<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment #1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-5550
TCI COMMUNICATIONS, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-0588868
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
All of the Registrant's common stock is owned by Tele-Communications, Inc.
The number of shares outstanding of the Registrant's common stock as of April
30, 1996, was:
Class A common stock - 811,655 shares; and
Class B common stock - 94,447 shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI COMMUNICATIONS, INC.
Date: July 3, 1996 By: /s/ Bernard W. Schotters
------------------------------------------
Bernard W. Schotters
Senior Vice President
(Principal Financial Officer)
Date: July 3, 1996 By: /s/ Stephen M. Brett
------------------------------------------
Stephen M. Brett
Senior Vice President
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 81 --
Trade and other receivables, net 229 262
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 3) 1,046 1,062
Property and equipment, at cost:
Land 61 63
Distribution systems 9,393 8,942
Support equipment and buildings 1,175 1,147
------- -------
10,629 10,152
Less accumulated depreciation 3,757 3,547
------- -------
6,872 6,605
------- -------
Franchise costs 14,288 13,618
Less accumulated amortization 2,116 2,055
------- -------
12,172 11,563
------- -------
Other assets, at cost, net of amortization 541 489
------- -------
$20,941 19,981
======= =======
</TABLE>
(continued)
I-1
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
Liabilities and Stockholder's Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 160 176
Accrued interest 172 226
Accrued programming expense 279 209
Other accrued expenses 406 473
Debt (note 4) 12,298 12,635
Deferred income taxes 4,469 4,261
Other liabilities 61 66
------- -------
Total liabilities 17,845 18,046
------- -------
Minority interests in equity
of consolidated subsidiaries 205 206
Redeemable preferred stock 232 --
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely subordinated debt
securities of the Company (note 5) 508 --
Stockholder's equity:
Class A common stock, $1 par value.
Authorized 910,553 shares;
issued and outstanding 811,655
shares 1 1
Class B common stock, $1 par value.
Authorized 94,447 shares;
issued and outstanding 94,447
shares -- --
Additional paid-in capital 3,670 3,122
Unrealized holding gains for
available-for-sale securities, net
of taxes 4 7
Accumulated deficit (447) (370)
------- -------
3,228 2,760
Investment in Tele-Communications, Inc.
("TCI") (note 1) (1,143) (1,143)
Due to TCI 66 112
------- -------
Total stockholder's equity 2,151 1,729
------- -------
Commitments and contingencies (note 7)
$20,941 19,981
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months
ended
March 31,
---------------------
1996 1995
------ ------
amounts in millions
<S> <C> <C>
Revenue (note 6) $1,402 1,169
Operating costs and expenses:
Operating 464 355
Selling, general and administrative 436 317
Adjustment to compensation relating
to stock appreciation rights (4) (1)
Depreciation 236 192
Amortization 96 76
------ ------
1,228 939
------ ------
Operating income 174 230
Other income (expense):
Interest expense (246) (232)
Interest and dividend income (note 6) 7 8
Share of losses of affiliates, net (note 3) (60) (9)
Other, net 3 11
------ ------
(296) (222)
------ ------
Earnings (loss) before income taxes (122) 8
Income tax benefit (expense) 45 (4)
------ ------
Net earnings (loss) (77) 4
Preferred stock dividend requirements (2) --
------ ------
Net earnings (loss) attributable to
common stockholder $ (79) 4
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Stockholder's Equity
Three months ended March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
holding
gains for
available-
Additional for-sale Investment Due Total
Common stock paid-in securities, Accumulated in to stockholder's
Class A Class B capital net of taxes deficit TCI TCI equity
------- ------- ---------- ------------ ----------- --------- ------ ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 -- 3,122 7 (370) (1,143) 112 1,729
Net loss -- -- -- -- (77) -- -- (77)
TCI Group common stock issued
and debt assumed by TCI in
acquisition reflected as
contribution -- -- 564 -- -- -- -- 564
Contribution of TCI subsidiary
(note 6) -- -- (14) -- -- -- -- (14)
Accreted dividends on preferred
stock -- -- (2) -- -- -- -- (2)
Change in unrealized holding gains
for available-for-sale securities,
net of taxes -- -- -- (3) -- -- -- (3)
Change in due to TCI -- -- -- -- -- -- (46 ) (46)
------ ------ ------ ------ ------ ------ ------ ------
Balance at March 31, 1996 $ 1 -- 3,670 4 (447) (1,143) 66 2,151
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1996 1995
------- -------
amounts in millions
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (77) 4
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 332 268
Adjustment to compensation relating to stock
appreciation rights (4) (1)
Share of losses of affiliates 60 9
Deferred income tax benefit (47) (10)
Other noncash credits (7) (16)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 46 20
Change in accrued interest (54) (36)
Change in other accruals and payables (22) 10
------- -------
Net cash provided by operating activities 227 248
------- -------
Cash flows from investing activities:
Cash paid for acquisitions (27) (9)
Capital expended for property and equipment (389) (325)
Cash proceeds from disposition of assets 40 13
Additional investments in and
loans to affiliates and others (61) (161)
Other investing activities (16) (15)
------- -------
Net cash used in investing activities (453) (497)
------- -------
Cash flows from financing activities:
Borrowings of debt 1,112 880
Repayments of debt (1,467) (930)
Issuance of preferred stock 223 --
Issuance of company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
subordinated debt securities of the Company 486 --
Change in due to/from TCI (47) 307
------- -------
Net cash provided by financing activities 307 257
------- -------
Net increase in cash 81 8
Cash at beginning of period -- 6
------- -------
Cash at end of period $ 81 14
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
March 31, 1996
(unaudited)
(1) General
-------
The accompanying consolidated financial statements include the accounts of
TCI Communications, Inc. ("TCIC" or the "Company") and those of all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results
for such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in TCIC's Annual Report on
Form 10-K for the year ended December 31, 1995.
TCIC, through its subsidiaries and affiliates, is principally engaged in
the construction, acquisition, ownership, and operation of cable television
systems. TCIC operates its cable television systems throughout the
continental United States through its four regional operating divisions --
Central, Great Lakes, Southeast and West.
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI to issue a new class of stock ("Liberty Group Stock")
which is intended to reflect the separate performance of the business unit
which produces and distributes cable television programming services,
("Liberty"). While the Liberty Group Stock constitutes common stock of TCI,
the issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the
rights of holders of TCI's or any of its subsidiaries' debt. On August 10,
1995, TCI distributed Liberty Group Stock representing one hundred percent
of the equity value attributable to Liberty to its security holders of
record on August 4, 1995. Additionally, the stockholders of TCI approved
the redesignation of the previously authorized TCI Class A and Class B
common stock into Series A TCI Group and Series B TCI Group common stock
("TCI Group Stock").
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company periodically reviews the
carrying amount of its long-lived assets, franchise costs and certain other
assets to determine whether current events or circumstances warrant
adjustments to such carrying amounts. The Company considers historical and
expected future net operating losses to be its primary indicators of
potential impairment. Assets are grouped and evaluated for impairment at
the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets ("Assets").
The Company deems Assets to be impaired if the Company is unable to recover
the carrying value of such Assets over their expected remaining useful life
through a forecast of undiscounted future operating cash flows directly
related to the Assets. If Assets are deemed to be impaired, the loss is
measured as the amount by which the carrying amount of the Assets exceeds
their fair value. The Company generally measures fair value by considering
sales prices for similar assets or by discounting estimated future cash
flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly
from such estimates. The Company adopted Statement No. 121 effective
January 1, 1996. Such adoption did not have a significant effect on the
financial position or results of operations of the Company.
(continued)
I-6
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts have been reclassified for comparability with the 1996
presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $300 million and $268 million for the three
months ended March 31, 1996 and 1995, respectively. Also during these
periods, cash paid for income taxes was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------
1996 1995
----- -----
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 831 2,769
Liabilities assumed, net of current assets 4 (279)
Deferred tax liability recorded in
acquisitions (240) (875)
Minority interests in equity of
acquired entities (4) (3)
Common stock issued and debt assumed
(in 1996) by TCI in acquisition reflected as
a contribution to TCIC (564) (234)
Increase in amounts due to TCI resulting
from common stock of TCI issued in
acquisition -- (1,369)
----- -----
Cash paid for acquisitions $ 27 9
----- -----
Accrued preferred stock dividends $ 2 --
===== =====
</TABLE>
(continued)
I-7
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(3) Investments in Affiliates
-------------------------
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Three months ended
Combined Operations March 31,
-----------------
1996 1995
----- -----
amounts in millions
<S> <C> <C>
Revenue $ 171 52
Operating expenses (186) (53)
Depreciation and amortization (22) (9)
----- -----
Operating loss (37) (10)
Interest expense (7) (2)
Other, net 24 (6)
----- -----
Net loss $ (20) (18)
===== =====
</TABLE>
TCIC has various investments accounted for under the equity method. The
most significant investment held by TCIC at March 31, 1996 was its
investment in a partnership ("Sprint Spectrum"), formed by TCIC, Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Sprint
Corporation ("Sprint") (carrying value of $671 million). See note 7.
Additionally, TCIC has an investment in Teleport Communications Group, Inc.
and TCG Partners (collectively, "TCG") (carrying value of $249 million).
Certain of TCIC's affiliates are general partnerships and any subsidiary of
TCIC that is a general partner in a general partnership is, as such, liable
as a matter of partnership law for all debts of that partnership in the
event liabilities of that partnership were to exceed its assets.
(4) Debt
----
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
amounts in millions
<S> <C> <C>
Parent company debt:
Notes payable $ 7,884 6,713
Bank credit facilities 140 179
Commercial paper 495 1,440
Other debt 1 1
------- -------
8,520 8,333
Debt of subsidiaries:
Bank credit facilities 2,759 3,258
Notes payable 930 934
Convertible notes (a) 45 45
Commercial paper -- 29
Other debt 44 36
------- -------
$12,298 12,635
======= =======
</TABLE>
(continued)
I-8
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(a) These convertible notes, which are stated net of unamortized discount of
$185 million and $186 million at March 31, 1996 and December 31, 1995,
respectively, mature on December 18, 2021. The notes require (so long as
conversion of the notes has not occurred) an annual interest payment
through 2003 equal to 1.85% of the face amount of the notes. The notes are
convertible, at the option of the holders, into shares of Series A TCI
Group Stock and Series A Liberty Group Stock.
TCIC's bank credit facilities and various other debt instruments generally
contain restrictive covenants which require, among other things, the maintenance
of certain earnings, specified cash flow and financial ratios (primarily the
ratios of cash flow to total debt and cash flow to debt service, as defined),
and include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and dividend payments.
As security for borrowings under one of TCIC's bank credit facilities, TCIC
pledged 100,524,364 shares of Series A TCI Group Stock held by a subsidiary of
TCIC.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCIC has entered into various interest rate exchange agreements
pursuant to which it pays (i) fixed interest rates (the "Fixed Rate Agreements")
ranging from 6.1% to 9.9% on notional amounts of $602 million at March 31, 1996
and (ii) variable interest rates (the "Variable Rate Agreements") on notional
amounts of $2,670 million at March 31, 1996. During the three months ended March
31, 1996 and 1995, TCIC's net receipts pursuant to the Fixed Rate Agreements
were $5 million for each of the periods; and TCIC's net receipts pursuant to the
Variable Rate Agreements were $8 million and $1 million, respectively.
TCIC's Fixed Rate Agreements and Variable Rate Agreements expire as follows:
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
---------- ---------- ------ ---------- -------------- ------
amounts in millions amounts in millions
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.4% 450
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
---- February 2000 5.8%-6.6% 650
$602 March 2000 5.8%-6.0% 675
==== September 2000 5.1% 75
-------
$ 2,670
=======
</TABLE>
(continued)
I-9
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
TCIC is exposed to credit losses for the periodic settlements of amounts
due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCIC does
not anticipate that it will incur any material credit losses because it
does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that TCIC would pay or receive to terminate the agreements at March
31, 1996, taking into consideration current interest rates and assuming the
current creditworthiness of the counterparties. TCIC would pay an estimated
$29 million at March 31, 1996 to terminate the agreements.
The fair value of TCIC's debt is estimated based on current market prices
for the same or similar issues or on the current rates offered to TCIC for
debt of the same remaining maturities. The fair value of debt, which has a
carrying value of $12,298 million, was $12,945 million at March 31, 1996.
TCIC is required to maintain unused availability under bank credit
facilities to the extent of outstanding commercial paper. Also, TCIC pays
fees, ranging from 1/4% to 1/2% per annum, on the average unborrowed
portion of the total amount available for borrowings under bank credit
facilities.
(5) Company-obligated mandatorily redeemable preferred securities of subsidiary
---------------------------------------------------------------------------
trust holding solely subordinated debt securities of the Company
----------------------------------------------------------------
In January 1996, TCI Communications Financing I (the "Trust"), a wholly
owned subsidiary of the Company, issued $16 million in common securities
and $500 million of 8.72% Trust Originated Preferred Securities/sm/ (the
"Preferred Securities" and together with the common securities, the "Trust
Securities"). The Trust exists for the exclusive purpose of issuing Trust
Securities and investing the proceeds thereof into an aggregate principal
amount of $516 million of 8.72% Subordinated Deferrable Interest Notes due
January 31, 2045 (the "Subordinated Debt Securities") of the Company. The
Subordinated Debt Securities are unsecured obligations of the Company and
are subordinate and junior in right of payment to certain other
indebtedness of the Company. Upon redemption of such Subordinated Debt
Securities, the Preferred Securities will be mandatorily redeemable. The
Company effectively provides a full and unconditional guarantee of the
Trust's obligations under the Preferred Securities. The Preferred
Securities are presented as a separate line item in the accompanying
consolidated balance sheet captioned "Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
subordinated debt securities of the Company."
(continued)
I-10
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(6) Transactions with Related Parties
---------------------------------
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and
certain other subsidiaries of TCI was implemented effective July 1, 1995.
The Tax Sharing Agreement formalizes certain of the elements of pre-
existing tax sharing arrangements and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. The Tax Sharing Agreement encompasses U.S. Federal,
state, local and foreign tax consequences and relies upon the U.S. Internal
Revenue Code of 1986 as amended, and any applicable state, local and
foreign tax law and related regulations. Beginning on the July 1, 1995
effective date, TCIC is responsible to TCI for its share of current
consolidated income tax liabilities. TCI will be responsible to TCIC to the
extent that TCIC's income tax attributes generated after the effective date
are utilized by TCI to reduce its consolidated income tax liabilities.
Accordingly, all tax attributes generated by TCIC's operations after the
effective date including, but not limited to, net operating losses, tax
credits, deferred intercompany gains, and the tax basis of assets are
inventoried and tracked for the entities comprising TCIC.
TCIC purchases sports and other programming from certain subsidiaries of
Liberty. Charges to TCIC (which are based upon customary rates charged to
others) for such programming were $27 million and $19 million for the three
months ended March 31, 1996 and 1995, respectively. Such amounts are
included in operating expenses in the accompanying consolidated statements
of operations.
Certain TCIC corporate general and administrative costs are charged to
subsidiaries of TCI at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are set
at levels that management believes to be reasonable and that approximate
the costs the subsidiaries would incur for comparable services on a stand
alone basis. During the three months ended March 31, 1996 and 1995, Liberty
and Tele-Communications International, Inc. ("TINTA"), a majority owned
subsidiary of TCI, were each allocated $1 million in corporate general and
administrative costs by TCIC.
Liberty leases satellite transponder facilities from TCIC. Charges by TCIC
for such arrangements for each of the three month periods ended March 31,
1996 and 1995, aggregated $3 million.
TCI Starz, Inc., a subsidiary of TCI, has a 50.1% general partnership
interest in QE+ Ltd Limited Partnership ("QE+"), which distributes STARZ!,
a first-run movie premium programming service. Liberty holds the remaining
49.9% partnership interest.
(continued)
I-11
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statement
TCIC has entered into a long-term affiliation agreement with QE+ in respect
to the distribution of the STARZ! service. Rates per subscriber specified in
the agreement are based upon customary rates charged to other cable system
operators. Payments to QE+ for the three months ended March 31, 1996 were
approximately $18 million. The affiliation agreement also provides that QE+
will not grant materially more favorable terms and conditions to other cable
system operators unless such more favorable terms and conditions are made
available to TCIC. The affiliation agreement also requires TCIC to make
payments to QE+ with respect to a guaranteed minimum number of subscribers
totaling approximately $339 million for the years 1996, 1997 and 1998.
At March 31, 1996, TCIC had an $107 million intercompany receivable from
TCI Starz, Inc. which represented the net effect of advances to TCI Starz, Inc.
who in turn paid such amounts to QE+ offset by TCIC's purchase of programming
from QE+. Such receivable is non-interest bearing for five years from the date
of the advances.
A consolidated subsidiary of Liberty, Home Shopping Network, Inc. pays a
commission to TCIC for merchandise sales to customers who are subscribers of
TCIC's cable systems. Aggregate commissions to TCIC were $2 million for each of
the three month periods ended March 31, 1996 and 1995. Such amounts are
recorded in revenue in the accompanying consolidated statements of operations.
A subsidiary of TCI purchases from TCIC, at TCIC's cost plus an
administrative fee, certain pay television and other programming. Charges for
such programming were $4 million for each of the three month periods ended March
31, 1996 and 1995. Such amounts are recorded in revenue in the accompanying
consolidated statements of operations.
On March 31, 1996, a subsidiary of TCI contributed the stock of Liberty of
Paterson, Inc. to TCIC in exchange for stock of a subsidiary of TCIC. Such
contribution is reflected as a decrease in the accompanying consolidated
statement of stockholder's equity.
A subsidiary of TINTA purchases from TCIC, at TCIC's cost plus an
administrative fee, certain pay television and other programming. Charges for
such programming were $1 million for the three months ended March 31, 1996.
TINTA has indemnified TCIC for any loss, claim or liability that TCIC may
incur by reason of certain guarantees and credit enhancements made by TCIC on
TINTA's behalf.
TCIC advanced certain subsidiaries of TCI interest-bearing loans during 1996 and
1995. Such advances aggregrated $112 million at March 31, 1996 and December 31,
1995. Interest earned by TCIC on such intercompany loans aggregated $2 million
and $3 million for the three months ended March 31, 1996 and 1995, respectively.
Such amounts are included in interest and dividend income in the accompanying
consolidated statements of operations.
(continued)
I-12
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(7) Commitments and Contingencies
-----------------------------
TCIC, Comcast, Cox and Sprint are partners in Sprint Spectrum, a
partnership formed to engage in the business of providing wireless
communications services on a nationwide basis. TCIC owns a 30% interest in
Sprint Spectrum. Sprint Spectrum was the successful bidder for personal
communications services ("PCS") licenses for 29 markets in the auction
conducted by the Federal Communications Commission ("FCC") that ended in
March 1995. The aggregate license cost for these licenses was approximately
$2.1 billion, all of which has been paid. Sprint Spectrum may elect to bid
in subsequent auctions of PCS licenses and/or acquire PCS licenses from
other holders, has invested in an entity ("APC") which holds the PCS
license for the Washington-Baltimore market, has agreed to invest in the
entity that will hold the PCS license for the Los Angeles-San Diego market,
and may invest in other entities that hold PCS licenses. Subsidiaries of
Cox, Sprint and TCIC are also partners in a partnership ("PhillieCo") that
holds a PCS license for the Philadelphia market which was acquired at a
license cost of $85 million. TCIC has a 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's
nationwide network, the partners are obligated to make additional cash
capital contributions to Sprint Spectrum in the aggregate amount of
approximately $1.9 billion during the two-year period that commenced
January 1, 1996. The business plan contemplates that Sprint Spectrum will
require additional equity thereafter.
In July 1995, TCIC and TCI entered into certain agreements with Viacom Inc.
("Viacom") and certain subsidiaries of Viacom regarding the purchase by
TCIC of all of the common stock of a subsidiary of Viacom ("Cable Sub")
which, at the time of purchase, will own Viacom's cable systems and related
assets.
The transaction has been structured as a tax-free reorganization in which
Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to a new subsidiary
of Viacom ("New Viacom Sub"). Cable Sub will also transfer to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the
"Loan Facility") to be arranged by TCIC, TCI and Cable Sub. Following these
transfers, Cable Sub will retain cable assets with an estimated value at
closing of approximately $2.2 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common Stock
and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the
opportunity to exchange (the "Exchange Offer") a portion of their shares of
Viacom Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). The Exchange Offer will be
subject to a number of conditions, including a condition (the "Minimum
Condition") that sufficient tenders are made of Viacom Common Stock that
permit the number of shares of Cable Sub Class A Stock issued pursuant to
the Exchange Offer to equal the total number of shares of Cable Sub Class A
Stock issuable in the Exchange Offer.
(continued)
I-13
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B Common Stock for $350 million
(which will be used to reduce Cable Sub's obligations under the Loan Facility).
At the time of such acquisition, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer will automatically convert into a
series of senior cumulative exchangeable preferred stock (the "Exchangeable
Preferred Stock") of Cable Sub with a stated value of $100 per share (the
"Stated Value"). The terms of the Exchangeable Preferred Stock, including its
dividend, redemption and exchange features, will be designed to cause the
Exchangeable Preferred Stock, in the opinion of two investment banks, to
initially trade at the Stated Value. The Exchangeable Preferred Stock will be
exchangeable, at the option of the holder commencing after the fifth anniversary
of the date of issuance, for shares of Series A TCI Group Stock. The
Exchangeable Preferred Stock will also be redeemable, at the option of Cable
Sub, after the fifth anniversary of the date of issuance, and will be subject to
mandatory redemption on the tenth anniversary of the date of issuance at a price
equal to the Stated Value per share plus accrued and unpaid dividends, payable
in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock,
or in any combination of the foregoing. If insufficient tenders are made by
Viacom stockholders in the Exchange Offer to permit the Minimum Condition to be
satisfied, Viacom will extend the Exchange Offer for up to 15 business days and,
during such extension, TCI and Viacom are to negotiate in good faith to
determine mutually acceptable changes to the terms and conditions for the
Exchangeable Preferred Stock and the Exchange Offer that each believes in good
faith will cause the Minimum Condition to be fulfilled and that would cause the
Exchangeable Preferred Stock to trade at a price equal to the Stated Value
immediately following the expiration of the Exchange Offer. In the event the
Minimum Condition is not thereafter met, TCI and Viacom will each have the right
to terminate the transaction. In addition, either party may terminate the
transaction if the Exchange Offer has not commenced by June 24, 1996 or been
consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue Service
that the transaction qualifies as a tax-free transaction and the satisfaction or
waiver of all of the conditions of the Exchange Offer. A request for a letter
ruling from the Internal Revenue Service has been filed by Viacom. TCIC
believes that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of TCIC has concluded that
consummation of the transaction is not yet probable. No assurance can be given
that the transaction will be consummated.
TCIC has guaranteed notes payable and other obligations of affiliated and
other companies with outstanding balances of approximately $213 million at March
31, 1996. Although there can be no assurance, management of TCIC believes that
it will not be required to meet its obligations under such guarantees, or if it
is required to fulfill any of such obligations, that they will not be material
to TCIC.
(continued)
I-14
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
In connection with the launch of STARZ!, TCIC became a direct obligor or
guarantor of the payment of certain amounts that may be due pursuant to motion
picture output, distribution, and license agreements. As of March 31, 1996, the
maximum amount of such obligations or guarantees was approximately $133 million.
The future obligations of TCIC with respect to these agreements is not currently
determinable because such amount is dependent upon certain variable factors.
TCIC has also committed to provide additional debt or equity funding to
certain of its affiliates. At March 31, 1996, such commitments aggregated $21
million.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries' common
stock. Estimates of the compensation related to the restricted stock awards and
options and/or SARs have been recorded in the accompanying consolidated
financial statements, but are subject to future adjustment based upon the market
value of the respective common stock and, ultimately, on the final market value
when the rights are exercised or the restricted stock awards are vested.
TCIC has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
I-15
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. The following discussion focuses on material
changes in the trends, risks and uncertainties affecting the Company's results
of operations and financial condition.
(1) Material changes in financial condition:
----------------------------------------
On August 10, 1995, TCI distributed Liberty Group Stock representing one
hundred percent of the equity value attributable to Liberty to its security
holders of record on August 4, 1995. Additionally, the stockholders of TCI
approved the redesignation of the previously authorized TCI Class A and Class B
common stock into Series A TCI Group and Series B TCI Group Stock.
TCIC, Comcast, Cox and Sprint are partners in Sprint Spectrum formed to
engage in the business of providing wireless communications services on a
nationwide basis. TCIC owns a 30% interest in Sprint Spectrum. Sprint Spectrum
was the successful bidder for PCS licenses for 29 markets in the auction
conducted by the FCC that ended in March 1995. The aggregate license cost for
these licenses was approximately $2.1 billion, all of which has been paid.
Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or
acquire PCS licenses from other holders, has invested in APC which holds the PCS
license for the Washington-Baltimore market, has agreed to invest in the entity
that will hold the PCS license for the Los Angeles-San Diego market, and may
invest in other entities that hold PCS licenses. Subsidiaries of Cox, Sprint
and TCIC are also partners in PhillieCo that holds a PCS license for the
Philadelphia market which was acquired at a license cost of $85 million. TCIC
has a 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The business
plan contemplates that Sprint Spectrum will require additional equity
thereafter.
In July 1995, TCIC and TCI entered into certain agreements with Viacom and
certain subsidiaries of Viacom regarding the purchase by TCIC of all of the
common stock of a subsidiary of Viacom which, at the time of purchase, will own
Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in which
Cable Sub will initially transfer all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to New Viacom Sub. Cable Sub
will also transfer to New Viacom Sub the proceeds of the Loan Facility.
Following these transfers, Cable Sub will retain cable assets with an estimated
value at closing of approximately $2.2 billion and the obligation to repay the
Loan Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
(continued)
I-16
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(1) Material changes in financial condition (continued):
----------------------------------------------------
Viacom will offer to the holders of Viacom Common Stock the opportunity to
exchange a portion of their shares of Viacom Common Stock for shares of Cable
Sub Class A Stock. The Exchange Offer will be subject to a number of
conditions, including meeting the Minimum Condition.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B Common Stock for $350 million
(which will be used to reduce Cable Sub's obligations under the Loan Facility).
At the time of such acquisition, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer will automatically convert into
Exchangeable Preferred Stock. In the event the Minimum Condition is not met
either through the tenders received in the Exchange Offer or upon any extension
of the Exchange Offer, TCI and Viacom will each have the right to terminate the
transaction. In addition, either party may terminate the transaction if the
Exchange Offer has not commenced by June 24, 1996 or been consummated by July
24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue Service
that the transaction qualifies as a tax-free transaction and the satisfaction or
waiver of all of the conditions of the Exchange Offer. A request for a letter
ruling from the Internal Revenue Service has been filed by Viacom. TCIC
believes that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of TCIC has concluded that
consummation of the transaction is not yet probable. Accordingly, no assurance
can be given that the transaction will be consummated. For additional
discussion of the Viacom transaction, see note 7 to the accompanying
consolidated financial statements.
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenues of $442 million and net earnings
of $34 million. It is expected that if the transaction is consummated, the
Company would account for such acquisition under the purchase method of
accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and the
estimated aggregate Stated Value of the Exchangeable Preferred Stock of $500
million) would be allocated to the assets and liabilities acquired according to
their respective fair values, with any excess being treated as intangible
assets. As such, the Company will, if such transaction is consummated, reflect
additional interest expense, depreciation, amortization and minority share of
losses of consolidated subsidiaries. On a pro forma basis, if the transaction
had been consummated under its current terms on or before January 1, 1995, Cable
Sub would have reflected loss before taxes of approximately $51 million for the
year ended December 31, 1995. On a pro forma basis, Cable Sub would reflect an
approximate $21 million of preferred stock dividend requirements on an annual
basis assuming, solely for the purpose of this presentation, a dividend rate of
4.25% per annum on the Exchangeable Preferred Stock. On a pro forma basis, the
Company would reflect the foregoing financial impacts of Cable Sub in its
consolidated results of operations except that the preferred stock dividend
requirement of Cable Sub would be reflected as minority interest in the
Company's statement of operations and the Company would incur an additional
approximately $28 million of interest expense per year arising from the assumed
borrowing by the Company for its $350 million capital contribution to Cable Sub.
TCIC does not anticipate that the pro forma effect of the transaction for the
three months ended March 31, 1996 will vary significantly from the pro forma
effect, on a pro rata basis, reflected for the year ended December 31, 1995.
(continued)
I-17
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(1) Material changes in financial condition (continued):
----------------------------------------------------
Pursuant to an underwritten public offering, TCI sold 19,550,000 shares of
TCI Class A common stock in February of 1995. TCI received approximately $401
million. Such proceeds were immediately used to reduce TCIC outstanding
indebtedness under credit facilities.
As security for borrowings under one of TCIC's bank credit facilities, TCIC
pledged 100,524,364 shares of Series A TCI Group Stock held by a subsidiary
of TCIC.
During the first quarter of 1996, the Company issued (i) 4.6 million shares
of Series A Cumulative Exchangeable Preferred Stock in a public offering for net
cash proceeds of $223 million and (ii) $1 billion of publicly-placed fixed rate
senior and medium term notes with interest rates ranging from 6.9% to 7.9% and
maturing dates ranging through 2026. In addition, a subsidiary of the Company
(a special purpose entity formed as a Delaware business trust) issued 20 million
preferred securities of 8.72% Trust Originated Preferred Securities for net cash
proceeds of $486 million. The Company used the proceeds from the aforementioned
debt and equity securities to retire overnight commercial paper and to repay
variable rate indebtedness.
Subsequent to March 31, 1996, TCIC was notified by two of the rating
agencies that the rating of its senior debt by such agencies had been downgraded
by one level to the first level below investment grade status. Two other rating
agencies reaffirmed TCIC's investment grade status; however one such agency
changed its outlook on the Company from stable to negative. Such actions may
adversely affect TCIC's access to the public debt market and its overall cost of
borrowings.
The Company has a credit facility which matures in September of 1996. The
outstanding balance of such facility was $487 million at March 31, 1996. The
Company currently anticipates that it will refinance such borrowings but there
can be no assurance that it can do so on terms acceptable to the Company.
The Company had approximately $3.2 billion in unused lines of credit at
March 31, 1996 excluding amounts related to lines of credit which provide
availability to support commercial paper. Although the Company was in
compliance with the restrictive covenants contained in its credit facilities at
said date, additional borrowings under the credit facilities are subject to the
Company's continuing compliance with such restrictive covenants (which relate
primarily to the maintenance of certain ratios of cash flow to total debt and
cash flow to debt service, as defined in the credit facilities). See note 4 to
the accompanying consolidated financial statements for additional information
regarding the material terms of the Company's lines of credit.
(continued)
I-18
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(1) Material changes in financial condition (continued):
----------------------------------------------------
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash operating
credits or charges)($502 million and $497 million, for the three months ended
March 31, 1996 and 1995, respectively) to interest expense ($246 million and
$232 million, for the three months ended March 31, 1996 and 1995, respectively),
is determined by reference to the consolidated statements of operations. The
Company's interest coverage ratio was 204% and 214% for the three months ended
March 31, 1996 and 1995, respectively. The decrease in the Company's interest
coverage for the three months ended March 31, 1996 is caused by increased
interest expense due to higher interest rates and debt levels in 1996 relative
to the comparable period in 1995. Management of the Company believes that the
foregoing interest coverage ratio is adequate in light of the consistency and
nonseasonal nature of its cable television operations and the relative
predictability of the Company's interest expense, over half of which results
from fixed rate indebtedness. Operating Cash Flow is a measure of value and
borrowing capacity within the cable television industry and is not intended to
be a substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net
cash provided by operating activities ($227 million and $248 million for the
three months ended March 31, 1996 and 1995, respectively) reflects net cash from
the operations of the Company available for the Company's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by the
Company for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of the Company and its subsidiaries to obtain additional
financing (including the subsidiaries available lines of credit and access to
public debt markets), issuances and sales of the Company's equity or equity of
its subsidiaries, proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See the Company's
consolidated statements of cash flows included in the accompanying consolidated
financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements and interest rate hedge agreements. Pursuant to the interest rate
exchange agreements, the Company pays (i) fixed interest rates ranging from 6.1%
to 9.9% on notional amounts of $602 million at March 31, 1996 and (ii)
variable interest rates on notional amounts of $2,670 million at March 31, 1996.
During the three months ended March 31, 1996 and 1995, the Company's net
receipts pursuant to its fixed rate exchange agreements were $5 million for each
of the periods; and the Company's net receipts pursuant to the variable rate
agreements were $8 million and $1 million, respectively. The Company is exposed
to credit losses for the periodic settlements of amounts due under the interest
rate exchange agreements in the event of nonperformance by the other parties to
the agreements. However, the Company does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance by the
counterparties.
(continued)
I-19
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(1) Material changes in financial condition (continued):
----------------------------------------------------
TCIC has guaranteed notes payable and other obligations of affiliated and
other companies with outstanding balances of approximately $213 million at March
31, 1996. Although there can be no assurance, management of TCIC believes that
it will not be required to meet its obligations under such guarantees, or if it
is required to meet any of such obligations, that they will not be material to
TCIC.
In connection with the launch of STARZ!, TCIC became a direct obligor or
guarantor of the payment of certain amounts that may be due pursuant to motion
picture output, distribution, and license agreements. As of March 31, 1996, the
maximum amount of such obligations or guarantees was approximately $133 million.
The future obligations of TCIC with respect to these agreements is not currently
determinable because such amount is dependent upon certain variable factors.
TCIC has also committed to provide additional debt or equity funding to
certain of its affiliates. At March 31, 1996, such commitments aggregated $21
million.
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
(2) Material changes in results of operations:
-----------------------------------------
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competion Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions,
TCIC's basic and tier service rates and its equipment and installation charges
(the "Regulated Services") are subject to the jurisdiction of local franchising
authorities and the FCC. The regulations established bench mark rates in 1993,
which were further reduced in 1994, to which the rates charged by cable
operators for Regulated Services were required to conform.
TCIC reduced its rates in 1993 and 1994 and limited its rate increase in
1995 in response to FCC regulations. TCIC believes that it has complied, in all
material respects, with the provisions of the 1992 Cable Act, including its rate
setting provisions. However, TCIC's rates for Regulated Services are subject to
review by the FCC, if a complaint has been filed, or by the appropriate
franchise authority, if such authority has been certified. If, as a result of
the review process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be retroactive to one
year prior to the implementation of the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom
Act") was signed into law. Because the 1996 Telecom Act does not deregulate
cable programming services tier rates until 1999 (and basic service tier rates
will remain regulated thereafter), TCIC believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse effect on its
results of operations.
(continued)
I-20
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(2) Material changes in results of operations (continued):
-----------------------------------------------------
Revenue increased approximately 20% for the three months ended March 31,
1996, as compared to the corresponding period of 1995. Such increase was the
result of growth in subscriber levels within TCIC's cable television systems
(4%), increases in the rates charged to TCIC's subscribers from inflation
increases, the provision of new channels and increases in equipment costs (4%),
the effect of certain acquisitions (4%), growth in TCIC's satellite subscribers
(6%), growth in revenue generated by TCIC's common carrier microwave assets
(1%), and growth in advertising sales (1%).
Included in TCIC's total revenue is revenue generated by TCIC's common
carrier microwave assets amounting to $25 million and $18 million for the three
months ended March 31, 1996 and 1995, respectively.
Operating expenses increased 31% for the three months ended March 31, 1996.
Exclusive of the effects of acquisitions (5%) and Primestar (7%) (see discussion
below), such expenses increased 19%. Programming and salary expenses accounted
for the majority of such increase. In this regard, programming expenses
represented $283 million (61%) and $237 million (67%) of operating expenses for
the three months ended March 31, 1996 and 1995, respectively. The Company cannot
determine whether and to what extent increases in the cost of programming will
affect its future operating costs. However, such programming costs have
increased at a greater percentage than increases in revenue of Regulated
Services. The Company experienced an increase in programming costs in the first
quarter of 1996 without increasing its rates charged to its customers. In the
Company's regulated cable systems, the Company has made the appropriate filings
to effectuate rate increases for its Regulated Services which will be effective
in June 1996. As allowed by FCC regulations, such rate increases include amounts
intended to recover increased programming costs incurred during the first five
months of 1996 and not previously recovered, as well as interest on said
amounts. The Company anticipates that such increases will result in additional
revenue of approximately $20 million per month.
Selling general and administrative expenses ("SG&A") increased 38% for the
three months ended March 31, 1996. Exclusive of the effects of acquisitions
(4%) and Primestar (17%), SG&A increased 17%. Such increase is due primarily to
salaries and related payroll expenses.
During 1995, the Company changed its approach to how it ordered and stored
excess cable distribution equipment. The Company created material support
centers and consolidated all of its excess inventory. During the three months
ended March 31, 1996, the Company incurred $2 million of costs related to such
material support centers. Additionally, during 1996, the Company incurred
approximately $6 million in expenses related to initiatives to improve its
customer service and to continue the redesign of its computer and accounting
systems.
(continued)
I-21
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
(2) Material changes in results of operations (continued):
-----------------------------------------------------
TCIC has an interest in an entity, Primestar Partners ("Primestar"), which
provides programming and marketing support to its partners who distribute a
multi-channel programming service via a medium power communications satellite to
home satellite dish owners. During the three months ended March 31, 1996,
TCIC's revenue and expenses related to such satellite service have increased
significantly over the corresponding period in 1995, as the number of TCIC's
Primestar subscribers increased from approximately 150,000 subscribers at March
31, 1995 to approximately 570,000 subscribers at March 31, 1996. During the
three months ended March 31, 1996, revenue increased from $24 million to $98
million and operating, selling, general and administrative expenses increased
from $16 million to $95 million, as compared to the three months ended March 31,
1995. TCIC incurs significant sales commission and installation costs when
customers initially subscribe. Therefore, as long as TCIC continues to launch
this new service and increase its Primestar subscriber base at such a rapid
pace, management expects operating costs and expenses will increase as well.
The increase in TCIC's depreciation expense in 1996 is due to acquisitions,
as well as increased capital expenditures incurred to upgrade and install
optical fiber technology in TCIC's cable systems. The systems, which facilitate
digital transmission of voice, video and data signals, will have optical fiber
to neighborhood nodes with coaxial cable distribution downstream from that
point. The increase in amortization expense in 1996 is due to acquisitions.
The Company records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
Included in share of losses for the three months ended March 31, 1996 is
$53 million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.
TCIC's net loss of $77 million for the three months ended March 31, 1996
represented a decrease of $81 million as compared to TCIC's net earnings of $4
million for the corresponding period of 1995. Such decrease is the result of an
increase in interest expense due to higher interest rates and debt levels, the
aforementioned share of losses from Sprint Spectrum and the increases in
depreciation and amortization expense.
In March of 1995, the FASB issued Statement No. 121 effective for fiscal
years beginning after December 15, 1995. Statement No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement No. 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company periodically reviews the carrying amount of its long-
lived assets, franchise costs and certain other assets to determine whether
current events or circumstances warrant adjustments to such carrying amounts.
The Company considers historical and expected future net operating losses to be
its primary indicators of potential impairment. Assets are grouped and evaluated
for impairment at the lowest level for which there are identifiable cash flows
that are largely independent of the cash flows of Assets. The Company deems
Assets to be impaired if the Company is unable to recover the carrying value of
such Assets over their expected remaining useful life through a forecast of
undiscounted future operating cash flows directly related to the Assets. If
Assets are deemed to be impaired, the loss is measured as the amount by which
the carrying amount of the Assets exceeds their fair value. The Company
generally measures fair value by considering sales prices for similar assets or
by discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates. The Company adopted Statement
No. 121 effective January 1, 1996. Such adoption did not have a significant
effect on the financial position or results of operations of the Company.
I-22
<PAGE>
TCI COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibit and Reports on Form 8-K.
- ------ -------------------------------
(a) Exhibit -
(27) TCI Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31, 1996:
Date of Item
Report Reported Financial Statements Filed
------- -------- --------------------------
February 9, 1996 Item 5 None.
February 14, 1996 Item 5 None.
II-1
<PAGE>
EXHIBIT INDEX
-------------
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
(27) TCI Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000096903
<NAME> TCI COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 251
<ALLOWANCES> 22
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,629
<DEPRECIATION> 3,757
<TOTAL-ASSETS> 20,941
<CURRENT-LIABILITIES> 0
<BONDS> 12,298
232
0
<COMMON> 1
<OTHER-SE> 2,151
<TOTAL-LIABILITY-AND-EQUITY> 20,941
<SALES> 0
<TOTAL-REVENUES> 1,402
<CGS> 0
<TOTAL-COSTS> 1,228
<OTHER-EXPENSES> 296
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> (122)
<INCOME-TAX> 45
<INCOME-CONTINUING> (77)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (77)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
