
HSN believes that seasonality does impact the business but not to the same
extent it impacts the retail industry in general.
In August of 1995, management of HSN instituted measures aimed at
streamlining operations primarily by reducing its work force and other
operating expenses. Although, these changes will result in future reductions to
operating expenses, HSN will incur costs related to severance in the third
quarter of 1995.
I-100
<PAGE> 102
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
Corporate Expenses
Corporate expenses are not reflected in the preceding table. During the six
months ended June 30, 1995, corporate expenses were $7.2 million, compared with
a net reversal of $7.3 million for the corresponding period in 1994. Such
amounts are primarily attributable to changes in compensation expense
associated with management incentive stock appreciation rights. The amount of
expense associated with stock appreciation rights is based on the market price
of the underlying common stock as of the date of the financial statements. The
expense is subject to future adjustment based on market price fluctuations
and, ultimately, on the final determination of market value when the rights
are exercised. Stock options and/or stock appreciation rights granted by
Liberty prior to the TCI/Liberty Combination have been assumed by TCI.
Excluding the impact of the stock appreciation rights, corporate expenses
increased by $1.0 million from the six months ended June 30, 1994 to the six
months ended June 30, 1995. This increase was primarily the result of litigation
settlement expense and overhead charges from TCI. Corporate expenses remained
relative comparable during the three months ended June 30, 1995, as compared to
the same period during 1994.
Upon distribution of the Liberty Group Stock, certain corporate general and
administrative costs will be charged to Liberty Media Group at rates set at the
beginning of each year based on projected utilization for that year. The
utilizationbased charges will be 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 through the date of the TCI/Liberty Combination do not
reflect the allocation of corporate general and administrative costs in the
aforementioned manner because the majority of the entities attributable to
Liberty Media Group were owned, directly or indirectly, by Liberty through such
dates. During the six months ended June 30, 1995, Liberty Media Group was
allocated $1,533,000 in corporate general and administrative costs by TCI.
Prior to the determination by the Board to seek approval by 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.
Entities included in Liberty Media Group lease office space and satellite
transponder facilities from TCI. Charges by TCI for such arrangements for the
six months ended June 30, 1995 and 1994, aggregated $7,914,000 and $2,577,000,
respectively.
I-101
<PAGE> 103
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material Changes in Results of Operations, Continued
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators (including
TCI) and others. Charges to TCI are based upon customary rates charged to
others.
HSN paid a commission to TCI for merchandise sales to customers who are
subscribers of TCI's cable systems. Aggregate commissions and charges by TCI
were approximately $3,101,000 and $2,780,000 for the six months ended June 30,
1995 and 1994, respectively.
Other Income and Expense
Dividend and interest income was $1.8 million and $3.9 million for the
three month and six month periods ended June 30, 1995, respectively and $6.2
million and $12.4 million for the corresponding two periods of 1994. The
decrease was primarily the result of the repayment of an HSN note receivable in
August 1994.
Liberty Media Group's share of earnings from affiliates was $3.4 million
in the second quarter of 1995 compared with share of earnings from affiliates of
$15.4 million in the second quarter of 1994. This decrease was partially the
result of the sale of substantially all of Liberty Media Group's interest in AMC
in July 1994, which investment had contributed $4.2 million of the second
quarter 1994 earnings. Liberty Media Group's share of earnings in affiliates
attributable to its interest in QVC decreased from earnings of $2.1 million in
the 1994 second quarter to earnings of $0.2 million in the 1995 second quarter.
This was primarily the result of increased interest expense on additional debt
arising from the QVC Merger. Australia, a new sports programming business, is
responsible for $3.8 million of the decrease in Liberty Media Group's share of
earnings. Liberty Media Group's share of earnings from affiliates was $1.5
million for the six months ended June 30, 1995 compared with share of earnings
from affiliates of $22.7 million for the six months ended June 30, 1994. The
sale of AMC resulted in a decrease of $8.5 million and QVC represents $6.5
million of the decrease. QVC earnings decreased for the six months due to
increased interest expense as well as compensation resulting from stock option
redemptions in the QVC Merger. Liberty Media Group's share of earnings decreased
by $6.6 million due to share of losses in Australia.
I-102
<PAGE> 104
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994 *
------------------ -----------------
Assets amounts in millions
------
<S> <C> <C>
Cash $ 78 11
Trade and other receivables, net 185 206
Due from Home Shopping Network, Inc. (note 8) 16 29
Prepaid expenses 43 22
Prepaid program rights 21 13
Committed film inventory 32 24
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 3) 1,751 1,019
Property and equipment, at cost:
Land 74 69
Distribution systems 9,065 7,705
Support equipment and buildings 1,078 935
---------- --------
10,217 8,709
Less accumulated depreciation 3,438 3,027
---------- -------
6,779 5,682
---------- -------
Franchise costs 13,709 11,152
Less accumulated amortization 1,868 1,708
---------- -------
11,841 9,444
--------- -------
Other assets, at cost, net of amortization 751 700
----------- --------
$ 21,497 17,150
=========== ========
</TABLE>
* Restated - see note 8.
(continued)
I-103
<PAGE> 105
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994 *
------------------ -----------------
Liabilities and Combined Equity amounts in millions
-------------------------------
<S> <C> <C>
Accounts payable $ 186 90
Accrued interest 194 183
Other accrued expenses 617 615
Debt (note 5) 12,385 11,068
Deferred income taxes 4,385 3,377
Other liabilities (note 8) 140 142
----------- --------
Total liabilities 17,907 15,475
----------- --------
Minority interests in equity
of consolidated subsidiaries 257 314
Redeemable preferred stock (note 6) 307 --
Combined equity (note 7):
Combined equity, including preferred
stocks 4,399 2,727
Cumulative foreign currency
translation adjustment 6 (4)
TCI Group unrealized holding gains (losses)
for available-for-sale securities, net of taxes 5 (5)
Liberty Media Group unrealized holding
gains for available-for-sale securities,
net of taxes 210 131
Interest in Liberty Media Group (1,594) (1,488)
---------- --------
Combined equity 3,026 1,361
---------- --------
Commitments and contingencies (note 9)
$ 21,497 17,150
========== ========
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
I-104
<PAGE> 106
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 30,
------------------ ------------------
1995 1994 * 1995 1994 *
---- ------ ---- ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,278 1,061 2,463 2,101
Operating costs and expenses:
Operating 370 299 731 581
Programming charges from Liberty
Media Group (note 8) 15 13 35 26
Selling, general and administrative 399 298 734 590
Charges to Liberty Media Group (note 8) (7) (3) (13) (5)
Compensation relating to stock
appreciation rights 16 1 15 --
Adjustment to compensation relating to
stock appreciation rights -- -- -- (18)
Depreciation 223 175 418 340
Amortization 94 74 170 147
--------- ---------- ---------- ---------
1,110 857 2,090 1,661
--------- ---------- ---------- ---------
Operating income 168 204 373 440
Other income (expense):
Interest expense (240) (187) (477) (365)
Interest and dividend income 9 4 14 8
Interest income from Liberty Media
Group (note 8) 1 1 1 1
Share of losses of other affiliates,
net (note 3) (47) (24) (74) (31)
Loss on early extinguishment of debt -- -- -- (2)
Minority interests in losses of
consolidated subsidiaries, net 4 2 9 --
Other, net (16) 7 (9) 3
--------- ---------- ---------- ---------
(289) (197) (536) (386)
--------- ---------- ---------- ---------
Earnings (loss) before income taxes (121) 7 (163) 54
Income tax benefit (expense) 38 (26) 46 (56)
---------- ---------- ---------- ---------
Loss before earnings
(loss) of Liberty Media Group (83) (19) (117) (2)
Earnings (loss) of Liberty Media Group -- 11 (11) 26
---------- ---------- ---------- ---------
Net earnings (loss) (83) (8) (128) 24
Dividend requirements on
preferred stocks (9) -- (17) --
--------- ---------- ---------- ---------
Net earnings (loss) attributable to
common shareholders $ (92) (8) (145) 24
========= ======= ======== =======
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
I-105
<PAGE> 107
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Six months ended June 30, 1995
(unaudited)
<TABLE>
<CAPTION>
TCI
Group Liberty
unrealized Media
holding Group
Combined Cumulative gains unrealized Interest
equity, foreign (losses) for gains for in
including currency available- available- Liberty
preferred translation for-sale for-sale Media Combined
stocks adjustment securities securities * Group * equity
------ ---------- ---------- ------------ ------- ------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 * $ 2,727 (4) (5) 131 (1,488) 1,361
Net loss (128) -- -- -- 11 (117)
Purchase of programming from
Liberty Media Group -- -- -- -- 35 35
Cost allocations to Liberty
Media Group -- -- -- -- (13) (13)
Interest income from Liberty
Media Group -- -- -- -- (1) (1)
Intergroup tax allocation
to Liberty -- -- -- -- 17 17
Turner Broadcasting System, Inc.
("TBS") stock received in
acquisition transferred
to Liberty Media Group -- -- -- -- (7) (7)
Net cash transfers to Liberty
Media Group -- -- -- -- (57) (57)
Change in unrealized gains
for available-for-sale
securities -- -- 10 79 (79) 10
Foreign currency translation
adjustment -- 10 -- -- -- 10
Accreted dividends on TCI
preferred stock subject to
mandatory redemption
requirements (7) -- -- -- -- (7)
Payment of TCI preferred stock
dividends (12) -- -- -- -- (12)
Issuance of TCI Class A
common stock for
acquisitions and investments 1,376 -- -- -- -- 1,376
Issuance of TCI Class A
common stock for acquisition
by Liberty Media Group 12 -- -- -- (12) --
Proceeds from issuances of
TCI Class A common stock
in public and private
offerings 431 -- -- -- -- 431
------- --------- --------- -------- ------ --------
Balance at June 30, 1995 $ 4,399 6 5 210 (1,594) 3,026
======= ========= ========= ======== ====== ========
</TABLE>
* Restated - see note 8.
See accompanying notes to combined financial statements.
I-106
<PAGE> 108
"TCI Group"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1995 1994
------ ------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss before net earnings
or loss of Liberty Media Group* $ (117) (2)
Adjustments to reconcile net loss before
net earnings or loss of Liberty Media Group to
net cash provided by operating activities:
Depreciation and amortization 588 487
Compensation relating to stock
appreciation rights 15 --
Adjustment to compensation relating to stock
appreciation rights -- (18)
Share of losses of other affiliates 74 31
Deferred income tax expense (benefit) (58) 27
Minority interests in losses (9) --
Loss on early extinguishment of debt -- 2
Noncash interest and dividend income (5) (6)
Other noncash charges (credits) 6 (2)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 46 20
Change in prepaids (26) (20)
Change in accruals and payables 30 62
--------- --------
Net cash provided by operating activities 544 581
--------- --------
Cash flows from investing activities:
Cash paid for acquisitions (205) (6)
Capital expended for property and equipment (764) (600)
Proceeds from disposition of assets 21 30
Additional investments in and
loans to affiliates and others (815) (210)
Changes in interest in Liberty Media Group (38) 24
Repayment of loans by affiliates and others 20 22
Other investing activities (38) (31)
--------- -------
Net cash used in investing activities (1,819) (771)
--------- -------
Cash flows from financing activities:
Borrowings of debt 4,567 1,564
Repayments of debt (3,644) (1,369)
Preferred stock dividends of subsidiaries -- (3)
Preferred stock dividends (12) --
Issuance of common stock 431 --
--------- --------
Net cash provided by financing activities 1,342 192
--------- --------
Net increase in cash 67 2
Cash at beginning of period 11 9
--------- --------
Cash at end of period $ 78 11
========= ========
</TABLE>
* Net earnings or loss of Liberty Media Group does not provide or use funds.
See accompanying notes to combined financial statements.
I-107
<PAGE> 109
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
June 30, 1995
(unaudtited)
(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 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 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, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of the
subsidiaries and assets not attributed to the 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 the Liberty Media Group is
referred to as the "TCI Group".
(continued)
I-108
<PAGE> 110
"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 will each continue to be responsible for their respective
liabilities. Holders of TCI Group common stock will be holders of
common stock of TCI and will continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities. The issuance of Liberty Group Stock does not affect
the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of
the 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 consolidated financial
information.
Dividends on the TCI Group common stock will be 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 the 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)
I-109
<PAGE> 111
"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 are convertible into or exchangeable for shares of TCI
Class A common stock will, as a result of the operation of
antidilution provisions, be 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 will be
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 the TCI Group to the 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 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-110
<PAGE> 112
"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 the TCI Group
own 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 the 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 the 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"). The
rights, privileges and preferences of the Series F Preferred Stock do
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, 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.
Each share of Series F Preferred Stock is convertible into 1,000
shares of TCI Class A 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 TCI Class A common stock
issuable upon conversion in the event of any non-cash dividend or
distribution of the TCI Class A 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 giving such holder the right to receive upon
conversion additional shares of TCI Class A common stock having a fair
value (as determined by the Board) equal to the number of shares of
Series A Liberty Group Stock which it would have received had such
shares of Series F Preferred Stock been converted immediately prior to
the record date for the Distribution rather than such number of shares
of Liberty Group Stock.
(continued)
I-111
<PAGE> 113
"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 TCI Class A 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 TCI Class A
common stock for a period specified, and subject to the adjustments
described, in the certificate of designation establishing the Series F
Preferred Stock.
(continued)
I-112
<PAGE> 114
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
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.
(continued)
I-113
<PAGE> 115
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $471 million and $352 million for the six
months ended June 30, 1995 and 1994, respectively. Also, during these
periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Cash paid in acquisitions:
Fair value of assets acquired $ 3,062 48
Liabilities assumed (221) (7)
Deferred tax liability recorded
in acquisitions (1,067) --
Minority interests in equity of
acquired entities 46 (35)
Common stock issued in acquisitions (1,315) --
Redeemable preferred stock issued
in acquisition (300) --
--------- ---
Cash paid in acquisitions $ 205 6
========= ===
TBS stock received in
acquisition transferred to
Liberty Media Group $ 7 --
========= ===
Common stock issued to subsidiaries in
Reorganization reflected as
treasury stock $ 1 --
========= ===
Retirement of Class A common stock
previously held by subsidiary $ 10 --
========= ===
Common stock issued in exchange for
cost investment $ 73 --
========= ===
Effect of foreign currency translation
adjustment on book value of foreign
equity investments $ 10 15
========= ===
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 $ 89 13
========= ===
Accrued preferred stock dividends $ 7 --
========= ===
</TABLE>
(continued)
I-114
<PAGE> 116
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Noncash exchange of equity investments
and consolidated subsidiaries for
consolidated subsidiary $ -- 38
========= ====
Common stock issued upon conversion of
redeemable preferred stock $ -- 18
========= ====
</TABLE>
(3) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Six months
ended
Combined Operations June 30,
------------------- ---------------------
1995 1994
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 917 605
Operating expenses (782) (419)
Depreciation and amortization (193) (86)
------ ----
Operating income (loss) (58) 100
Interest expense (109) (62)
Other, net (21) (5)
------ ----
Net earnings (loss) $ (188) 33
====== ====
</TABLE>
TCI Group has various investments accounted for under the equity
method. Some of the more significant investments held by TCI Group at
June 30, 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 $666
million) (see note 9), TeleWest Communications plc (carrying value of
$444 million) and Teleport Communications Group, Inc. and TCG Partners
(collectively, "TCG") (carrying value of $143 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.
(continued)
I-115
<PAGE> 117
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) 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 6).
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 $286 million, before
liabilities assumed and subject to adjustment as further described
below. The purchase price was paid with cash consideration of $199
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. The purchase price is subject to adjustment
upon final determination of the actual number of Cablevision's
equivalent basic subscribers and liabilities at April 25, 1995. 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 would have been increased by $93 million, net loss
would have been increased by $6 million and loss attributable to common
shareholders would have been increased by $7 million for the six
months ended June 30, 1995 had such acquired entities been
consolidated with TCI Group on January 1, 1994. On a pro forma basis,
revenue would have increased by $208 million, net earnings would have
been reduced by $3 million and earnings attributable to common
shareholders would have been reduced by $11 million for the six months
ended June 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.
(continued)
I-116
<PAGE> 118
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 is 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>
June 30, December 31,
1995 1994
------------------ -----------------
amounts in millions
<S> <C> <C>
Senior notes $ 5,337 5,387
Bank credit facilities 4,516 4,011
Commercial paper 1,242 445
Notes payable 986 1,024
Convertible notes (a) 45 45
Cablevision Notes (b) 87 --
Other debt 172 156
--------- ------
$ 12,385 11,068
========= ======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at June 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 June 30, 1995, the notes were
convertible, at the option of the holders, into an aggregate
of 38,707,574 shares of TCI Class A common 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.
(continued)
I-117
<PAGE> 119
"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 $612 million at June 30, 1995 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,530 million at June 30, 1995. During the six months ended June 30,
1995 and 1994, the TCI Group's net payments pursuant to the Fixed Rate
Agreements were $6.3 million and $13.2 million, respectively; and TCI
Group's net receipts pursuant to the Variable Rate Agreements were
$2.0 million and $26.6 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>
August 1995 7.7% $ 10 August 1995 7.7% $ 10
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
$612 March 2000 5.8%-6.0% 675
==== September 2000 5.1% 75
-------
$ 2,530
=======
</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 $325 million which fix the maximum
variable interest rates at 11%. Such agreements expire during the
third and fourth quarters of 1995.
The fair value of the interest rate exchange agreements is the
estimated amount that TCI Group would pay or receive to terminate the
agreements at June 30, 1995, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
TCI Group would be required to pay $29 million at June 30, 1995 to
terminate the agreements.
(continued)
I-118
<PAGE> 120
"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 $12,385 million, was $12,527 million at June 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.
(6) Redeemable 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 of Directors out of
unrestricted funds legally available therefor, cumulative dividends,
in preference to dividends on any stock that ranks junior to the
Series D Preferred Stock (currently the Class A common stock, the
Class B common stock and the Class B Preferred Stock), that shall
accrue on each share of Series D Preferred stock at the rate of 5-1/2%
per annum of the liquidation value ($300 per share). Dividends are
cumulative, and in the event that dividends are not paid in full on
two consecutive dividend payment dates or in the event that TCI fails
to effect any required redemption of Series D Preferred Stock, accrue
at the rate of 10% per annum of the liquidation value. The Series D
Preferred Stock ranks on parity with the Class A Preferred Stock, the
Series C Preferred Stock and the Series E Preferred Stock.
Each share of Series D Preferred Stock is convertible into 10 shares
of TCI Class A common stock, subject to adjustment upon certain events
specified in the certificate of designation establishing Series D
Preferred Stock. To the extent any cash dividends are not paid on any
dividend payment date, the amount of such dividends will be deemed
converted into shares of TCI Class A common stock at a conversion rate
equal to 95% of the then current market price of TCI Class A common
stock, and upon issuance of TCI Class A common stock to holders of
Series D Preferred Stock in respect of such deemed conversion, such
dividend will be deemed paid for all purposes. See note 1.
Shares of Series D Preferred Stock are redeemable for cash at the
option of the holder at any time after the tenth anniversary of the
issue date at a price equal to the liquidation value in effect as of
the date of the redemption. Shares of Series D Preferred Stock may
also be redeemed for cash at the option of TCI after the fifth
anniversary of the issue date at such redemption price or after the
third anniversary of the issue date if the market value per share of
TCI Class A common stock shall have exceeded $37.50 for periods
specified in the certificate of designation.
(continued)
I-119
<PAGE> 121
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
If TCI fails to effect any required redemption of Series D Preferred
Stock, the holders thereof will have the option to convert their
shares of Series D Preferred Stock into TCI Class A common stock at a
conversion rate of 95% of the then current market value of TCI Class A
common stock, provided that such option may not be exercised unless
the failure to redeem continues for more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the
shareholders of TCI.
(7) Stockholders' Equity
Common Stock
The Class A common stock has one vote per share and the Class B common
stock has ten votes per share. Each share of Class B common stock is
convertible, at the option of the holder, into one share of Class A
common stock. See note 1.
Subsequent to the distribution of the Liberty Group Stock, the rights
of holders of the TCI Group common stock upon liquidation of TCI will
be based on 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.
Stock Options
TCI has adopted the Tele-Communications, Inc. 1994 Stock Incentive
Plan (the "Plan"). The Plan provides for awards to be made in respect
of a maximum of 16 million shares of TCI Class A common stock. Awards
may be made as grants of stock options, stock appreciation rights,
restricted shares, stock units or any combination thereof. The
following descriptions represent the terms of certain awards under the
Plan (see note 1).
Stock options to acquire 152,514 shares of TCI Class A common stock at
adjusted purchase prices ranging from $8.83 to $18.63 per share were
outstanding at June 30, 1995. During the six months ended June 30,
1995, 9,714 options were exercised and no options were canceled.
Options to acquire 9,714 shares of TCI Class A common stock expire
August 14, 1995. Options to acquire 142,800 shares of TCI Class A
common stock expire December 15, 1998.
(continued)
I-120
<PAGE> 122
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock options in tandem with stock appreciation rights to purchase
3,880,750 shares of Class A common stock at a purchase price of $16.75
per share were outstanding at June 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 six months ended June 30, 1995, stock appreciation rights covering
82,250 shares of Class A common stock were exercised and the tandem
stock options were canceled.
Stock options in tandem with stock appreciation rights to purchase
1,940,000 shares of TCI Class A common stock at a purchase price of
$16.75 per share were outstanding at June 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.
Stock options in tandem with stock appreciation rights to purchase
2,000,000 shares of TCI Class A common stock at a purchase price of
$16.75 per share were outstanding at June 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.
On November 17, 1994, stock options in tandem with stock appreciation
rights to purchase 2,885,000 shares of TCI Class A common stock were
granted pursuant to the Plan to certain officers and other key
employees at a purchase price of $22.00 per share. Such options
become exercisable and vest evenly over five years, first become
exercisable beginning November 17, 1995 and expire on November 17,
2004.
On August 3, 1995, shareholders of TCI 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 of
Directors and was not an employee of TCI or any of its subsidiaries,
of options to purchase 50,000 shares of Class A common stock.
Pursuant to the Director Stock Option Plan, options to purchase
300,000 shares were grated 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.
See note 1.
Estimated compensation relating to stock appreciation rights has been
recorded through June 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.
(continued)
I-121
<PAGE> 123
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At June 30, 1995, there were 68,428,838 shares of TCI Class A common
stock reserved for issuance under exercise privileges related to
options and convertible debt securities. In addition, one share of
Class A common stock is reserved for each share of Class B common
stock. See note 1 for the effect of the Distribution on the
conversion rights of holders of convertible securities.
(8) Transactions with Liberty Media Group and Other Related Parties
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
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 six months ended June 30, 1995,
Liberty Media was allocated $1,533,000 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
the TCI Group hold the remaining 50.1% partnership interest.
(continued)
I-122
<PAGE> 124
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that the 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 the TCI Group special capital contributions and any preferred
return payable thereon. To the extent such special capital
contributions are insufficient to fund the cash requirements of QE+,
the TCI Group and the Liberty Media Group will each be obligated to
fund such cash requirements in proportion to their respective
ownership percentages.
The 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 the TCI Group. The affiliation agreement also
requires the 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.
In connection with the launch of the STARZ! service, the TCI Group
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 June 30, 1995, the maximum amount of such
obligations or guarantees was approximately $152 million. The future
obligations of the TCI Group with respect to these agreements is not
currently determinable because such amount is dependent on the number
of qualifying films produced by the motion pictures studios, the
amount of United States theatrical film rentals for such qualifying
films, and certain other factors.
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 the
TCI Group have been repaid, including the preferred return thereon.
(continued)
I-123
<PAGE> 125
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 the 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 six months ended June 30, 1995 and 1994,
aggregated $8 million, and $3 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 paid 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 approximately $3 million
for each of the six month periods ended June 30, 1995 and 1994.
During the first quarter of 1995, the Liberty Media Group acquired an
additional interest in an investment previously accounted for under
the cost method. Upon consummation of such transaction, the 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 the 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 effect of the restatement was less than $1
million to the earnings from Liberty Media Group for the six months
ended June 30, 1994.
(continued)
I-124
<PAGE> 126
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 will be included in borrowings from
and loans to TCI Group or, if determined by the Board, as an equity
contribution to be reflected as an Inter-Group Interest to the 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, TCI Class A common stock and TCI Class B 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 the Liberty Media Group. Financial impacts of
repurchases of Liberty Group Stock the consideration for which is
charged to the Liberty Group will be reflected entirely in the
combined financial statements of the 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.
(continued)
I-125
<PAGE> 127
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Commitments and Contingencies
During 1994, the TCI Group, Comcast, Cox and Sprint formed WirelessCo
to engage in the business of providing wireless communications
services on a nationwide basis. Through WirelessCo, the partners have
been participating in auctions ("PCS Auctions") of broadband personal
communications services ("PCS") licenses being conducted by the
Federal Communications Commission ("FCC"). In the first round
auction, which concluded during the first quarter of 1995, WirelessCo
was the winning bidder for PSC licenses for 29 markets, including New
York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth,
Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale.
The aggregate license cost for these licenses is approximately $2.1
billion.
WirelessCo has also invested in American PSC, L.P. ("APC"), which
holds a PCS license granted under the FCC's pioneer preference program
for the Washington-Baltimore market. WirelessCo acquired its 49%
limited partnership interest in APC for $23 million and has agreed to
make capital contributions to APC equal to 49/51 of the cost of APC's
PCS license. Additional capital contributions may be required in the
event APC is unable to finance the full cost of its PCS license.
WirelessCo may also be required to finance the build-out expenditures
for APC's PCS system. Cox, which holds a pioneer preference PCS
license for the Los Angeles-San Diego market, and WirelessCo have also
agreed on the general terms and conditions upon which Cox (with a 60%
interest) and WirelessCo (with a 40% interest) would form a
partnership to hold and develop a PCS system using the Los Angeles-San
Diego license. APC and the Cox partnership would affiliate their PCS
systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under
the "Sprint" brand. TCI Group owns a 30% interest in WirelessCo.
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.
(continued)
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<PAGE> 128
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the end of the first quarter 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.
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.
At June 30, 1995, TCI Group was liable for a $720 million letter of
credit which guarantees contributions to WirelessCo. TCI Group
pledged 76,295,092 shares of TCI Class A common stock held by
subsidiaries of TCI as collateral for the letter of credit. During
1995, borrowings aggregating $602 million were made pursuant to the
letter of credit.
(continued)
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<PAGE> 129
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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. The amount
of refunds, if any, which could be payable by TCI Group in the event
that systems' rates are successfully challenged by franchising
authorities is not considered to be material.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $230 million at June 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, 2002 (the "Film License Obligations"). As of
June 30, 1995, these agreements require minimum payments aggregating
approximately $289 million. The aggregate amount of the Film License
Obligations is not currently estimable because such amount is
dependent upon the number of qualifying films produced by the motion
picture studios, the amount of United States theatrical film rentals
for such qualifying films, and certain other factors. Nevertheless,
TCI Group's required aggregate payments under the Film License
Obligations could prove to be significant.
(continued)
I-128
<PAGE> 130
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group has also committed to provide additional debt or equity
funding to certain of its affiliates. At June 30, 1995, such
commitments aggregated $162 million.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying combined financial statements.
(10) Subsequent Event
On July 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 aggregate
consideration of $320 million, before deducting related expenses
(currently estimated to be approximately $18 million). The shares
sold to the public represent 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. TCI
continues to own 83% of the issued and outstanding stock of TCI
International.
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.
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.
(continued)
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<PAGE> 131
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined 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.
(continued)
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<PAGE> 132
"TCI Group"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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
Group 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. Accordingly, no assurance can be given that
the transaction will be consummated.
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<PAGE> 133
"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 the 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, the existing TCI
Class A and Class B common stock is intended to reflect the separate
performance of the TCI Group, which is generally comprised of the subsidiaries
and assets not attributed to the 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 the
Liberty Media Group are referred to as the "TCI Group".
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 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.
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<PAGE> 134
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 will each continue to be responsible
for their respective liabilities. Holders of TCI Group common stock will be
holders of common stock of TCI and will continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities. The issuance of Liberty Group Stock does not affect the rights of
creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition and TCI could affect
the combined results of operations or financial condition of the 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 consolidated financial
information.
Dividends on the TCI Group common stock will be 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 the 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.
After the Distribution, existing preferred stock and debt securities
of TCI that are convertible into or exchangeable for shares of TCI Class A
common stock will, as a result of the operation of antidilution provisions, be
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 will be 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 the TCI Group to
the 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
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<PAGE> 135
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 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.
A number of wholly-owned subsidiaries which are part of the TCI Group
own shares of Class A common stock and preferred stock of TCI ("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 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 the 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
the Liberty Media Group represented by any outstanding shares of Liberty Group
Stock (an "Inter-Group Interest"). 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 (the "Series F Preferred Stock"). The rights, privileges and
preferences of the Series F Preferred Stock do not entitle its holders to
receive Liberty Group Stock in the Distribution or upon conversion of the
Series F Preferred Stock.
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<PAGE> 136
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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. Each share of Series F
Preferred Stock is convertible into 1,000 shares of TCI Class A 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 TCI Class A common stock issuable upon conversion in
the event of any non-cash dividend or distribution of the TCI Class A 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 giving
such holder the right to receive upon conversion additional shares of TCI Class
A common stock having a fair value (as determined by the Board) equal to the
number of shares of Series A Liberty Group Stock which it would have received
had such shares of Series F Preferred Stock been converted immediately prior to
the record date for the Distribution rather than such number of shares of
Liberty Group 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 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 TCI Class A common
stock in such liquidation, dissolution or winding up multiplied by the
applicable conversion rate of a share of Series F Preferred Stock.
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<PAGE> 137
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 TCI Class A common stock for a period specified, and subject to the
adjustments described, in the certificate of designation establishing 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 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 will be included in borrowings from and loans
to TCI Group or, if determined by the Board, as an equity contribution to be
reflected as an Inter-Group Interest to the Liberty Media Group.
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<PAGE> 138
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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, TCI Class A common stock and TCI Class B 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 the Liberty
Media Group. Financial impacts of repurchases of Liberty Group Stock the
consideration for which is charged to the Liberty Group will be reflected
entirely in the combined financial statements of the 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 $320 million, before deducting related expenses
(currently estimated to be approximately $18 million). The shares sold to the
public represent 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. TCI continues to own 83% of the issued and
outstanding stock of TCI International.
During 1994, the TCI Group, Comcast, Cox and Sprint formed WirelessCo
to engage in the business of providing wireless communications services on a
nationwide basis. Through WirelessCo, 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.
I-137
<PAGE> 139
"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. The TCI Group owns a 30% interest in WirelessCo.
During 1994, subsidiaries of Cox, Sprint and the 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. The TCI Group anticipates funding its portion of WirelessCo's
capital requirements through borrowings under a new credit facility.
At the end of the first quarter of 1995, 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, the 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.
I-138
<PAGE> 140
"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.
At June 30, 1995, the TCI Group was liable for a $720 million letter
of credit which guarantees contributions to WirelessCo. TCI Group pledged
76,295,092 shares of TCI Class A common stock held by subsidiaries of TCI as
collateral for the letter of credit. During 1995, borrowings aggregating $602
million were made pursuant to the letter of credit.
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, the 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 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 TCI Class A common stock. The
Series D Preferred Stock is redeemable for cash at the option of TCI after five
years and at the option of either TCI or the holder after ten years. The
amount of net liabilities assumed by TCI Group and the number of shares of TCI
Class A common stock issued to TeleCable's shareholders are subject to
post-closing adjustments.
I-139
<PAGE> 141
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
During the first quarter of 1995, the Liberty Media Group acquired an
additional interest in an investment previously accounted for under the cost
method. Upon consummation of such transaction, the 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 the 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 effect of the
restatement was less than $1 million to the earnings from the Liberty Media
Group for the six months ended June 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.
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.
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. Accordingly, no
assurance can be given that the transaction will be consummated.
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 the TCI Group is dependent upon the ability of
subsidiaries attributable to the 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
therefore, 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.
The TCI Group had approximately $1.7 billion in unused lines of credit
at June 30, 1995, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although the TCI Group was 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 5 to the accompanying
combined financial statements for additional information regarding the material
terms of the lines of credit.
I-140
<PAGE> 142
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Subsequent to June 30, 1995, TCI Group sold $350 million principal
amount of its 8% Senior Notes due August 1, 2005 and $750 million principal
amount of its 8-3/4% Senior Debentures due August 1, 2015 in an underwritten
public offering. The net proceeds of approximately $1,085 million were
utilized to repay variable rate indebtedness.
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)($976 million and $909 million for the six months
ended June 30, 1995 and 1994, respectively) to interest expense ($477 million
and $365 million for the six months ended June 30, 1995 and 1994,
respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 205% and 249% for the six
months ended June 30, 1995 and 1994, respectively. Management of the TCI Group
believes that the foregoing interest coverage ratio is adequate in light of the
consistency and nonseasonal nature of its cable television operations and the
relative predictability of TCI Group's interest expense, almost half of which
results from fixed rate indebtedness. Operating Cash Flow is a measure of
value and borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flows provided by operating activities, a
measure of performance prepared in accordance with generally accepted
accounting principles, and should not be relied upon as such. Operating Cash
Flow, as defined, does not take into consideration substantial costs of doing
business, such as interest expense, and should not be considered in isolation
to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($544 million and $581 million for
the six months ended June 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
the 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 the 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.
I-141
<PAGE> 143
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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 TCI Group has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the TCI Group pays (i) fixed interest rates ranging from
6.1% to 9.9% on notional amounts of $612 million at June 30, 1995 and (ii)
variable interest rates on notional amounts of $2,530 million at June 30, 1995.
During the six months ended June 30, 1995 and 1994, TCI Group's net payments
pursuant to the Fixed Rate Agreements were $6.3 million and $13.2 million,
respectively. During the six months ended June 30, 1995 and 1994, TCI Group's
net receipts pursuant to the Variable Rate Agreements were $2.0 million and
$26.6 million, respectively. TCI Group's interest rate hedge agreements fix
the maximum variable interest rates on notional amounts of $325 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.
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.
The 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 that vary in size depending upon the power of the
satellite dish; two DBS operators offer nationwide video services that can be
received by a satellite that measures approximately eighteen inches in
diameter. DBS operators can acquire the right to distribute over satellite all
of the significant cable television programming currently available on 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.
I-142
<PAGE> 144
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $230
million at June 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, 2002. As of December 31, 1994, these agreements require minimum
payments aggregating approximately $207 million. The aggregate amount of the
Film License Obligations is not currently estimable because such amount is
dependent upon the number of qualifying films produced by the motion picture
studios, the amount of United States theatrical film rentals for such
qualifying films, and certain other factors. Nevertheless, TCI Group's
required aggregate payments under the Film License 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 June 30, 1995, such commitments aggregated
$162 million.
I-143
<PAGE> 145
"TCI Group"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
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.
I-144
<PAGE> 146
"TCI Group"
(a combination of certain assets, as defined in note 1)
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.
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.
TCI Group estimates that the FCC's 1993 and 1994 rate regulations will
result in an aggregate annualized reduction of revenue and operating income
ranging from $280 million to $300 million based upon rates charged prior to
implementation of such rate regulations. The estimated annualized reduction in
revenue assumes that the FCC will not require further reductions beyond the
current regulations and is prior to any possible mitigating factors (none of
which is assured) such as (i) the provision of alternate service offerings (ii)
the implementation of rate adjustments to non-regulated services and (iii) the
utilization of cost-of-service methodologies, as described below.
Cable operators may justify rates higher than the benchmark rates
established by the FCC through demonstrating higher costs based upon a
cost-of-service showing. Under this methodology, cable operators may be
allowed to recover through the rates they charge for Regulated Services, their
normal operating expenses plus an interim rate of return of 11.25% on the rate
base, as defined, which rate may be subject to change in the future.
I-145
<PAGE> 147
"TCI Group"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
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.
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. The amount of
refunds, if any, which could be payable by TCI Group in the event that any
system's rates were to be successfully challenged, is not considered to be
material.
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.
Revenue increased 20% and 17% for the three months and six months ended
June 30, 1995, respectively, as compared to the corresponding periods of 1994.
The three month increase is the result of growth in subscriber levels within
TCI Group's cable television system (7%), and the effect of certain
acquisitions, including TeleCable and Cablevision (12%), and various other
individually insignificant increases (8%) net of a decrease in revenue due to
rate reductions required by rate regulation implemented pursuant to the 1992
Cable Act (4%) and a decrease due to the transfer of Netlink USA to the
Programming unit in the Reorganization (3%). The six month increase is the
result of growth in subscriber levels (7%), the effect of certain
acquisitions,including TeleCable and Cablevision (9%), and various other
individually insignificant increases (8%), net of a decrease due to rate
regulation (4%) and a decrease due to the transfer of Netlink USA (3%).
Included in TCIC's total revenue is revenue generated by TCIC's common carrier
microwave assets amounting to $18 million and $37 million for the three months
and six months ended June 30, 1995, respectively, and $13 million and $26
million for the three months and six months ended June 30, 1994, respectively.
Operating costs and expenses increased 30% and 26% for the three
months and six months ended June 30, 1995, respectively, as compared to the
corresponding periods of 1994. 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.
I-146
<PAGE> 148
"TCI Group"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
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 six months ended June 30, 1995, Liberty Media was
allocated $1,533,000 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.
TCI Group has an ownership interest of approximately 38% 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 June 30, 1995 of $444 million and
comprised $26 million of TCI Group's share of its affiliates' losses during the
six months ended June 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 $175 million at June 30, 1995 and accounted
for $19 million of TCI Group's share of its affiliates' losses in 1995.
I-147
<PAGE> 149
"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. At December 31, 1994, TeleWest Communications had
completed approximately 37% of its network construction and, it is expected
that TeleWest Communications' network construction will be substantially
complete within the next five years. 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 L401.3 million ($630 million using the
November 23, 1994 exchange rate) of 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.
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 loss (before the net loss of Liberty Media Group and
preferred stock dividends) of $83 million and $117 million for the three months
and six months ended June 30, 1995, respectively, represented increases of $64
million and $115 million as compared to TCI Group's net loss (before net
earnings of Liberty Media Group) of $19 million and $2 million for the
corresponding periods of 1994. Such decrease is principally the result of the
effect of the aforementioned reduction in rates charged for Regulated Services,
an increase in interest expense due to an increase in interest rates, net of
the increase in operating income from the acquisition of TeleCable.
I-148
<PAGE> 150
TELE-COMMUNICATIONS, INC.
and
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended June
30, 1995 to which TCI or TCIC or any of their consolidated
subsidiaries is a party or of which any of their property is the
subject, except as follows:
Leo Wagner v. United Cable Television of Baltimore Limited
Partnership. This matter was filed in the United States
District Court of Maryland on February 8, 1994. The plaintiff
alleged that he was the victim of reverse discrimination and
sought unspecified back pay and lost wages, $250,000 in
compensatory damages and $10,000,000 in punitive damages. The
matter was settled in June of 1995 for a nominal amount. This
represents the final resolution of this matter, and,
accordingly, this case will not be reported in future filings.
II-1
<PAGE> 151
TELE-COMMUNICATIONS, INC.
and
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27.1) Tele-Communications, Inc. Financial Data Schedule
(27.2) TCI Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30,
1995:
<TABLE>
<CAPTION>
Date of Item
Report Reported Financial Statements Filed
------- -------- --------------------------
<S> <C> <C>
Tele-Communications, Inc.:
--------------------------
April 6, 1995 Item 5 None.
and
Item 7
April 20, 1995, Item 5 Cablevision (A Combination of Certain Cable
as amended on and Television Assets of Cablevision S.A.,
June 13, 1995 Item 7 Televisora Belgrano S.A., Construed S.A. and
Univent's S.A., as defined):
Year ended December 31, 1994
and 1993.
May 4, 1995, Item 2 None.
as amended on and
June 13, 1995 Item 7
TCI Communications, Inc.:
-------------------------
April 6, 1995 Item 5 None.
and
Item 7
April 20, 1995, Item 5 Cablevision (A Combination of Certain Cable
as amended on and Television Assets of Cablevision S.A.,
June 13, 1995 Item 7 Televisora Belgrano S.A., Construed S.A. and
Univent's S.A., as defined):
Year ended December 31, 1994
and 1993.
</TABLE>
II-2
<PAGE> 152
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.
<TABLE>
<S> <C>
TELE-COMMUNICATIONS, INC.
Date: August 11, 1995 By: /s/ John C. Malone
--------------------------------------------
John C. Malone
President, and Chief
Executive Officer
Date: August 11, 1995 By: /s/ Donne F. Fisher
---------------------------------------------
Donne F. Fisher
Executive Vice President
(Principal Financial and
Accounting Officer)
TCI COMMUNICATIONS, INC.
Date: August 11, 1995 By: /s/ Brendan R. Clouston
------------------------------------------
Brendan R. Clouston
President, and Chief
Executive Officer
Date: August 11, 1995 By: /s/ Gary K. Bracken
--------------------------------------------
Gary K. Bracken, Controller
and Senior Vice President
(Principal Financial Officer
and Chief Accounting
Officer)
</TABLE>
II-3
<PAGE> 153
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
(27.1) Tele-Communications, Inc. Financial Data Schedule
(27.2) TCI Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<CIK> 0000925692
<NAME> TELE-COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 343
<ALLOWANCES> 31
<INVENTORY> 110
<CURRENT-ASSETS> 0
<PP&E> 10,466
<DEPRECIATION> 3,485
<TOTAL-ASSETS> 23,901
<CURRENT-LIABILITIES> 0
<BONDS> 12,520
<COMMON> 746
307
0
<OTHER-SE> 3,874
<TOTAL-LIABILITY-AND-EQUITY> 23,901
<SALES> 490
<TOTAL-REVENUES> 3,184
<CGS> 333
<TOTAL-COSTS> 2,853
<OTHER-EXPENSES> 526
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 483
<INCOME-PRETAX> (195)
<INCOME-TAX> (67)
<INCOME-CONTINUING> (128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000096903
<NAME> TCI COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 217
<ALLOWANCES> 19
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,944
<DEPRECIATION> 3,382
<TOTAL-ASSETS> 19,458
<CURRENT-LIABILITIES> 0
<BONDS> 11,983
<COMMON> 1
0
0
<OTHER-SE> 2,048
<TOTAL-LIABILITY-AND-EQUITY> 19,458
<SALES> 0
<TOTAL-REVENUES> 2,431
<CGS> 0
<TOTAL-COSTS> 1,993
<OTHER-EXPENSES> 472
<LOSS-PROVISION> 29
<INTEREST-EXPENSE> 464
<INCOME-PRETAX> (34)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (24)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
