<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: February 3, 1995
Date of Earliest Event Reported: January 26, 1995
TELE-COMMUNICATIONS, INC.
AND
TCI COMMUNICATIONS, INC.
----------------------------------------------------------
(Exact name of Registrants as specified in their charters)
State of Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
0-20421 and 0-5550 84-1260157 and 84-0588868
- ----------------------------- -------------------------------------
(Commission File Numbers) (I.R.S. Employer Identification Nos.)
5619 DTC Parkway
Englewood, Colorado 80111
- --------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrants' telephone number, including area code: (303) 267-5500
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
As of January 26, 1995, Tele-Communications, Inc. ("TCI"), TCI
Communications, Inc. ("TCIC"), a wholly-owned subsidiary of TCI, and TeleCable
Corporation ("TeleCable") consummated a transaction, whereby TeleCable was
merged into TCIC, a wholly-owned subsidiary of TCI (the "Merger"). The
aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of
approximately $300 million of TeleCable's net liabilities and the issuance to
TeleCable's shareholders of approximately 42 million shares of TCI Class A
common stock and 1 million shares of TCI Convertible Preferred Stock, Series D
(the "Series D Preferred Stock") with an aggregate initial liquidation value of
$300 million. The Series D Preferred Stock, which accrues dividends at a rate
of 5.5% per annum, is convertible into 10 million shares of TCI Class A common
stock. The Series D Preferred Stock is redeemable at the option of TCI after
five years and at the option of either TCI or the holder after ten years. The
amount of net liabilities assumed by TCIC and the number of shares of TCI Class
A common stock issued to TeleCable's shareholders are subject to post-closing
adjustments. At September 30, 1994, TeleCable operated approximately 13,500
miles of cable distribution systems that served approximately 750,000 basic
subscribers in 15 states. Historical financial statements of TeleCable for the
nine months ended September 30, 1994 and for the year ended December 31, 1993,
were previously filed under Item 7 of the Company's Current Reports on Form 8-K
dated December 2, 1994 and August 26, 1994, respectively.
ITEM 5. OTHER EVENTS
QVC, Inc, ("QVC") QVC Programming Holdings, Inc. (the "Purchaser"), a
corporation which will be wholly owned by Liberty Media Corporation
("Liberty"), a wholly owned subsidiary of Tele-Communications, Inc. ("TCI"),
and Comcast Corporation ("Comcast"), are parties to an Agreement and Plan of
Merger, dated as of August 4, 1994, as amended (the "Merger Agreement").
Pursuant to the Merger Agreement, the Purchaser Commenced an offer to purchase
all outstanding shares of Common Stock ("QVC Common Stock") and Series B
Preferred Stock and Series C Preferred Stock ("QVC Preferred Stock" and,
together with the QVC Common Stock, the "Shares") of QVC at $46 per share of
QVC Common Stock and $460 per share of QVC Preferred Stock, net to the seller
in cash, upon the terms of the related Offer to Purchase, as supplemented, and
Letters of Transmittal (the "QVC Tender Offer").
If the QVC Tender Offer is consummated, the Purchaser will be merged
with and into QVC (the "QVC Merger") and any remaining shares of QVC will be
converted in the QVC Merger into cash at the same price as that offered in the
QVC Tender Offer.
As disclosed in a Supplement, dated the date hereof, to the Offer to
Purchase the expiration date for the QVC Tender Offer has been extended to
midnight, New York City time, on Thursday, February 9, 1995. The QVC Tender
Offer continues to be conditioned on various conditions, including obtaining
financing sufficient to allow the Purchaser to purchase all of the outstanding
Shares pursuant to the QVC Tender Offer, to consummate the QVC Merger and to
pay related fees and expenses and to the absence of certain legal actions or
proceedings. As further disclosed in the Supplement, Comcast and Liberty
presently anticipate that such financing will be obtained shortly. If the QVC
Tender Offer is consummated, Liberty will own approximately 43% of the
Purchaser and will account for such investment utilizing the equity method.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements
QVC, Inc. and Subsidiaries
Nine months ended October 31, 1994:
Consolidated Balance Sheets,
October 31, 1994 and December 31, 1993 (unaudited)
Consolidated Statements of Operations,
Nine months ended October 31, 1994 and 1993 (unaudited)
Consolidated Statements of Cash Flows,
Nine months ended October 31, 1994 and 1993 (unaudited)
Consolidated Statement of Shareholders' Equity,
Nine months ended October 31, 1994 (unaudited)
Notes to Consolidated Financial Statements,
Nine months ended October 31, 1994 (unaudited)
Year ended January 31, 1994:
Independent Auditors' Report
Consolidated Balance Sheets
Years ended January 31, 1994 and 1993
Consolidated Statements of Operations
Years ended January 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity
Years ended January 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows
Years ended January 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Years ended January 31, 1994, 1993 and 1992
(b) Pro Forma Financial Information
TCI Communications, Inc. and Subsidiaries:
Condensed Pro Forma Combined Balance Sheet,
September 30, 1994 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Nine months ended September 30, 1994 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Year ended December 31, 1993 (unaudited)
Notes to Condensed Pro Forma Combined Financial Statements,
September 30, 1994 (unaudited)
<PAGE> 4
(b) Pro Forma Financial Information, continued)
Tele-Communications, Inc. and Subsidiaries:
Condensed Pro Forma Combined Balance Sheet,
September 30, 1994 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Nine months ended September 30, 1994 (unaudited)
Condensed Pro Forma Combined Statement of Operations,
Year ended December 31, 1993 (unaudited)
Notes to Condensed Pro Forma Combined Financial Statements,
September 30, 1994 (unaudited)
(c) Exhibits
None.
_________________________
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrants have duly caused this report to be signed on their behalf by
the undersigned hereunto duly authorized.
Date: February 3, 1995
TELE-COMMUNICATIONS, INC.
(Registrant)
By:/s/ Stephen M. Brett
--------------------------------
Stephen M. Brett
Executive Vice President and
Secretary
TCI COMMUNICATIONS, INC.
(Registrant)
By:/s/ Stephen M. Brett
--------------------------------
Stephen M. Brett
Senior Vice President and
General Counsel
<PAGE> 6
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1994 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 80,790 $ 15,873
Accounts receivable, less allowance for doubtful accounts of
$67,671 at October 31, 1994 and $52,759 at January 31, 1994..... 193,540 183,162
Inventories...................................................... 198,012 148,208
Deferred taxes................................................... 56,748 59,749
Prepaid expenses................................................. 8,238 5,536
----------- -----------
Total current assets........................................ 537,328 412,528
Property, plant and equipment, at cost, less accumulated
depreciation........................................................ 89,739 80,579
Cable television distribution rights, net............................. 99,729 99,579
Other assets, net..................................................... 38,086 33,664
Excess of cost over acquired net assets............................... 244,475 251,810
----------- -----------
Total assets................................................ $ 1,009,357 $ 878,160
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................. $ 3,158 $ 3,114
Accounts payable -- trade........................................ 130,801 81,594
Accrued liabilities.............................................. 264,286 225,989
----------- -----------
Total current liabilities................................... 398,245 310,697
Long-term debt, less current maturities............................... 6,599 7,044
----------- -----------
Total liabilities........................................... 404,844 317,741
----------- -----------
Shareholders' equity:
Convertible Preferred Stock, par value $.10...................... 50 56
Common Stock, par value $.01..................................... 409 399
Additional paid-in capital....................................... 451,659 446,027
Retained earnings................................................ 152,193 113,937
Foreign currency translation adjustments......................... 202 --
----------- -----------
Total shareholders' equity.................................. 604,513 560,419
----------- -----------
Total liabilities and shareholders' equity.................. $ 1,009,357 $ 878,160
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 7
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue......................................... $364,467 $313,945 $964,185 $849,615
Cost of goods sold.................................. 223,165 185,043 588,292 499,002
-------- -------- -------- --------
Gross profit........................................ 141,302 128,902 375,893 350,613
-------- -------- -------- --------
Operating expenses:
Variable costs................................. 46,869 43,976 126,920 121,277
General and administrative..................... 45,314 31,532 114,523 98,372
Depreciation................................... 4,636 4,175 13,154 12,278
Amortization of intangible assets.............. 8,349 6,453 20,894 19,609
-------- -------- -------- --------
105,168 86,136 275,491 251,536
-------- -------- -------- --------
Operating income.................................... 36,134 42,766 100,402 99,077
-------- -------- -------- --------
Other income (expense):
Losses from joint ventures..................... (7,677) (2,118) (27,248) (2,118)
Interest income................................ 4,434 2,430 12,333 7,698
Interest expense............................... (345) (346) (1,046) (1,242)
-------- -------- -------- --------
(3,588) (34) (15,961) 4,338
-------- -------- -------- --------
Income before income taxes and cumulative effect of
a change in accounting principle.................. 32,546 42,732 84,441 103,415
Income tax provision................................ (18,080) (21,215) (46,185) (50,950)
-------- -------- -------- --------
Income before cumulative effect of a change in
accounting principle.............................. 14,466 21,517 38,256 52,465
Cumulative effect of a change in accounting for
income taxes...................................... -- -- -- 3,990
-------- -------- -------- --------
Net income.......................................... $ 14,466 $ 21,517 $ 38,256 $ 56,455
======== ======== ======== ========
Income per share:
Income before cumulative effect of a change in
accounting principle......................... $ .29 $ .42 $ .78 $ 1.04
Cumulative effect of a change in accounting for
income taxes................................. -- -- -- .08
-------- -------- -------- --------
Net income..................................... $ .29 $ .42 $ .78 $ 1.12
======== ======== ======== ========
Weighted average number of common and common
equivalent shares................................. 48,945 50,680 48,901 50,582
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 8
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
---------------------
1994 1993
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 38,256 $ 56,455
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in deferred taxes........................ (3,005) 4,303
Cumulative effect of a change in accounting for income
taxes...................................................... -- (3,990)
Depreciation................................................. 13,154 12,278
Amortization of intangible assets............................ 20,894 19,609
Losses from joint ventures................................... 27,248 2,118
Losses on sales of equipment................................. 450 --
Deferral of Q2 start-up costs..................................... (7,985) (144)
Effects of changes in working capital items*...................... 27,621 (31,756)
-------- --------
Net cash provided by operating activities......................... 116,633 58,873
-------- --------
Cash flows from investing activities:
Capital expenditures.............................................. (26,627) (19,531)
Expenditures for cable television distribution rights............. (11,569) --
Changes in other assets........................................... (423) (819)
Investments in and advances to joint ventures..................... (22,196) (13,312)
Proceeds from sales of equipment.................................. 3,864 --
-------- --------
Net cash used in investing activities............................. (56,951) (33,662)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit facilities...................... -- 20,000
Payments against revolving credit facilities...................... -- (20,000)
Principal payments under other debt............................... (401) (374)
Payments under Senior term loan................................... -- (21,000)
Proceeds from exercise of stock options........................... 2,536 983
Proceeds from exercise of warrants................................ 3,100 6,185
-------- --------
Net cash provided by (used in) financing activities............... 5,235 (14,206)
-------- --------
Net increase in cash and cash equivalents.............................. 64,917 11,005
Cash and cash equivalents at beginning of period....................... 15,873 4,279
-------- --------
Cash and cash equivalents at end of period............................. $ 80,790 $ 15,284
======== ========
* Analysis of effects of changes in working capital items:
Increase in accounts receivable................................... $(10,378) $(29,887)
Increase in inventories........................................... (49,804) (46,406)
Decrease (increase) in deferred taxes............................. 3,001 (9,812)
Increase in prepaid expenses...................................... (2,702) (5,532)
Increase in accounts payable...................................... 49,207 29,514
Increase in accrued liabilities................................... 38,297 30,367
-------- --------
$ 27,621 $(31,756)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 9
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
CONVERTIBLE COMMON PAID-IN RETAINED CURRENCY
PREFERRED STOCK STOCK CAPITAL EARNINGS TRANSLATION TOTAL
--------------- ------ ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1994........ $56 $399 $ 446,027 $113,937 $ -- $560,419
Net income for period........... -- -- -- 38,256 -- 38,256
Proceeds from exercise of --
warrants...................... 3 3,097 -- -- 3,100
Proceeds from the exercise of
employee stock options........ -- 1 2,535 -- -- 2,536
Conversion of shares............ (6) 6 -- -- -- --
Foreign currency translation
adjustments................... -- -- -- -- 202 202
--- ---- --------- -------- ----- --------
Balance October 31, 1994........ $50 $409 $ 451,659 $152,193 $ 202 $604,513
=== ==== ========= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 10
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the years ended January 31, 1994 and 1993.
In the opinion of QVC, Inc. (the "Company"), all adjustments necessary for
a fair presentation of such consolidated financial statements have been
included. Such adjustments principally consist of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of the Company
and all subsidiaries. Investments in the Company's joint ventures (50% or less
owned) are accounted for under the equity method. All significant intercompany
accounts and transactions are eliminated in consolidation.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements in the QVC, Inc. Annual Report
on Form 10-K for the fiscal year ended January 31, 1994.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1994 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land.......................................................... $ 7,818 $ 3,977
Buildings and improvements.................................... 57,317 50,627
Furniture and other equipment................................. 34,384 33,866
Broadcast equipment........................................... 10,163 8,942
Computer equipment and software............................... 19,288 20,005
Construction in progress...................................... 295 1,684
----------- -----------
129,265 119,101
Less -- accumulated depreciation.............................. (39,526) (38,522)
----------- -----------
Net property, plant and equipment............................. $ 89,739 $ 80,579
----------- -----------
</TABLE>
In October 1994, the Company purchased a 600,000 square foot office and
warehouse facility in West Chester, Pennsylvania for a total cost of
approximately $9.6 million. It is anticipated that some of the operations
located in other facilities will be transferred to this building.
6
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1994 1994
----------- -----------
<S> <C> <C>
Deferred taxes (Note 6)....................................... $20,271 $17,265
Investments in and advances to joint ventures, net of
accumulated losses.......................................... 6,345 11,194
Start-up costs................................................ 11,444 3,459
Satellite transponder rights.................................. 1,000 1,000
Other......................................................... 1,496 1,234
----------- -----------
40,556 34,152
Less -- accumulated amortization.............................. (2,470) (488)
----------- -----------
Net other assets.............................................. $38,086 $33,664
======== ========
</TABLE>
During fiscal 1993, the Company established electronic retailing program
service in the United Kingdom ("QVC -- The Shopping Channel") and Mexico ("CVC")
through joint venture agreements with British Sky Broadcasting Limited and Grupo
Televisa, S.A. de C.V., respectively. The joint venture in the United Kingdom
began broadcasting on October 1, 1993, and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in the United
Kingdom requires, among other things, that the Company provide all funding to
the joint venture until it is profitable. The Company will then recover all
prior funding before any profits are shared. Accordingly, the Company has
included 100% of the loss on operations of this venture in the Consolidated
Statements of Operations. The operating results of the joint venture in Mexico
are shared equally by the partners.
Summarized financial information for "QVC -- The Shopping Channel" and
"CVC" on a 100% basis follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, 1994 JANUARY 31, 1994
-------------------------- -------------------------
QVC -- THE QVC -- THE
SHOPPING CHANNEL CVC SHOPPING CHANNEL CVC
---------------- ------- ---------------- ------
<S> <C> <C> <C> <C>
Current assets........................ $ 10,912 $14,512 $5,608 $9,687
Property, plant and equipment, net.... 2,599 2,282 1,645 1,665
Unamortized start-up costs............ 865 630 2,205 1,650
Current liabilities................... 9,053 17,085 4,181 9,507
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, 1994 OCTOBER 31, 1994
----------------------------------- -----------------------------------
QVC -- THE QVC -- THE
SHOPPING CHANNEL CVC SHOPPING CHANNEL CVC
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenue.......................... $ 8,082 $ 9,467 $ 15,699 $ 21,116
Gross profit......................... 3,222 3,198 5,406 5,979
Loss................................. (5,720) (2,290) (20,015) (8,537)
</TABLE>
During the month of October 1993, "QVC -- The Shopping Channel" experienced
net sales of $487,000, gross profit of $87,000 and a net loss of $2.1 million.
In fiscal 1993, the Company also entered a joint venture with Tribune
Entertainment Company and Regal Communications to form QRT Enterprises ("QRT").
QRT produced and syndicated "Can We Shop" with Joan Rivers, which commenced
broadcasting January 17, 1994. On June 15, 1994, QRT announced plans to cease
the venture with the last show broadcasted on July 15. 1994. "Can We Shop" was a
one-hour, Monday through Friday television show through which merchandise was
sold.
7
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has made a $4.4 million investment in Friday Holdings, L.P., a
limited partnership ("Friday Holdings"). The limited partnership's purpose was
to establish or acquire businesses in the communications field and to develop
information products. This partnership is currently being liquidated.
The Company's share of gains (losses) from joint ventures during the three
and nine months ended October 31, 1994 follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
<S> <C> <C>
QVC -- The Shopping Channel................................ $ (5,720) $ (20,015)
CVC........................................................ (1,145) (4,268)
QRT........................................................ 138 (1,115)
Friday Holdings............................................ (900) (1,800)
Other...................................................... (50) (50)
------------ -----------
$ (7,677) $ (27,248)
========== =========
</TABLE>
The Company capitalized $11.4 million of costs relating to the start-up of
Q2, a new televised shopping/programming service, which fully launched on August
1, 1994 in the United States. The capitalized start-up costs are being amortized
over eighteen months. Total amortization for the quarter ended October 31, 1994
was $1.9 million.
NOTE 5 -- CAPITAL STOCK
The Company has 175,000,000 shares of Common Stock authorized. There were
40,906,497 shares outstanding at October 31, 1994 and 39,895,447 shares
outstanding at January 31, 1994. The increase in the number of shares of Common
Stock outstanding is the result of the exercise of warrants (310,000), the
exercise of employee stock options (105,000) and the conversion of Convertible
Preferred Stock (596,050).
The following table summarizes the number of Convertible Preferred shares
at October 31, 1994 and January 31, 1994 (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, 1994 JANUARY 31, 1994
SHARES ----------------------- -----------------------
AUTHORIZED OUTSTANDING PAR VALUE OUTSTANDING PAR VALUE
---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Series A........................... 10 -- $-- -- $--
Series B........................... 1,000 18 2 28 3
Series C........................... 1,000 481 48 531 53
Series D........................... 300 -- -- 1 --
--- ---
$50 $56
======= =======
</TABLE>
NOTE 6 -- INCOME TAXES
The Company adopted the principles of Statement of Financial Accounting
Standards No. 109 ("SFAS 109") to account for income taxes in the first quarter
of fiscal 1993. The cumulative effect of adopting SFAS 109 was to increase net
income by approximately $4.0 million in the first quarter of fiscal 1993. The
provisions for income taxes for the three months and nine months ended October
31, 1994 and 1993 are based on the estimated annual effective tax rate after
considering the federal and state statutory rates, amortization of intangibles
arising from the CVN acquisition, which is not deductible for tax purposes, and
the fact that the losses from joint ventures provide no state income tax
benefit.
In 1994, the Company received notice that the Internal Revenue Service
("IRS") has completed its examinations of the Company's federal income tax
returns through fiscal 1991. As a result of the examination, the IRS has
proposed adjustments that relate primarily to the amortization of cable
television distribution rights, that would result in a potential tax liability
for those years in excess of $56.0 million. The Company intends to vigorously
contest these proposed adjustments. While it is not possible at this time to
predict the
8
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outcome of these actions, it is the opinion of management, after reviewing the
matter with outside counsel, that this matter will be resolved without having a
material effect on the Company's financial position.
NOTE 7 -- INCOME PER SHARE
The Company computes income per share using the modified treasury stock
method. The following table presents the computation of net income per share for
the three and nine months ended October 31, 1994 and 1993 (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Income:
Income before cumulative effect of a change in
accounting for income taxes.................. $14,466 $21,517 $38,256 $52,465
Cumulative effect of a change in accounting for
income taxes................................. -- -- -- 3,990
------- ------- ------- -------
Net income..................................... $14,466 $21,517 $38,256 $56,455
======= ======= ======= =======
Shares:
Weighted average number of common shares
outstanding.................................. 40,713 38,855 40,320 37,235
Add -- Common equivalent shares assuming
conversion of Series B, Series C and Series D
Convertible Preferred Stock.................. 5,145 6,508 5,414 7,922
Add -- Common shares assumed to be outstanding
from exercise of warrants and options........ 9,665 10,093 9,746 10,282
Less -- Assumed purchase of Common Stock from
proceeds of exercise of warrants and
options...................................... (6,578) (4,776) (6,579) (4,857)
------- ------- ------- -------
48,945 50,680 48,901 50,582
======= ======= ======= =======
Income per share:
Income before cumulative effect of a change in
accounting principle......................... $ .29 $ .42 $ .78 $ 1.04
Cumulative effect of a change in accounting for
income taxes................................. -- -- -- .08
------- ------- ------- -------
Net income..................................... $ .29 $ .42 $ .78 $ 1.12
======= ======= ======= =======
</TABLE>
NOTE 8 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
OCTOBER 31,
---------------
1994 1993
---- -------
(IN THOUSANDS)
<S> <C> <C>
Supplemental cash flow information:
Interest paid.......................................... $855 $ 1,099
Income taxes paid...................................... 207 32,414
</TABLE>
During the nine months ended October 31, 1993, the only non-cash investing
and financing activity was the $202,000 foreign currency translation adjustments
related to investments in foreign joint ventures.
9
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- ACQUISITION BY COMCAST CORPORATION AND LIBERTY MEDIA CORPORATION
On August 4, 1994, the Company, Comcast Corporation ("Comcast"), Liberty
Media Corporation ("Liberty") and a company wholly owned by Comcast and Liberty
("Holdings") entered into a definitive merger agreement pursuant to which
Holdings will acquire QVC and thereafter QVC will merge with a subsidiary of
Holdings. On August 11, 1994, Holdings commenced a tender offer for all shares
of stock of QVC at a cash price of $46 per share of QVC Common Stock and $460
per share of QVC Convertible Preferred Stock. The total cost of the acquisition
for the QVC Stock not owned by Comcast or Liberty will be in excess of $1.4
billion. Comcast and Liberty have agreed to fund a total of approximately $303
million of the acquisition with the balance to be provided through debt
financing which, after the merger, will be an obligation of QVC. Following the
acquisition, Comcast and Liberty will own approximately 57% and 43%,
respectively, of Holdings, which will own 100% of QVC.
NOTE 10 -- LITIGATION
As previously reported to the Securities and Exchange Commission, the
Company has been named as a defendant in certain actions filed in state and
federal courts in Delaware arising out of Liberty's prior acquisitions of shares
of Home Shopping Network, Inc. ("HSN") and the Company's July 1993 letter
proposal to HSN to combine HSN and the Company in a stock-for-stock transaction
(the "HSN Actions"). The plaintiffs and defendants to the HSN Actions have
executed a Memorandum of Understanding (the "MOU") setting forth an agreement in
principle for the settlement of the HSN Actions for a total consideration of $13
million (plus $200,000 to cover administrative expenses), all of which is to be
funded by Liberty. In May 1994, the Company became a party to a revised MOU.
Under the revised MOU, the Company is not required to pay any portion of the
proposed settlement fund or the administrative expenses of the settlement.
On August 19, 1994, plaintiffs and defendants in the HSN Actions entered
into a stipulation in connection with the contemplated settlement of such
actions (the "Delaware Settlement"), which was then filed with the Delaware
courts. On November 18, 1994, the parties entered into a revised Stipulation
(the "Revised Stipulation"), which was then filed with the Delaware courts. The
Revised Stipulation continues to provide for the Delaware Settlement, but also
provides for the settlement of a separate related action (the "Related Action")
brought in Delaware Chancery Court against Liberty and certain other defendants
in the HSN Actions (but not the Company). The Revised Stipulation provides that
settlement of the Related Action and the Delaware Settlement are not dependent
on each other.
Pursuant to the Delaware Settlement, three subclasses of plaintiffs would
be certified for settlement purposes. Members of two of the three subclasses
will have the right to opt out of the Delaware Settlement pursuant to procedures
set forth in the Revised Stipulation. The Delaware Settlement contemplates that
Liberty will create a settlement fund of $13.2 million (plus interest from
December 31, 1993) and that the net proceeds of the settlement fund will be
distributed to the eligible members of the two subclasses who do not opt out of
the settlement in accordance with a proposed plan of distribution. QVC is not
required to pay any portion of the settlement fund.
Consummation of the proposed Delaware Settlement is subject to a number of
conditions, including (i) obtaining final approval from the Delaware courts,
(ii) the number of shares opting out of the settlement not exceeding a
confidential, predetermined ceiling, and (iii) the dismissal of the HSN Actions
by the Delaware courts with prejudice and the release of claims in the HSN
Actions. If approved by the Delaware courts, the Delaware Settlement would
result in the dismissal with prejudice of the HSN Actions and the release of all
claims in the HSN Actions. The Delaware courts have scheduled hearings on the
proposed Delaware Settlement to be held on January 24, 1995.
In October 1993, the Company brought an action in Delaware Chancery Court
against Viacom Inc. ("Viacom"), Paramount Communications Inc. ("Paramount") and
certain Paramount directors for breach of fiduciary duty in failing to give fair
treatment to the Company's merger proposal while granting undue
10
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advantages to Viacom's merger proposal. In November 1993, the court granted the
Company's motion for a preliminary injunction against certain anti-takeover
mechanisms being used to preclude the Paramount shareholders from accepting the
Company's cash tender offer for Paramount shares. This injunction was affirmed
by the Delaware Supreme Court in December 1993. Viacom subsequently filed a
motion to dismiss the Company's complaint. Paramount's time to respond to the
complaint has been extended to January 26, 1995.
In July 1994, after the announcement that Comcast and Liberty would make a
joint offer to purchase all of the outstanding shares of stock of the Company,
eight putative class action lawsuits (the "Consolidated Action") were filed by
certain shareholders of the Company in Delaware Chancery Court on behalf of a
purported class consisting of all public shareholders of the Company. The
defendants in the Consolidated Action include the Company and directors of the
Company. Plaintiffs alleged, among other things, that the defendants breached
their fiduciary duties when considering the Comcast offer in that they failed to
take all possible steps to seek out and encourage the best offer for the
Company. Plaintiffs sought, among other things, an injunction ordering the
defendants to auction the Company and an award of unspecified compensatory
damages to the members of the plaintiff class.
In early August 1994, Comcast and Liberty were joined as defendants in the
Consolidated Action. On August 5, 1994, the parties reached an agreement in
principle providing for the settlement and dismissal with prejudice of the
Consolidated Action. The agreement in principle provides, among other things,
that an affiliate of Comcast and Liberty will commence a tender offer to
purchase all of the outstanding shares of QVC Common Stock for $46 per share in
cash, to be followed by a merger in which the remaining holders of QVC Common
Stock will receive $46 per share in cash. The agreement in principle also
provides that all defendants deny that any of them have committed or threatened
to commit any violations of law or breaches of duty; that plaintiffs' counsel
will apply to the court for an award of fees (to be paid by the Company in the
event that the offer and merger are consummated) in an amount to be agreed among
plaintiffs and defendants; and that the terms of the settlement are subject to
court approval in all respects. In the event of court approval, all claims
against defendants (and certain others) that were or could have been asserted in
the settled Consolidated Action will be dismissed with prejudice and released,
and shareholders of the Company who may have had such claims at any time from
June 29, 1994 through the effective date of the merger, will be barred from
asserting them in the future. Prior to the time that court approval for the
settlement described above is sought, shareholders of the Company who are
members of the class on behalf of whom the action is brought will receive
written notice of the terms of the settlement and the claims to be settled,
released, dismissed and barred.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. Although the outcome of these
matters cannot be determined, in the opinion of management, disposition of these
proceedings will not have a material effect on the Company's financial position.
11
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders QVC, Inc.:
We have audited the consolidated financial statements of QVC, Inc. and
subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QVC, Inc.
and subsidiaries as of January 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information
set forth therein.
As discussed in notes 1 and 13 to the consolidated financial statements,
the Company changed its method of accounting for income taxes in 1993 to adopt
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
KPMG PEAT MARWICK
Philadelphia, Pennsylvania
March 4, 1994
26
<PAGE> 17
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1994 1993
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 15,873 $ 4,279
Accounts receivable, less allowance for doubtful accounts of $52,759 in 1994 and
$21,316 in 1993 (Note 2) ...................................................... 183,162 97,008
Inventories ...................................................................... 148,208 118,712
Deferred taxes (Note 13) ......................................................... 59,749 10,680
Prepaid expenses ................................................................. 5,536 3,716
-------- --------
Total current assets .......................................................... 412,528 234,395
Property, plant and equipment (Note 3) ............................................. 80,579 72,863
Cable television distribution rights (Note 4) ...................................... 99,579 115,248
Other assets (Note 5) .............................................................. 33,664 9,028
Excess of cost over acquired net assets, less accumulated amortization of $43,551 in
1994 and $33,710 in 1993 ......................................................... 251,810 268,161
-------- --------
Total assets .................................................................. $878,160 $699,695
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 7) .................................... $ 3,114 $ 24,073
Accounts payable-trade ........................................................... 81,594 51,622
Accrued liabilities (Note 6) ..................................................... 225,989 151,358
-------- --------
Total current liabilities ..................................................... 310,697 227,053
Long-term debt, less current maturities (Note 7) ................................... 7,044 7,586
-------- --------
Total liabilities ............................................................. 317,741 234,639
-------- --------
Commitments and contingencies (Notes 8 and 14)
Shareholders' equity (Notes 9 and 10):
Convertible Preferred Stock, par value $.10 ...................................... 56 93
Common Stock, par value $.01 ..................................................... 399 357
Additional paid-in capital ....................................................... 446,027 409,970
Retained earnings ................................................................ 113,937 54,636
-------- --------
Total shareholders' equity .................................................... 560,419 465,056
-------- --------
Total liabilities and shareholders' equity .................................... $878,160 $699,695
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 18
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------
1993 1992 1991
-------------- ----------- -----------
<S> <C> <C> <C>
Net revenue ............................................................. $ 1,222,104 $ 1,070,587 $ 921,804
Cost of goods sold ...................................................... 723,175 621,840 534,650
------------- ------------- -------------
Gross profit ............................................................ 498,929 448,747 387,154
------------- ------------- -------------
Operating expenses:
Variable costs ........................................................ 171,242 160,420 145,348
General and administrative ............................................ 132,743 123,604 110,747
Depreciation .......................................................... 16,682 17,105 16,679
Amortization of intangible assets ..................................... 26,019 29,420 29,983
------------- ------------- -------------
346,686 330,549 302,757
------------- ------------- -------------
Operating income ........................................................ 152,243 118,198 84,397
------------- ------------- -------------
Other income (expense):
Costs of Paramount tender offer (Note 16) ............................. (34,800) -- --
Losses from joint ventures (Note 5) ................................... (11,432) -- --
Interest expense ...................................................... (1,590) (18,364) (38,979)
Interest income ....................................................... 10,865 8,834 7,480
------------- ------------- -------------
(36,957) (9,530) (31,499)
------------- ------------- -------------
Income before income taxes, extraordinary item and cumulative effect of a
change in accounting principle ........................................ 115,286 108,668 52,898
Income tax provision (Note 13) .......................................... (59,975) (52,080) (31,165)
------------- ------------- -------------
Income before extraordinary item and cumulative effect of a change in
accounting principle .................................................. 55,311 56,588 21,733
Extraordinary item -- loss on extinguishment of debt, net of tax benefit
(Note 5) .............................................................. -- (1,496) (2,108)
Cumulative effect of a change in accounting for income taxes (Note 13) .. 3,990 -- --
------------- ------------- -------------
Net income .............................................................. $ 59,301 $ 55,092 $ 19,625
============= ============= =============
Income per share (Note 11):
Primary:
Income before extraordinary item and cumulative effect of a change in
accounting principle .............................................. $ 1.10 $ 1.32 $ .68
Extraordinary item, net of tax benefit .............................. -- (.03) (.07)
Cumulative effect of a change in accounting for income taxes ........ .08 -- --
------------- ------------- -------------
Net income .......................................................... $ 1.18 $ 1.29 $ .61
============= ============= =============
Fully diluted:
Income before extraordinary item and cumulative effect of a change in
accounting principle .............................................. $ 1.10 $ 1.27 $ .67
Extraordinary item, net of tax benefit .............................. -- (.03) (.06)
Cumulative effect of a change in accounting for income taxes ........ .08 -- --
------------- ------------- -------------
Net income .......................................................... $ 1.18 $ 1.24 $ .61
============= ============= =============
Weighted average number of common and common equivalent shares used in
computing income per share:
Primary ............................................................... 50,062 43,890 31,959
============= ============= =============
Fully diluted ......................................................... 50,205 45,386 38,313
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 19
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------
1993 1992 1991
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 59,301 $ 55,092 $ 19,625
Adjustments for non-cash items included in net income:
Cumulative effect of a change in accounting for income taxes ....... (3,990) -- --
Loss on extinguishment of debt ..................................... -- 2,720 3,838
Losses from joint ventures ......................................... 11,432 -- --
Depreciation ....................................................... 16,682 17,105 16,679
Amortization of intangible assets .................................. 26,019 29,420 29,983
Grant of executive stock award ..................................... -- 4,869 --
Provision for income taxes not requiring a cash outlay ............. 3,366 20,275 15,800
Interest incurred but not paid ..................................... -- 96 9,199
Issuance of Common Stock under Standby Equity
Agreement ....................................................... -- -- 614
Losses on termination of capitalized lease and sales of fixed assets 190 90 464
Changes in other non-current assets ................................... (3,458) 5,303 642
Effects of changes in working capital items (Note 15) ................. (36,239) (33,557) 40,107
--------- --------- ---------
Net cash provided by operating activities ............................. 73,303 101,413 136,951
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures .................................................. (24,588) (21,137) (11,870)
Investments in and advances to joint ventures ......................... (22,626) -- --
Proceeds from sales of property, plant and equipment .................. -- 28 9,010
Adjustments to purchase price of CVN Companies, Inc. .................. -- 5 (230)
Changes in other non-current assets ................................... (347) (494) 330
--------- --------- ---------
Net cash used in investing activities ................................. (47,561) (21,598) (2,760)
--------- --------- ---------
Cash flows from financing activities:
Payments under Senior term loan ....................................... (21,000) (135,297) (128,101)
Principal payments under capitalized leases, mortgages and other debt . (502) (5,300) (12,905)
Borrowings under revolving credit facilities .......................... 20,000 -- 40,414
Payments against revolving credit facilities .......................... (20,000) -- (40,414)
Proceeds from exercise of stock options and other ..................... 1,169 16,687 891
Net proceeds from sale of Common Stock ................................ -- -- 51,082
Proceeds from exercise of warrants .................................... 6,185 11,570 --
Payment of unsecured note payable ..................................... -- -- (31,444)
--------- --------- ---------
Net cash used in financing activities ................................. (14,148) (112,340) (120,477)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .................... 11,594 (32,525) 13,714
Cash and cash equivalents at beginning of year .......................... 4,279 36,804 23,090
--------- --------- ---------
Cash and cash equivalents at end of year ................................ $ 15,873 $ 4,279 $ 36,804
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 20
QVC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL RETAINED
PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK CAPITAL (DEFICIT) STOCK TOTAL
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance January 31, 1991 ..................... $ 125 $ 176 $ 228,628 $ (20,081) $ (68) $ 208,780
Net income for year ........................ -- -- -- 19,625 -- 19,625
Income tax benefit resulting from certain
capital stock transactions ............... -- -- 11,500 -- -- 11,500
Proceeds from the exercise of employee stock
options .................................. -- -- 893 -- -- 893
Issuance of Common Stock under Standby
Equity Agreement ......................... -- 1 613 -- -- 614
Excess of value assigned over amount
received for Series B Convertible
Preferred Stock .......................... -- -- (239) -- -- (239)
Issuance of shares of Common Stock and
warrants in lieu of cash interest
payments ................................. -- 2 2,998 -- -- 3,000
Purchases of Treasury Stock ................ -- -- -- -- (2) (2)
Net proceeds from public offering of Common
Stock .................................... -- 37 51,045 -- -- 51,082
Common Stock exchanged to retire unsecured
note payable ............................. -- 23 31,422 -- -- 31,445
Conversion of shares ....................... (11) 11 -- -- -- --
Adjustments to warrants exchanged and Common
Stock issued in connection with the CVN
acquisition .............................. -- -- (912) -- -- (912)
---------- ---------- ---------- ---------- ---------- ----------
Balance January 31, 1992 ..................... 114 250 325,948 (456) (70) 325,786
---------- ---------- ---------- ---------- ---------- ----------
Net income for year ........................ -- -- -- 55,092 -- 55,092
Income tax benefit resulting from capital
stock transactions, exercise of stock
options and net operating loss
carryforward ............................. -- -- 22,312 -- -- 22,312
Proceeds from the exercise of employee stock
options .................................. -- 13 16,708 -- (31) 16,690
Proceeds from exercise of warrants ......... -- 11 11,559 -- -- 11,570
Grant of executive stock award ............. -- 2 4,867 -- -- 4,869
Convertible subordinated note exchanged for
Common Stock, net of unamortized debt
placement fees of $1,260 ................. -- 17 28,723 -- -- 28,740
Common Stock issued in warrant exchange
offer (Note 10) .......................... -- 68 91,394 -- (91,462) --
Conversion of shares ....................... (20) 20 -- -- -- --
Purchases of Treasury Stock ................ -- -- -- -- (3) (3)
Retirement of Treasury Stock ............... (1) (24) (91,541) -- 91,566 --
---------- ---------- ---------- ---------- ---------- ----------
Balance January 31, 1993 ..................... 93 357 409,970 54,636 -- 465,056
---------- ---------- ---------- ---------- ---------- ----------
Net income for year ........................ -- -- -- 59,301 -- 59,301
Income tax benefit resulting from cumulative
effect of a change in accounting for
income
taxes .................................... -- -- 27,053 -- -- 27,053
Income tax benefit resulting from exercise
of stock options ......................... -- -- 1,655 -- -- 1,655
Proceeds from the exercise of employee stock
options .................................. -- 1 1,168 -- -- 1,169
Proceeds from exercise of warrants ......... -- 4 6,181 -- -- 6,185
Conversion of shares ....................... (37) 37 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance January, 31, 1994 .................... $ 56 $ 399 $ 446,027 $ 113,937 -- $ 560,419
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
30
<PAGE> 21
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of the Company
and all subsidiaries. Investments in the Company's joint ventures (50% or less
owned) are accounted for under the equity method. All significant intercompany
accounts and transactions are eliminated in consolidation.
FISCAL YEAR.
The Company's fiscal year ends on January 31. Fiscal years are designated
in the financial statements and notes by the calendar year in which the fiscal
year commences.
CASH AND CASH EQUIVALENTS.
All highly-liquid debt instruments purchased with a maturity of three
months or less are classified as cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate the
fair value of those assets.
INVENTORIES.
Inventories, consisting primarily of products held for sale, are stated
at the lower of cost or market. Cost is determined by the average cost method
which approximates the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT.
The cost of property, plant and equipment is capitalized and depreciated
over their estimated useful lives using the straight-line method. When assets
are sold or retired, the cost and accumulated depreciation are removed from
the accounts and any gain or loss is included in income. The cost of
maintenance and repairs is charged to expense as incurred.
EXCESS OF COST OVER ACQUIRED NET ASSETS.
The excess of cost over acquired net assets is amortized over thirty
years using the straight-line method.
TRANSLATION OF FOREIGN CURRENCIES.
All balance sheet items for foreign operations are translated at the
current exchange rate as of the balance sheet date, and income and expense
items are translated at average currency exchange rates for the year. Exchange
gains and losses resulting from foreign currency transactions are included in
losses from joint ventures.
NET SALES AND RETURNS.
Revenue is recognized at time of shipment to customers. The Company's
policy is to allow customers to return merchandise for full credit up to
thirty days after date of shipment. An allowance for returned merchandise is
provided as a percentage of sales based on historical experience. The return
provision was approximately 21, 19, and 18 percent of sales in fiscal 1993,
1992 and 1991, respectively.
31
<PAGE> 22
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CAPITALIZATION OF START-UP COSTS.
The Company capitalizes all direct incremental costs incurred prior to
operations for new broadcast ventures. These costs are amortized over a period
of eighteen months starting at the commencement of broadcast operations.
INCOME TAXES.
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
cumulative effect of the change in the method of accounting for income taxes
was included in the first quarter of 1993 Consolidated Statements of
Operations and Shareholders' Equity. Prior years' financial statements were
not restated. Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date.
The Company previously used the asset and liability method under SFAS 96.
Under the asset and liability method of SFAS 96, deferred tax assets and
liabilities were recognized for all events that had been recognized in the
financial statements. Under SFAS 96, the future tax consequences of recovering
assets or settling liabilities at their financial statement carrying amounts
were considered in calculating deferred taxes. Generally, SFAS 96 prohibited
consideration of any other future events in calculating deferred taxes.
NOTE 2 -- ACCOUNTS RECEIVABLE
The Company has an agreement with an unrelated third party which provides
for the sale and servicing of accounts receivable originating from the
Company's revolving credit card. The Company sold accounts receivable at face
value of $418.2 million, $392.7 million and $290.4 million under this
agreement in fiscal 1993, 1992 and 1991, respectively. The Company remains
obligated to repurchase uncollectible accounts pursuant to the recourse
provisions of the agreement and is required to maintain a specified percentage
of all outstanding receivables transferred under the program as a deposit with
the third party to secure its obligations under the agreement. The Company is
required to pay certain finance and servicing fees which are offset by finance
charges on customer account balances. The net amount of this finance charge
income is included as interest income and is comprised of the following (in
millions):
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Finance charges on customer account balances... $ 26.2 $ 23.2 $ 20.0
--------- --------- ---------
Funding fees... 8.7 8.1 7.7
Service fees... 10.5 9.5 9.4
--------- --------- ---------
19.2 17.6 17.1
--------- --------- ---------
Net finance income... $ 7.0 $ 5.6 $ 2.9
========= ========= =========
</TABLE>
32
<PAGE> 23
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACCOUNTS RECEIVABLE -- (CONTINUED)
The uncollected balances of accounts receivable sold under this program
are $201.2 million and $180.3 million at January 31, 1994 and 1993,
respectively, of which $170.1 million and $71.5 million represent deposits
under the agreement and are included in accounts receivable. The total reserve
balances maintained for the repurchase of uncollectible accounts are $55.7
million and $42.6 million at January 31, 1994 and 1993, respectively.
Approximately $8.6 million and $25.7 million of the reserve balances are
included in accrued liabilities at January 31, 1994 and 1993, respectively;
the remaining balances are included with allowance for doubtful accounts.
Receivables sold under this agreement are considered financial
instruments with off-balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, ESTIMATED
------------------------ USEFUL
1994 1993 LIFE
----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ............................ $ 3,977 $ 3,228 --
Buildings and improvements ...... 50,627 45,385 20-30 years
Furniture and other equipment ... 33,866 30,246 3- 8 years
Broadcast equipment ............. 8,942 12,478 5- 7 years
Computer equipment and software . 20,005 18,047 3- 5 years
Construction in progress ........ 1,684 482 --
--------- -----------
119,101 109,866
Less -- accumulated depreciation (38,522) (37,003)
--------- -----------
Net property, plant and equipment $ 80,579 $ 72,863
========= ===========
</TABLE>
In July 1993, the Company completed construction of a 50,000 square foot
telecommunications center in Chesapeake, Virginia for a total cost of
approximately $6.9 million. This new telecommunications center replaced a
facility that was leased.
NOTE 4 == CABLE TELEVISION DISTRIBUTION RIGHTS
Cable television distribution rights consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
========================
1994 1993
=========== ===========
(IN THOUSANDS)
<S> <C> <C>
Cable television distribution rights ... $ 162,142 $ 166,082
Less == accumulated amortization ....... (62,563) (50,834)
========= =========
Net cable television distribution rights $ 99,579 $ 115,248
========= =========
</TABLE>
The amounts assigned to cable television distribution rights arose
principally from excess fair values assigned, as determined by independent
appraisals, to Convertible Preferred Stock issued to cable system operators in
exchange for distribution agreements.
33
<PAGE> 24
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- CABLE TELEVISION DISTRIBUTION RIGHTS -- (CONTINUED)
Cable television distribution rights are amortized by the straight-line
method over the lives of the individual agreements. The remaining weighted
average life for all cable television distribution rights is approximately 10
years at January 31, 1994.
NOTE 5 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred taxes (Note 13) ............................................... $ 17,265 $ 7,120
Investments in and advances to joint ventures, net of accumulated losses 11,194 --
Start-up costs ......................................................... 3,459 --
Satellite transponder rights ........................................... 1,000 1,000
Debt placement fees .................................................... 162 15,292
Other .................................................................. 1,072 1,475
-------- --------
34,152 24,887
Less -- accumulated amortization ....................................... (488) (15,859)
-------- --------
Net other assets ....................................................... $ 33,664 $ 9,028
-------- --------
-------- --------
</TABLE>
During fiscal 1993, the Company established electronic retailing program
service in England ("QVC -- The Shopping Channel") and Mexico ("CVC"), through
joint venture agreements with British Sky Broadcasting Limited and Grupo
Televisa, S.A. de C.V., respectively. The joint venture in England began
broadcasting on October 1, 1993 and the joint venture in Mexico began
broadcasting on November 15, 1993. The joint venture agreement in England
requires, among other things, that the Company provide all funding to the
joint venture until it is profitable. The Company will then recover all prior
funding, before any profits are shared. Accordingly, for 1993, the Company has
included 100% of the loss on operations of this venture in the Consolidated
Statements of Operations. The operating results of the joint venture in Mexico
are shared equally by the partners.
Summarized financial information for "QVC -- The Shopping Channel" and
"CVC" on a 100% basis as of and for the period ended January 31, 1994 follows
(unaudited -- in thousands):
<TABLE>
<CAPTION>
QVC -- THE
SHOPPING CHANNEL CVC
----------------- ---------
<S> <C> <C>
Current assets ................................. $ 5,608 $ 9,687
Property, plant and equipment, net ............. 1,645 1,665
Unamortized start-up costs ..................... 2,205 1,650
Current liabilities ............................ 4,181 9,507
Net revenue .................................... 2,994 2,316
Gross profit ................................... 514 248
Loss ........................................... (8,943) (3,606)
</TABLE>
In fiscal 1993, the Company also entered a joint venture with Tribune
Entertainment Company and Regal Communications to form QRT Enterprises ("QRT").
QRT produces and syndicates "Can We Shop" with Joan Rivers, which commenced
broadcasting January 17, 1994. "Can We Shop" is a
34
<PAGE> 25
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- OTHER ASSETS -- (CONTINUED)
one-hour, Monday through Friday television show through which merchandise
is sold. The Company's one-third share of QRT's operating loss amounted to
$386,000 in 1993.
In fiscal 1993, the Company made a $3.8 million investment in Friday
Holdings, L.P., a limited partnership. The limited partnership's purpose is to
establish or acquire businesses in the communications field and to develop
information products. The Company's one-third share of Friday Holdings'
operating loss amounted to $300,000 in 1993.
During the year, the Company also capitalized $3.5 million in costs
relating to Q2, a new televised shopping/programming service, scheduled to be
launched in the spring of 1994 in the United States. The capitalized start-up
costs will be amortized over eighteen months starting at the commencement of
broadcast operations.
Debt placement fees on the Senior term loan arising out of the CVN
acquisition have been amortized over the expected life of the debt using the
effective interest rate method. On March 5, 1993, the Company retired the
Senior term loan. Debt placement fees of $15.1 million associated with the
Senior term loan were fully amortized and the cost and accumulated
amortization were removed from the accounts. During fiscal 1992, the Company
prepaid $86.3 million of the Senior term loan. As a result, the amortization
of debt placement fees of $2.7 million was accelerated and reported as an
extraordinary loss of $1.5 million, net of $1.2 million income tax benefit.
During fiscal 1991, the Company prepaid $98.1 million of the Senior term loan,
and the amortization of debt placement fees of $3.8 million was accelerated
and reported as an extraordinary loss of $2.1 million, net of $1.7 million
income tax benefit.
NOTE 6 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------
1994 1993
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Income taxes (Note 13) ................................................ $ 80,879 $ 25,889
Reserve for uncollectible accounts under revolving credit
program (Note 2) .................................................... 8,636 25,699
Non-inventory accounts payable ........................................ 35,452 26,418
Accrued compensation and benefits ..................................... 13,996 13,035
Sales and other taxes ................................................. 11,324 12,079
Allowance for sales returns ........................................... 17,787 11,344
Other ................................................................. 57,915 36,894
-------- --------
$225,989 $151,358
-------- --------
</TABLE>
35
<PAGE> 26
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- LONG-TERM DEBT
Aggregate amounts of outstanding long-term debt consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
10.4% Mortgage notes payable in monthly installments
until 1998............................................. $ 10,158 $ 10,659
Senior term loan......................................... -- 21,000
--------- ---------
10,158 31,659
Less -- current portion.................................. (3,114) (24,073)
--------- ---------
$ 7,044 $ 7,586
========= =========
</TABLE>
The Company has a $60.0 million bank revolving credit facility to finance
operations as well as to fund letters of credit for merchandise purchases.
Interest on outstanding amounts under this agreement is payable at the bank's
prime rate or other interest rate options. A commitment fee of .25% is payable
on the unused portion of the revolving credit facility. The credit agreement
requires the Company to maintain certain ratios for total liabilities to
shareholders' equity and for coverage of fixed charges. The Company borrowed
$20.0 million under the facility in March 1993 and retired the remaining
balance on the Senior term loan. All amounts borrowed under the facility were
repaid from net cash provided by operating activities during the first quarter
of 1993. Outstanding letters of credit totaled approximately $7.8 million at
January 31, 1994.
The interest rate on the outstanding balance of the Senior term loan was
4.4% at January 31, 1993.
Maturities of the 10.4% mortgage notes payable for the five years
subsequent to January 31, 1994 are $3,114,000 in 1994; $601,000 in 1995;
$666,000 in 1996; $739,000 in 1997 and $5,038,000 in 1998.
NOTE 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS
Future minimum payments under all non-cancellable operating leases and
transponder service agreements with initial terms of one year or more at
January 31, 1994 consist of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1994 .................................................. $ 8,029
1995 .................................................. 6,405
1996 .................................................. 5,450
1997 .................................................. 5,173
1998 .................................................. 5,287
Thereafter ............................................ 34,001
--------
Total $ 64,345
========
</TABLE>
Expense for operating leases, principally for data processing equipment
and facilities, and for transponder service agreements amounted to
$11,280,000, $12,895,000 and $13,047,000 in fiscal years 1993, 1992 and 1991,
respectively.
In November 1992, the Company started to transmit the QVC program on a
protected, non-preemptible transponder on the C-4 Satellite at a monthly cost
that averages $224,000 over the term of the twelve-year agreement.
36
<PAGE> 27
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LEASES AND TRANSPONDER SERVICE AGREEMENTS -- (CONTINUED)
In December 1992, the Company started to transmit The QVC Fashion Channel
on a protected non-preemptible transponder on the C-3 Satellite at a cost of
$205,000 per month over the term of the twelve-year agreement.
NOTE 9 -- CAPITAL STOCK
The Company has 175,000,000 shares of Common Stock authorized. There were
39,895,447 shares outstanding at January 31, 1994 and 35,734,062 shares
outstanding at January 31, 1993. The reasons for the increase in the number of
shares of Common Stock outstanding were the conversion of Convertible
Preferred Stock (3,659,040), the exercise of warrants (408,908) and the
exercise of employee stock options (93,437).
The following table summarizes the convertible preferred shares at
January 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
SHARES AUTHORIZED SHARES OUTSTANDING PAR VALUE
----------------- -------------------- --------------------
1994 AND 1993 1994 1993 1994 1993
-------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Series A ........... 10 -- -- $ -- $--
Series B ........... 1,000 28 55 3 6
Series C ........... 1,000 531 788 53 79
Series D ........... 300 1 83 -- 8
------ ------
$ 56 $ 93
====== ======
</TABLE>
The shares of Convertible Preferred Stock were issued to cable system
operators in connection with their signing or extending cable television
distribution agreements in prior years.
CONVERTIBILITY.
Each share of Series B, Series C and Series D Convertible Preferred Stock
is convertible into ten shares of Common Stock.
VOTING RIGHTS.
The holders of the Common Stock are empowered to elect two directors of
the Company as a class. The holders of each class of stock are entitled to
cast one vote per share for the election of the remaining directors of the
Company.
LIQUIDATION.
Upon the dissolution and liquidation of the Company, the assets remaining
after the payment of all debts and liabilities of the Company shall be
distributed first to the holders of the Series B Convertible Preferred Stock
at $10.00 per share. To the extent available, the holders of Series C
Convertible Preferred Stock will then receive $10.00 per share followed by
Series D Convertible Preferred Stock holders at $15.00 per share. The balance,
if any, will be paid to the holders of the Common Stock share-for-share.
37
<PAGE> 28
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS
The following table summarizes shares of Common Stock reserved for
issuance for outstanding stock options and warrants:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE PRICE
JANUARY 31, AT JANUARY 31,
----------------------- ----------------
1994 1993 1994 1993 EXPIRATION DATE
---------- ---------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Qualified stock options ................. 1,751,800 1,717,462 $ 30.56 $ 28.94 11/1996-01/2004
--------- --------- ------- ------- -- ---- -- ----
Non-qualified stock options ............. 6,275,500 6,279,600 32.83 32.33 04/2000-07/2003
Warrants issued in connection with 1987
debt financing ........................ 310,000 310,000 10.00 10.00 04/1994
Warrants issued in connection with
Convertible subordinated debt ......... 1,600,000 1,600,000 17.49 17.49 10/1995
Warrants exchanged for CVN Series 2
Warrants .............................. -- 408,908 -- 15.13 --
Warrants issued with Common Stock in lieu
of cash interest expense .............. 100,000 100,000 13.35 13.35 04/1996-10/1996
------ ---------------
Total reserved shares .............. 10,037,300 10,415,970
========== ==========
</TABLE>
The Company has Incentive Stock Option Plans ("ISO Plans") under which
options may be granted to key managerial employees to purchase up to
10,300,000 shares of Common Stock. The ISO Plans are administered by the
Executive Compensation Committee appointed by the Company's Board of
Directors. The Committee has the authority to determine optionees, the number
of shares to be covered by each option and certain other terms and conditions
of the grant. The ISO Plans require that the exercise price of options be
equal to or greater than the fair market value of the stock at the time of
grant, and the term of any option cannot exceed ten years. Options issued
under the 1990 Non-Qualified Stock Option Plan and the 1993 Qualified Stock
Option Plan vest ratably over four years, commencing one year from the date of
the grant of the option, and qualified and non-qualified options under all
other ISO Plans, except where noted below, vest ratably over three years,
commencing on the date of grant.
In connection with obtaining a portion of the proposed financing for the
cash tender offer for Paramount Communications Inc. (Note 16), the Company
granted BellSouth Corporation, Advance Publications, Inc. and Cox Enterprises,
Inc. options to purchase an aggregate of 14.3 million shares of Common Stock
at $60.00 per share. The options were granted at the termination of the
QVC/Paramount tender offer on February 15, 1994 and are exercisable until the
later of August 15, 1994 or ten business days after stockholders of the
Company vote with respect to such grant of options.
On December 9, 1992, the Company and two of its principal shareholders
(Comcast Corporation and Liberty Media Corporation) announced an agreement
pursuant to which Mr. Barry Diller would become Chairman of the Board and
Chief Executive Officer. In connection with this agreement, the Company
granted Mr. Diller 160,000 shares of Common Stock. The value of the shares on
the date of grant ($4.9 million) was charged to general and administrative
expense in fiscal 1992. Also in connection with this agreement, the Company
granted to Mr. Diller stock options covering 6,000,000 shares of Common Stock.
All of the options have a five-year term. One-half of these options ("base
options") has an exercise price of $30.43; the other one-half ("scaled
options") has an exercise price equal to $30.43 per share increased by 13
percent per annum until December 9, 1994 and thereafter by 15 percent per
annum compounded annually. The exercise price on any unexercised scaled
options increases annually. One-half of the base options and one-half of the
scaled options became exercisable
38
<PAGE> 29
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS -- (CONTINUED)
December 9, 1993 and the balance become exercisable December 9, 1994. The
exercise date can be accelerated upon certain events.
In August 1991, the Company granted to Mr. Joseph M. Segel, then Chairman
and Chief Executive Officer, non-qualified stock options covering 600,000
shares of Common Stock at an exercise price of $15.90. One-half of these
options vested on the first anniversary of the date of grant and the balance
was to vest on the second anniversary of the date of grant. On December 9,
1992, the Board of Directors and the Executive Compensation Committee approved
the acceleration of the vesting of the second half of these options to
December 1992, in order to allow Mr. Segel to realize their value in 1992. The
Board and the Executive Compensation Committee also accelerated an additional
50,000 options under ISO Plans for Mr. Segel that were scheduled to vest in
1993 and 1994.
On December 9, 1992, the Board agreed to enter into a consulting and
severance arrangement with Mr. Segel whereby he would serve as a consultant to
the Company for a period of ten years after his retirement in January 1993 at
an annual salary of $240,000 and, as incentive to Mr. Segel to accept
employment as a consultant, granted to Mr. Segel, pursuant to the 1992
Qualified Incentive Stock Option Plan, 100,000 options to purchase shares of
Common Stock, exercisable at $30.43 per share. These options vest ratably over
a period of five years. The present value of the ten-year consulting and
severance arrangement with Mr. Segel of $2.2 million was expensed in fiscal
1992.
The Board also approved entering into three-year (five-year in the case
of Michael C. Boyd, former President of the Company) employment agreements for
nine senior Company executives, pursuant to which, among other things, the
executives would be entitled to compensation at their current salaries and
eligible for bonus and incentive compensation programs as may be maintained
from time to time during the term of the agreement. As incentive to enter into
the employment agreements, the Board granted to these executives, pursuant to
the 1992 Stock Option Plan, an aggregate 1,450,000 options to purchase Common
Stock exercisable at $30.43 per share. Options granted under the 1992 Stock
Option Plan vest ratably over three years (five years in the case of Mr.
Boyd). In February 1994, Mr. Boyd retired from the Company and entered into a
consulting agreement. Accordingly, the present value of his employment
agreement of $1.3 million was expensed in fiscal 1993.
39
<PAGE> 30
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCK OPTIONS, WARRANTS AND AWARDS -- (CONTINUED)
A summary of changes in outstanding options under the ISO Plans is as
follows:
<TABLE>
<CAPTION>
NON-QUALIFIED OPTION
QUALIFIED OPTION SHARES SHARES
------------------------ ------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE PRICE RANGE
----------- ----------- ----------- ----------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1991 590,112 504,737 630,000 85,000 $ 5.00 -- $ 17.25
Granted ................... 5,000 1,250 607,500 -- 12.13 -- 15.90
Cancelled ................. (26,500) (19,000) (11,000) (1,375) 5.00 -- 16.00
Became exercisable ........ -- 49,625 -- 144,875 5.00 -- 16.00
Exercised ................. (65,825) (65,825) (26,000) (26,000) 5.00 -- 13.00
---------- ---------- ------ ---------- ------
Balance at January 31, 1992 502,787 470,787 1,200,500 202,500 5.00 -- 17.25
Granted ................... 1,582,000 351,167 6,010,000 -- 19.00 -- 38.86
Cancelled ................. (1,750) (1,750) (11,000) (3,500) 5.00 -- 16.00
Became exercisable ........ -- 29,500 -- 796,375 5.00 -- 16.00
Exercised ................. (365,575) (365,575) (919,900) (919,900) 5.00 -- 17.25
---------- ---------- ------ ---------- ------
Balance at January 31, 1993 1,717,462 484,129 6,279,600 75,475 5.00 -- 38.86
Granted ................... 106,000 1,250 50,000 -- 39.88 -- 70.75
Cancelled ................. (5,575) (5,575) (26,750) (3,000) 5.00 -- 23.25
Became exercisable ........ -- 370,416 -- 3,095,250 5.00 -- 34.39
Exercised ................. (66,087) (66,087) (27,350) (27,350) 5.00 -- 23.25
------- ------- ------- ------- ------- --------- -------
Balance at January 31, 1994 1,751,800 784,133 6,275,500 3,140,375 $ 5.00 -- $ 70.75
--------- ------- ---------- ---------- ------ ---------- ------
--------- ------- ---------- ---------- ------ ---------- ------
</TABLE>
In December, 1992, the Company offered to exchange warrants into shares
of Common Stock equivalent in value to the difference between the warrant
exercise price and the market price ($37.75) at the time of the offer.
Warrants that would have been exercisable for 7,061,005 shares were
extinguished in this offer and the Company issued 4,367,690 net shares of
Common Stock. The warrant holders were able to effect the exchange several
ways. The net effect on the number of shares of Common Stock outstanding after
the exchange was the same. A total of 3,893,962 warrants was exercised by
delivering to the Company 1,424,404 previously issued shares of Common Stock
valued at the market price ($37.75). A total of 2,492,017 warrants was
exercised for $37,692,000, the proceeds of which were used to purchase from
the warrant holders 998,457 shares of Common Stock at market. A total of
675,026 warrants was exchanged for 404,572 shares of Common Stock with an
aggregate value equal to the difference between the market price and the
exercise price. Warrant holders of an aggregate 2,418,908 shares declined the
offer. Since this warrant exchange was treated as a non-cash financing
transaction, it is not reflected on the Consolidated Statements of Cash Flows.
40
<PAGE> 31
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME PER SHARE
The Company computes income per share using the modified treasury stock
method. The following table presents the information needed to compute net
income per share for fiscal years 1993, 1992 and 1991 (in thousands, except
per share data):
<TABLE>
<CAPTION>
1993 1992 1991
------------------------ ----------------------- ------------------------
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Income before extraordinary item and
cumulative effect of a change in
accounting principle ................. $ 55,311 $ 55,311 $ 56,588 $ 56,588 $ 21,733 $ 21,733
Add -- Imputed income from interest
savings, net of tax, on assumed
retirement of debt with remaining
proceeds from assumed exercise of
warrants and options ................. -- -- 1,452 1,239 -- 3,896
-------- -------- -------- -------- -------- --------
Adjusted income before extraordinary
item and cumulative effect of a change
in accounting principle .............. 55,311 55,311 58,040 57,827 21,733 25,629
Extraordinary item -- loss on
extinguishment of debt, net of tax
benefit .............................. -- -- (1,496) (1,496) (2,108) (2,108)
Cumulative effect of a change in
accounting for income taxes .......... 3,990 3,990 -- -- -- --
-------- -------- -------- -------- -------- --------
Adjusted net income .................... $ 59,301 $ 59,301 $ 56,544 $ 56,331 $ 19,625 $ 23,521
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
SHARES:
Weighted average number of common shares
outstanding .......................... 37,845 37,845 27,885 27,885 19,750 19,750
Add -- Common equivalent shares assuming
conversion of Series B, C and D
Convertible Preferred Stock .......... 7,387 7,387 10,340 10,340 12,209 12,209
Add -- Common equivalent shares assuming
conversion of subordinated note at
beginning of fiscal year ............. -- -- -- 1,280 -- 1,704
Add -- Common shares assumed to be
outstanding from exercise of warrants
and options .......................... 10,184 10,180 12,812 10,517 -- 11,925
Less -- Assumed purchase of Common Stock
from proceeds of exercise of warrants
and options .......................... (5,354) (5,207) (7,147) (4,636) -- (7,275)
-------- -------- -------- -------- -------- --------
50,062 50,205 43,890 45,386 31,959 38,313
======== ======== ======== ======== ======== ========
INCOME PER SHARE:
Income before extraordinary item and
cumulative effect of a change in
accounting principle ................. $ 1.10 $ 1.10 $ 1.32 $ 1.27 $ .68 $ .67
Extraordinary item, net of tax
benefit .............................. -- -- (.03) (.03) (.07) (.06)
Cumulative effect of a change in
accounting for income taxes .......... .08 .08 -- -- -- --
-------- -------- -------- -------- -------- --------
Net income ............................. $ 1.18 $ 1.18 $ 1.29 $ 1.24 $ .61 $ .61
======== ======== ======== ======== ======== ========
</TABLE>
41
<PAGE> 32
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- INCOME PER SHARE -- (CONTINUED)
PRO FORMA NET INCOME PER SHARE
On a pro forma basis, net income for fiscal 1991 would have been $22.9
million, or $.64 per share, assuming the Company's October 1991 public
offering of Common Stock and the related retirement of long-term debt as well
as the exchange of Common Stock with Liberty Media Corporation in satisfaction
of one-half of the unsecured note payable occurred as of the beginning of the
year. The pro forma computation assumes adjustments have been made to interest
expense attributable to the reduction of the long-term debt, net of income tax
effect. It also assumes that the shares issued in connection with the public
offering and the exchange were outstanding from the beginning of the period.
NOTE 12 -- RETIREMENT AND SAVINGS PLANS
The Company has a defined contribution Employee Retirement Plan which
covers substantially all of the Company's employees after completion of one
year of service. The Company's contribution under the Plan is equal to 3.0% of
eligible employees' salaries. The costs of this Plan charged to expenses were
$2,202,000, $2,177,000, and $1,664,000 in fiscal years 1993, 1992 and 1991,
respectively.
In addition, the Company sponsors a 401(k) Savings Plan which permits
employees to make contributions to the Savings Plan on a pre-tax salary
reduction basis in accordance with the Internal Revenue Code. Substantially
all full-time employees are eligible to participate after completion of one
year of service. The Company matches a portion of the voluntary employee
contributions. The costs of this Savings Plan charged to expenses were
$2,053,000, $1,501,000, and $812,000 in fiscal years 1993, 1992 and 1991,
respectively.
NOTE 13 -- INCOME TAXES
Effective February 1, 1993, the Company changed its method of accounting
for income taxes as required by SFAS 109. The cumulative effect of this change
in accounting was to increase the net income of the first quarter of fiscal
1993 by approximately $4.0 million, which is reported separately in the
Consolidated Statements of Operations. Prior year's financial statements have
not been restated to reflect the provisions of SFAS 109.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal .................... $ 66,366 $ 49,770 $ 19,394
State ...................... 21,710 19,810 11,771
--------- --------- ---------
Total ...................... 88,076 69,580 31,165
--------- --------- ---------
Deferred
Federal .................... (23,159) (17,500) --
State ...................... (4,942) -- --
--------- --------- ---------
Total ...................... (28,101) (17,500) --
--------- --------- ---------
Total provision .............. $ 59,975 $ 52,080 $ 31,165
========= ========= =========
</TABLE>
42
<PAGE> 33
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- INCOME TAXES -- (CONTINUED)
Total income tax expense differs from the amounts computed by applying
the U.S. federal income tax rate of 35.0% for fiscal 1993 and 34.0% for fiscal
1992 and 1991 to income before income taxes and extraordinary item as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Provision at statutory rate ............................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit ............ 14.5 12.0 14.7
Amortization of intangibles not deductible for tax purposes 3.0 3.2 6.7
Net operating loss carryforward ........................... -- -- (1.2)
Other ..................................................... (.5) (1.3) 4.7
---- ---- ----
Total income tax expense .................................. 52.0% 47.9% 58.9%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the value of assets and liabilities and their tax bases and the
benefit of existing net operating loss carryforwards. Significant components
of the net deferred tax assets as of January 31, 1994 and 1993 follow (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts and related
reserves for uncollectible accounts under the Company's revolving credit program ..... $ 25,715 $ 15,985
Inventories, principally due to obsolescence reserves and additional costs of inventories
for tax purposes pursuant to the Tax Reform Act of 1986 .............................. 7,497 6,801
Allowance for sales returns ............................................................. 7,625 3,857
Executive stock award ................................................................... -- 1,655
Costs associated with the terminated Paramount tender offer ............................. 14,964 --
Costs associated with cable television distribution rights .............................. 26,619 2,813
Other ................................................................................... 7,061 (363)
-------- --------
Total gross deferred tax assets ......................................................... 89,481 30,748
Less: Valuation allowance ............................................................... (12,467) --
Less -- amounts not recognized due to SFAS 96 limitations on carrybacks of future net
deductible amounts and carryforwards of alternative minimum tax credits .............. -- (12,948)
-------- --------
Net deferred tax assets ................................................................. $ 77,014 $ 17,800
======== ========
</TABLE>
Of the total net additional deferred tax asset recorded at the time of the
adoption of SFAS 109, approximately $27.0 million was credited to additional
paid-in capital and approximately $6.5 million was credited to the excess of
cost over acquired net assets. The net increase in the deferred tax asset
during fiscal 1993 differs from the deferred benefit component of the current
year's tax provision primarily due to the recognition of a portion of the net
operating loss carryforwards.
43
<PAGE> 34
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- INCOME TAXES -- (CONTINUED)
Deferred tax assets were not recorded as of January 31, 1993 for state
income tax purposes since the Company's income is principally allocable to
states that do not permit carrybacks that would give rise to refundable taxes.
In addition, no deferred tax assets were recorded for federal or state tax
purposes in fiscal 1991 since refundable taxes could not be generated from
carrying back future net deductible amounts under the requirements of SFAS 96.
The increase in the deferred tax asset for fiscal 1992 differs from the
deferred benefit component of the current year tax provision because portions
of the deferred tax provision recorded were allocated to additional paid-in
capital or the excess of cost over acquired net assets.
The valuation allowance for deferred tax assets as of February 1, 1993
was $12.2 million. The net change in the valuation allowance for fiscal 1993
was an increase of $255,000. Approximately $6.0 million of the valuation
allowance will result in a credit to additional paid-in capital when it
becomes more likely than not that certain deductions associated with cable
television distribution rights will be realizable.
The following table summarizes the nature of certain tax benefits
realized that reduced taxes payable but were not credited to the tax provision
(in thousands):
<TABLE>
<CAPTION>
ADDITIONAL PAID-IN EXCESS OF COST OVER
CAPITAL ACQUIRED NET ASSETS
-------------------- --------------------
SOURCE OF TAX BENEFIT 1993 1992 1993 1992
- --------------------------------------------------------------- --------- --------- --------- -------
<S> <C> <C> <C> <C>
Exercise of employee stock options ......................... $ 1,655 $12,366 -- --
Net operating loss carryforward and other deductions arising
from equity transactions ................................. -- 6,967 -- --
Realization of tax benefits associated with temporary
differences in CVN acquisition ........................... -- -- 6,510 5,086
Alternative minimum tax credit carryforward generated from
equity related deductions ................................ -- 2,979 -- --
------- ------- ------- -------
$ 1,655 $22,312 $ 6,510 $ 5,086
========= ======= ======= ========
</TABLE>
In 1993, the tax benefits realized from net operating loss carryforwards
of $6.6 million reduced taxes payable and were credited to deferred tax
assets.
As of January 31, 1994, the Company has a net operating loss carryforward
of $634,000 available to reduce future federal taxable income. There are no
other credits or loss carryforwards available as of the end of fiscal 1993.
NOTE 14 -- LITIGATION
In July 1993, Shop Television Network, Inc. ("STN"), J.C. Penney Company,
Inc. ("JCP"), JCPenney Television Shopping Channel Inc. ("JCPTV"), Michael
Rosen and the Company settled the litigation that STN had brought in the
Superior Court of the State of California for the County of Los Angeles in
1991, in connection with the negotiation and execution of an agreement dated
May 16, 1991, between the Company and JCPTV. The settlement required dismissal
of all pending litigation between the parties, payment of approximately $8.8
million to STN, and repurchase by STN of all its shares held by JCP for an
agreed price. JCPTV and the Company agreed to divide the settlement payment to
STN between them, with the Company being responsible for the payment of
approximately $3.8 million of such settlement payment. This amount was
included as a charge in general and administrative expenses in the second
quarter of fiscal 1993.
44
<PAGE> 35
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- LITIGATION -- (CONTINUED)
In July 1993, the Company was joined as a defendant in actions filed in
state and federal court in Delaware by certain shareholders of Home Shopping
Network, Inc. ("HSN") against HSN, Liberty Media Corporation ("Liberty"),
Liberty Program Investments, Inc., RMS Limited Partnership ("RMS"), and
certain individual directors and officers of HSN. The actions challenge
Liberty's purchase of HSN Class A and Class B Common Stock from RMS, Liberty's
tender offer for 15.0 million shares of HSN Common Stock as well as the
Company's July 12, 1993 letter proposal to HSN to combine HSN and the Company
in a stock-for-stock transaction (the "Proposed HSN Merger"). The actions
allege that the Company aided and abetted breaches of fiduciary duties in
connection with the Proposed HSN Merger, as well as violations of certain
regulations of the Securities Exchange Act. Plaintiffs seek class
certification, declaratory and injunctive relief, compensatory damages,
counsel fees, interest and costs. Management believes that the allegations
against the Company in these shareholder lawsuits are unfounded and intends to
defend against such actions vigorously. On November 5, 1993, the Company and
HSN announced their mutual agreement to terminate negotiations on the Proposed
HSN Merger. The Company's time to respond to the complaint in the state action
was extended indefinitely. In March, 1994, the Company filed a motion to
dismiss the complaint in the federal action. The parties are currently engaged
in settlement discussions.
In September 1993, Viacom International Inc. ("Viacom International"), a
subsidiary of Viacom Inc. ("Viacom"), brought an action against the Company,
Tele-Communications, Inc., Liberty, Satellite Services, Inc., Encore Media
Corp., and Netlink USA, challenging the Company's September 20, 1993 proposal
to Paramount Communications Inc. ("Paramount") to combine Paramount and the
Company in a cash and stock-for-stock exchange. Viacom International amended
its complaint in November, 1993, adding Comcast Corporation ("Comcast") as an
additional defendant. The Company filed an answer to the amended complaint on
November 19, 1993. Comcast was subsequently dismissed as a defendant.
Management believes that the allegations against the Company in Viacom
International's action are unfounded and intends to defend against such action
vigorously. On February 15, 1994, the Company terminated its tender offer for
50.1% of Paramount Common Stock.
In October 1993, the Company commenced legal action in the Delaware
Chancery Court against Viacom, Paramount and certain Paramount directors for
breach of fiduciary duties in failing to give fair treatment to the Company's
merger proposal while granting undue advantages to Viacom's merger proposal.
The Company sought to compel Paramount's board to give the two merger
proposals equal consideration and also sought to invalidate certain "lockup"
agreements and share purchase options given by Paramount to Viacom. Following
a hearing, the Court, on November 24, 1993, granted the Company's motion for a
preliminary injunction against Paramount's poison pill rights plan and certain
other anti-takeover mechanisms being used to preclude the Paramount
shareholders from accepting the Company's cash tender offer for approximately
50.1% of Paramount's shares. On appeal by Paramount and Viacom, the Delaware
Supreme court affirmed the injunction granted by the Delaware Chancery Court
on December 9, 1993, and issued a formal opinion in support of its ruling on
February 4, 1994. On December 21, 1993, Viacom filed a motion to dismiss the
Company's complaint against it. On February 15, 1994, the Company terminated
its tender offer for Paramount's Common Stock.
The Company has also been named as a defendant in various legal
proceedings arising in the ordinary course of business. Although the outcome
of these matters cannot be determined, in the opinion of management,
disposition of these proceedings will not have a material effect on the
Company's financial position.
45
<PAGE> 36
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SUPPLEMENTAL INFORMATION ON CONSOLIDATED STATEMENTS OF CASH FLOWS
An analysis of changes in working capital items follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Increase in accounts receivable ............ $(86,154) $(29,029) $ (6,006)
Increase in inventories .................... (29,496) (9,784) (8,428)
Increase in deferred taxes ................. (24,389) (10,680) --
Increase in prepaid expenses ............... (1,820) (450) (732)
Increase in accounts payable -- trade ...... 29,972 11,312 7,245
Increase in accrued liabilities ............ 75,648 5,074 48,028
-------- -------- --------
$(36,239) $(33,557) $ 40,107
======== ======== ========
Supplemental cash flow information:
Interest paid ............................ $ 1,369 $ 20,512 $ 30,397
Income taxes paid ........................ 31,841 37,944 1,351
</TABLE>
In fiscal year 1993, the Company did not enter into any non-cash
financing transactions. In fiscal years 1992 and 1991, the following non-cash
financing transactions were entered into by the Company (dollars in
thousands).
<TABLE>
<S> <C>
1992
Issuance of 1,704,546 shares of Common Stock in prepayment of Convertible
subordinated note, net of $1,260 debt placement fees ......................... $ 28,740
Exercise of 3,893,962 warrants through deliverance of 1,424,404 shares of
Common Stock at market value ................................................. 53,771
Exercise of 2,492,017 warrants for $37,692 with simultaneous repurchase of
998,457 shares of Common Stock at market value ............................... 37,692
Issuance of 404,572 shares of Common Stock in exchange for 675,026 warrants,
representing the aggregate difference between the market price and the
exercise price ............................................................... 15,273
Exercise of stock options through deliverance of 800 shares of Common Stock at
market value ................................................................. 31
1991
Issuance of an aggregate of 243,522 shares of Common Stock and 100,000
warrants to Comcast Financial Corporation in lieu of cash interest expense ... $ 3,000
Issuance of 75,075 shares of Common Stock to the Standby Investors in
consideration for signing the Standby Equity Agreement ....................... 614
Issuance of 2,269,552 shares of Common Stock to Liberty Media Corporation in
exchange for one-half of the outstanding balance of an unsecured note
payable ...................................................................... 31,445
Adjustment to the number of shares of Common Stock assumed issued to holders
of certain CVN Series 2 Warrants from 3,377,949 to 3,410,843 (at market
value) ....................................................................... 526
Adjustment to the number of new QVC Warrants assumed exchanged for certain CVN
Series 2 Warrants from 6,822,767 to 6,469,913 (value based on an independent
appraisal) ................................................................... (1,438)
</TABLE>
46
<PAGE> 37
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- PARAMOUNT TENDER OFFER
On October 27, 1993, the Company made an $80.00 cash tender offer for
50.1 percent of the outstanding common shares of Paramount. This tender offer
was amended several times during the bidding process against Viacom for
Paramount. On February 1, 1994, the Company amended its cash tender offer to
$104 per share. The Company offered approximately $6.4 billion in cash for
61.7 million Paramount common shares. The proposed cash tender offer would
have been funded through a $3.25 billion bank loan commitment and proposed
capital contributions to the Company of $1.5 billion from BellSouth
Corporation and $0.5 billion each from Advance Publications, Cox Enterprises
and Comcast Corporation. On February 15, 1994, Paramount notified the Company
that Viacom received the minimum condition in its tender offer and had
delivered to Paramount a completion certificate pursuant to the bidding
procedures. Accordingly, the Company terminated its tender offer for 50.1
percent of the Common Stock of Paramount. The costs incurred on the tender
offer, comprised principally of bank fees and legal and advisory fees, totaled
$34.8 million which were expensed in the fourth quarter of 1993. The $3.25
billion bank loan commitment expired on February 15, 1994 upon the termination
of the tender offer.
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT AS TO PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL 1993
-------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue ................................................... $ 273,232 $ 262,438 $ 313,945 $ 372,489
Gross profit .................................................. 113,773 107,938 128,902 148,316
Income before income taxes and cumulative effect of a change in
accounting principle (1) .................................... 34,546 26,137 42,732 11,871
Income tax provision .......................................... (16,925) (12,810) (21,215) (9,025)
Income before cumulative effect of a change in accounting
principle ................................................... 17,621 13,327 21,517 2,846
Cumulative effect of a change in accounting principle (2) ..... 3,990 -- -- --
Net income .................................................... 21,611 13,327 21,517 2,846
Income per share (3):
Primary
Income before cumulative effect of a change in accounting
principle ............................................... .36 .26 .42 .06
Net income ................................................ .44 .26 .42 .06
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1992
----------------------------------------------------
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue ................................................... $ 233,168 $ 221,253 $ 274,332 $ 341,834
Gross profit .................................................. 100,354 94,259 115,501 138,633
Income before income taxes and extraordinary item ............. 22,917 15,905 31,468 38,378
Income tax provision .......................................... (11,425) (7,190) (15,105) (18,360)
Income before extraordinary item .............................. 11,492 8,715 16,363 20,018
Extraordinary item, net of tax benefit (4) .................... (348) -- -- (1,148)
Net income .................................................... 11,144 8,715 16,363 18,870
Income per share (5)(6):
Primary
Income before extraordinary item .......................... .29 .22 .40 .44
Net income ................................................ .28 .22 .40 .42
Fully-diluted
Income before extraordinary item .......................... .29 .22 .40 .42
Net income ................................................ .28 .22 .40 .40
</TABLE>
- ------------------
(1) Fourth quarter amount includes a charge of $34.8 million related to the
Paramount tender offer (Note 16).
(2) Amount represents the cumulative effect of adopting SFAS 109.
47
<PAGE> 38
QVC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
(IN THOUSANDS, EXCEPT AS TO PER SHARE DATA)
(3) Fully diluted earnings per share for all periods are not presented since
they are the same as the primary earnings per share.
(4) Amounts represent accelerated amortization of debt placement fees, net of
income tax benefits, due to prepayments of the Senior term loan (Note 5).
(5) The sum of the quarterly per share amounts does not equal the annual amount
due to the substantial changes in the number of shares throughout the year.
(6) In the fourth quarter of fiscal 1992, the modified treasury stock method of
computing earnings per share resulted in a fully-diluted computation with a
lower amount than the primary computation. This is due primarily to using the
year-end closing share price for the fully-diluted computation versus the
average share price for the fourth quarter. The year-end closing price was
$40.50 versus a fourth quarter average of $32.92.
48
<PAGE> 39
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
TCI Communications, Inc. ("TCIC") dated as of September 30, 1994, assumes that
(i) the merger with TeleCable Corporation ("TeleCable") (the "Merger") (ii) the
combination of TCIC and Liberty Media Corporation ("Liberty"), whereby TCIC
and Liberty each became a wholly-owned subsidiary of TCI (the "TCI/Liberty
Combination"), (iii) the transfer of United Artists International, Inc. from
TCIC to TCI International Holdings, Inc. (the "International Transfer") and
(iv) the investment in IP-IV had occurred as of such date. See notes (1), (2),
(3) and (4).
In addition, the following unaudited condensed pro forma combined
statements of operations of TCIC for the nine months ended September 30, 1994
and the year ended December 31, 1993 assume that the Merger, the TCI/Liberty
Combination, the International Transfer and the investment in IP-IV had
occurred as of January 1, 1993.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Merger, the
TCI/Liberty Combination, the International Transfer and the investment in IP-
IV had occurred as of January 1, 1993. These condensed pro forma combined
financial statements of TCIC should be read in conjunction with the condensed
pro forma financial statements and the related notes thereto of TCI included
elsewhere herein and the respective historical financial statements and the
related notes thereto of TCIC and TCI.
1
<PAGE> 40
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
September 30, 1994
---------------------------------------------------------------------------------------
International Pro forma IP-IV
TCIC TeleCable Transfer Adjustments Pro forma TCI
Historical Historical(1) Historical (2) (1)(2)(3) (4) Pro forma
---------- ------------- -------------- ---------------- ------------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
------
Cash and receivables $ 227 16 (21) -- -- 222
Due from affiliated companies 64 -- -- -- -- 64
Investment in affiliates
and Turner Broadcasting System,
Inc., and related receivables 1,655 22 (404) -- 7 (10) 1,880
600 (11)
Property and equipment, net of
accumulated depreciation 5,471 258 (12) 333 (5) -- 6,050
Franchise costs and other assets,
net of amortization 9,791 21 (35) 1,020 (5) -- 11,580
783 (6)
-------- ----- -------- ------ ------ ------
$ 17,208 317 (472) 2,136 607 19,796
======== ===== ======== ====== ======= ======
Liabilities and Stockholder's Equity
------------------------------------
Payables and accruals $ 871 31 (14) -- -- 888
Debt 10,479 282 (9) -- 600 (11) 11,359
7 (10)
Deferred income taxes 3,426 48 14 783 (6) -- 4,271
Other liabilities 89 6 -- -- -- 95
-------- ----- -------- ------ ------ ------
Total liabilities 14,865 367 (9) 783 607 16,613
-------- ----- -------- ------ ------ ------
Minority interests 312 3 (28) -- -- 287
Common stockholder's equity:
Class A common stock 1 -- -- -- -- 1
Class B common stock -- 7 -- (7)(7) -- --
Additional paid-in capital 2,842 (262) (643) 262 (7) -- 4,142
1,300 (8)
643 (9)
Cumulative foreign currency
translation adjustment (5) -- 5 -- -- --
Unrealized holding gains for
available-for-sale securities 169 4 -- (4)(7) -- 169
Note receivable from executive
stock purchase plan -- (3) -- 3 (7) -- --
Accumulated earnings (deficit) (287) 201 203 (201)(7) -- (287)
(203)(9)
Investment in TCI (689) -- -- (440)(9) -- (1,129)
-------- ----- -------- ------ ------ ------
2,031 (53) (435) 1,353 -- 2,896
-------- ----- -------- ------ ------ ------
$ 17,208 317 (472) 2,136 607 19,796
======== ===== ======== ====== ====== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
2
<PAGE> 41
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, 1994
--------------------------------------------------------------------------------
International Pro forma IP-IV
TCIC TeleCable Transfer Adjustments Pro forma TCI
Historical Historical(1) Historical(2) (1)(2)(3) (4) Pro forma
---------- ------------- -------------- ------------ --------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 3,213 222 (17) -- -- 3,418
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights (1,882) (127) 30 -- -- (1,979)
Depreciation and amortization (711) (34) 2 (35)(12) -- (778)
--------- ----- ----- --- ------- -------
Operating income 620 61 15 (35) -- 661
Interest expense (566) (17) -- -- (27)(13) (610)
Interest and dividend income 26 -- (1) -- 54 (16) 79
Share of earnings of Liberty 125 -- -- (125)(14) -- --
Share of losses of other
affiliates, net (59) -- 46 -- 2 (17) (101)
(90)(18)
Other expense, net (4) (1) (7) -- -- (12)
---------- ---- ---- ------ ------- --------
Earnings before income taxes 142 43 53 (160) (61) 17
Income tax expense (81) (17) (22) 65 (15) 25 (15) (30)
--------- ---- --- ----- -------- --------
Net earnings (loss) $ 61 26 31 (95) (36) (13) (19)
========= ===== ==== ====== ======== ========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
3
<PAGE> 42
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1993
---------------------------------------------------------------------------------------
International Pro forma IP-IV
TCIC TeleCable Transfer Adjustments Pro forma TCI
Historical Historical(1) Historical(2) (1)(2)(3) (4) Pro forma
---------- ------------- ------------- ----------- --------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 4,153 287 (2) -- -- 4,438
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights (2,326) (163) 9 -- -- (2,480)
Depreciation and amortization (911) (45) 1 (48)(12) -- (1,003)
--------- ----- ----- --- ----- ------
Operating income 916 79 8 (48) -- 955
Interest expense (731) (24) -- -- (36)(13) (791)
Interest and dividend income 34 -- (2) -- 72 (16) 104
Share of earnings of Liberty 4 -- -- (4)(14) -- --
Share of losses of other
affiliates, net (76) -- 62 -- 6 (17) (84)
(76)(18)
Gain on dispositions 42 2 -- -- -- 44
Other expense, net (28) -- -- -- -- (28)
---------- ------- ------ ------ ----- ------
Earnings before income taxes 161 57 68 (52) (34) 200
Income tax expense (168) (23) (28) 22 (15) 14 (15) (183)
--------- ----- --- ------ ----- ------
Net earnings (loss) (7) 34 40 (30) (20) 17
Dividend requirement on
redeemable preferred stocks (2) -- -- 2 (20) -- --
----------- ------- ------ ------- ----- ------
Net earnings (loss) applicable
to common shareholders $ (9) 34 40 (28) (20) 17(19)
========== ====== ==== ======= ===== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
4
<PAGE> 43
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
(1) As of August 8, 1994, TCI, TCIC and TeleCable entered into a
definitive merger agreement (the "Merger Agreement") whereby TeleCable
will be 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 shares of TCI Class A common stock (currently
estimated to be approximately 42 million shares) and 1 million
shares of a new series of preferred stock to be designated
"Convertible Preferred Stock, Series D" ("Series D Preferred Stock")
with an aggregate initial liquidation value of $300 million. The
Series D Preferred Stock, which will accrue dividends at a rate of
5.5% per annum, will be convertible into 10 million shares of TCI
Class A common stock. The Series D Preferred Stock will be redeemable
at the option of TCI after five years and at the option of either TCI
or the holder after ten years. Although the amount of net liabilities
to be assumed by TCIC and the number of shares of TCI Class A common
stock to be issued to TeleCable's shareholders are subject to closing
adjustments, management does not believe that any such adjustments
will be material.
(2) Subsequent to September 30, 1994, TCI was reorganized based upon four
lines of business: Domestic Cable and Communications; Programming;
International Cable and Programming; and Technology/Venture Capital.
In connection with this reorganization, on November 18, 1994, TCIC
transferred its ownership of United Artists International, Inc. to TCI
International Holdings, Inc. in exchange for 79,903 shares of a newly
created class of TCI preferred stock, Redeemable Convertible Preferred
Stock, Series E (the "Series E Preferred Stock"). Such transaction
has been reflected at historical cost. Series E Preferred Stock
accrues dividends at the rate of 5.0% per annum and is convertible
into TCI Class A common stock at the initial conversion rate of 1,000
shares of TCI Class A common stock for one share of the Series E
Preferred Stock.
(3) The TCI/Liberty Combination, which were consummated on August 4, 1994,
were structured as a tax free exchange whereby the common stock of
TCIC and Liberty and the preferred stock of Liberty were exchanged for
like shares of TCI. The merger agreement provided that each share of
TCIC's and Liberty's common stock (including shares held by TCIC's or
Liberty's subsidiaries) would be converted into one share and 0.975 of
a share, respectively, of the corresponding class of TCI's common
stock. Shares of Liberty Class E Preferred Stock were converted into
shares of a preferred stock of TCI having designations, preferences,
rights and qualifications, limitations and restrictions substantially
identical to the shares of preferred stock being converted. Shares of
the remaining Liberty preferred stock held by subsidiaries of TCIC
were converted into shares of a class of TCI preferred stock having an
equivalent fair value to that which was given up. The TCI/Liberty
Combination has been accounted for as a purchase of Liberty by TCI
utilizing Liberty's historical predecessor cost.
(continued)
5
<PAGE> 44
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
(4) On January 20, 1995, Tele-Vue, Viacom, IP-IV and RCS Pacific entered
into the Agreement pursuant to which RCS Pacific will acquire from
Tele-Vue the assets of cable television systems serving approximately
1 million subscribers as of December 31, 1994 for total consideration
of approximately $1,983,000,000, subject to adjustment in accordance
with the terms of the Agreement. A subsidiary of TCI has agreed to
loan $600 million in cash to IP-IV. IP-IV will, in turn, loan such
$600 million to RCS Pacific. RCS Pacific could use the proceeds of the
aforementioned loan as a portion of the total cash consideration to be
paid to Tele-Vue, or at the option of TCI, to purchase $600 million of
TCI Class A common stock. Should TCI elect to sell such common stock,
RCS Pacific has the option to pay the consideration by delivery to
Tele-Vue of its short-term note of up to $600 million of the total
consideration with the balance to be paid in cash. Such note, if it
is delivered, will be secured by RCS Pacific's pledge of shares of
stock of TCI having an aggregate market value equal to the principal
amount of such note, and payment of such note is expected to be made
with the proceeds of the sale of the TCI stock pledged as collateral.
TCI will guarantee that RCS Pacific will receive, upon sale of such
TCI common stock, an amount equal to the principal amount of, and
accrued interest on, the note delivered to Tele-Vue. The consummation
of the transactions contemplated by the Agreement is conditioned,
among other things, on receipt of approvals of various franchise and
other governmental authorities and receipt of "minority tax
certificates" from the FCC.
(5) Represents an allocation of the purchase price of TeleCable to its
tangible and intangible assets. The cost allocations were estimated
using information available at the date of preparation of these
condensed pro forma combined financial statements and will be adjusted
upon final appraisal of the assets acquired. Therefore, the actual
allocations may differ from those allocations reflected herein.
(6) Represents the estimated incremental deferred income tax liability
associated with the TeleCable purchase price allocations, as described
in note (5) above. The adjustment assumes a combined federal and
state income tax rate of 41%.
(7) Represents the elimination of TeleCable's historical stockholders'
deficit, including the note receivable from the employee stock
purchase plan. Pursuant to the Merger Agreement, any portion of such
note receivable that remains unpaid at closing will not be included in
the calculation of net liabilities to be assumed by TCIC at closing.
(8) Represents TCI's capital contribution to TCIC resulting from the
issuance by TCI to TeleCable shareholders of shares of TCI Class A
common stock (currently estimated to be approximately 42 million
shares) and 1 million shares of Series D Preferred Stock with an
aggregate liquidation value of $300 million. The number of shares of
TCI Class A common stock to be issued, which will be calculated using a
per share value of $24, is dependent upon the amount of net
liabilities of TeleCable that is assumed by TCIC at closing and
certain other factors. See note (1) above.
(9) Represents the elimination of the historical equity of the
International Transfer and the issuance of the Series E Preferred
Stock to TCIC recorded at historical cost.
6
<PAGE> 45
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Tele-Communications, Inc.)
Notes to Condensed Pro Forma Combined Financial Statements
(10) Represents TCIC's capital contribution to IP-IV.
(11) Represents borrowing by TCIC, the proceeds of which will be loaned to
IP-IV who will then loan the proceeds to RCS Pacific.
(12) Represents depreciation and amortization of TeleCable's allocated
excess purchase price, based upon weighted average lives of 12-1/2
years for property and equipment and 40 years for franchise costs.
See note (4) above.
(13) Reflects assumed interest expense on borrowings by TCIC to provide
$600 million loan and $7 million capital contribution to IP-IV. Such
interest expense is calculated at the assumed rate of 6% per annum.
(14) Reflects the elimination of TCIC's share of Liberty's historical
earnings. See note (3) above.
(15) Reflects the estimated income tax effect of the pro forma adjustments.
(16) Represents assumed interest income on note receivable described in
note 11. Such interest income is calculated at the assumed rate of 12%
per annum.
(17) Represents TCIC's share of historical earnings of IP-IV based upon
historical earnings of the cable television systems to be acquired by
RCS Pacific from Tele-Vue.
(18) Represents the adjustment to TCI's share of historical earnings of
IP-IV to reflect the acquisition of certain cable television systems
by RCS Pacific. Such adjustment reflects TCI's 25% interest in IP-IV
through such time as the capital contribution of the general partner
of IP-IV has been reduced to zero through allocated share of losses.
After such time, this adjustment reflects the recognition by TCI of
100% of the losses of IP-IV. Such losses result from assumed
additional depreciation and amortization of the allocated excess
purchase price and from assumed additional interest expense on the
assumed indebtedness incurred by RCS Pacific to fund the purchase
price.
(19) Should TCI elect to sell $600 million of TCI Class A common stock to
RCS Pacific and should RCS Pacific elect to pay a portion of the
consideration with a note payable in the principal amount of $600
million, net loss would be $16 million for the nine months ended
September 30, 1994 and net earnings attributable to common
shareholders would be $13 million for the year ended December 31,
1993, respectively.
(20) Reflects the elimination of the preferred stock dividend requirement
on TCIC preferred stock converted into common stock of TCIC during the
year ended December 31, 1993.
7
<PAGE> 46
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
The following unaudited condensed pro forma combined balance sheet of
TCI, dated as of September 30, 1994, assumes that (i) the Merger, (ii) the
TCI/Liberty Combination (iii) the investment in IP-IV and (iv) the QVC Tender
Offer had occurred as of such date. See notes (1), (2), (3) and (4).
The following unaudited condensed pro forma combined statements of
operations of TCI for the nine months ended September 30, 1994 and the year
ended December 31, 1993 assume that the Merger, the TCI/Liberty Combination,
the investment in IP-IV and the QVC Tender Offer had occurred as of January 1,
1993.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Merger, the
TCI/Liberty Combination, the investment in IP-IV and the QVC Tender Offer had
occurred as of January 1, 1993. These condensed pro forma combined financial
statements of TCI should be read in conjunction with the condensed pro forma
financial statements and the related notes thereto of TCIC included elsewhere
herein and the respective historical financial statements and the related notes
thereto of TCI.
8
<PAGE> 47
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
September 30, 1994
----------------------------------------------------------------------------------------
QVC
IP-IV Tender Offer
TCI TeleCable Pro forma pro forma pro forma TCI
Historical Historical(2) adjustments(2) (3) (4) Pro forma
---------- -------------- -------------- -------------- --------- ---------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Assets
------
Cash, receivables and other
current assets $ 369 16 -- -- (7)(4) 378
Investment in affiliates and
Turner Broadcasting System, Inc.,
and related receivables 2,218 22 -- 7 (9) 7 (4) 2,854
600 (10)
Property and equipment, net of
accumulated depreciation 5,729 258 333 (5) -- -- 6,320
Franchise costs, intangibles and
other assets, net of amortization 10,801 21 1,020 (5) -- 12,625
783 (6) --
-------- ---- ------ ------ ----- ------
$ 19,117 317 2,136 607 -- 22,177
======== ==== ====== ====== ===== ======
Liabilities and Stockholders' Equity
------------------------------------
Payables and accruals $ 1,182 31 -- -- -- 1,213
Debt 10,654 282 -- 7 (9) -- 11,543
600 (10)
Deferred income taxes 3,729 48 783 (6) -- -- 4,560
Other liabilities 131 6 -- -- -- 137
-------- ---- ------ ------ ----- ------
Total liabilities 15,696 367 783 607 -- 17,453
-------- ---- ------ ------ ----- ------
Minority interests 446 3 -- -- -- 449
Series D Preferred Stock -- -- 300 (8) -- -- 300
Stockholders' equity:
Preferred Stock -- -- -- -- -- --
Class A common stock 571 -- 42 (8) -- -- 613
Class B common stock 89 7 (7)(7) -- -- 89
Additional paid-in capital 2,833 (262) 958 (8) -- -- 3,791
262 (7)
Cumulative foreign currency
translation adjustment (5) -- -- -- -- (5)
Unrealized holding gains for
available-for sale securities 433 4 (4)(7) -- -- 433
Retained earnings (deficit) (285) 201 (201)(7) -- -- (285)
Receivable from related party (15) (3) 3 (7) -- -- (15)
Treasury stock (646) -- -- -- -- (646)
-------- ---- ------ ------ ----- ------
2,975 (53) 1,053 -- -- 3,975
-------- ---- ------ ------ ----- ------
$ 19,117 317 2,136 607 -- 22,177
======== ==== ====== ====== ===== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
9
<PAGE> 48
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, 1994
-----------------------------------------------------------------
IV-IP
TCI Liberty TeleCable Pro forma Pro forma
Historical Historical(1) Historical(2) adjustments(1)(2) (3)
---------- ------------- ------------- ----------------- ------------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C> <C>
Revenue $ 3,427 790 222 (37)(11) --
Operating, selling, general and
administrative expenses and
compensation relating to
stock appreciation rights (2,080) (726) (127) 37 (11) --
Depreciation and amortization (722) (32) (34) (35)(12) --
------- ----- ----- ----- -----
Operating income 625 32 61 (35) --
Interest expense (568) (22) (17) 12 (13) (27)(18)
Interest and dividend income 26 15 -- (12)(13) 54 (19)
Share of earnings of Liberty 125 -- -- (125)(14) --
Share of earnings (losses) of
affiliates, net (56) 23 -- -- 2 (20)
(90)(21)
Gain on dispositions -- 183 -- -- --
Other expense, net (4) (11) (1) -- --
------- ----- ------ ----- ----
Earnings before income taxes 148 220 43 (160) (61)
Income tax expense (85) (95) (17) 65 (15) 25 (15)
------- ----- ------ ---- ----
Net earnings 63 125 26 (95) (36)
Dividend requirement on
redeemable preferred stocks (3) (14) -- (12)(16) --
8 (17)
------- ----- ------ ----- ----
Net earnings attributable
to common shareholders $ 60 111 26 (99) (36)
======= ===== ====== ==== ====
Primary and fully diluted earnings
attributable to common
shareholder per common and
common equivalent share $ .12
=======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1994
----------------------------
QVC
Tender
Offer
pro forma TCI
(4) Pro forma
-------- ---------
amounts in millions, except
per share amounts
<S> <C> <C>
Revenue -- 4,402
Operating, selling, general and
administrative expenses and
compensation relating to
stock appreciation rights -- (2,896)
Depreciation and amortization -- (823)
------ -------
Operating income -- 683
Interest expense -- (622)
Interest and dividend income -- 83
Share of earnings of Liberty -- --
Share of earnings (losses) of
affiliates, net 13 (22) (137)
(29)(23)
Gain on dispositions -- 183
Other expense, net -- (16)
------ -----
Earnings before income taxes (16) 174
Income tax expense 6 (15) (101)
------ ------
Net earnings (10) 73
Dividend requirement on
redeemable preferred stocks -- (21)
------ ------
Net earnings attributable
to common shareholders (10) 52 (27)
====== ========
Primary and fully diluted earnings
attributable to common
shareholder per common and
common equivalent share $ .08 (28)
========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
10
<PAGE> 49
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Condensed Pro Forma Combined Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Year ended December 31, 1993
-------------------------------------------------------------------------------------------------
QVC
Tender
Pro forma IV-IP Offer
TCI Liberty TeleCable adjustments Pro forma Pro forma TCI
Historical Historical (1) Historical (2) (1)(2) (3) (4) Pro forma
---------- -------------- -------------- ------------ --------- --------- ---------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 4,153 1,153 287 (55)(11) -- -- 5,538
Operating, selling, general and
administrative expenses and
compensation relation to stock
appreciation rights (2,326) (1,105) (163) 55 (11) -- -- (3,539)
Depreciation and amortization (911) (49) (45) (48)(12) -- -- (1,053)
-------- ------ ------ ---- ---- ------ ------
Operating income (loss) 916 (1) 79 (48) -- -- 946
Interest expense (731) (31) (24) 17 (13) (36)(18) -- (805)
Interest and dividend income 34 23 -- (17)(13) 72 (19) -- 112
Share of earnings of Liberty 4 -- -- (4)(14) -- -- --
Share of earnings (losses) of
affiliates, net (76) 34 -- -- 6 (20) 12 (22) (139)
(76)(21) (39)(23)
Gain on dispositions 42 32 2 -- -- -- 76
Loss on transactions with TCIC -- (30) -- -- -- -- (30)(26)
Loss on early extinguishment of
debt (17) (2) -- -- -- -- (19)
Other expense, net (11) (9) -- -- -- -- (20)
-------- ------ ------ ---- ---- ------ ------
Earnings (loss) before
income taxes 161 16 57 (52) (34) (27) 121
Income tax expense (168) (12) (23) 22 (15) 14 (15) 11 (15) (156)
-------- ------ ------ ---- ---- ------ ------
Net earnings (loss) (7) 4 34 (30) (20) (16) (35)
Dividend requirement on redeemable
preferred stocks (2) (32) -- (17)(16) -- -- (26)
9 (17)
2 (24)
14 (25)
-------- ------ ------ ---- ---- ----- ------
Net loss attributable to
common shareholders $ (9) (28) 34 (22) (20) (16) (61)(27)
======== ====== ====== ==== ==== ===== ======
Loss per common share $ (.02) $ (.10)(29)
======== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
11
<PAGE> 50
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Condensed Pro Forma Combined Financial Statements
September 30, 1994
(unaudited)
(1) The TCI/Liberty Combination, which were consummated on August 4, 1994,
were structured as a tax free exchange whereby the common stock of
TCIC and Liberty and the preferred stock of Liberty were exchanged for
like shares of TCI. The merger agreement provided that each share of
TCIC's and Liberty's common stock (including shares held by TCIC's or
Liberty's subsidiaries) would be converted into one share and 0.975 of
a share, respectively, of the corresponding class of TCI's common
stock. Shares of Liberty Class E Preferred Stock were converted into
shares of a preferred stock of TCI having designations, preferences,
rights and qualifications, limitations and restrictions substantially
identical to the shares of preferred stock being converted. Shares of
the remaining Liberty preferred stock held by subsidiaries of TCIC
were converted into shares of a class of TCI preferred stock having an
equivalent fair value to that which was given up. All preferred stock
of TCI held by TCIC or its subsidiaries has been eliminated in
consolidation. The TCI/Liberty Combination has been accounted for as
a purchase of Liberty by TCI utilizing Liberty's historical
predecessor cost.
(2) As of August 8, 1994, TCI, TCIC and TeleCable entered into the Merger
Agreement whereby TeleCable will be 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 shares of TCI Class A common
stock (currently estimated to be approximately 42 million shares)
and 1 million shares of Series D Preferred Stock with an aggregate
initial liquidation value of $300 million. The Series D Preferred
Stock, which will accrue dividends at a rate of 5.5% per annum, will
be convertible into 10 million shares of TCI Class A common stock.
The Series D Preferred Stock will be redeemable at the option of TCI
after five years and at the option of either TCI or the holder after
ten years. Although the amount of net liabilities to be assumed by
TCIC and the number of shares of TCI Class A common stock to be issued
to TeleCable's shareholders are subject to closing adjustments,
management does not believe that any such adjustments will be
material.
(3) On January 20, 1995, Tele-Vue, Viacom, IP-IV and RCS Pacific entered
into the Agreement pursuant to which RCS Pacific will acquire from
Tele-Vue the assets of cable television systems serving approximately
1 million subscribers as of December 31, 1994 for total consideration
of approximately $1,983,000,000, subject to adjustment in accordance
with the terms of the Agreement. A subsidiary of TCI has agreed to
loan $600 million in cash to IP-IV. IP-IV will, in turn, loan such
$600 million to RCS Pacific. RCS Pacific could use the proceeds of the
aforementioned loan as a portion of the total cash consideration to be
paid to Tele-Vue, or at the option of TCI, to purchase $600 million of
TCI Class A common stock. Should TCI elect to sell such common stock,
RCS Pacific has the option to pay the consideration by delivery to
Tele-Vue of its short-term note of up to $600 million of the total
consideration with the balance to be paid in cash. Such note, if it
is delivered, will be secured by RCS Pacific's pledge of shares of
stock of TCI having an aggregate market value equal to the principal
amount of such note, and payment of such note is expected to be made
with the proceeds of the sale of the TCI stock pledged as collateral.
TCI will guarantee that RCS Pacific will receive, upon sale of such
TCI common stock, an amount equal to the principal amount of, and
accrued interest on, the note delivered to Tele-Vue. The consummation
of the transactions contemplated by the Agreement is conditioned,
among other things, on receipt of approvals of various franchise and
other governmental authorities and receipts of "minority tax
certificates" from the FCC.
(4) The Purchaser has outstanding an offer to purchase all outstanding
shares of QVC Common Stock and QVC Preferred Stock of QVC at
$46 per share of QVC Common Stock and $460 per share of QVC Preferred
Stock, net to the seller in cash, upon the terms of the related Offer
to Purchase, as supplemented, and related Letters of Transmittal. If
the QVC Tender Offer is consummated, the Purchaser will be merged with
and into QVC and any remaining shares of QVC will be converted in the
QVC Merger into cash at the same price as that offered in the QVC
Tender Offer. As disclosed in a Supplement, dated the date hereof, to
the Offer to Purchase the expiration date for the QVC Tender Offer has
been extended to midnight, New York City time, on Thursday, February
9, 1995. The QVC Tender Offer is subject to various conditions,
including obtaining financing sufficient to allow the Purchaser to
purchase all of the outstanding Shares pursuant to the QVC Tender
Offer, to consummate the QVC Merger and to pay related fees and
expenses and to the absence of certain legal actions or proceedings.
If the QVC Tender offer is consumated, Liberty will own approximately
43% of the Purchaser and will account for such investment utilizing
the equity method.
(continued)
12
<PAGE> 51
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Condensed Pro Forma Combined Financial Statements
(5) Represents an allocation of the purchase price of TeleCable to its
tangible and intangible assets. The cost allocations were estimated
using information available at the date of preparation of these
condensed pro forma combined financial statements and will be adjusted
upon final appraisal of the assets acquired. Therefore, the actual
allocations may differ from those allocations reflected herein.
(6) Represents the estimated incremental deferred income tax liability
associated with the TeleCable purchase price allocations, as described
in note (5) above. The adjustment assumes a combined federal and
state income tax rate of 41%.
(7) Represents the elimination of TeleCable's historical stockholders'
deficit, including the note receivable from the employee stock
purchase plan. Pursuant to the Merger Agreement, any portion of such
note receivable that remains unpaid at closing will not be included in
the calculation of net liabilities to be assumed by TCIC at closing.
(8) Represents TCI's capital contribution to TCIC resulting from the
issuance by TCI to TeleCable shareholders of shares of TCI Class A
common stock (currently estimated to be approximately 42 million
shares) and 1 million shares of Series D Preferred Stock with an
aggregate liquidation value of $300 million. The number of shares of
TCI Class A common stock to be issued, which will be calculated using
a per share value of $24, is dependent upon the amount of net
liabilities of TeleCable that is assumed by TCIC at closing and
certain other factors. See note (2) above.
(9) Represents TCI's capital contribution to IP-IV.
(10) Represents borrowings by TCI, the proceeds of which will be loaned to
IP-IV who will in turn loan the proceeds to RCS Pacific.
(11) Represents the elimination of intercompany revenue and operating
expenses between TCIC and Liberty arising from the sale of certain
cable television programming to their respective cable television
subscribers. See note (2) above.
(12) Represents depreciation and amortization of TeleCable's allocated
excess purchase price based upon weighted average lives of 12-1/2
years for property and equipment and 40 years for franchise costs. See
note (1).
(13) Represents the elimination of interest on intercompany indebtedness
between TCIC and Liberty. See note (1) above.
(14) Represents the elimination of TCIC's share of Liberty's historical
earnings.
(15) Reflects the estimated income tax effect of the pro forma adjustments.
(continued)
13
<PAGE> 52
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Condensed Pro Forma Combined Financial Statements
(16) Represents the dividend requirements on TCI's Series D Preferred Stock
(to be issued in connection with the proposed Merger - see note 2).
(17) Represents the elimination of the preferred stock dividend requirement
on certain preferred stock of Liberty repurchased from TCIC in June of
1993.
(18) Reflects assumed interest expense on borrowings by TCI to provide a
$600 million loan and $7 million capital contribution to IP-IV.
Such interest expense is calculated at the assumed rate of 6%
per annum.
(19) Represents assumed interest income on note receivable described in
note 9. Such interest income is calculated at the assumed rate of 12%
per annum.
(20) Represents TCI's share of historical earnings of IP-IV based upon
historical earnings of the cable television systems to be acquired by
RCS Pacific from Tele-Vue.
(21) Represents the adjustment to TCI's share of historical earnings of
IP-IV to reflect the acquisition of certain cable television systems
by RCS Pacific. Such adjustment reflects TCI's 25% interest in IP-IV
through such time as the capital contribution of the general partner
of IP-IV has been reduced to zero through allocated share of losses.
After such time, the adjustment reflects the recognition by TCI of
100% of the losses of IP-IV. Such losses result from assumed
additional depreciation and amortization of the allocated excess
purchase price and from assumed additional interest expense on the
assumed indebtedness incurred by RCS Pacific to fund the purchase
price.
(22) Reflects the incremental increase in TCI's share of QVC's historical
earnings resulting from the proposed consummation of the QVC Tender
Offer.
(23) Represents the adjustment to TCI's share of the pro forma loss of
the Purchaser after giving effect to the proposed consummation of the
QVC Tender Offer. Such adjustment reflects the estimated incremental
interest, depreciation and amortization expense, net of income taxes,
that will be incurred by the Purchaser following the proposed
consummation of the QVC Tender Offer.
(24) Reflects the elimination of the preferred stock dividend requirement
on TCIC preferred stock converted into common stock of TCIC during the
year ended December 31, 1993.
(25) Represents the elimination of the preferred stock dividend
requirements on Liberty preferred stock held by TCIC converted into
preferred stock of TCI.
(26) Amount not eliminated for pro forma purposes as a reserve for an
impairment would have been required (based upon fair market value of
underlying asset) equal to the loss recognized by Liberty.
(27) Should TCI elect to sell $600 million of TCI Class A common stock to
RCS Pacific and should RCS Pacific elect to pay a portion of the
consideration with a note payable in the principal amount of $600
million, net earnings attributable to common shareholders would be $59
million (or $.09 per share) for the nine months ended September 30,
1994 and net loss attributable to common shareholders would be $49
million (or $.08 per share) for the year ended December 31, 1993,
respectively.
(28) Reflects primary and fully diluted earnings per common and common
equivalent share based upon 650,386,837 weighted average shares. Such
amount is calculated utilizing 517,168,689 weighted average shares of
TCI at September 30, 1994 (such amount representing TCI's weighted
average shares, as disclosed in its historical financial statements),
adjusted for the effect of shares issued in the TCI/Liberty
Combination as if such transaction had occurred on January 1 and
adjusted for the issuance of approximately 42 million shares of TCI
Class A common stock to be issued in connection with the Merger.
Shares issuable upon conversion of the Series D Preferred Stock (see
note 2) have not been included in the computation of weighted average
shares outstanding for the nine months ended September 30, 1994
because their inclusion would be anti-dilutive.
(continued)
14
<PAGE> 53
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly TCI/Liberty Holding Company)
Notes to Condensed Pro Forma Combined Financial Statements
(29) Reflects loss per common share based upon 591,282,340 weighted average
shares. Such amount is calculated utilizing (i) 432,566,150 weighted
average shares of TCIC at December 31, 1993 (such amount representing
TCIC's weighted average shares, as disclosed in its historical
financial statements) reduced by 6,525,721 shares of TCIC common stock
previously held by Liberty (ii) 126,932,745 weighted averages shares
of Liberty at December 31, 1993 (such amount representing Liberty's
weighted average shares, as disclosed in its historical financial
statements and Liberty common stock repurchased from TCIC in 1993, all
of which have been adjusted by 0.975 of a share) reduced by 3,390,834
shares of Liberty common stock (as adjusted by 0.975 of a share)
previously held by TCIC and (iii) 41,700,000 shares of TCI Class A
common stock to be issued in connection with the proposed Merger.
Shares issuable upon conversion of the Series D Preferred Stock (see
note 2) have not been included in the computation of weighted average
shares outstanding for the year ended December 31, 1993 because their
inclusion would be anti-dilutive.
15
