-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EKdvf2uxPBhimCIjriN5MkijuLHfK3koYfvXfi0iRK+7ay/e9HnaI2yItuTokeHT 2kX7BGu9d/oMyYnG9N39Hg== 0000940180-97-000773.txt : 19970912 0000940180-97-000773.hdr.sgml : 19970912 ACCESSION NUMBER: 0000940180-97-000773 CONFORMED SUBMISSION TYPE: SC 13E4/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970905 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: TELE COMMUNICATIONS INC /CO/ CENTRAL INDEX KEY: 0000925692 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841260157 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E4/A SEC ACT: SEC FILE NUMBER: 005-44063 FILM NUMBER: 97676081 BUSINESS ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 FORMER COMPANY: FORMER CONFORMED NAME: TCI LIBERTY HOLDING CO DATE OF NAME CHANGE: 19940620 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: TELE COMMUNICATIONS INC /CO/ CENTRAL INDEX KEY: 0000925692 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841260157 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E4/A BUSINESS ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111-3000 FORMER COMPANY: FORMER CONFORMED NAME: TCI LIBERTY HOLDING CO DATE OF NAME CHANGE: 19940620 SC 13E4/A 1 AMENDMENT NO. 1 TO SCHEDULE 13E-4 As filed with the Securities and Exchange Commission on September 5, 1997 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- SCHEDULE 13E-4/A (AMENDMENT NO. 1) ISSUER TENDER OFFER STATEMENT (PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) -------------------- TELE-COMMUNICATIONS, INC. (NAME OF ISSUER) TELE-COMMUNICATIONS, INC. (NAME OF PERSON(S) FILING STATEMENT) TELE-COMMUNICATIONS, INC. SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND TELE-COMMUNICATIONS, INC. SERIES B LIBERTY MEDIA GROUP COMMON STOCK (TITLE OF CLASS OF SECURITIES) 87924V507 (SERIES A) 87924V606 (SERIES B) (CUSIP NUMBER OF CLASS OF SECURITIES) -------------------- STEPHEN M. BRETT, ESQ. TELE-COMMUNICATIONS, INC. TERRACE TOWER II 5619 DTC PARKWAY ENGLEWOOD, COLORADO 80111-3000 (303) 267-5500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT) -------------------- COPY TO: ELIZABETH M. MARKOWSKI, ESQ. BAKER & BOTTS, L.L.P. 599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022-6030 (212) 705-5000 -------------------- ================================================================================ INTRODUCTION This Amendment No. 1 ("Amendment No. 1") amends the Issuer Tender Offer Statement on Schedule 13E-4 filed by Tele-Communications, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on August 19, 1997 (the "Schedule 13E-4"), in connection with the offer by the Company to purchase up to an aggregate of 10,000,000 shares of its Tele- Communications, Inc. Series A Liberty Media Group Common Stock, par value $1.00 per share (the "Series A Liberty Media Group Common Stock"), and its Tele- Communications, Inc. Series B Liberty Media Group Common Stock, par value $1.00 per share (the "Series B Liberty Media Group Common Stock" and, together with the Series A Liberty Media Group Common Stock, the "Liberty Media Group Common Stock"), at $27 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Company's Offer to Purchase, dated August 19, 1997 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together constitute the "Offer"), copies of which are filed as Exhibits (a)(1) and (a)(2) respectively, to the Schedule 13E-4. Capitalized terms used and not defined herein have the meanings assigned to such terms in the Offer to Purchase and the Schedule 13E-4. The purpose of this Amendment No. 1 is to amend certain portions of the Offer to Purchase which were incorporated by reference in Item 8(e) of the original Schedule 13E-4 filed on August 19, 1997. ITEM 8. ADDITIONAL INFORMATION. Item 8(e) is hereby amended in its entirety to read as follows: (e) The information in the materials filed herewith as Item 9(a)(1) through 9(g)(2) is incorporated herein by reference, except that Item 9(a)(1) of the Offer to Purchase, is hereby amended as follows: 1. Under the caption "INTRODUCTION" on page 3 of the Offer to Purchase, the following sentence should be added to the end of the first paragraph: The safe harbor provisions of the Private Securities Litigation Reform Act of 1995 do not extend to forward looking statements made with respect to a tender offer. 2. The text set forth under the caption "THE OFFER -- 6. Certain Conditions of the Offer" on pages 13-14 of the Offer to Purchase, is hereby amended to read in its entirety as follows (additions reflected in italics): Notwithstanding any other provision of the Offer, the Company shall not be required to accept for payment, purchase or pay for any Shares tendered, and may terminate or amend the Offer or may postpone the acceptance for payment of, or the purchase of and the payment for Shares tendered, subject to the rules under the Exchange Act, if at any time on or after August 18, 1997 and prior to the Expiration Date any of the following events shall have occurred (or shall have been determined by the Company to have occurred) that, in the Company's reasonable judgment in any such 2 case and regardless of the circumstances giving rise thereto (including any action or omission to act by the Company), makes it inadvisable to proceed with the Offer or with such acceptance for payment or payment: (a) there shall have been threatened, instituted or pending any action or proceeding by any government or governmental, regulatory or administrative agency, authority or tribunal or any other person, domestic or foreign, before any court, authority, agency or tribunal that directly or indirectly (i) challenges the making of the Offer, the acquisition of some or all of the Shares pursuant to the Offer or otherwise relates in any manner to the Offer, or (ii) in the Company's reasonable judgment, could materially and adversely affect the business, condition (financial or other), income, operations or prospects of the Company and its subsidiaries, taken as a whole, or the Liberty Media Group as a whole, or otherwise materially impair in any way the contemplated future conduct of the business of the Company or any of its subsidiaries or materially impair the contemplated benefits of the Offer to the Company; (b) there shall have been any action threatened, pending or taken, or approval withheld, or any statute, rule, regulation, judgment, order or injunction threatened, proposed, sought, promulgated, enacted, entered, amended, enforced or deemed to be applicable to the Offer or the Company or any of its subsidiaries, by any court or any authority, agency or tribunal that, in the Company's reasonable judgment, would or might directly or indirectly (i) make the acceptance for payment of, or payment for, some or all of the Shares illegal or otherwise restrict or prohibit consummation of the Offer; (ii) delay or restrict the ability of the Company, or render the Company unable, to accept for payment or pay for some or all of the Shares; (iii) materially impair the contemplated benefits of the Offer to the Company; or (iv) materially and adversely affect the business, condition (financial or other), income, operations or prospects of the Company and its subsidiaries, taken as a whole, or the Liberty Media Group as a whole, or otherwise materially impair in any way the contemplated future conduct of the business of the Company or any of its subsidiaries; (c) there shall have occurred (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market; (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States; (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States; (iv) any limitation (whether or not mandatory) by any governmental regulatory or administrative agency or authority on, or any event that, in the Company's reasonable judgment, might affect, the extension of credit by banks or other lending institutions in the United States; (v) any significant decrease in the market price of the Shares or any change in the general political, market, economic or financial conditions in the United 3 States or abroad that could, in the reasonable judgment of the Company, have a material adverse effect on the business, operations or prospects of the Company or the Liberty Media Group or the trading in the Shares; (vi) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof; or (vii) any decline in either the Dow Jones Industrial Average or the Standard and Poor's Index of 500 Industrial Companies by an amount in excess of 10% measured from the close of business on August 18, 1997; (d) a tender or exchange offer with respect to some or all of the Shares (other than the Offer), or a merger or acquisition proposal for the Company, shall have been proposed, announced or made by another person or shall have been publicly disclosed, or the Company shall have learned after the date of this Offer that (i) any person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) shall have acquired or proposed to acquire beneficial ownership of more than 5% of the outstanding Shares, or any new group shall have been formed that beneficially owns more than 5% of the outstanding Shares; or (e) any change or changes shall have occurred in the business, financial condition, assets, income, operations, prospects or stock ownership of the Company or its subsidiaries that, in the Company's reasonable judgment, is or may be material to the Company or its subsidiaries. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances (including any action or inaction by the Company) giving rise to any such condition. Further, such conditions may be waived by the Company, in whole or in part, at any time and from time to time in its sole discretion. The Company's failure at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination by the Company concerning the events described above will be final and binding. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (g)(1) Pages II-50 through II-129 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (g)(2) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4 SIGNATURE After due inquiry and to the best of the Company's knowledge and belief, the undersigned certifies that the information set forth in this Schedule 13E-4 is true, complete and correct. Dated: September 4, 1997 TELE-COMMUNICATIONS, INC. By: /s/ Robert R. Bennett ---------------------- Name: Robert R. Bennett Title: Executive Vice President 5 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (g)(1) Pages II-50 through II-129 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (g)(2) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 6 EX-99.G1 2 PAGES II-50 TO II-129 OF ANNUAL REPORT YEAR ENDED 12/31/1996 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited the accompanying consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-50 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995
1996 1995 ------- ------ Assets amounts in millions - ------ Cash and cash equivalents $ 394 118 Trade and other receivables, net 448 407 Inventories, net -- 104 Prepaid expenses 81 65 Prepaid program rights 49 47 Committed film inventory 136 122 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 3,012 2,372 Investment in Time Warner, Inc. ("Time Warner") (note 5) 2,027 -- Investment in Turner Broadcasting System, Inc. ("TBS") (note 5) -- 955 Property and equipment, at cost: Land 77 88 Distribution systems 10,078 9,545 Support equipment and buildings 1,541 1,429 ------- ------ 11,696 11,062 Less accumulated depreciation 4,168 3,653 ------- ------ 7,528 7,409 ------- ------ Franchise costs 17,875 14,322 Less accumulated amortization 2,439 2,092 ------- ------ 15,436 12,230 ------- ------ Other assets, at cost, net of amortization 1,133 1,748 ------- ------ $30,244 25,577 ======= ======
(continued) II-51 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued December 31, 1996 and 1995
1996 1995 -------- ------ Liabilities and Stockholders' Equity amounts in millions - ------------------------------------ Accounts payable $ 216 243 Accrued interest 274 233 Accrued programming expense 347 318 Other accrued expenses 812 1,114 Debt (note 8) 14,926 13,211 Deferred income taxes (note 14) 6,012 4,584 Other liabilities 253 195 ------- ------ Total liabilities 22,840 19,898 ------- ------ Minority interests in equity of consolidated subsidiaries 1,493 651 Redeemable preferred stocks (note 9) 658 478 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC") (note 10) 1,000 -- Stockholders' equity (note 11): Series Preferred Stock, $.01 par value -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value -- -- Tele-Communications, Inc. Series A TCI Group common stock, $1 par value. Authorized 1,750,000,000 shares; issued 696,325,478 shares in 1996 and 672,211,009 shares in 1995 696 672 Tele-Communications, Inc. Series B TCI Group common stock, $1 par value. Authorized 150,000,000 shares; issued 84,647,065 shares in 1996 and 84,691,554 shares in 1995 85 85 Tele-Communications, Inc. Series A Liberty Media Group common stock, $1 par value. Authorized 750,000,000 shares; issued 227,844,437 shares in 1996 and 224,942,830 shares in 1995 228 225 Tele-Communications, Inc. Series B Liberty Media Group common stock, $1 par value. Authorized 75,000,000 shares; issued 21,189,369 shares in 1996 and 21,196,868 shares in 1995 21 21 Additional paid-in capital 3,672 3,986 Cumulative foreign currency translation adjustment, net of taxes 26 (9) Unrealized holding gains for available-for-sale securities, net of taxes 15 338 Accumulated deficit (176) (454) ------- ------ 4,567 4,864 Series A TCI Group common stock, at cost, held by subsidiaries (116,853,196 shares and 100,524,364 shares in 1996 and 1995, respectively) (314) (314) ------- ------ Total stockholders' equity 4,253 4,550 ------- ------ Commitments and contingencies (note 15) $30,244 25,577 ======= ======
See accompanying notes to consolidated financial statements. II-52 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------ ----- amounts in millions, except per share amounts Revenue (note 16): Communications and programming services (note 6) $ 7,038 5,586 4,250 Net sales from electronic retailing services 984 920 432 ------- ------ ----- 8,022 6,506 4,682 ------- ------ ----- Operating costs and expenses: Operating 2,917 2,161 1,507 Cost of sales from electronic retailing services 605 603 263 Selling, general and administrative 2,224 1,754 1,114 Compensation (adjustment to compensation) relating to options and stock appreciation rights (13) 57 (8) Restructuring charges 41 17 -- Depreciation 1,093 899 700 Amortization 523 473 318 ------- ------ ----- 7,390 5,964 3,894 ------- ------ ----- Operating income (note 16) 632 542 788 Other income (expense): Interest expense (1,096) (1,010) (785) Interest and dividend income 64 52 36 Share of losses of affiliates, net (note 4) (473) (193) (112) Share of earnings of Liberty Media Corporation -- -- 128 Loss on early extinguishment of debt (note 8) (71) (6) (9) Minority interests in losses (earnings) of consolidated subsidiaries, net (56) 17 2 Gain on sale of subsidiary stock (note 13) -- 123 -- Gain on sale of stock by equity investee (note 4) 12 165 161 Gain (loss) on disposition of assets 1,593 49 (10) Other, net (65) (30) (17) ------- ------ ----- (92) (833) (606) ------- ------ ----- Earnings (loss) before income taxes 540 (291) 182 Income tax benefit (expense) (note 14) (262) 120 (120) ------- ------ ----- Net earnings (loss) (note 16) 278 (171) 62 Dividend requirements on preferred stocks (35) (34) (8) ------- ------ ----- Net earnings (loss) attributable to common stockholders (note 6) $ 243 (205) 54 ======= ====== =====
(continued) II-53 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations, continued Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------ ------ ---- amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders (note 2): TCI Class A and Class B common stock $ -- (71) 54 TCI Group Series A and Series B common stock 813) (107) -- Liberty Media Group Series A and Series B common stock 1,056 (27) -- ------ ------ ---- $ 243 (205) 54 ====== ====== ==== Primary net earnings (loss) attributable to common stockholders per common and common equivalent share (notes 2 and 6): TCI Class A and Class B common stock $ -- (.11) .10 TCI Group Series A and Series B common stock $(1.22) (.16) -- Liberty Media Group Series A and Series B common stock $ 3.97 (.11) -- Fully diluted net earnings (loss) attributable to common stockholders per common and common equivalent share (notes 2 and 6): TCI Class A and Class B common stock $ -- (.11) .10 TCI Group Series A and Series B common stock $(1.22) (.16) -- Liberty Media Group Series A and Series B common stock $ 3.88 (.11) --
See accompanying notes to consolidated financial statements. II-54 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994
Common Stock ------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ----------------- ------------------- ------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital --------- ------- ------- -------- -------- -------- -------- ---------- amounts in millions Balance at December 31, 1993* $ -- 482 47 -- -- -- -- 2,293 Unrealized holding gains for available- for-sale securities as of January 1, 1994 -- -- -- -- -- -- -- -- Net earnings -- -- -- -- -- -- -- -- Conversion of redeemable preferred stock (note 9) -- 1 -- -- -- -- -- 17 Issuance of common stock upon conversion of notes (note 8) -- 3 -- -- -- -- -- -- Issuance of common stock upon exercise of stock option -- -- -- -- -- -- -- 3 Acquisition and retirement of common stock -- -- -- -- -- -- -- (2) Issuance of common stock for acquisition -- 85 42 -- -- -- -- 383 Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (8) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 4 Foreign currency translation adjustment -- -- -- -- -- -- -- -- Issuance of TCI Class A common stock to subsidiaries of TCI in Reorganization -- -- -- -- -- -- -- (23) Issuance of Class A common stock for investment -- 6 -- -- -- -- -- 124 Repayment of note receivable from related party -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- ---- --- --- --- --- --- --- ------ Balance at December 31, 1994 $ -- 577 89 -- -- -- -- 2,791 ---- --- --- --- --- --- --- -----
Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ----------- ------------ ---------- ----------- -------- ------------- amounts in millions Balance at December 31, 1993* (29) -- -- (344) (333) 2,116 Unrealized holding gains for available- for-sale securities as of January 1, 1994 -- 297 -- -- -- 297 Net earnings -- -- -- 62 -- 62 Conversion of redeemable preferred stock (note 9) -- -- -- -- -- 18 Issuance of common stock upon conversion of notes (note 8) -- -- -- -- -- 3 Issuance of common stock upon exercise of stock option -- -- -- -- -- 3 Acquisition and retirement of common stock -- -- -- -- -- (2) Issuance of common stock for acquisition -- 4 (15) -- (285) 214 Accreted dividends on all classes of preferred stock -- -- -- -- -- (8) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 4 Foreign currency translation adjustment 25 -- -- -- -- 25 Issuance of TCI Class A common stock to subsidiaries of TCI in Reorganization -- -- -- -- 23 -- Issuance of Class A common stock for investment -- -- -- -- -- 130 Repayment of note receivable from related party -- -- 15 -- (15) -- Change in unrealized holding gains for available-for-sale securities -- (207) -- -- -- (207) --- ---- --- ---- ---- ----- Balance at December 31, 1994 (4) 94 -- (282) (610) 2,655 --- ---- --- ---- ---- -----
(continued) II-55 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1996, 1995 and 1994
Common Stock ------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ----------------- ------------------- ------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital --------- ------- ------- -------- -------- -------- -------- ---------- amounts in millions Balance at December 31, 1994 $ -- 577 89 -- -- -- -- 2,791 Net loss -- -- -- -- -- -- -- -- Issuance of common stock in public offering -- 20 -- -- -- -- -- 381 Issuance of common stock in private offering -- 1 -- -- -- -- -- 29 Issuance of common stock for acquisitions and investments (note 6) -- 59 -- -- -- -- -- 1,329 Issuance of Class A common stock to subsidiary of TCI in Reorganization -- -- -- -- -- -- -- (6) Issuance of Class A common stock to subsidiary in exchange for investment -- -- -- -- -- -- -- (1) Retirement of Class A common stock previously held by subsidiary -- -- -- -- -- -- -- 29 Exchange of common stock held by subsidiaries of TCI for Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") (note 9) -- (86) (4) -- -- -- -- (542) Conversion of Series F Preferred Stock held by subsidiary for Series A TCI Group common stock -- -- -- 101 -- -- -- 213 Distribution of Series A and Series B Liberty Media Group common stock to TCI common stockholders (note 1) -- -- -- -- -- 225 21 (246) Costs associated with Distribution to stockholders -- -- -- -- -- -- -- (8) Redesignation of TCI common stock into Series A and Series B TCI Group common stock (note 1) -- (571) (85) 571 85 -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (34) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 10 Payment of preferred stock dividends -- -- -- -- -- -- -- (10) Issuance of common stock by subsidiary (note 13) -- -- -- -- -- -- -- 51 Foreign currency translation adjustment -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries -- -- -- -- -- -- -- -- ---- ---- --- --- --- --- --- ----- Balance at December 31, 1995 $ -- -- -- 672 85 225 21 3,986 ---- ---- --- --- --- --- --- ----- Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ----------- ------------ ---------- ----------- -------- ------------- amounts in millions Balance at December 31, 1994 (4) 94 -- (282) (610) 2,655 Net loss -- -- -- (171) -- (171) Issuance of common stock in public offering -- -- -- -- -- 401 Issuance of common stock in private offering -- -- -- -- -- 30 Issuance of common stock for acquisitions and investments (note 6) -- -- -- -- -- 1,388 Issuance of Class A common stock to subsidiary of TCI in Reorganization -- -- -- -- 6 -- Issuance of Class A common stock to subsidiary in exchange for investment -- -- -- -- 1 -- Retirement of Class A common stock previously held by subsidiary -- -- -- -- (29) -- Exchange of common stock held by subsidiaries of TCI for Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") (note 9) -- -- -- -- 632 -- Conversion of Series F Preferred Stock held by subsidiary for Series A TCI Group common stock -- -- -- -- (314) -- Distribution of Series A and Series B Liberty Media Group common stock to TCI common stockholders (note 1) -- -- -- -- -- -- Costs associated with Distribution to stockholders -- -- -- -- -- (8) Redesignation of TCI common stock into Series A and Series B TCI Group common stock (note 1) -- -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- (34) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 10 Payment of preferred stock dividends -- -- -- -- -- (10) Issuance of common stock by subsidiary (note 13) -- -- -- -- -- 51 Foreign currency translation adjustment (5) -- -- -- -- (5) Change in unrealized holding gains for available-for-sale securities -- 244 -- -- -- 244 Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries -- -- -- (1) -- (1) --- --- --- ----- ---- ----- Balance at December 31, 1995 (9) 338 -- (454) (314) 4,550 --- --- --- ----- ---- -----
(continued) II-56 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1996, 1995 and 1994
Common Stock ------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ----------------- ------------------- ------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital --------- ------- ------- -------- -------- -------- -------- ---------- amounts in millions Balance at December 31, 1995 $ -- -- -- 672 85 225 21 3,986 Net earnings -- -- -- -- -- -- -- -- Issuance of common stock for acquisition (note 6) -- -- -- 11 -- 4 -- 250 Issuance of common stock upon conversion of notes -- -- -- 2 -- 1 -- (1) Issuance of common stock upon conversion of preferred stock -- -- -- 1 -- -- -- 15 Exchange of cost investment for TCI Group and Liberty Media Group common stock -- -- -- (6) -- (2) -- (122) Contribution of common stock to subsidiary -- -- -- 16 -- -- -- (16) Spin-off of TCI Satellite Entertainment, Inc. (note 7) -- -- -- -- -- -- -- (405) Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (35) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 10 Payment of preferred stock -- -- -- -- -- -- -- (10) dividends Foreign currency translation adjustment -- -- -- -- -- -- -- -- Recognition of unrealized holding gains on available-for-sale securities (note 5) -- -- -- -- -- -- -- -- Recognition of unrealized holding losses on available-for-sale securities -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- ---- --- --- --- --- --- --- ----- Balance at December 31, 1996 $ -- -- -- 696 85 228 21 3,672 ==== === === === === === === ===== Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ----------- ------------ ---------- ----------- -------- ------------- amounts in millions Balance at December 31, 1995 (9) 338 -- (454) (314) 4,550 Net earnings -- -- -- 278 -- 278 Issuance of common stock for acquisition (note 6) -- -- -- -- -- 265 Issuance of common stock upon conversion of notes -- -- -- -- -- 2 Issuance of common stock upon conversion of preferred stock -- -- -- -- -- 16 Exchange of cost investment for TCI Group and Liberty Media Group common stock -- -- -- -- -- (130) Contribution of common stock to subsidiary -- -- -- -- -- -- Spin-off of TCI Satellite Entertainment, Inc. (note 7) -- -- -- -- -- (405) Accreted dividends on all classes of preferred stock -- -- -- -- -- (35) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 10 Payment of preferred stock dividends -- -- -- -- -- (10) Foreign currency translation adjustment 35 -- -- -- -- 35 Recognition of unrealized holding gains on available-for-sale securities (note 5) -- (428) -- -- -- (428) Recognition of unrealized holding losses on available-for-sale securities -- 64 -- -- -- 64 Change in unrealized holding gains for available-for-sale securities -- 41 -- -- -- 41 --- ---- --- ---- ---- ----- Balance at December 31, 1996 26 15 -- (176) (314) 4,253 === ==== === ==== ==== =====
See accompanying notes to consolidated financial statements. II-57 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------ ------ amounts in millions (see note 3) Cash flows from operating activities: Net earnings (loss) $ 278 (171) 62 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,616 1,372 1,018 Compensation (adjustment to compensation) relating to options and stock appreciation rights (13) 57 (8) Payments of stock appreciation rights (3) (9) -- Restructuring charges 41 17 -- Payments of restructuring charges (8) (17) -- Share of losses of affiliates 473 193 112 Share of earnings of Liberty Media Corporation -- -- (128) Loss on early extinguishment of debt 71 6 9 Minority interests in earnings (losses) 56 (17) (2) Gain on sale of subsidiary stock -- (123) -- Gain on sale of stock by equity investee (12) (165) (161) Loss (gain) on disposition of assets (1,593) (49) 10 Deferred income tax expense (benefit) 224 (153) 37 Other noncash charges (credits) 11 (28) (2) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (115) (70) 15 Change in inventories (8) 16 (26) Change in prepaids (23) (86) (97) Change in accrued interest 40 45 13 Change in other accruals and payables 193 139 56 ------- ------ ------ Net cash provided by operating activities 1,228 957 908 ------- ------ ------ Cash flows from investing activities: Cash paid for acquisitions (598) (477) (358) Capital expended for property and equipment (2,055) (1,782) (1,264) Cash proceeds from disposition of assets 341 166 39 Additional investments in and loans to affiliates and others (798) (1,134) (445) Repayments of loans to affiliates and others 679 18 148 Other investing activities (38) (135) (15) ------- ------ ------ Net cash used in investing activities (2,469) (3,344) (1,895) ------- ------ ------ Cash flows from financing activities: Borrowings of debt 8,163 8,152 4,676 Repayments of debt (7,969) (6,567) (3,607) Prepayment penalties (60) -- -- Proceeds from sale of subsidiary stock 223 445 -- Proceeds from issuances of common stock -- 431 1 Proceeds from issuance of Trust Securities 971 -- -- Contributions by minority shareholders of subsidiaries 319 -- -- Payment of dividends on subsidiary preferred stock and Trust Securities (95) (6) (6) Payment of preferred stock dividends (35) (24) (4) Costs associated with Distribution to stockholders -- (8) -- Other financing activities -- 8 -- ------- ------ ------ Net cash provided by financing activities 1,517 2,431 1,060 ------- ------ ------ Net increase in cash and cash equivalents 276 44 73 Cash and cash equivalents at beginning of year 118 74 1 ------- ------ ------ Cash and cash equivalents at end of year $ 394 118 74 ======= ====== ======
See accompanying notes to consolidated financial statements. II-58 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (1) Organization ------------ Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Preferred stock of TCI which is owned by subsidiaries of TCI eliminates in consolidation. Common stock of the Company held by subsidiaries is treated as treasury stock in consolidation. Industry Segments ----------------- The Company currently has significant operations principally in two industry segments: cable and communications services ("Communications") and programming services ("Programming"). Programming includes the production, acquisition and distribution of globally branded entertainment, education and information programming services and software for distribution through all available formats and media; and home shopping via television and other interactive media, direct marketing, advertising sales, infomercials and transaction processing. Home Shopping is a programming service which includes a retail function. The Company's cable and communications segment is comprised of five lines of business: Domestic Cable and Communications (the "Cable Unit"); International Cable and Programming ("TINTA"); Telephony; Internet; and Technology/Venture Capital. TINTA, Telephony, Internet and Technology/Venture Capital are not separately reportable segments due to their relative insignificance. The Company has investments accounted for under the equity method and the cost method, which also operate in the Communications and Programming industries. See note 16 for additional segment information. Targeted Stock -------------- On August 3, 1995, the TCI stockholders authorized the TCI Board of Directors (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes programming services ("Liberty Media Group"). 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"). 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, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to the Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including TCI's Cable Unit, TINTA, Telephony unit, Internet unit and Technology/Venture Capital unit. Such subsidiaries and assets are referred to as "TCI Group". (continued) II-59 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group or to Liberty Media Group for purposes of preparing their combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Dividends on TCI Group Stock are payable at the sole discretion of the Board out of the lesser of assets of TCI legally available for dividends and the available dividend amount with respect to TCI Group, as defined. Determinations to pay dividends on TCI Group Stock will be based primarily upon the financial condition, results of operations and business requirements of TCI Group and TCI as a whole. Dividends on Liberty Group Stock are payable at the sole discretion of the Board out of the lesser of all assets of TCI legally available for dividends and the available dividend amount with respect to Liberty Media Group, as defined. Determinations to pay dividends on Liberty Group Stock will be based primarily upon the financial condition, results of operations and business requirements of Liberty Media Group and TCI as a whole. After the Distribution, existing preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of TCI Class A common stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange (in addition to the same number of shares of redesignated Series A TCI Group Stock as were theretofore issuable thereunder) the number of shares of Series A Liberty Group Stock that would have been issuable in the Distribution with respect to the TCI Class A common stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Distribution. Options to purchase TCI Class A common stock outstanding at the time of the Distribution were adjusted by issuing to the holders of such options separate options to purchase that number of shares of Series A Liberty Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Class A common stock prior to the record date for the Distribution and reallocating a portion of the aggregate exercise price of the previously outstanding options to the newly issued options to purchase Series A Liberty Group Stock. (continued) II-60 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A number of wholly-owned subsidiaries of the Company which are part of TCI Group owned shares of TCI Class A common stock and TCI preferred stock ("Subsidiary Shares"). Because the Distribution was made as a dividend to all holders of TCI's Class A common stock and Class B common stock and, pursuant to the anti-dilution provisions set forth therein, to the holders of securities convertible into TCI Class A common stock and Class B common stock upon the conversion thereof, shares of Liberty Group Stock would otherwise have been issued and become issuable in respect of the Subsidiary Shares held by these subsidiaries and would have been attributed to TCI Group. The Liberty Group Stock issued in connection with the Distribution was intended to constitute 100% of the equity value thereof to the holders of the TCI Class A common stock and TCI Class B common stock, and TCI Group did not initially have any interest in Liberty Media Group represented by any outstanding shares of Liberty Group Stock (an "Inter-Group Interest"). Therefore, TCI determined to exchange all of the outstanding Subsidiary Shares for shares of Series F Preferred Stock. See note 9. The rights, privileges and preferences of the Series F Preferred Stock did not entitle its holders to receive Liberty Group Stock in the Distribution or upon conversion of the Series F Preferred Stock. Stock Dividend -------------- Effective January 13, 1997, the Company issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been retroactively restated to reflect the Liberty Group Stock Dividend. Telephony Group Stock Proposal ------------------------------ On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of the Company's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of March 24, 1997, no shares of Telephony Group Stock have been issued. (continued) II-61 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of the Company attributable to Telephony Group, in addition to the separate performance of the Company's domestic cable distribution business; telephony distribution and communications business (other than the investments attributed to Telephony Group); international cable, telephony and programming businesses; technology/venture capital business; and any other business of the Company not attributed to either Liberty Media Group or Telephony Group. As shares of Telephony Group Stock are issued and distributed or sold, the percentage of the common stockholders' equity value of the Company attributable to Telephony Group that is or is intended to be reflected in the TCI Group Stock will be reduced accordingly. The composition of Liberty Media Group was not affected by the authorization, and will not be affected by the issuance, of Telephony Group Stock. (2) Summary of Significant Accounting Policies ------------------------------------------ Cash and Cash Equivalents ------------------------- Cash and cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables ----------- Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Program Rights -------------- Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed film inventory and program rights payable are recorded at the estimated costs of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the specific number of exhibitions. Investments ----------- All marketable equity securities held by the Company are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of stockholders' equity. Realized gains and losses are determined on a specific-identification basis. (continued) II-62 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other investments in which the ownership interest is less than 20% and are not considered marketable securities are generally carried at cost. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. Changes in the Company's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in the Company's consolidated statements of operations. Long-Lived Assets ----------------- (a) Property and Equipment ---------------------- Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1996, 1995 and 1994, interest capitalized was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems, 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (b) Franchise Costs --------------- Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the Company in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. (continued) II-63 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 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. Pursuant to Statement No. 121, the Company periodically reviews the carrying amounts 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. Interest Rate Derivatives ------------------------- Amounts receivable or payable under derivative financial instruments used to manage interest rate risks arising from the Company's financial liabilities are recognized as interest expense. Gains and losses on early terminations of derivatives are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining term of the derivative financial instruments. The Company does not use such instruments for trading purposes. Minority Interests ------------------ Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause the Company to repurchase such holders' common equity. (continued) II-64 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Included in minority interests in equity of consolidated subsidiaries is $902 million and $49 million in 1996 and 1995, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. The current dividend requirements on these preferred stocks aggregate $47 million per annum and such dividend requirements are reflected as minority interests in the accompanying consolidated statements of operations. Foreign Currency Translation ---------------------------- All balance sheet accounts of foreign investments are translated at the current exchange rate as of the end of the accounting period. Statement of operations items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Net Sales from Electronic Retailing Services -------------------------------------------- Revenue includes merchandise sales reduced by incentive discounts and sales returns to arrive at net sales from electronic retailing services. Revenue is recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. The Company's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. Stock Based Compensation ------------------------ Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, the Company continues to account for stock-based employee compensation pursuant to APB Opinion No. 25. The Company has included the disclosures required by Statement No. 123 in note 11. Earnings (Loss) Per Common and Common Equivalent Share ------------------------------------------------------ (a) TCI Class A and B Common Stock ------------------------------ Loss per common share attributable to common stockholders for the period from January 1, 1995 through the Distribution was computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding (648.2 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) II-65 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Primary earnings per common and common equivalent share attributable to common stockholders for the year ended December 31, 1994 was computed by dividing net earnings attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding (540.8 million). Fully diluted earnings per common and common equivalent share attributable to common stockholders for the year ended December 31, 1994 was computed by dividing earnings attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding (540.8 million). Shares issuable upon conversion of the Convertible Preferred Stock, Series C ("Series C Preferred Stock") (see note 9) have not been included in the computation of weighted average shares because their effect would be anti-dilutive. (b) TCI Group Stock --------------- The loss attributable to TCI Group stockholders per common share for the year ended December 31, 1996 and for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to TCI Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period (664.8 million and 656.4 million, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (c) Liberty Group Stock ------------------- Primary earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing net earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (266.3 million). Fully diluted earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (272.4 million). Shares issuable upon conversion of the Series C Preferred Stock, the Convertible Preferred Stock, Series D (the "Series D Preferred Stock"), and the Redeemable Convertible Liberty Media Group Preferred Stock, Series H have been included in the computation of weighted average shares. (continued) II-66 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The loss attributable to Liberty Media Group stockholders per common share for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (246.1 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Estimates --------- 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications ----------------- Certain amounts have been reclassified for comparability with the 1996 presentation. (3) Supplemental Disclosures to Consolidated Statements of Cash Flows ----------------------------------------------------------------- Cash paid for interest was $1,056 million, $965 million and $758 million for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes was $25 million in 1996, $63 million in 1995 and was not material in 1994. Significant noncash investing and financing activities are reflected in the following table. See also note 7 for the impact of the spin-off of TCI Satellite Entertainment, Inc.
Years ended December 31, ------------------------------ 1996 1995 1994 ------- ------ ----- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 4,998 3,571 1,921 Liabilities assumed, net of current assets (1,811) (445) (648) Deferred tax liability recorded in acquisitions (1,379) (1,083) (190) Minority interests in equity of acquired entities (113) 49 (35) Note receivable from related party assumed -- -- 15 Common stock and preferred stock issued in acquisitions (457) (1,615) (808) Preferred stock of subsidiaries issued in acquisitions (640) -- -- Common stock issued to subsidiaries -- -- 285 Unrealized gains on available-for-sale securities of acquired entities -- -- (182) ------- ------ ----- Cash paid for acquisitions $ 598 477 358 ======= ====== =====
(continued) II-67 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Years ended December 31, ------------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Exchange of consolidated subsidiaries for note receivable and equity investments $894 -- -- ==== === === Conversion of debt into additional minority interest in consolidated subsidiary $ -- 14 -- ==== === === Assets contributed for interest in limited liability company $ -- 3 -- ==== === === Issuance of subsidiary stock for equity investment $ -- 11 -- ==== === ===
(4) Investments in Affiliates The Company has various investments accounted for under the equity method. The following table includes the Company's carrying value and percentage ownership of the more significant investments at December 31, 1996.
December 31, 1996 ------------------------------------ Percentage Carrying Ownership Value ---------- --------- amounts in millions Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and PhillieCo, L.P. 30% - 35.3% $ 830 Teleport Communications Group, Inc. ("TCG") 31.1% 276 Home Shopping Network, Inc. ("HSN") 19.9% 142 BDTV INC. and BDTV II, INC. 99% 200 Telewest Communications plc ("Telewest") 27% 488 Various foreign equity investments (other than Telewest) var. 422 Discovery Communications, Inc. 49% 118 QVC, Inc. 43% 104
(continued) II-68 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Summarized unaudited financial information for affiliates is as follows:
December 31, ------------------ 1996 1995 ------- ------ Combined Financial Position amounts in millions - --------------------------- Property and equipment, net $ 4,770 3,464 Franchise costs, net 3,392 1,302 Other assets, net 13,287 8,127 ------- ------ Total assets $21,449 12,893 ======= ====== Debt $ 8,657 5,438 Due to TCI 42 47 Other liabilities 5,539 1,803 Owners' equity 7,211 5,605 ------- ------ Total liabilities and equity $21,449 12,893 ======= ======
Years ended December 31, ------------------------------- 1996 1995 1994 ------- ------ ------ Combined Operations amounts in millions Revenue $ 5,996 4,540 3,033 Operating expenses (5,488) (3,956) (2,678) Depreciation and amortization (1,037) (542) (261) ------- ------ ------ Operating income (loss) (529) 42 94 Interest expense (631) (349) (112) Other, net (369) (151) 13 ------- ------ ------ Net loss $(1,529) (458) (5) ======= ====== ======
The Company is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide, using the "Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The Company has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. II-69 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Sprint PCS Partnerships have licenses, and have affiliated with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or population equivalents), based on the Donnelley Marketing Service estimate of the December 31, 1995 population of the relevant geographic areas. The Sprint PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction conducted by the Federal Communications Commission ("FCC") that ended in March 1995, for an aggregate license cost of approximately $2.1 billion. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego, California. The Sprint PCS Partnerships may invest in other entities that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. From inception through 1996, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company contributed an aggregate of approximately $0.9 billion, including approximately $0.2 billion during the year ended December 31, 1996.) The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. The Company expects that the remaining approximately $1.2 billion of such amount (of which the Company's share is approximately $0.4 billion) will be contributed by the end of the second quarter of 1998 (although there can be no assurance that any additional capital will be contributed). The Company expects that the Sprint PCS Partnerships will require additional equity thereafter. TCG, a competitive local exchange carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410,000,000. As a result of the TCG IPO, the Company's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, the Company recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and TINTA formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed Liberty/Fox U.S. Sports LLC ("Fox Sports") into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. (continued) II-70 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Internationally, News Corp. and a limited liability company ("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multichannel, multipoint distribution systems or cable television. Fox Sports International is accounted for using the equity method. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). (continued) II-71 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. Telewest is a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest was formed on October 3, 1995 upon the merger (the "TeleWest Merger") of TeleWest Communications plc ("TeleWest Communications") with SBC (CableComms) (UK). Prior to the TeleWest Merger, the Company had an effective ownership interest of approximately 36% in TeleWest Communications. As a result of the TeleWest Merger, the Company recognized a gain of approximately $165 million (before deducting deferred income taxes of $58 million), which gain represents the difference between the Company's recorded cost for TeleWest Communications and the Company's 27% effective proportionate share of Telewest's net assets. Telewest contributed $109 million, $70 million and $43 million of the Company's share of its affiliates' losses during the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other equity method investments accounted for $79 million, $62 million and $50 million of the Company's share of its affiliates' losses in 1996, 1995 and 1994, respectively. (continued) II-72 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of TeleWest Communications' November 1994 initial public offering and the associated dilution of the Company's ownership interest of TeleWest Communications, the Company recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million). Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (5) Investment in Time Warner ------------------------- At December 31, 1995, TCI owned shares of TBS common stock and shares of TBS preferred stock that were convertible into TBS common stock. The Company's total holdings represented an approximate 7.5% voting interest for those matters which preferred and common voted as a single class. On October 10, 1996, Time Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, the Company received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. At December 31, 1996, the Company's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2 billion based upon the market value of the marketable common stock into which it is convertible. (continued) II-73 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would hold the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. (6) Acquisitions ------------ On July 31, 1996, pursuant to certain agreements entered into among TCIC, a subsidiary of TCI, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred 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 also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. (continued) II-74 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Prior to the consummation of the Viacom Acquisition, Viacom offered 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"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock is 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 at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also 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. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. The Viacom Acquisition has been accounted for by the purchase method. Accordingly, the results of operations of Cable Sub have been consolidated with those of the Company since the date of acquisition, and the Company recorded Cable Sub's assets and liabilities at fair value. On a pro forma basis, the Company's revenue, net loss, and net loss per share of TCI Group Stock would have been increased by $280 million, $55 million and $.08, respectively, for the year ended December 31, 1996; and revenue, net loss, net loss per share of TCI Group Stock and net loss per share of TCI Class A Common Stock would have been increased by $446 million, $115 million, $.07 and $.10, respectively, for the year ended December 31, 1995 had Cable Sub been consolidated with the Company on January 1, 1995. The foregoing unaudited pro forma financial information is based upon historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of the results had the Company operated Cable Sub since January 1, 1995. As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable") consummated a transaction, whereby TeleCable was merged into TCIC. The aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of approximately $300 million of TeleCable's net liabilities and the issuance to TeleCable's shareholders of approximately 42 million shares of TCI Class A common stock and 1 million shares of Series D Preferred Stock with an aggregate initial liquidation value of $300 million (see note 9). (continued) II-75 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision for a purchase price of $282 million, before liabilities assumed. The purchase price was paid with cash consideration of $195 million and TINTA's issuance of $87 million principal amount of secured negotiable promissory notes payable to the selling shareholders. TINTA has an option during the two-year period ended April 25, 1997 to increase its ownership interest in Cablevision up to 80% at a cost per subscriber similar to the initial purchase price, adjusted however for certain fluctuations in applicable foreign currency exchange rates. (7) Spin-Off of TCI Satellite Entertainment, Inc. --------------------------------------------- Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which the Company accounted for under the equity method. Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. In addition, the Satellite Spin-off effected a change in the conversion rate for each of the Company's equity and debt securities that are convertible into Series A TCI Group Stock. See notes 8, 9 and 11. Summarized financial information of Satellite as of and through the date of the Satellite Spin-off is as follows (amounts in millions):
Financial Position - ------------------ Cash, receivables and other assets $ 104 Investment in PRIMESTAR Partners L.P. 32 Property and equipment, net 1,111 ------- $ 1,247 ======= Accounts payable and accrued liabilities $ 60 Due to PRIMESTAR Partners L.P. 458 Due to TCI 324 Equity 405 ------- $ 1,247 ======= Operations - ---------- Revenue $ 377 Operating expenses (373) Depreciation (166) ------- Loss before income tax benefit (162) Income tax benefit 53 ------- Net loss $ (109) =======
(continued) II-76 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Debt ---- Debt is summarized as follows:
Weighted average December 31, interest rate at ------------------- December 31, 1996 1996 1995 ----------------- -------- ----- amounts in millions Debt of subsidiaries: Notes payable 8.3% $ 9,308 7,713 Bank credit facilities 6.6% 4,813 3,854 Commercial paper 6.1% 638 1,469 Convertible notes (a) 9.5% 43 45 Other debt 124 130 -------- ------ $ 14,926 13,211 ======== ======
(a) These convertible notes, which are stated net of unamortized discount of $178 million and $186 million at December 31, 1996 and 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. During 1996, certain of these notes were converted into 1,623,800 shares of Series A TCI Group Stock and 608,925 shares of Series A Liberty Group Stock. During 1995 and 1994, certain of these notes were converted into 3,416 shares and 2,350,000 shares of TCI Class A common stock, respectively. At December 31, 1996, the notes were convertible, at the option of the holders, into an aggregate of 37,083,773 shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty Group Stock (as adjusted to give effect to the Liberty Group Stock Dividend). During the year ended December 31, 1996, in order to reduce future interest costs, the Company redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, the Company recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. Also, during the year ended December 31, 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, the Company recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. At December 31, 1996, subsidiaries of the Company had approximately $1.8 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. The bank credit facilities and various other debt instruments of the Company's subsidiaries generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. (continued) II-77 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As security for borrowings under one of its bank credit facilities, the Company has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of the Company. As security for borrowings under another of its credit facilities, TCI has pledged a portion of its Time Warner common stock. The fair value of the debt of the Company's subsidiaries is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $14,926 million, was $15,523 million at December 31, 1996. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company has entered into various interest rate exchange agreements pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million), and $36 million, respectively. During the year ended December 31, 1996, the Company terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. After giving effect to the Company's interest rate exchange agreements, approximately 49% of the Company's indebtedness bears interest at fixed rates. The Company's Fixed Rate Agreements and Variable Rate Agreements expire as follows (amounts in millions, except percentages):
Fixed Rate Agreements Variable Rate Agreements ------------------------------------------- ------------------------------------------------ Expiration Interest Rate Notional Expiration Interest Rate Notional Date To Be Paid Amount Date To Be Received Amount ---------- ------------- -------- ---------- -------------- -------- October 1997 7.2%-9.3% $ 80 April 1997 7.0% $ 200 December 1997 8.7% 230 September 1998 4.8%-5.4% 450 ------ April 1999 7.4% 50 $ 310 February 2000 5.8%-6.6% 300 ====== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 ------ $1,750 ======
The Company is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. (continued) II-78 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The fair value of the interest rate exchange agreements is the estimated amount that the Company would pay or receive to terminate the agreements at December 31, 1996, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. At December 31, 1996, the Company would be required to pay an estimated $15 million to terminate the Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate Agreements. Certain of TCI's subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. Annual maturities of debt for each of the next five years are as follows (amounts in millions): 1997 $1,418* 1998 490 1999 721 2000 766 2001 1,079 * Includes $638 million of commercial paper. (9) Redeemable Preferred Stocks --------------------------- The conversion rates identified below for the redeemable preferred stocks that are convertible into Series A TCI Group Stock were adjusted, as applicable, on December 4, 1996 as a result of the Satellite Spin-off. See note 7. The conversion rates for the redeemable preferred stocks that are convertible into Series A Liberty Group Stock have been adjusted to give effect to the Liberty Group Stock Dividend. See note 1. Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series C," par value $.01 per share, as partial consideration for an acquisition by TCI. There were 80,000 shares of Series C Preferred Stock authorized and 70,575 shares outstanding at December 31, 1996. Each share of Series C Preferred Stock is convertible, at the option of the holders, into 116.24 shares of Series A TCI Group Stock and 37 shares of Series A Liberty Group Stock, subject to anti-dilution adjustments. The dividend, liquidation and redemption features of the Series C Preferred Stock will be determined by reference to the liquidation value of the Series C Preferred Stock, which as of any date of determination is equal, on a per share basis, to the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the dividend payment date on or immediately preceding such date of determination to the extent not paid on or before such date, plus (iii), for purposes of determining liquidation and redemption payments, all unpaid dividends accrued on the sum of clauses (i) and (ii) above, to such date of determination. (continued) II-79 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Subject to the prior preferences and other rights of any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock, the holders of Series C Preferred Stock are entitled to receive and, subject to any prohibition or restriction contained in any instrument evidencing indebtedness of TCI, TCI is obligated to pay preferential cumulative cash dividends out of funds legally available therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of the liquidation value per share, whether or not such dividends are declared or funds are legally or contractually available for payment of dividends, except that if TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, dividends will thereafter accrue cumulatively at an annual rate of 15% of the liquidation value per share. Accrued dividends are payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing on the first dividend payment date after the issuance of the Series C Preferred Stock. Dividends not paid on any dividend payment date will be added to the liquidation value on such date and remain a part thereof until such dividends and all dividends accrued thereon are paid in full. Dividends accrue on unpaid dividends at the rate of 5-1/2% per annum, unless such dividends remain unpaid for two consecutive quarters in which event such rate will increase to 15% per annum. The Series C Preferred Stock ranks prior to the Series A TCI Group Stock, Series A Liberty Group Stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock with respect to the declaration and payment of dividends. Upon the dissolution, liquidation or winding up of TCI, holders of the Series C Preferred Stock will be entitled to receive from the assets of TCI available for distribution to stockholders an amount in cash, per share, equal to the liquidation value. The Series C Preferred Stock will rank prior to the TCI common stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock as to any such distributions. The Series C Preferred Stock is subject to optional redemption at any time after the seventh anniversary of its issuance, in whole or in part, by TCI at a redemption price, per share, equal to the then liquidation value of the Series C Preferred Stock. Subject to the rights of any other class or series of the Company's preferred stock ranking pari passu with the Series C Preferred Stock, the Series C Preferred Stock is required to be redeemed by the Company at any time after such seventh anniversary at the option of the holder, in whole or in part (provided that the aggregate liquidation value of the shares to be redeemed is in excess of $1 million), in each case at a redemption price, per share, equal to the liquidation value. (continued) II-80 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For so long as any dividends are in arrears on the Series C Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock and until all dividends accrued up to the immediately preceding dividend payment date on the Series C Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, TCI may not redeem or otherwise acquire any shares of Series C Preferred Stock, any such parity stock or any class or series of its preferred stock ranking junior (including the TCI common stock and the Series C Preferred Stock) unless all then outstanding shares of Series C Preferred Stock and such parity stock are redeemed. If TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, and until all such shares are redeemed in full, TCI may not redeem any such parity stock or junior stock, or otherwise acquire any shares of such stock or Series C Preferred Stock. Nothing contained in the two immediately preceding sentences shall prevent TCI from acquiring (i) shares of Series C Preferred Stock and any such parity stock pursuant to a purchase or exchange offer made to holders of all outstanding shares of Series C Preferred Stock and such parity stock, if (a) as to holders of all outstanding shares of Series C Preferred Stock, the terms of the purchase or exchange offer for all such shares are identical, (b) as to holders for all outstanding shares of a particular series or class of parity stock, the terms of the purchase or exchange offer for all such shares are identical and (c) as among holders of all outstanding shares of Series C Preferred Stock and parity stock, the terms of each purchase or exchange offer are substantially identical relative to the respective liquidation prices of the shares of Series C Preferred Stock and each series or class of such parity stock, or (ii) shares of Series C Preferred Stock, parity stock or junior stock in exchange for, or through the application of the proceeds of the sale of, shares of junior stock. The Series C Preferred Stock is subject to restrictions on transfer although it has certain customary registration rights with respect to the underlying shares of TCI Group and Liberty Group Stock. The Series C Preferred Stock may vote on all matters submitted to a vote of the holders of the TCI common stock, has one vote for each share of TCI Group and Liberty Group Stock into which the shares of Series C Preferred Stock are converted for such purpose, and may vote as a single class with the TCI common stock. The Series C Preferred Stock has no other voting rights except as required by the Delaware General Corporation Law ("DGCL") and except that the consent of the holders of record of shares representing at least two-thirds of the liquidation value of the outstanding shares of the Series C Preferred Stock is necessary to (i) amend the designation, rights, preferences and limitations of the Series C Preferred Stock as set forth in the TCI Charter and (ii) to create or designate any class or series of TCI preferred stock that would rank prior to the Series C Preferred Stock. Convertible Preferred Stock, Series D. The Company issued 1,000,000 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series D", par value $.01 per share, as partial consideration for the merger between TCIC and TeleCable (see note 6). At December 31, 1996, there were 997,222 shares of Series D Preferred Stock outstanding. (continued) II-81 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The holders of the Series D Preferred Stock shall be entitled to receive, when and as declared by the Board out of unrestricted funds legally available therefor, cumulative dividends, in preference to dividends on any stock that ranks junior to the Series D Preferred Stock (currently the TCI Group Stock, the Liberty Group Stock and the Class B Preferred Stock), that shall accrue on each share of Series D Preferred stock at the rate of 5-1/2% per annum of the liquidation value ($300 per share). Dividends are cumulative, and in the event that dividends are not paid in full on two consecutive dividend payment dates or in the event that TCI fails to effect any required redemption of Series D Preferred Stock, accrue at the rate of 10% per annum of the liquidation value. The Series D Preferred Stock ranks on parity with the Series C Preferred Stock and the Series F Preferred Stock. Each share of Series D Preferred Stock is convertible into 10 shares of Series A TCI Group Stock and 3.5 shares of Series A Liberty Group Stock, subject to adjustment upon certain events specified in the certificate of designation establishing Series D Preferred Stock. In addition to the aforementioned shares of TCI common stock, holders of Series D Preferred Stock are entitled to one share of Satellite common stock for each share of Series D Preferred Stock converted. Such shares of Satellite common stock represent the number of shares of Satellite common stock that they would have received had they converted their Series D Preferred Stock into TCI Group Stock prior to the Satellite Spin-off. To the extent any cash dividends are not paid on any dividend payment date, the amount of such dividends will be deemed converted into shares of TCI common stock at a conversion rate equal to 95% of the then current market price of common stock, and upon issuance of common stock to holders of Series D Preferred Stock in respect of such deemed conversion, such dividend will be deemed paid for all purposes. Shares of Series D Preferred Stock are redeemable for cash at the option of the holder at any time after the tenth anniversary of the issue date at a price equal to the liquidation value in effect as of the date of the redemption. Shares of Series D Preferred Stock may also be redeemed for cash at the option of TCI after the fifth anniversary of the issue date at such redemption price or after the third anniversary of the issue date if the market value per share exceeds certain defined levels for periods specified in the certificate of designation. If TCI fails to effect any required redemption of Series D Preferred Stock, the holders thereof will have the option to convert their shares of Series D Preferred Stock into common stock at a conversion rate of 95% of the then current market value of common stock, provided that such option may not be exercised unless the failure to redeem continues for more than a year. Except as required by law, holders of Series D Preferred Stock are not entitled to vote on any matters submitted to a vote of the stockholders of TCI. (continued) II-82 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Convertible Redeemable Participating Preferred Stock, Series F. The Company is authorized to issue 500,000 shares of Series F Preferred Stock, par value $.01 per share. Subsidiaries of TCI hold all the issued and outstanding shares (278,307 shares). Immediately prior to the record date for the Distribution, the Company caused each of its subsidiaries holding Subsidiary Shares to exchange such shares for shares of Series F Preferred Stock having an aggregate value of not less than that of the Subsidiary Shares so exchanged. Subsidiaries of TCI exchanged all of the Subsidiary Shares for 355,141 shares of Series F Preferred Stock. Subsequent to such exchange, a holder of 78,077 shares of Series F Preferred Stock converted its holdings into 100,524,364 shares of Series A TCI Group Stock. Each holder of Series F Preferred Stock has the right to receive upon conversion 1,496.65 shares of Series A TCI Group Stock. The anti-dilution provisions of the Series F Preferred Stock provide that the conversion rate of the Series F Preferred Stock will be adjusted by increasing the number of shares of Series A TCI Group Stock issuable upon conversion in the event of any non-cash dividend or distribution of the Series A TCI Group Stock to give effect to the value of the securities, assets or other property so distributed; however, no such adjustment shall entitle the holder to receive the actual security, asset or other property so distributed upon the conversion of shares of Series F Preferred Stock. The holders of the Series F Preferred Stock are entitled to participate, on an as-converted basis, with the holders of the Series A TCI Group Stock, with respect to any cash dividends or distribution declared and paid on the Series A TCI Group Stock. Dividends or distribution on the Series A TCI Group Stock which are not paid in cash would result in the adjustment of the applicable conversion rate as described above. Upon the dissolution, liquidation or winding up of the Company, holders of the Series F Preferred Stock will be entitled to receive from the assets of the Company available for distribution to stockholders an amount, in cash or property or a combination thereof, per share of Series F Preferred Stock, equal to the sum of (x) $.01 and (y) the amount to be distributed per share of Series A TCI Group Stock in such liquidation, dissolution or winding up multiplied by the applicable conversion rate of a share of Series F Preferred Stock. The Series F Preferred Stock is subject to optional redemption by the Company at any time after its issuance, in whole or in party, at a redemption price, per share, equal to the issue price of a share of Series F Preferred Stock (as adjusted in respect of stock splits, reverse splits and other events affecting the shares of Series F Preferred Stock), plus any dividends which have been declared but are unpaid as of the date fixed for such redemption. The Company may elect to pay the redemption price (or designated portion thereof) of the shares of Series F Preferred Stock called for redemption by issuing to the holder thereof, in respect of its shares to be redeemed, a number of shares of Series A TCI Group Stock equal to the aggregate redemption price (or designated portion thereof) of such shares divided by the average of the last sales prices of the Series A TCI Group Stock for a period specified, and subject to the adjustments described, in the certificate of designation establishing the Series F Preferred Stock. (continued) II-83 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock"). In January, 1996, TCI issued 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible Liberty Media Group Preferred Stock, Series H" as consideration for an acquisition. At December 31, 1996, there were 6,695,427 shares of each of Series G Preferred Stock and Series H Preferred Stock outstanding. The initial liquidation value for the Series G Preferred Stock and Series H Preferred Stock is $21.60 per share and $5.40 per share, respectively, subject in both cases, to increase in an amount equal to aggregate accrued but unpaid dividends, if any. Dividends will begin to accrue on the Series G and Series H Preferred Stock on the first anniversary of issuance of the Series G and Series H Preferred Stock, and will thereafter be payable semi-annually commencing August 1, 1997, at the rate of 4% per annum on the liquidation value. Any dividends paid on the Series G and Series H Preferred Stock may be paid, at TCI's election, in cash or shares of TCI Group Stock. Additional dividends will accrue on unpaid dividends initially at a rate of 4% per annum. The dividend rate on dividends that remain unpaid for six months will increase to 8.625% per annum. Each share of Series G Preferred Stock is convertible at the option of the holder at any time prior to the close of business on the last business day prior to redemption into 1.19 shares of Series A TCI Group Stock and each share of Series H Preferred Stock is convertible at any time prior to the close of business on the last business day prior to redemption into .2625 shares of Series A Liberty Group Stock. However, the shares of Series A Liberty Group Stock issuable upon conversion of the Series H Preferred Stock shall be adjusted to provide for the Liberty Group Stock Dividend. The conversion rights of Series G and Series H Preferred Stock are subject to adjustment in certain circumstances. Among other such adjustments, if the Liberty Group Stock, or any other redeemable capital stock of TCI into which either series of Preferred Stock may be convertible ("Redeemable Capital Stock"), is redeemed in full by TCI (the "Redemption Event"), then, except as otherwise described below, the shares of such Series G and Series H Preferred Stock will thereafter be convertible into the kind and amount of consideration that would have been received in such Redemption Event by a holder of the number of shares of Redeemable Capital Stock that would have been issuable upon conversion of such shares of Series G and Series H Preferred Stock, if they had been converted in full immediately prior to such Redemption Event. (continued) II-84 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements However, if any series of Redeemable Capital Stock into which a series of Series G or Series H Preferred Stock is then convertible is redeemed in full by TCI in exchange for securities of another issuer ("Redemption Securities"), TCI may elect to provide the holders of such Series G or Series H Preferred Stock with the right to exchange such Series G or Series H Preferred Stock, concurrently with the Redemption Event, for preferred stock of such other issuer ("Mirror Preferred Stock"). Such Mirror Preferred Stock shall be convertible into Redemption Securities and shall otherwise have terms and conditions comparable to the Series G or Series H Preferred Stock exchanged. If TCI provides such an exchange right, any holder that does not then choose to participate in such exchange will continue to hold such Series G or Series H Preferred Stock but such holder will lose the conversion right with respect to the Redeemable Capital Stock redeemed in the Redemption Event and will not have any right to receive Redemption Securities in lieu thereof. A holder that participates in such exchange will receive Mirror Preferred Stock convertible into Redemption Securities, but will no longer hold the Series G or Series H Preferred Stock so exchanged. An alternative provision will apply if, at the time of exercise of any such exchange right provided by TCI, the holder of the applicable series of Series G or Series H Preferred Stock would be entitled to receive on conversion any property in addition to the Redeemable Capital Stock being redeemed. In that case, holders that choose to participate in the exchange will receive both Mirror Preferred Stock issued by the issuer of the Redemption Securities of the other issuer and a new preferred stock of TCI convertible into such additional property. In such event, the Mirror Preferred Stock and such new TCI preferred stock will have a combined liquidation value equal to the liquidation value of the Series G or Series H Preferred Stock exchanged and will otherwise have terms and conditions comparable to such Series G or Series H Preferred Stock. The Series G and Series H Preferred Stock are redeemable at TCI's option, in whole or in part, any time on or after February 1, 2001. The Series G and Series H Preferred Stock will be redeemable in full on February 1, 2016, to the extent then outstanding. In all cases, the redemption price per share will be the liquidation value thereof, including the amount of any accrued but unpaid dividends thereon, to and including the redemption date. The Series G and Series H Preferred Stock will rank prior to TCI common stock and the TCI Class B Preferred Stock and pari passu with all other currently outstanding classes and series of TCI preferred stock with respect to the declaration and payment of dividends and in liquidation. The Series G and Series H Preferred Stock will vote in any general election of directors of TCI and will have one vote per share for such purposes and will vote as a single class with the TCI common stock, the TCI Class B Preferred Stock and any other class or series of TCI Preferred Stock entitled to vote in any general election of directors. The Series G and Series H Preferred Stock will have no other voting rights except as required by the DGCL. II-85 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Company-Obligated Mandatorily Redeemable Preferred Securities of ---------------------------------------------------------------- Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC --------------------------------------------------------------------- In January 1996, TCI Communications Financing I ("Trust I"), an indirect wholly-owned subsidiary of the Company, issued $16 million in common securities to TCIC, and issued $500 million of 8.72% Trust Originated Preferred SecuritiesSM (the "Trust I Preferred Securities" and together with the common securities, the "Trust I Securities") to the public. Trust I exists for the exclusive purposes of issuing Trust I 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 "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust I's obligations under the Trust I Preferred Securities. In May 1996, TCI Communications Financing II ("Trust II"), an indirect wholly-owned subsidiary of the Company, issued $16 million in common securities to TCIC, and issued $500 million of 10% Trust Preferred Securities (the "Trust II Preferred Securities" and together with the common securities, the "Trust II Securities") to the public. Trust II exists for the exclusive purposes of issuing Trust II Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 10% Subordinated Deferrable Interest Notes due May 31, 2045 (the "10% Subordinated Debt Securities") of TCIC. The 10% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 10% Subordinated Debt Securities, the Trust II Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust II's obligations under the Trust II Preferred Securities. The Trust I and Trust II Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheet captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of TCI Communications, Inc." Dividends accrued on the Trust I and Trust II Preferred Securities are included in minority interests in losses (earnings) of consolidated subsidiaries in the accompanying consolidated statements of operations. (11) Stockholders' Equity -------------------- Common Stock ------------ The Series A TCI Group Stock and Series A Liberty Group Stock each have one vote per share, and the Series B TCI Group Stock and Series B Liberty Group Stock each have ten votes per share. Each share of Series B TCI Group Stock is convertible, at the option of the holder, into one share of Series A TCI Group Stock, and each share of Series B Liberty Group Stock is convertible, at the option of the holder, into one share of Series A Liberty Group Stock. See note 1. (continued) II-86 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The rights of holders of the TCI Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the TCI Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. Similarly, the rights of holders of the Liberty Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the Liberty Group Stock to the aggregate market capitalization, as defined, of the Liberty Group Stock and the TCI Group Stock. Employee Benefit Plans ---------------------- The Company has several employee stock purchase plans (the "Plans") to provide employees an opportunity for ownership in the Company and to create a retirement fund. Terms of the Plans generally provide for employees to contribute up to 10% of their compensation to a trust for investment in TCI Group Stock and Liberty Media Group Stock. The Company, by annual resolution of the Board, generally contributes up to 100% of the amount contributed by employees. Certain of the Company's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $35 million, $28 million and $21 million for 1996, 1995 and 1994, respectively. Preferred Stock --------------- Class A Preferred Stock. The Company is authorized to issue 700,000 shares of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 592,797 shares. The holders of the Class A Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. See note 1. Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The Company is authorized to issue 1,675,096 shares of Class B Preferred Stock and 1,620,026 of such shares are issued and outstanding. Dividends accrue cumulatively (but without compounding) at an annual rate of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation Value"), whether or not such dividends are declared or funds are legally available for payment of dividends. Accrued dividends will be payable annually on March 1 of each year (or the next succeeding business day if March 1 does not fall on a business day), and, in the sole discretion of the Board, may be declared and paid in cash, in shares of Series A TCI Group Stock or in any combination of the foregoing. Accrued dividends not paid as provided above on any dividend payment date will accumulate and such accumulated unpaid dividends may be declared and paid in cash, shares of Series A TCI Group Stock or any combination thereof at any time (subject to the rights of any senior stock and, if applicable, to the concurrent satisfaction of any dividend arrearages on any class or series of TCI preferred stock ranking on a parity with the Class B Preferred Stock with respect to dividend rights) with reference to any regular dividend payment date, to holders of record of Class B Preferred Stock as of a special record date fixed by the Board (which date may not be more than 45 days nor less than 10 days prior to the date fixed for the payment of such accumulated unpaid dividends). The Class B Preferred Stock ranks junior to the Series F Preferred Stock with respect to the declaration and payment of dividends. (continued) II-87 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements If all or any portion of a dividend payment is to be paid through the issuance and delivery of shares of Series A TCI Group Stock, the number of such shares to be issued and delivered will be determined by dividing the amount of the dividend to be paid in shares of Series A TCI Group Stock by the Average Market Price of the Series A TCI Group Stock. For this purpose, "Average Market Price" means the average of the daily last reported sale prices (or, if no sale price is reported on any day, the average of the high and low bid prices on such day) of a share of Series A TCI Group Stock for the period of 20 consecutive trading days ending on the tenth trading day prior to the regular record date or special record date, as the case may be, for the applicable dividend payment. In the event of any liquidation, dissolution or winding up of TCI, the holders of Class B Preferred Stock will be entitled, after payment of preferential amounts on any class or series of stock ranking prior to the Class B Preferred Stock with respect to liquidating distributions, to receive from the assets of TCI available for distribution to stockholders an amount in cash or property or a combination thereof, per share, equal to the Stated Liquidation Value thereof, plus all accumulated and accrued but unpaid dividends thereon to and including the redemption date. TCI does not have any mandatory obligation to redeem the Class B Preferred Stock as of any fixed date, at the option of the holders or otherwise. Subject to the prior preferences and other rights of any class or series of TCI preferred stock, the Class B Preferred Stock will be exchangeable at the option of TCI in whole but not in part at any time for junior subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a qualified trustee to be chosen by TCI. If TCI exercises its optional exchange right, each holder of outstanding shares of Class B Preferred Stock will be entitled to receive in exchange therefor newly issued Junior Exchange Notes of a series authorized and established for the purpose of such exchange, the aggregate principal amount of which will be equal to the aggregate Stated Liquidation Value of the shares of Class B Preferred Stock so exchanged by such holder, plus all accumulated and accrued but unpaid dividends thereon to and including the exchange date. The Junior Exchange Notes will be issuable only in principal amounts of $100 or any integral multiple thereof and a cash adjustment will be paid to the holder for any excess principal that would otherwise be issuable. The Junior Exchange Notes will mature on the fifteenth anniversary of the date of issuance and will be subject to earlier redemption at the option of TCI, in whole or in part, for a redemption price equal to the principal amount thereof plus accrued but unpaid interest. Interest will accrue, and be payable annually, on the principal amount of the Junior Exchange Notes at a rate per annum to be determined prior to issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will accrue on overdue principal at the same rate, but will not accrue on overdue interest. The Junior Exchange Notes will represent unsecured general obligations of TCI and will be subordinated in right of payment to all Senior Debt (as defined in the Indenture). Accordingly, holders of Class B Preferred Stock who receive Junior Exchange Notes in exchange therefor may have difficulty selling such Notes. (continued) II-88 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For so long as any dividends are in arrears on the Class B Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Class B Preferred Stock which is entitled to payment of cumulative dividends prior to the redemption, exchange, purchase or other acquisition of the Class B Preferred Stock, and until all dividends accrued up to the immediately preceding dividend payment date on the Class B Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, neither TCI nor any subsidiary thereof may redeem, exchange, purchase or otherwise acquire any shares of Class B Preferred Stock, any such parity stock or any class or series of its capital stock ranking junior to the Class B Preferred Stock (including the TCI common stock), or set aside any money or assets for such purpose, unless all of the outstanding shares of Class B Preferred Stock and such parity stock are redeemed. If TCI fails to redeem or exchange shares of Class B Preferred Stock on a date fixed for redemption or exchange, and until such shares are redeemed or exchanged in full, TCI may not redeem or exchange any parity stock or junior stock, declare or pay any dividend on or make any distribution with respect to any junior stock or set aside money or assets for such purpose and neither TCI nor any subsidiary thereof may purchase or otherwise acquire any Class B Preferred Stock, parity stock or junior stock or set aside money or assets for any such purpose. The failure of TCI to pay any dividends on any class or series of parity stock or to redeem or exchange on any date fixed for redemption or exchange any shares of Class B Preferred Stock shall not prevent TCI from (i) paying any dividends on junior stock solely in shares of junior stock or the redemption purchase or other acquisition of junior stock solely in exchange for (together with cash adjustment for fractional shares, if any) or (but only in the case of a failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, shares of junior stock; or (ii) the payment of dividends on any parity stock solely in shares of parity stock and/or junior stock or the redemption, exchange, purchase or other acquisition of Class B Preferred Stock or parity stock solely in exchange for (together with a cash adjustment for fractional shares, if any), or (but only in the case of failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, parity stock and/or junior stock. The Class B Preferred Stock will vote in any general election of directors, will have one vote per share for such purpose and will vote as a single class with the TCI common stock and any class or series of TCI preferred stock entitled to vote in any general election of directors. The Class B Preferred Stock will have no other voting rights except as required by the DGCL. Series Preferred Stock. The TCI Series Preferred Stock is issuable, from time to time, in one or more series, with such designations, preferences and relative participating, option or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board. The Company is authorized to issue 50,000,000 shares of Series Preferred Stock. All shares of any one series of the TCI Series Preferred Stock are required to be alike for every particular and all shares are required to rank equally and be identical in all respects, except insofar as they may vary with respect to matters which the Board is expressly authorized by the TCI Charter to determine in the resolution or resolutions proving for the issue of any series of the TCI Series Preferred Stock. (continued) II-89 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Redeemable Convertible Preferred Stock, Series E. The Company is authorized to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par value $.01. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 246,402 shares. The holders of the Series E Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. Stock Options ------------- In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan (the "1994 Plan"). The Plan provided for awards to be made in respect of a maximum of 16 million shares of TCI Class A common stock. Awards may be made as grants of stock options, stock appreciation rights, restricted shares, stock units or any combination thereof. The 1994 Plan was adjusted to provide that the number and type of shares subject to future awards consists of a number of shares of Series A TCI Group Stock equal to the number of shares of Class A common stock subject to future awards immediately prior to the Distribution and a number of shares of Series A Liberty Group Stock equal to one-fourth of the number of shares of Class A common stock subject to future awards immediately prior to Distribution. Following the Distribution, the Compensation Committee of TCI may in its discretion grant awards, including awards of options on, or stock appreciation rights respecting, shares of Series A TCI Group Stock, Series A Liberty Group Stock, or combinations thereof, in such amounts and types as it determines in accordance with the terms of the 1994 Plan, as adjusted. In 1995, the Company adopted the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (the "1995 Plan"). In addition, the Company has established the Tele-Communications, Inc. 1996 Stock Incentive Plan (the "1996 Plan" and together with the 1994 Plan and the 1995 Plan, the "Incentive Plans") which was approved by stockholders at the TCI 1996 annual meeting. The 1996 Plan provides (i) for stock-based awards to be made in respect of a maximum of 16 million shares of Series A TCI Group Stock and a maximum of 6 million shares of Series A Liberty Group Stock (subject to certain adjustments described below) and (ii) for cash awards in amounts determined by the TCI compensation committee. Series A TCI Group Stock and Series A Liberty Group Stock shall be hereinafter collectively referred to as the "Common Stock". Awards may be made as grants of stock options ("Options"), stock appreciation rights ("SARs"), restricted shares ("Restricted Shares"), stock units ("Stock Units"), performance awards ("Performance Awards"), or any combination thereof (collectively, "Awards"). Shares in respect of which Awards are made may be either authorized but unissued shares of Common Stock or issued shares reacquired by the Company, including shares purchased in the open market. Shares of Common Stock that are subject to Awards that expire, terminate or are annulled for any reason without having been exercised (or, with respect to Tandem SARs deemed exercised, by virtue of the exercise of a related Option), or are Restricted Shares or Stock Units that are forfeited prior to becoming vested, or are subject to Awards of SAR's that are exercised for cash, will return to the pool of such shares available for grant under the 1996 Plan. (continued) II-90 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In connection with the Distribution, each holder of an outstanding option or stock appreciation right received an additional option or stock appreciation right, as applicable, covering a number of shares of Series A Liberty Group Stock equal to one-fourth of the number of shares of Class A common stock theretofore subject to the outstanding option or stock appreciation right, and the outstanding option or stock appreciation right would continue in effect as an option or stock appreciation right covering the same number of shares of Series A TCI Group Stock (as redesignated) that were theretofore subject to the option or stock appreciation right. The aggregate pre-adjustment strike price of the outstanding options or stock appreciation rights was allocated between the outstanding options or stock appreciation rights and the newly issued options or stock appreciation rights in a ratio determined by the Compensation Committee. The following descriptions of stock options and/or stock appreciation rights have been adjusted to reflect such change. Awards of Series A TCI Group Stock made under the Incentive Plans were adjusted in connection with the Satellite Spin-off such that immediately prior to the Satellite Spin-off, each option was divided into two separately exercisable options: (i) an option to purchase Satellite Series A common stock (an "Add-on Satellite Option"), exercisable for the number of shares of Satellite Series A common stock that would have been issued in the Satellite Spin-off in respect of the shares of Series A TCI Group Stock subject to the applicable TCI option, if such TCI option had been exercised in full immediately prior to the record date of the Satellite Spin-off, and containing substantially equivalent terms as the existing TCI option, and (ii) an option to purchase Series A TCI Group Stock (an "Adjusted TCI Option"), exercisable for the same number of shares of Series A TCI Group Stock as the corresponding TCI option had been. The aggregate exercise price of each TCI option was allocated between the Add-on Satellite Option and the Adjusted TCI Option into which it is divided, and all other terms of the Add-on Satellite Option and Adjusted TCI Option will in all material respects be the same as such TCI option. Similar adjustments were made to the outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs, effective immediately prior to the Satellite Spin-off. As a result of the foregoing, certain persons who remain TCI employees or non-employee directors after the Satellite Spin-off and certain persons who were TCI employees prior to the Satellite Spin-off but became Satellite employees after the Satellite Spin-off hold both Adjusted TCI Options and separate Add-on Satellite Options and/or hold both Adjusted TCI SARs and separate Add-on Satellite SARs. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI employees and non-employee directors following the Satellite Spin-off are obligations solely of TCI. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by persons who are Satellite employees at the time of the Satellite Spin-off and following the Satellite Spin-off are no longer TCI employees are obligations solely of Satellite. Prior to the Satellite Spin-off, TCI and Satellite entered into an agreement to sell to each other from time to time at the then current market price shares of Series A TCI Group Stock and Satellite Series A common stock, respectively, as necessary to satisfy their respective obligations under such securities. (continued) II-91 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the Liberty Stock Dividend, options to purchase shares of Liberty Group Stock were increased by one option for each two options previously granted, and the exercise price was also adjusted accordingly. The folowing Liberty Group Stock option disclosures have been adjusted to reflect such changes. The following table presents the number and weighted average exercise price ("WAEP") of certain options in tandem with SARs to purchase Class A common stock, Series A TCI Group Stock and Series A Liberty Group Stock pursuant to the Incentive Plans:
Series A Class A Series A Liberty common TCI Group Group stock WAEP Stock WAEP Stock WAEP ----------- ----- ---------- ---- --------- ---- Outstanding at January 1, 1994 8,309,336 $16.61 -- -- Granted 3,220,000 22.00 -- -- Assumed 54,600 19.56 -- -- Exercised (217,483) 17.26 -- -- Canceled (45,625) 20.13 -- -- ----------- ---------- --------- Outstanding at December 31, 1994 11,320,828 18.13 -- -- Converted from (11,218,866) 18.15 11,218,866 $13.58 -- Class A options Adjustment for -- -- 4,207,056 $12.10 Distribution Granted -- 7,507,500 16.99 3,879,000 15.95 Exercised (91,962) 16.07 (933,516) 12.45 (340,504) 11.11 Canceled (10,000) 17.25 (90,500) 13.07 (33,936) 11.66 ----------- ---------- --------- Outstanding at December 31, 1995 -- 17,702,350 15.08 7,711,616 14.08 Exercised -- (196,300) 12.70 (87,730) 11.89 Canceled -- (132,200) 15.35 (27,900) 12.68 ----------- ---------- --------- Outstanding at December 31, 1996 -- 17,373,850 12.97 7,595,986 14.11 =========== ========== ========= Exercisable at December 31, 1994 3,053,348 16.35 -- -- =========== ========== ========= Exercisable at December 31, 1995 -- 4,717,230 12.87 1,774,222 11.48 =========== ========== ========= Exercisable at December 31, 1996 -- 8,189,828 11.89 3,290,718 12.71 =========== ========== ========= Vesting Period 4-5 yrs 4-5 yrs ========== =========
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded 330,000 restricted shares of Series A TCI Group common stock and 45,000 restricted shares of Series A Liberty Group Stock to certain officers and other key employees of the Company. Such restricted shares vest as to 50% on December 13, 2000 and as to the remaining 50% on December 13, 2001. SARs with respect to 1,357,875 shares of Series A TCI Group Stock and 533,811 shares of Series A Liberty Group Stock were outstanding at December 31, 1996. These rights have an adjusted strike price of $0.52 and $0.54 per share, respectively, and become exercisable and vest evenly over seven years, beginning March 28, 1991. The SARs expire on March 28, 2001. The Company has the option of paying the holder in stock or cash. During the year ended December 31, 1996, SARs with respect to 65,625 shares of Series A TCI Group Stock were exercised. (continued) II-92 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On August 3, 1995, stockholders of the Company approved the Director Stock Option Plan (the "DSOP") including the grant, effective as of November 16, 1994, to each person that as of that date was a member of the Board and was not an employee of the Company or any of its subsidiaries, of options to purchase 50,000 shares of TCI Class A common stock. Pursuant to the DSOP, options to purchase 300,000 shares of TCI Class A common stock were granted at an exercise price of $22.00 per share. Such options had a weighted average fair value of $16.49 on the date of grant. Options issued pursuant to the DSOP vest and become exercisable over a five-year period from the date of grant and expire 10 years from the date of grant. During the year ended December 31, 1995, options to purchase 50,000 shares of Series A TCI Group Stock and options to purchase 18,750 shares of Series A Liberty Group Stock with a WAEP of $16.50 and $14.67, respectively, were canceled. During the year ended December 31, 1996, options to purchase 150,000 shares of Series A TCI Group Stock and options to purchase 56,250 shares of Series A Liberty Group stock were issued pursuant to the DSOP. Such option had a weighted average fair value of $9.83 and $11.51, respectively, on the date of grant. At December 31, 1996, 400,000 options with respect to TCI Group Stock granted pursuant to the DSOP were outstanding, 100,000 of which were exercisable. Such options had a range of exercise prices of $12.25 to $16.99, with a WAEP of $14.06, and a weighted average remaining contractual life of 8.63 years. At December 31, 1996, 150,000 options with respect to Liberty Group Stock granted pursuant to the DSOP were outstanding, 37,500 of which were exercisable. Such options had a range of exercise prices of $14.67 to $17.50, with a WAEP of $15.65, and a weighted average remaining contractual life of 8.63 years. The estimated fair values noted above are based on the Black-Scholes model and are stated in current annualized dollars on a present value basis. The key assumptions used in the model for purposes of these calculations include the following: (a) a discount rate equal to the 10-year Treasury rate on the date of grant; (b) a 35% volatility factor, (c) the 10-year option term; (d) the closing price of the respective common stock on the date of grant; and (e) an expected dividend rate of zero. The actual value that the subject directors may realize will depend upon the extent to which the stock price exceeds the exercise price on the date the options are exercised. Accordingly, the value realized by such directors will not necessarily be the value determined by the model. Estimated compensation relating to restricted stock awards, options with tandem SARs and SARs has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate 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. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. (continued) II-93 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other ----- In connection with the exercise of a stock option by an officer/director of Liberty, a note was given to Liberty as partial payment of the exercise price. This note bore interest at 7.54% per annum. The Company recorded the net assumed note receivable, amounting to $15 million, from such officer as a reduction of stockholders' equity. On October 27, 1994, such officer tendered to the Company 634,917 shares of TCI Class B common stock in full payment of principal and interest amounting to $15 million. The excess of consideration received on debentures converted or options exercised over the par value of the stock issued is credited to additional paid-in capital. At December 31, 1996, there were 127,607,438 shares of Series A TCI Group Stock and 30,090,303 shares of Series A Liberty Group Stock (as adjusted to give effect to the Liberty Group Stock Dividend) reserved for issuance under exercise privileges related to options, convertible debt securities and convertible preferred stock and upon vesting of the restricted stock awards described in this note 11 and in notes 8 and 9. In addition, one share of Series A TCI Group Stock is reserved for each outstanding share of Series B TCI Group Stock and one share of Series A Liberty Group Stock is reserved for each outstanding share of Series B Liberty Group Stock. See note 1 for the effect of the Distribution on the conversion rights of holders of convertible securities. (12) Transactions with Officers and Directors ---------------------------------------- Effective January 31, 1996, a director of the Company purchased one-third of the Company's interest in two limited partnerships and obtained two ten-year options to purchase the Company's remaining partnership interests. The purchase price for the one-third partnership interests was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a wholly-owned subsidiary of the Company) Series C Cumulative Compounding Preferred Stock owned by such director, and the purchase price for the ten-year options was $100 for each option. All options are exercisable for cash in the aggregate amount of $3,000,000. On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an executive officer of TCI was transferred all of TCI's right title and interest in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock of WestMarc owned by TCI. Such preferred stock has a liquidation value of $1,999,500 and is subject to forfeiture by such officer in the event of certain circumstances from the date of grant through December 13, 2005. (continued) II-94 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Effective December 1, 1996, an executive officer of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI Telephony Services, Inc., a consolidated subsidiary of the Company, ("Telephony Services"). The aggregate exercise price for each such option is equal to 1.0% of (i) the Company's cumulative investment in Telephony Services as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax benefits generated by Telephony Services (up to $500 million) as and when used by TCI. Each such executive officer was also granted a similar option representing 1.0% of the Company's common equity in TCI Wireline, Inc., another consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise price for each such Wireline option is equal to 1.0% of the Company's cumulative investment in Wireline as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise. Any exercise by one of such executive officers of all or part of one of such options (as to either the Telephony Services option or the Wireline option) would need to be accompanied by the exercise by such executive officer of a pro rata portion of the other such option. All of such options vest 20% per annum beginning February 1, 1997, and will expire on February 1, 2006. Effective December 1, 1996, two executive officers of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI.NET, Inc., a consolidated subsidiary of the Company. The aggregate exercise price for each such TCI.NET, Inc. option is equal to 1.0% of the Company's cumulative investment in TCI.NET, Inc. as of December 31, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise price. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. On the date of the Satellite Spin-off, the Company granted options to two of its executive officers to purchase 1.0% and an option to an employee of TCIC to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise price for each such option is equal to 1.0% or 0.5%, as applicable, of the Company's net investment in Satellite on the date of the Satellite Spin-off. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Estimated compensation relating to the aforementioned restricted stock award and options has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate 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. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. (continued) II-95 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Sale of Subsidiary Stock ------------------------ On July 18, 1995, TINTA completed an initial public offering (the "IPO") in which it sold 20 million shares of TINTA Series A common stock to the public for consideration of $16.00 per share aggregating $320 million, before deducting related expenses (approximately $19 million). The shares sold to the public represented 17% of TINTA's total issued and outstanding common stock. Also in July 1995, TINTA issued 687,500 shares of TINTA Series A common stock as partial consideration for a 35% ownership interest in Torneos Y Competencias S.A., an Argentine sports programming company (the "TYC Acquisition"). As a result of the IPO and the TYC Acquisition, the Company recognized a gain amounting to $123 million. In June 1995, Flextech issued share capital for cash and preferred shares of Thomson Directories Limited. In connection with such issuance, the Company recorded a $51 million increase to stockholders' equity and a $93 million increase to minority interests in equity of consolidated subsidiaries. No gain was recognized in the Company's consolidated statement of operations due primarily to the existence of the Company's contingent obligations to repurchase certain of the Flextech share capital. (14) Income Taxes ------------ TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which the Company owns less than 80% each file a separate income tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. Income tax benefit (expense) for the years ended December 31, 1996, 1995 and 1994 consists of: Current Deferred Total ------- -------- ----- amounts in millions Year ended December 31, 1996: Federal $ (25) (175) (200) State and local (13) (49) (62) ----- ---- ---- $ (38) (224) (262) ===== ==== ==== Year ended December 31, 1995: Federal $ (23) 130 107 State and local (10) 23 13 ----- ---- ---- $ (33) 153 120 ===== ==== ==== Year ended December 31, 1994: Federal $ (69) (29) (98) State and local (14) (8) (22) ----- ---- ---- $ (83) (37) (120) ===== ==== ==== (continued) II-96 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Income tax benefit (expense) differs from the amounts computed by applying the Federal income tax rate of 35% as a result of the following: Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Computed "expected" tax benefit (expense) $(189) 102 (64) Amortization not deductible for tax purposes (22) (25) (13) Minority interest in losses (earnings) of consolidated subsidiaries (3) 9 (3) Gain on sale of subsidiary stock -- 43 -- Recognition of losses of consolidated partnership -- -- (10) State and local income taxes, net of federal income tax benefit (49) (4) (20) Valuation allowance on foreign corporation -- -- (10) Other 1 (5) -- ----- ---- ---- $(262) 120 (120) ===== ==== ==== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, -------------------- 1996 1995 ------- ------- amounts in millions Deferred tax assets: Net operating loss carryforwards $ 679 583 Less - valuation allowance (121) (121) Investment tax credit carryforwards 118 118 Less - valuation allowance (41) (41) Alternative minimum tax credit carryforwards 95 95 Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 232 176 Future deductible amounts principally due to non-deductible accruals 79 90 Other 11 10 ------- ------- Net deferred tax assets 1,052 910 ------- ------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,193 1,111 Franchise costs, principally due to differences in amortization 4,676 3,569 Investment in affiliates, due principally to undistributed earnings of affiliates 917 499 Intangible assets, principally due to differences in amortization 36 42 Leases capitalized for tax purposes 90 53 Other 152 220 ------- ------- Total gross deferred tax liabilities 7,064 5,494 ------- ------- Net deferred tax liability $ 6,012 $ 4,584 ======= =======
(continued) II-97 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The valuation allowance for deferred tax assets as of December 31, 1996 was $162 million. Such balance did not change from December 31, 1995. At December 31, 1996, the Company had net operating loss carryforwards for income tax purposes aggregating approximately $1,499 million of which, if not utilized to reduce taxable income in future periods, $136 million expires in 2003, $117 million in 2004, $355 million in 2005, $288 million in 2006, $138 million in 2009, $167 million in 2010 and $298 million in 2011. Certain subsidiaries of the Company had additional net operating loss carryforwards for income tax purposes aggregating approximately $236 million and these net operating losses are subject to certain rules limiting their usage. At December 31, 1996, the Company had remaining available investment tax credits of approximately $63 million which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of the Company had additional investment tax credit carryforwards aggregating approximately $55 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. Certain of the Federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the IRS for the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues related to the years 1981-1991 have been resolved in the Company's favor. The IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the opinion of management, any additional tax liability, not previously provided for, resulting from the IRS Examinations or the IRS Appeals, ultimately determined to be payable, should not have a material adverse effect on the consolidated financial position of the Company. (15) Commitments and Contingencies ----------------------------- On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. (continued) II-98 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the Company's rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating approximately $571 million. The aggregate amount of the Film Licensing Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, the Company's aggregate payments under the Film Licensing Obligations could prove to be significant. The Company has made certain financial commitments related to the acquisition of sports program rights through 2004. At December 31, 1996, such commitments aggregated $226 million. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $278 million at December 31, 1996. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to fulfill any of such guarantees, that they will not be material to the Company. The Company leases business offices, has entered into converter lease agreements, pole rental agreements and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $187 million, $142 million and $82 million in 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions): 1997 $ 173 1998 163 1999 149 2000 126 2001 116 Thereafter 354 It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1997. (continued) II-99 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Certain key employees of the Company hold restricted stock awards, options 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 pursuant to APB Opinion No. 25. Such estimates 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. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. Estimates of compensation relating to phantom stock appreciation rights ("PSARs") granted to employees of a subsidiary of TCI have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. Effective January 1, 1994, these employees have a put right that requires such subsidiary to purchase their respective PSARs. The subsidiary may call the PSARs on or after January 1, 1996. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (continued) II-100 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Information about the Company's Operations ------------------------------------------ The following is selected information about the Company's operations for the years ended December 31, 1996, 1995 and 1994. Separate amounts of the Company's home shopping service have been provided to enhance the readers understanding of the Company. Programming -------------------- Communi- Electronic Other Intersegment cations Retailing Programming Eliminations Total -------- --------- ----------- ------------ ----- 1996 amounts in millions Revenue $ 6,790 984 355 (107) 8,022 ======= ==== ===== ==== ====== Operating income (loss) $ 546 36 50 -- 632 ======= ==== ===== ==== ====== Depreciation and amortization $ 1,555 37 24 -- 1,616 ======= ==== ===== ==== ====== Capital expenditures $ 2,043 5 7 -- 2,055 ======= ==== ===== ==== ====== Identifiable assets $27,154 442 2,617 31 30,244 ======= ==== ===== ==== ====== 1995 Revenue $ 5,153 920 521 (88) 6,506 ======= ==== ===== ==== ====== Operating income (loss) $ 653 (85) (26) -- 542 ======= ==== ===== ==== ====== Depreciation and amortization $ 1,274 43 55 -- 1,372 ======= ==== ===== ==== ====== Capital expenditures $ 1,733 13 36 -- 1,782 ======= ==== ===== ==== ====== Identifiable assets $23,059 725 1,793 -- 25,577 ======= ==== ===== ==== ====== 1994 Revenue $ 4,043 432 240 (33) 4,682 ======= ==== ===== ==== ====== Operating income (loss) $ 781 9 (2) -- 788 ======= ==== ===== ==== ====== Depreciation and amortization $ 992 15 11 -- 1,018 ======= ==== ===== ==== ====== Capital expenditures $ 1,239 19 6 -- 1,264 ======= ==== ===== ==== ====== Identifiable assets $17,121 739 1,448 (32) 19,276 ======= ==== ===== ==== ====== (continued) II-101 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Quarterly Financial Information (Unaudited) -------------------------------------------
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- --------- --------- --------- amounts in millions, except per share amounts 1996: Revenue: As previously reported $ 1,959 2,022 2,135 Adjustment to reclassify franchise fee revenue (67) (70) (74) Adjustment to reclassify shipping and handling revenue (27) -- -- Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) --------- --------- --------- As adjusted $ 1,861 1,948 2,058 2,155 ======== ========= ========= ========= Operating income: As previously reported $ 176 173 223 Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) --------- --------- --------- As adjusted $ 172 169 220 71 ======== ========= ========= ========= Net earnings (loss): As previously reported $ (118) (184) (136) Adjustment to reflect optical fiber leases as capital leases (3) (3) (2) --------- --------- --------- As adjusted $ (121) (187) (138) 724 ======== ========= ========= ========= Primary earnings (loss) attributable to common stockholders per common and common equivalent share: Series A and Series B TCI Group Stock: As previously reported $ (.22) (.29) (.24) Adjustment to reflect optical fiber leases as capital leases -- (.01) (.01) --------- --------- --------- As adjusted $ (.22) (.30) (.25) (.46) ======= ========= ========= ========= Series A and Series B Liberty Group Stock (a) $ .06 .02 .07 3.83 Fully diluted earnings (loss) attributable to common stockholders per common and common equivalent share: Series A and Series B TCI Group Stock: As previously reported $ (.22) (.29) (.24) Adjustment to reflect optical fiber leases as capital leases -- (.01) (.01) --------- --------- ---------- As adjusted $ (.22) (.30) (.25) (.46) ======= ========= ========= ========= Series A and Series B Liberty Group Stock (a) $ .06 .02 .07 3.74 1995: Revenue: As previously reported $ 1,524 1,674 1,761 1,892 Adjustment to reclassify franchise fee revenue (56) (62) (63) (65) Adjustment to reclassify shipping and handling revenue (22) (26) (23) (28) --------- --------- --------- --------- As adjusted $ 1,446 1,586 1,675 1,799 ======== ========= ========= ========= Operating income $ 180 135 176 51 Net earnings (loss) $ (44) (95) 32 (64) Primary and fully diluted earnings (loss) attributable to common stockholders per common and common equivalent share: TCI Class A and Class B common stock $ (.08) (.16) .12 N/A Series A and Series B TCI Group Stock N/A N/A $ (.09) (.07) Series A and Series B Liberty Group Stock (a) N/A N/A $ (.02) (.09)
------------------ (a) Adjusted to give effect to the Liberty Group Stock Dividend. II-102 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited and reported separately herein on the consolidated financial statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996. We have also audited the accompanying combined balance sheets of Liberty Media Group (a combination of certain assets of Tele-Communications, Inc., as defined in note 1) as of December 31, 1996 and 1995, and the related combined statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. As more fully described in note 1, the combined financial statements of Liberty Media Group are intended to reflect the performance of the businesses of Tele-Communications, Inc., which produce and distribute cable television programming services. The combined financial statements of Liberty Media Group should be read in conjunction with the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Liberty Media Group as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-103 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets December 31, 1996 and 1995
1996 1995 ------------- ------------- Assets amounts in thousands - ------ Cash and cash equivalents $ 317,359 41,225 Trade and other receivables, net 24,796 107,180 Inventories, net -- 103,968 Prepaid expenses 1,150 14,176 Prepaid program rights 32,063 32,170 Committed film inventory 20,092 29,931 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 545,121 299,331 Investment in Time Warner, Inc. ("Time Warner") (note 5) 2,016,799 -- Investment in Turner Broadcasting System, Inc. ("TBS") (note 5) -- 945,282 Other investments and related receivables (note 6) 81,537 110,791 Property and equipment, at cost: Land 39 21,254 Support equipment and buildings 17,756 180,051 Computer and broadcast equipment -- 44,962 ---------- --------- 17,795 246,267 Less accumulated depreciation 7,846 42,233 ---------- --------- 9,949 204,034 ---------- --------- Intangibles: Excess cost over acquired net assets 8,755 364,995 Other intangibles -- 279,467 Cable distribution fees -- 115,746 ---------- --------- 8,755 760,208 Less accumulated amortization 2,126 142,741 ---------- --------- 6,629 617,467 ---------- --------- Other assets, at cost, net of amortization 3,457 12,081 ---------- --------- $3,058,952 2,517,636 ========== =========
(continued) II-104 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets, continued December 31, 1996 and 1995
1996 1995 -------------- ----------------- Liabilities and Combined Equity amounts in thousands - ------------------------------- Accounts payable and accrued liabilities $ 19,397 261,237 Accrued compensation relating to phantom stock appreciation rights (note 10) 17,758 2,183 Program rights payable 33,700 34,864 Deferred revenue 6,166 50,803 Debt (note 7) 1,620 250,990 Deferred income taxes (note 8) 582,089 201,909 Other liabilities -- 14,261 -------------- ----------------- Total liabilities 660,730 816,247 -------------- ----------------- Minority interests in equity of consolidated subsidiaries 1,052 87,960 Combined equity (note 9): Combined equity 2,355,021 1,336,125 Due to TCI Group 42,149 7,496 Unrealized holding gains for available-for-sale securities, net of taxes -- 269,808 -------------- ----------------- 2,397,170 1,613,429 -------------- ----------------- Commitments and contingencies (note 10) $ 3,058,952 2,517,636 ============== =================
See accompanying notes to combined financial statements. II-105 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---------- --------- --------- amounts in thousands, except per share amounts Revenue: Net sales from electronic retailing services $ 984,117 919,796 1,014,384 Programming services: From TCI Group (note 9) 106,734 79,738 64,660 From others 248,508 441,312 292,371 ---------- --------- --------- 1,339,359 1,440,846 1,371,415 ---------- --------- --------- Cost of sales, operating costs and expenses: Cost of sales 605,116 602,849 618,972 Operating 265,586 426,445 325,565 Selling, general and administrative 282,265 372,216 340,462 Charges by TCI Group (note 9) 21,915 23,899 14,180 Compensation relating to phantom rights and stock appreciation rights (notes 9 and 10) 17,353 11,686 -- Adjustment to compensation relating to stock appreciation rights (note 9) -- -- (8,574) Restructuring charges -- 16,846 -- Depreciation 15,543 24,769 22,574 Amortization 45,149 73,242 26,762 ---------- --------- --------- $1,252,927 1,551,952 1,339,941 ---------- --------- --------- Operating income (loss) 86,432 (111,106) 31,474 Other income (expense): Interest expense (16,671) (17,395) (10,333) Interest expense to TCI Group -- (1,920) (2,348) Dividend and interest income, primarily from affiliates 22,040 11,552 20,249 Share of earnings (losses) of affiliates (note 4) 7,524 (15,092) 30,833 Minority interests in lossess (earnings) of consolidated subsidiaries (13,257) 34,518 (10,083) Gain (loss) on disposition of assets (note 5) 1,537,408 (2,195) 181,088 Litigation settlements -- (9,003) -- Other, net 575 17 (2,375) ---------- --------- --------- 1,537,619 482 207,031 ---------- --------- --------- Earnings (loss) before income taxes 1,624,051 (110,624) 238,505 Income tax benefit (expense) (note 8) (567,655) 54,292 (103,941) ---------- --------- --------- Net earnings (loss) $1,056,396 (56,332) 134,564 ========== ========= ========= Primary earnings (loss) per common and common equivalent share (note 2) $ 3.97 (.11) ========== ========= Fully diluted earnings (loss) per common and common equivalent share (note 2) $ 3.88 (.11) ========== =========
See accompanying notes to combined financial statements. II-106 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity Years ended December 31, 1996, 1995 and 1994
Unrealized holding gains for available-for- Total Combined Due to sale securities, combined equity TCI Group net of taxes equity ---------- --------- ------------ --------- amounts in thousands Balance at December 31, 1993 $1,185,381 2,738 -- 1,188,119 Unrealized holding gains for available-for-sale securities as of -- -- 292,918 292,918 January 1, 1994 Net earnings 134,564 -- -- 134,564 Sale of programming to TCI Group (64,660) -- -- (64,660) Cost allocations from TCI Group 14,180 -- -- 14,180 Accrued cable distribution fees to TCI Group from Home Shopping Network, Inc. ("HSN") -- 28,170 -- 28,170 Allocation of compensation relating to stock appreciation rights (8,574) -- -- (8,574) Interest expense allocation from TCI Group 2,348 -- -- 2,348 Intergroup tax allocation 78,238 -- -- 78,238 Acquisition of Prime Ticket Networks, 210,796 -- -- 210,796 L.P. Net cash transfers to TCI Group (160,833) (2,184) -- (163,017) Change in unrealized holding gains for available-for-sale securities -- -- (194,729) (194,729) ---------- --------- ---------- --------- Balance at December 31, 1994 1,391,440 28,724 98,189 1,518,353 Net loss (56,332) -- -- (56,332) Sale of programming to TCI Group (43,079) (36,659) -- (79,738) Cost allocations from TCI Group 14,480 9,419 -- 23,899 Cable distribution fees paid to TCI Group from HSN -- (26,540) -- (26,540) Allocation of compensation relating to stock appreciation rights 6,765 2,738 -- 9,503 Interest expense allocation from TCI Group 1,786 134 -- 1,920 Intergroup tax allocation 435 (407) -- 28 Deferred tax assets transferred to TCI Group (13,717) -- -- (13,717) Deferred tax assets transferred to TCI Group upon implementation of tax sharing agreement (note 8) (2,410) -- -- (2,410) Net cash transferred from TCI Group 17,637 30,087 -- 47,724 Contribution to combined equity for acquisitions 19,120 -- -- 19,120 Change in unrealized holding gains for available-for-sale securities -- -- 171,619 171,619 ---------- --------- ---------- --------- Balance at December 31, 1995 1,336,125 7,496 269,808 1,613,429 Net earnings 1,056,396 -- -- 1,056,396 Repurchase of Liberty Group Stock (37,500) -- -- (37,500) Sale of programming to TCI Group -- (106,734) -- (106,734) Cost allocations from TCI Group -- 21,915 -- 21,915 Cable distribution fees paid to TCI Group from HSN -- 2,620 -- 2,620 Adjustment to allocation of compensation relating to stock appreciation rights -- (2,789) -- (2,789) Allocation of payment of compensation relating to stock appreciation rights -- (192) -- (192) Intergroup tax allocation -- 32,042 -- 32,042 Net cash transfers from TCI Group -- 87,791 -- 87,791 Recognition of previously unrealized gains on available-for-sale securities -- -- (355,922) (355,922) Change in unrealized holding gains on available-for-sale securities -- -- 86,114 86,114 ---------- --------- ---------- --------- Balance at December 31, 1996 $2,355,021 42,149 -- 2,397,170 ========== ========= ========== =========
See accompanying notes to combined financial statements. II-107 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---------- --------- --------- amounts in thousands (see note 3) Cash flows from operating activities: Net earnings (loss) $1,056,396 (56,332) 134,564 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 60,692 98,011 49,336 Compensation relating to phantom rights and stock appreciation rights 17,353 11,686 -- Adjustment to compensation relating to stock appreciation rights -- -- (8,574) Payment of compensation relating to phantom rights and stock appreciation rights (1,218) -- -- Share of losses (earnings) of affiliates, net (7,524) 15,092 (30,833) Deferred income tax expense (benefit) 542,613 (53,900) 25,703 Intergroup tax allocation 32,042 28 -- Noncash interest expense 4,097 1,920 -- Minority interests in earnings (losses) 13,257 (34,518) 10,083 Litigation settlements -- 9,003 -- Payments of litigation settlements (3,725) (30,313) -- Loss (gain) on disposition of assets (1,537,408) 2,195 (181,088) Other noncash charges (1,003) 4,501 1,491 Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (40,180) (11,851) (13,437) Change in inventories 1,180 7,895 (18,455) Change in prepaid expenses (6,182) (16,658) (10,418) Change in payables, accruals and deferred revenue 19,461 54,937 48,810 ---------- --------- --------- Net cash provided by operating activities 149,851 1,696 7,182 ---------- --------- --------- Cash flows from investing activities: Cash paid for acquisitions (55,000) (36,596) -- Capital expended for property and equipment (11,734) (48,700) (32,455) Additional investments in and loans to affiliates and others (36,044) (69,479) (23,856) Return of capital from affiliates 6,144 20,009 9,880 Collections on loans to affiliates and others 1,918 2,501 149,162 Cash paid for cable distribution fees (31,529) (43,875) (71,871) Proceeds from disposition of assets 27,623 373 180,429 Other investing activities (7,572) 14,168 (2,245) ---------- --------- --------- Net cash provided (used) by investing activities (106,194) (161,599) 209,044 ---------- --------- --------- Cash flows from financing activities: Borrowings of debt 278,899 222,549 46,859 Repayments of debt (333,906) (50,284) (139,096) Change in cash transfers from TCI Group 5,592 (34,655) (149,442) Repurchase of Liberty Group Stock (37,500) -- -- Contributions by minority shareholders of subsidiaries 319,457 2,084 6,272 Distributions to minority shareholders of subsidiaries (65) (1,529) (400) ---------- --------- --------- Net cash provided (used) by financing activities 232,477 138,165 (235,807) ---------- --------- --------- Net increase (decrease) in cash and cash equivalents 276,134 (21,738) (19,581) Cash and cash equivalents at beginning of year 41,225 62,963 82,544 ---------- --------- --------- Cash and cash equivalents at end of year $ 317,359 41,225 62,963 ========== ========= =========
See accompanying notes to combined financial statements. II-108 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements December 31, 1996,1995 and 1994 (1) Basis of Presentation --------------------- The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele- Communications, Inc. ("TCI") that are attributed to Liberty Media Group, as defined below. All significant intercompany accounts and transactions have been eliminated. On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes cable television programming services ("Liberty Media Group"). 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"). Liberty Media Group's programming services include production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products. Additionally, Liberty Media Group is engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing. The issuance of 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, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and assets are collectively referred to as "TCI Group". Intercompany balances resulting from transactions with such units are reflected as borrowings from or loans to TCI Group and, prior to the Distribution, are included in combined equity in the accompanying combined financial statements. See note 9. Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to Liberty Media Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries will each continue to be responsible for their respective liabilities. Holders of Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. (continued) II-109 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of Liberty Media Group and the market price of shares of Liberty Group Stock. In addition, net losses of any portion of TCI, dividends and distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce funds of TCI legally available for dividends on all series of common stock. Accordingly, Liberty Media Group financial information should be read in conjunction with the TCI consolidated financial information. Dividends on Liberty Group Stock are payable at the sole discretion of the Board out of the lesser of all assets of TCI legally available for dividends and the available dividend amount with respect to Liberty Media Group, as defined. Determinations to pay dividends on Liberty Group Stock will be based primarily upon the financial condition, results of operations and business requirements of Liberty Media Group and TCI as a whole. After the Distribution, existing preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of TCI Class A common stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange (in addition to the same number of shares of redesignated Series A TCI Group Stock as were theretofore issuable thereunder) the number of shares of Series A Liberty Group Stock that would have been issuable in the Distribution with respect to the TCI Class A common stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Distribution. Options to purchase TCI Class A common stock outstanding at the time of the Distribution were adjusted by issuing to the holders of such options separate options to purchase that number of shares of Series A Liberty Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Class A common stock prior to the record date for the Distribution and reallocating a portion of the aggregate exercise price of the previously outstanding options to the newly issued options to purchase Series A Liberty Group Stock. The issuance of shares of Series A Liberty Group Stock upon such conversion, exchange or exercise of such convertible securities will not result in any transfer of funds or other assets from TCI Group to Liberty Media Group in consideration of such issuance. In the case of the exercise of such options to purchase Series A Liberty Group Stock, the proceeds received upon the exercise of such options will be attributed to Liberty Media Group. Effective January 13, 1997, TCI issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been retroactively restated to reflect the Liberty Group Stock Dividend. (continued) II-110 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (2) Summary of Significant Accounting Policies ------------------------------------------ Cash and Cash Equivalents ------------------------- Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables ----------- Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Program Rights -------------- Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed film inventory and program rights payable are recorded at the estimated costs of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the specific number of exhibitions. Investments ----------- All marketable equity securities held by Liberty Media Group are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of combined equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are generally carried at cost. For those investments in affiliates in which Liberty Media Group's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize Liberty Media Group's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of Liberty Media Group's investment in, advances to and commitments for the investee. Liberty Media Group's share of net earnings or losses of affiliates includes the amortization of the difference between Liberty Media Group's investment and its share of the net assets of the investee. However, recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to Liberty Media Group's ownership interest in such affiliates. Changes in Liberty Media Group's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in Liberty Media Group's consolidated statements of operations. (continued) II-111 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Long-Lived Assets ----------------- (a) Property and Equipment ---------------------- Property and equipment, including significant improvements, is stated at cost which includes acquisition costs allocated to tangible assets acquired. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 40 years for support equipment and buildings (furniture and other equipment are depreciated from 3 to 8 years and buildings and improvements are depreciated from 20 to 40 years). Repairs and maintenance and any gains or losses on disposition of assets are included in operations. (b) Excess Cost Over Acquired Net Assets ------------------------------------ Excess cost over acquired net assets consists of the difference between the cost of acquiring programming entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over 30 years. 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. The accounting for long-lived assets that are expected to be disposed are also addressed in Statement No. 121. Liberty Media Group 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 Liberty Media Group. Pursuant to Statement No. 121, Liberty Media Group periodically reviews the carrying amount of its long-lived assets and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. Liberty Media Group 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"). Liberty Media Group deems Assets to be impaired if Liberty Media Group 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. Liberty Media Group 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. (continued) II-112 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Minority Interests ------------------ Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause Liberty Media Group to repurchase such holders' common equity. Deferred Revenue ---------------- Deferred revenue represents advance billings primarily to home satellite dish owners and providers. Such revenue is recognized in the month service is provided. Net Sales From Electronic Retailing Services -------------------------------------------- Revenue includes merchandise sales reduced by incentive discounts and sales returns to arrive at net sales from electronic retailing services. Revenue is recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. Liberty Media Group's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. Stock Based Compensation ------------------------ Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, Liberty Media Group continues to account for stock-based employee compensation pursuant to APB Opinion No. 25. See note 9. Earnings (Loss) Per Common and Common Equivalent Share ------------------------------------------------------ Primary earnings attributable to Liberty Media Group stockholders per common share for the year ended December 31, 1996 was computed by dividing net earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares of Liberty Media Group Series A and Series B common stock outstanding during the period, as adjusted for the effect of the Liberty Group Stock Dividend (266.3 million). Common stock equivalents were not included in the computation because their inclusion would be anti-dilutive to TCI. (continued) II-113 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Fully diluted earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (272.4 million). Shares issuable upon conversion of TCI's Convertible Preferred Stock, Series C; Convertible Preferred Stock, Series D; and Redeemable Convertible Liberty Media Group Preferred Stock, Series H have been included in the computation of weighted average shares. The loss per common share for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares of Liberty Media Group Series A and Series B common stock outstanding during the period, as adjusted for the effect of the Liberty Group Stock Dividend (246.1 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Earnings per common share are omitted from the statements of operations for the periods from January 1, 1995 through the Distribution and for the year ended December 31, 1994 as Liberty Group Stock was not part of the capital structure of TCI until August 10, 1995, the date of the Distribution. Estimates --------- 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications ----------------- Certain amounts have been reclassified for comparability with the 1996 presentation. (3) Supplemental Disclosures to Combined Statements of Cash Flows ------------------------------------------------------------- Cash paid for interest was $16,032,000, $14,968,000 and $8,853,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes during the years ended December 31, 1996, 1995 and 1994 was $1,553,000, $1,707,000 and $83,267,000, respectively. In addition, Liberty Media Group received income tax refunds amounting to $14,648,000 and $11,258,000 during the years ended December 31, 1996 and 1995, respectively. (continued) II-114 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Significant noncash investing and financing activities are as follows:
Years ended December 31, ------------------------------------- 1996 1995 1994 ------- ------- -------- amounts in thousands Cash paid for acquisitions: Fair value of assets acquired $55,000 35,329 302,043 Net liabilities assumed -- (934) (21,350) Contribution to combined equity from TCI for acquisition -- (19,120) (210,796) Deferred tax asset (liability) recorded in acquisition -- 1,084 (69,897) Minority interests in equity of acquired entities -- 20,237 -- ------- ------- -------- Cash paid for acquisitions $55,000 36,596 -- ======= ======= ======== Exchange of consolidated subsidiaries for note receivable and equity investments $574,104 -- -- ======= ======= ======== Conversion of debt into additional minority $ -- 14,215 -- ======= ======= ======== Assets contributed for interest in limited liability company $ -- 2,633 -- ======= ======= ========
(4) Investments in Affiliates ------------------------- Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
December 31, -------------------------------------- 1996 1995 ---------------- ---------------- amounts in thousands Combined Financial Position - --------------------------- Property and equipment, net $ 524,949 $ 340,072 Program rights 360,129 256,255 Cable distribution rights 276,342 184,160 Due from Liberty Media Group -- 11,313 Other intangibles 2,892,021 1,174,738 Other assets 1,619,096 989,993 ---------------- -------------- Total assets $ 5,672,537 2,956,531 ================ ============== Debt $ 1,811,509 1,359,471 Due to Liberty Media Group 9,239 1,654 Program rights payable 162,212 92,287 Other liabilities 1,939,108 924,812 Owners' equity 1,750,469 578,307 ---------------- -------------- Total liabilities and equity $ 5,672,537 2,956,531 ================ ==============
(continued) II-115 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements
Years ended December 31, --------------------------------------------------- 1996 1995 1994 ----------------- ----------------- --------------- amounts in thousands Combined Operations - ------------------- Revenue $ 3,392,548 2,632,908 2,152,341 Operating expenses (3,167,329) (2,338,703) (1,880,754) Depreciation and amortization (153,325) (137,663) (90,780) ----------------- --------------- ------------- Operating income 71,894 156,542 180,807 Interest expense (103,321) (107,506) (31,900) Other, net (187,787) (95,446) (117,014) ----------------- --------------- ------------- Net earnings (loss) $ (219,214) (46,410) 31,893 ================= =============== =============
The following table reflects the carrying value of Liberty Media Group's investments, accounted for under the equity method, including related receivables:
December 31, ---------------------------- 1996 1995 -------- ------- amounts in thousands Discovery Communications, Inc. ("Discovery") $117,724 117,373 QVC, Inc. ("QVC") 103,855 81,160 Sunshine Network ("Sunshine") (a) -- 8,221 SportsChannel Chicago ("Chicago") (a) -- 29,722 Home Team Sports Limited Partnership ("HTS") (a) -- 3,514 International Cable Channels Partnership, Ltd. ("ICCP") 9,411 11,563 Premier Sports (a) -- 4,212 Bet Holdings, Inc. ("BET") 20,225 15,353 Courtroom Television Network ("Court") 2,160 7,711 Liberty/Fox U.S. Sports LLC ("Fox Sports") (a) (21,964) -- Superstar/Netlink Group LLC ("Superstar/Netlink") (b) (37,236) -- DMX Inc. ("DMX") 2,331 -- HSN (c) 141,921 -- BDTV INC. and BDTV II INC. (c) 199,701 -- Other 6,993 20,502 -------- ------- $545,121 299,331 ======== =======
(continued) II-116 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (a) As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and Tele- Communications International, Inc. ("TINTA"), a consolidated subsidiary of TCI, formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed Fox Sports into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. Internationally, News Corp. and Liberty/TINTA LLC ("Liberty/TINTA"), a limited liability corporation owned 50% by Liberty Media Group and 50% by TINTA, formed a venture ("Fox Sports International") to operate previously existing sports services in Latin American and Australia and a variety of new sports services throughout the world except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multi-channel, multi-point distribution systems or cable television. Liberty/TINTA is accounted for using the equity method. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. (b) On April 1, 1996, United Video Satellite Group, Inc. ("UVSG") and Liberty Media Group formed Superstar/Netlink, a limited liability company of UVSG's Superstar Satellite Entertainment combined with Netlink USA's ("Netlink") retail business. Liberty Media Group and UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail business no longer consolidates with the financial results of Liberty Media Group. (continued) II-117 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (c) Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. (continued) II-118 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. The following table reflects Liberty Media Group's share of earnings (losses) of each of the aforementioned affiliates: Years ended December 31, --------------------------------------- 1996 1995 1994 ------ -------- ------ amounts in thousands Discovery $351 4,191 7,093 QVC 22,720 2,261 10,830 Sunshine 634 2,524 1,376 Chicago 3,065 6,560 6,465 HTS 397 744 531 ICCP (2,755) (1,973) (1,469) Premier Sports (3,199) (8,478) -- BET 4,872 4,158 3,071 Court (2,543) (21,064) -- Liberty/TINTA (6,603) -- -- Superstar/Netlink 10,754 -- -- DMX (13,617) -- -- BDTV-I and BDTV-II (954) -- -- Other (a) (5,598) (4,015) 2,936 ------- -------- ------ $ 7,524 (15,092) 30,833 ======= ======= ====== (a) Included in other investments is Liberty Media Group's 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership which distributes STARZ!, a first-run movie premium programming service launched in 1994. Entities attributed to TCI Group hold the remaining 50.1% partnership interest. (continued) II-119 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The QE+ limited partnership agreement provides that TCI Group will be required to make special capital contributions to QE+ through July 1, 2005, up to a maximum amount of $350 million, approximately $203 million of which was paid through December 31, 1996. QE+ is obligated to pay TCI Group a preferred return of 10% per annum on the first $200 million of its special capital contributions beginning five years from the date of the contribution or five years from January 1, 1996, whichever is later. Any TCI Group special capital contributions in excess of $200 million will be entitled to a preferred return of 10% per annum from the date of the contribution. QE+ is required to apply 75% of its available cash flow, as defined, to repay the TCI Group special capital contributions and any preferred return payable thereon. To the extent such special capital contributions are insufficient to fund the cash requirements of QE+, TCI Group and Liberty Media Group will each have the option to fund such cash requirements in proportion to their respective ownership percentages. Liberty Media Group also has the right to acquire an additional 10.1% general partnership interest in QE+ based on a formula designed to approximate the fair value of such interest. Such right is exercisable for a period of ten years beginning January 1, 1999 after QE+ has had positive cash flow for two consecutive calendar quarters. The right is exercisable only after all special capital contributions from TCI Group have been repaid, including any preferred return as discussed above. Encore Media Corporation ("Encore") (90% owned by Liberty Media Group) earns management fees from QE+ equal to 20% of managed costs, as defined. In addition, effective July 1, 1995, Liberty Media Group started earning a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. Such Content Fees aggregated $3,735,000 and $972,000 for the year ended December 31, 1996 and the six months ended December 31, 1995, respectively, and are included in revenue from TCI Group in the combined statements of operations. The Content Fee agreement expires on June 30, 2001, subject to renewal on an annual basis thereafter. Payment of the Content Fee will be subordinated to the repayment of the contributions made by TCI Group and the preferred return thereon. Certain of Liberty Media Group's affiliates are general partnerships and any subsidiary of Liberty Media Group that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) II-120 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (5) Investment in Time Warner ------------------------- At December 31, 1995, Liberty Media Group owned shares of TBS common stock and shares of TBS preferred stock that were convertible into TBS common stock. Liberty Media Group's total holdings represented an approximate 7.5% voting interest for those matters which preferred and common stock voted as a single class. On October 10, 1996, Time Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, Liberty Media Group recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. At December 31, 1996, Liberty Media Group's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2 billion based upon the market value of the marketable common stock into which it is convertible. As security for borrowings under one of its credit facilities, Liberty Media Group pledged a portion of its TBS common stock. Upon consummation of the TBS/Time Warner Merger, the revolving credit agreement was amended and provides as security for this indebtedness the TW Exchange Stock received for the previously pledged TBS Class B Common Stock. See note 7. II-121 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would own, directly or indirectly, the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. (6) Other Investments ----------------- Other investments and related receivables are summarized as follows:
December 31, --------------------------------- 1996 1995 ------------- ------------ amounts in thousands Marketable equity securities, at fair value $ 790 16,681 Convertible debt, at cost, which approximates fair value 23,000 23,000 Other investments, at cost, and related receivables 57,747 71,110 ------------- --------------- $ 81,537 110,791 ============= ===============
(continued) II-122 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Management of Liberty Media Group estimates that the market value, calculated utilizing a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices, of all of Liberty Media Group's other investments aggregated $162 million and $192 million at December 31, 1996 and December 31, 1995, respectively. No independent external appraisals were conducted for those assets. (7) Debt ---- Debt is summarized as follows:
December 31, ----------------------------------- 1996 1995 ------------- ------------ amounts in thousands Note payable to bank (a) $ 1,620 -- Bank credit facility (b) -- 30,000 Note payable to partnership -- 5,654 Notes payable to bank -- 206,600 Other debt, with varying rates and maturities -- 8,736 ------------- ------------ $ 1,620 250,990 ============= ===========
(a) Payable by Encore Media Corporation ----------------------------------- This note payable provides for borrowings up to $50 million through September 30, 1999, at which time the commitment is required to be reduced in eight equal, quarterly amounts through June 30, 2001. Interest on borrowings under the note is tied to, at Encore's option, the bank's prime rate plus an applicable margin or the London Interbank Offered Rate plus an applicable margin (8.25% at December 31, 1996). Encore is required to pay a commitment fee which varies based on Encore's leverage ratio. The note is secured by substantially all of Encore's assets. (b) Payable by Communications Capital Corp. ("CCC") ----------------------------------------------- This revolving credit agreement, as amended, provides for borrowings up to $325 million through August of 1997. Borrowings under such agreement bear interest at optional measures which approximate the prime rate. As security for this indebtedness, Liberty Media Group pledged substantially all of its TBS Class B common stock. Upon consummation of the TBS/Time Warner Merger, the revolving credit agreement was amended and provides as security for this indebtedness the TW Exchange Stock received for the previously pledged TBS Class B Common Stock. CCC must pay an annual commitment fee of .3125% of the unfunded portion of the commitment. (continued) II-123 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The fair value of Liberty Media Group's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Liberty Media Group for debt of the same remaining maturities. The fair market value of such debt approximated its carrying value at December 31, 1996. (8) Income Taxes ------------ TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than 80% each file a separate tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis. Income tax expense for Liberty Media Group is based upon those items in the consolidated tax calculations of TCI applicable to Liberty Media Group. Intergroup tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) and alternative minimum taxes to Liberty Media Group in relation to its amount of taxable earnings or losses. Prior to the Distribution, the payable or receivable arising from the intergroup tax allocation has been reflected as an increase or decrease in combined equity. Subsequent to the Distribution, such amounts are reflected as borrowings from or loans to TCI Group. A tax sharing agreement (the "Tax Sharing Agreement") among entities attributed to Liberty Media Group, TCI and certain subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain of the elements of a pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. federal, state, local and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, Liberty Media Group is responsible to TCI for its share of current consolidated income tax liabilities. TCI is responsible to Liberty Media Group to the extent that Liberty Media Group's income tax attributes generated after the effective date are utilized by TCI to reduce its consolidated income tax liabilities. Accordingly, all tax attributes generated by Liberty Media Group's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising Liberty Media Group. In connection with the implementation of the Tax Sharing Agreement, Liberty Media Group recorded a decrease to its deferred income tax liability and an increase to its combined equity of $2,410,000. (continued) II-124 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Income tax benefit (expense) consists of:
Current Deferred Total ------- -------- ----- amounts in thousands Year ended December 31, 1996: State and local intergroup tax expense allocation $ (1,251) (95,417) (96,668) Federal intergroup tax expense allocation (23,791) (447,196) (470,987) ----------- -------- -------- $ (25,042) (542,613) (567,655) =========== ======== ======== Year ended December 31, 1995: State and local intergroup tax benefit (expense) allocation $ (2,192) 8,920 6,728 Federal intergroup tax benefit allocation 2,584 44,980 47,564 ----------- -------- -------- $ 392 53,900 54,292 =========== ======== ======== Year ended December 31, 1994: State and local intergroup tax expense allocation $ (16,699) (4,742) (21,441) Federal intergroup tax expense allocation (61,539) (20,961) (82,500) ----------- -------- -------- $ (78,238) (25,703) (103,941) =========== ======== ========
Income tax benefit (expense) differs from the amounts computed by the federal tax rate of 35% as a result of the following:
Year ended December 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ----------- amounts in thousands Computed expected tax benefit (expense) $(568,418) 38,726 (83,477) Dividends excluded for income tax purposes 2,114 1,116 1,134 Minority interest of consolidated subsidiaries (4,735) 13,333 (3,548) Amortization not deductible for income tax purposes (3,765) (5,723) (4,774) Excess executive compensation -- 688 -- State and local income taxes, net of federal income tax benefit (61,250) 2,043 (13,937) Change in allocated state tax rate -- 2,353 -- Recognition of difference in income tax basis of investments in consolidated subsidiaries 66,735 -- 920 Other, net 1,664 1,756 (259) --------- ---------- ----------- $(567,655) 54,292 (103,941) ========= ========== ===========
(continued) II-125 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, ------------------------ 1996 1995 -------- ------- amounts in thousands Deferred tax assets: Net operating and capital loss carryforwards $9,264 36,254 Charitable contribution carryforward 166 733 Inventory costs -- 10,339 Provision for returns and allowance -- 9,460 Future deductible amount attributable to accrued stock appreciation rights and deferred compensation 6,927 3,094 Property and equipment, due principally to differences in depreciation 5,475 6,087 Intangible assets, due principally to differences in amortization 1,428 -- Other future deductible amounts due principally to non-deductible accruals 395 996 -------- ------- Deferred tax assets 23,655 66,963 -------- ------- Deferred tax liabilities: Lease obligations, capitalized for income tax purposes 17,075 18,249 Intangible assets, due principally to differences in amortization -- 3,392 Investments in affiliates, due principally to undistributed earnings of affiliates 588,669 247,231 -------- ------- Deferred tax liabilities 605,744 268,872 -------- ------- Net deferred tax liabilities $582,089 201,909 ======== =======
There was no valuation allowance for deferred tax assets as of December 31, 1996 and 1995. At December 31, 1996, Liberty Media Group had net operating and capital loss carryforwards for income tax purposes aggregating approximately $50,049,000 which, if not utilized to reduce taxable income in future periods, expire as follows: $2,352,000 in 2003, $478,000 in 2004, $11,345,000 in 2005, $22,528,000 in 2006 and $13,346,000 in 2007. Pursuant to the Tax Sharing Agreement, Liberty Media Group has already received benefit for approximately $26,625,000 of the net operating loss carryforward disclosed above. Liberty Media Group is responsible to TCI to the extent this amount of net operating loss carryforward is utilized by TCI in future periods. (continued) II-126 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (9) Combined Equity --------------- General ------- The rights of holders of the Liberty Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the Liberty Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. Stock Options and Stock Appreciation Rights ------------------------------------------- Estimates of the compensation relating to options and/or stock appreciation rights granted to employees of Liberty Media Group are allocated to Liberty Media Group and have been recorded in the accompanying combined financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of Series A TCI Group Stock and the Series A Liberty Group Stock and, ultimately, on the final determination of market value when the rights are exercised. Had Liberty Media Group accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying combined financial statements. Prior to the Distribution, the payable or receivable arising from the compensation related to the options and/or stock appreciation rights has been reflected as an increase or decrease in combined equity. Subsequent to the Distribution, such amounts are reflected as borrowings from or loans to TCI Group. Transactions with TCI and Other Related Parties ----------------------------------------------- Certain TCI corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand-alone basis. During the years ended December 31, 1996 and 1995, Liberty Media Group was allocated $2,723,000 and $3,066,000, respectively, in corporate general and administrative costs by TCI Group. Entities included in Liberty Media Group lease satellite transponder facilities from TCI Group. Charges by TCI Group for such arrangements and other related operating expenses for the years ended December 31, 1996, 1995 and 1994 aggregated $11,946,000, $14,709,000 and $7,542,000, respectively. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute sports and other programming to cable television operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. HSN pays a commission to TCI Group for merchandise sales to customers who are subscribers of TCI Group's cable systems. Aggregate commissions and charges by TCI Group were $7,187,000, $6,124,000 and $6,638,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (continued) II-127 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Previously, cash receipts of certain businesses attributed to Liberty Media Group were remitted to TCI Group and certain cash disbursements of Liberty Media Group were funded by TCI Group on a daily basis. Prior to the Distribution, the net amounts of such cash activities are included in combined equity. Subsequent to the Distribution, such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to Liberty Media Group. The Board could determine from time to time that debt of TCI not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. For all periods prior to the Distribution, all financial impacts of equity offerings are attributed entirely to TCI Group. After the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, and all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, will to such extent be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions of Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group, and financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group will be attributed entirely to TCI Group. Subsequent to the Distribution, borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. (10) Commitments and Contingencies ----------------------------- Liberty Media Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film Licensing Obligations"). Based on subscriber levels at December 31, 1996, these agreements require minimum payments aggregating approximately $194 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. (continued) II-128 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Liberty Media Group leases business offices, has entered into transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $40,039,000, $47,569,000 and $34,274,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands): 1997 $ 20,227 1998 20,256 1999 14,881 2000 12,825 2001 10,507 Thereafter 23,751 It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1997. Estimates of compensation relating to phantom stock appreciation rights ("PSARs") granted to employees of a subsidiary of Liberty Media Group have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. Effective January 1, 1994, these employees have a put right that requires such subsidiary to purchase their respective PSARs. The subsidiary may call the PSARs on or after January 1, 1996. II-129 EX-99.G2 3 QUARTERLY REPORT ON FORM 10-Q ENDED 6/30/1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 F O R M 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 0-20421 TELE-COMMUNICATIONS, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) State of Delaware 84-1260157 ------------------------------- ------------------------------------ (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 --- --- The number of shares outstanding of Tele-Communications, Inc.'s common stock (net of treasury shares and shares held by subsidiaries) as of July 31, 1997, was: Tele-Communications, Inc. Series A TCI Group common stock - 660,181,987 shares, Tele-Communications, Inc. Series B TCI Group common stock - 52,405,138 shares, Tele-Communications, Inc. Series A Liberty Media Group common stock - 223,083,080 shares, Tele-Communications, Inc. Series B Liberty Media Group common stock - 21,175,465 shares, Tele-Communications, Inc. Series A Telephony Group common stock - 0 shares, and Tele-Communications, Inc. Series B Telephony Group common stock - 0 shares.
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
June 30, December 31, 1997 1996 -------- ----------- Assets amounts in millions - ------ Cash and cash equivalents $ 406 394 Trade and other receivables, net 565 448 Prepaid expenses 81 81 Prepaid program rights 79 49 Committed film inventory 129 136 Investments in affiliates, accounted for under the equity method, and related receivables (note 5) 3,046 3,012 Investment in Time Warner, Inc. ("Time Warner") (note 6) 2,344 2,027 Property and equipment, at cost: Land 75 77 Distribution systems 10,335 10,039 Support equipment and buildings 1,539 1,541 ------- ------ 11,949 11,657 Less accumulated depreciation 4,422 4,129 ------- ------ 7,527 7,528 ------- ------ Franchise costs 18,416 17,875 Less accumulated amortization 2,621 2,439 ------- ------ 15,795 15,436 ------- ------ Other assets, net of amortization 988 1,133 ------- ------ $30,960 30,244 ======= ====== (continued)
I-1 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued (unaudited)
June 30, December 31, 1997 1996 -------- ----------- Liabilities and Stockholders' Equity amounts in millions - ------------------------------------ Accounts payable $ 101 216 Accrued interest 272 274 Accrued programming expense 329 347 Other accrued expenses 1,053 812 Deferred option premium (note 6) 306 -- Debt (note 8) 14,743 14,926 Deferred income taxes 5,928 6,012 Other liabilities 319 253 -------- --------- Total liabilities 23,051 22,840 -------- --------- Minority interests in equity of consolidated subsidiaries 1,376 1,493 Redeemable preferred stocks 661 658 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC")(note 9) 1,500 1,000 Stockholders' equity (note 10): Series Preferred Stock, $.01 par value -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value -- -- Tele-Communications, Inc. Series A TCI Group common stock, $1 par value. Authorized 1,750,000,000 shares; issued 745,724,192 shares in 1997 and 696,325,478 shares in 1996 746 696 Tele-Communications, Inc. Series B TCI Group common stock, $1 par value. Authorized 150,000,000 shares; issued 84,767,178 shares in 1997 and 84,647,065 shares in 1996 85 85 Tele-Communications, Inc. Series A Liberty Media Group common stock, $1 par value. Authorized 750,000,000 shares; issued 228,801,906 shares in 1997 and 227,844,437 shares in 1996 229 228 Tele-Communications, Inc. Series B Liberty Media Group common stock, $1 par value. Authorized 75,000,000 shares; issued 21,175,465 shares in 1997 and 21,189,369 shares in 1996 21 21 Tele-Communications, Inc. Series A Telephony Group Stock, $1 par value. Authorized 750,000,000 shares, no shares outstanding -- -- Tele-Communications, Inc. Series B Telephony Group Stock, $1 par value. Authorized 75,000,000 shares, no shares outstanding -- -- Additional paid-in capital 4,493 3,672 Cumulative foreign currency translation adjustment, net of taxes 15 26 Unrealized holding gains for available-for-sale securities, net of taxes 28 15 Accumulated deficit (388) (176) -------- --------- 5,229 4,567 Treasury stock and common stock held by subsidiaries, at cost (note 10) (857) (314) -------- --------- Total stockholders' equity 4,372 4,253 -------- --------- Commitments and contingencies (note 12) $ 30,960 30,244 ======== =========
See accompanying notes to consolidated financial statements. I-2 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited)
Three months ended Six months ended June 30, June 30, ----------------- ---------------- 1997 1996 1997 1996 ------- ------ ------ ------ amounts in millions, except per share amounts Revenue: Communications and programming services $ 1,887 1,704 3,714 3,309 Net sales from electronic retailing services (note 5) -- 244 -- 500 ------- ------ ------ ------ 1,887 1,948 3,714 3,809 ------- ------ ------ ------ Operating costs and expenses: Operating 736 707 1,432 1,369 Cost of sales from electronic retailing services (note 5) -- 152 -- 317 Selling, general and administrative 435 530 828 1,031 Compensation (adjustment to compensation) relating to stock appreciation rights 56 4 71 (5) Depreciation 261 259 502 511 Amortization 146 127 279 245 ------- ------ ------ ------ 1,634 1,779 3,112 3,468 ------- ------ ------ ------ Operating income 253 169 602 341 Other income (expense): Interest expense (294) (265) (583) (526) Interest and dividend income 18 14 39 24 Share of losses of affiliates, net (note 5) (182) (96) (338) (211) Loss on early extinguishment of debt (note 8) (11) (66) (11) (66) Minority interests in earnings of consolidated subsidiaries, net (56) (6) (94) (4) Gain on sale of stock by equity investee (note 5) 21 -- 21 -- Gain on disposition of assets (note 5) 43 -- 62 10 Other, net (4) (11) (6) (5) ------- ------ ------ ------ (465) (430) (910) (778) ------- ------ ------ ------ Loss before income taxes (212) (261) (308) (437) Income tax benefit 58 74 96 129 ------- ------ ------ ------ Net loss (154) (187) (212) (308) Dividend requirements on preferred stocks (11) (9) (21) (18) ------- ------ ------ ------ Net loss attributable to common stockholders $ (165) (196) (233) (326) ======= ====== ====== ====== Net earnings (loss) attributable to common stockholders: TCI Group Series A and Series B common stock $ (171) (200) (255) (345) Liberty Media Group Series A and Series B common stock 6 4 22 19 ------- ------ ------ ------ $ (165) (196) (233) (326) ======= ====== ====== ====== Net earnings (loss) attributable to common stockholders per common share (note 2): TCI Group Series A and Series B common stock $ (.25) (.30) (.37) (.52) ======= ====== ====== ====== Liberty Media Group Series A and Series B common stock $ .03 .02 .09 .08 ======= ====== ====== ======
See accompanying notes to consolidated financial statements. I-3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity Six months ended June 30, 1997 (unaudited)
Common Stock --------------------------------------------------------- Class B TCI Group Liberty Media Group Telephony Group Additional- Preferred ------------------ ------------------- ----------------- paid-in Stock Series A Series B Series A Series B Series A Series B capital --------- -------- -------- ------- -------- -------- -------- -------- amounts in millions Balance at January 1, 1997 $ -- 696 85 228 21 -- -- 3,672 Net loss -- -- -- -- -- -- -- -- Issuance of common stock for acquisitions -- 16 -- -- -- -- -- 242 Issuance of Series A TCI Group common stock in exchange for Series B TCI Group common stock (note 10) -- 31 -- -- -- -- -- 499 Repurchase of common stock in public market -- -- -- -- -- -- -- -- Issuance of common stock by equity investee (note 5) -- -- -- -- -- -- -- 99 Issuance of common stock upon conversion of notes -- 3 -- 1 -- -- -- (1) Issuance of common stock to Tele-Communications, Inc. Employee Stock Purchase Plan -- -- -- -- -- -- -- 8 Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (21) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 5 Payment of preferred stock dividends -- -- -- -- -- -- -- (10) Foreign currency translation adjustment -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- ----- --- -- --- -- -- -- ------ Balance at June 30, 1997 $ -- 746 85 229 21 -- -- 4,493 ===== === == === == == == ====== Unrealized Treasury Cumulative holding stock and foreign gains for common currency available- stock translation for-sale held by Total adjustment, securities, Accumulated subsidiaries, stockholders' net of taxes net of taxes deficit at cost equity -------------- -------------- ------------ ------------- ----------- amounts in millions Balance at January 1, 1997 26 15 (176) (314) 4,253 Net loss -- -- (212) -- (212) Issuance of common stock for acquisitions -- -- -- -- 258 Issuance of Series A TCI Group common stock in exchange for Series B TCI Group common stock (note 10) -- -- -- (530) -- Repurchase of common stock in public market -- -- -- (13) (13) Issuance of common stock by equity investee (note 5) -- -- -- -- 99 Issuance of common stock upon conversion of notes -- -- -- -- 3 Issuance of common stock to Tele-Communications, Inc. Employee Stock Purchase Plan -- -- -- -- 8 Accreted dividends on all classes of preferred stock -- -- -- -- (21) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- 5 Payment of preferred stock dividends -- -- -- -- (10) Foreign currency translation adjustment (11) -- -- -- (11) Change in unrealized holding gains for available-for-sale securities -- 13 -- -- 13 ------ ----------- ------------ --------- --------- Balance at June 30, 1997 15 28 (388) (857) 4,372 ====== =========== ============ ========= =========
See accompanying notes to consolidated financial statements. I-4 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, -------------------- 1997 1996 -------- ---------- amounts in millions (see note 4) Cash flows from operating activities: Net loss $ (212) (308) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 781 756 Compensation (adjustment to compensation) relating to stock appreciation rights 71 (5) Payments of obligation relating to stock appreciation rights (14) (3) Share of losses of affiliates, net 338 211 Loss on early extinguishment of debt 11 66 Minority interests in earnings of consolidated subsidiaries, net 94 4 Gain on sale of stock by equity investee (21) -- Gain on disposition of assets (62) (10) Deferred income tax benefit (147) (146) Payments of restructuring charges (19) -- Other noncash charges -- 9 Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (125) (15) Change in inventories -- 12 Change in prepaids (92) (15) Change in accrued interest (2) 34 Change in other accruals and payables 164 (62) ----------- ----------- Net cash provided by operating activities 765 528 ----------- ----------- Cash flows from investing activities: Cash paid for acquisitions (206) (156) Capital expended for property and equipment (215) (955) Additional investments in and loans to affiliates and others (184) (576) Repayments of loans to affiliates 174 16 Proceeds from disposition of assets 193 102 Cash received in exchanges 15 50 Other investing activities (116) (99) ----------- ----------- Net cash used in investing activities (339) (1,618) ----------- ----------- Cash flows from financing activities: Borrowings of debt 1,238 4,674 Repayments of debt (2,030) (4,781) Prepayment penalties (7) (60) Proceeds from issuance of common stock 4 -- Proceeds from issuance of Trust Preferred Securities 490 971 Proceeds from issuance of subsidiary preferred stock 48 223 Contributions by minority shareholders of subsidiaries 6 314 Repurchase of Liberty Media Group common stock (13) -- Payment for repurchase of subsidiary common stock (42) -- Payment of preferred stock dividends (23) (23) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (85) (12) ----------- ----------- Net cash provided (used) by financing activities (414) 1,306 ----------- ----------- Net increase in cash and cash equivalents 12 216 Cash and cash equivalents at beginning of period 394 118 ----------- ----------- Cash and cash equivalents at end of period $ 406 334 =========== ===========
See accompanying notes to consolidated financial statements. I-5 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997 (unaudited) (1) General ------- The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in TCI's Annual Report on Form 10-K for the year ended December 31, 1996. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Effective January 13, 1997, the Company issued a stock dividend to holders of Tele-Communications, Inc. Series A and Series B Liberty Media Group common Stock ("Liberty Group Stock") consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been retroactively restated to reflect the Liberty Group Stock Dividend. Certain amounts have been reclassified for comparability with the 1997 presentation. (2) Earnings (Loss) Per Common and Common Equivalent Share ------------------------------------------------------ The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with potentially dilutive securities, such as convertible debt, options and warrants, diluted EPS. Statement No. 128 is effective for annual and interim periods ending after December 31, 1997. The Company does not expect that Statement No. 128 will have a material impact on the Company's earnings (loss) per share as described below. (continued) I-6 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements TCI Group Series A and Series B Common Stock -------------------------------------------- The loss attributable to Tele-Communications, Inc. Series A and Series B TCI Group common stock ("TCI Group Stock") stockholders per common share was computed by dividing net loss attributable to TCI Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period (682.9 million and 668.4 million for the three months ended June 30, 1997 and 1996, respectively; and 680.1 million and 663.2 million for the six months ended June 30, 1997 and 1996, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Liberty Media Group Series A and Series B Common Stock ------------------------------------------------------ Earnings attributable to Liberty Group Stock stockholders per common share was computed by dividing net earnings attributable to Liberty Group Stock stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period (249.7 million and 250.6 million for the three months ended June 30, 1997 and 1996, respectively; and 249.6 million and 248.7 million for the six months ended June 30, 1997 and 1996, respectively). Common stock equivalents were not included in the computation because their inclusion would be anti-dilutive to TCI. (3) Derivative Financial Instruments -------------------------------- The Company has entered into variable and fixed interest rate exchange agreements ("Interest Rate Swaps") which it uses to manage interest rate risk arising from the Company's financial liabilities. Such Interest Rate Swaps are accounted for as hedges; and accordingly, amounts receivable or payable under Interest Rate Swaps are recognized as adjustments to interest expense. Gains and losses on early terminations of Interest Rate Swaps are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining term of the derivative financial instruments. The Company does not use such instruments for trading purposes. Derivative financial instruments that can be settled, at the Company's option, in shares of the Company's common stock are accounted for as equity instruments. Periodic settlements of amounts payable/receivable pursuant to such financial instruments are included in additional paid-in capital. (continued) I-7 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements From time to time, the Company uses certain derivative financial instruments to manage its foreign currency risks. Because the Company generally views its foreign operating subsidiaries and affiliates as long-term investments, the Company generally does not attempt to hedge existing investments in its foreign affiliates and subsidiaries. However, the Company may enter into forward contracts to reduce its exposure to short-term (generally no more than one year) movements in the exchange rates applicable to firm funding commitments that are denominated in currencies other than the U.S. dollar. When high correlation of changes in the market value of the forward contract and changes in the fair value of the firm commitment is probable, the forward contract is accounted for as a hedge. Changes in the market value of a forward contract that qualifies as a hedge and any gains or losses on early termination of such a forward contract are deferred and included in the measurement of the item (generally an investment in, or an advance to, a foreign affiliate) that results from the funding of such commitment. Market value changes in derivative financial instruments that do not qualify as hedges are recognized currently in the consolidated statements of operations. To date, the Company's use of forward contracts, as described above, has not had a material impact on the Company's financial position or results of operations. (4) Supplemental Disclosures to Consolidated Statements of Cash Flows ----------------------------------------------------------------- Cash paid for interest was $589 million and $492 million for the six months ended June 30, 1997 and 1996, respectively. Cash paid for income taxes during these periods was not material. Summary of cash paid for acquisitions and cash received in exchanges is as follows:
Six months ended June 30, -------------------- 1997 1996 -------- ---------- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ (1,123) (1,330) Liabilities assumed, net of current assets 622 377 Deferred tax liability recorded in acquisitions 34 244 Minority interests in equity of acquired entities 3 92 Common stock and preferred stock issued in acquisitions 258 461 ---------- ----------- Cash paid for acquisitions $ (206) (156) ========== =========== Cash received in exchanges: Aggregate cost basis of assets acquired $ (395) (193) Historical cost of assets exchanged 399 222 Gain recorded on exchange of assets 11 21 ---------- ----------- Cash received in exchanges $ 15 50 ========== =========== (continued)
I-8 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) Investments in Affiliates ------------------------- The Company has various investments accounted for under the equity method. The following table includes the Company's carrying value and percentage ownership of the more significant investments at June 30, 1997.
June 30, 1997 ----------------------------------- Percentage Carrying Ownership Value ------------- ------------ amounts in millions Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and PhillieCo, L.P. 30% - 35% $ 703 Teleport Communications Group, Inc. ("TCG") 30% 271 Home Shopping Network, Inc. ("HSN") 19.9% 144 BDTV INC. and BDTV II INC. 99% 201 Flextech p.l.c. ("Flextech") 35.9% 267 Telewest Communications plc ("Telewest") 27% 401 Various foreign equity investments (other than Telewest and Flextech) various 293 Discovery Communications, Inc. 49% 118 QVC, Inc. 43% 116
Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
Six months ended Combined Operations June 30, ------------------- -------------------- 1997 1996 -------- ---------- amounts in millions Revenue $ 3,608 2,639 Operating expenses (3,444) (2,296) Depreciation and amortization (598) (335) ----------- ------------ Operating income (loss) (434) 8 Interest expense (368) (239) Other, net (248) (117) ----------- ------------ Net loss $ (1,050) (348) =========== ============
The Company is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide, using the "Sprint"(R) brand (a registered trademark of Sprint Communications Company, L.P.) (the "PCS Ventures"). The PCS Ventures include Sprint Spectrum Holding Company, L. P. ("Sprint Spectrum") and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The Company has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35% interest as a partner in PhillieCo. During the six months ended June 30, 1997 and 1996, the Sprint PCS Partnerships contributed $155 million and $79 million, respectively, to the Company's share of affiliate losses. Such 1996 amount includes $34 million related to prior periods. (continued) I-9 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Sprint PCS Partnerships have licenses, and have affiliated (or agreed to affiliate) with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or major trading areas) covering over 190 million "Pops" (or population equivalents) at December 31, 1996. Of the Sprint PCS Partnerships' licenses (which cover 30 (of 51) MTAs), 29 were acquired in an auction conducted by the Federal Communications Commission ("FCC") that ended in March 1995, for an aggregate license cost of approximately $2.1 billion and one PCS license (covering the Omaha MTA) was contributed to the Sprint PCS Partnerships by an affiliate of Cox in February 1997. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego and Orange County, California. The Sprint PCS Partnerships may invest in other entities that hold PCS licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million and currently operates a PCS system in Philadelphia, Pennsylvania. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. As of July 15, 1997, Sprint PCS had launched service in over 50 cities in the U.S. From inception through March 1997, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company contributed an aggregate of approximately $0.9 billion). The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and to fund operating losses and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. The Company expects that the remaining approximately $1.2 billion of such amount (of which the Company's share is approximately $0.4 billion) will be contributed by the end of the first quarter of 1998 (although there can be no assurance that any additional capital will be contributed). The Company expects that the Sprint PCS Partnerships will require additional equity thereafter. Pursuant to an agreement entered into in connection with certain financings by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum may be required to make additional contributions to Sprint Spectrum to fund projected cash shortfalls to the extent that the amount of the partners' aggregate contributions to Sprint Spectrum (exclusive of certain amounts, including amounts invested in certain affiliates of Sprint Spectrum), following December 31, 1995 are less than $1.0 billion; however, based on the currently expected timing and use of the partners' contributions to Sprint Spectrum, the Company currently believes that such agreement will not result in the Company's being required to make any incremental capital contributions in addition to its pro rata portion of the aforementioned $4.2 billion amount. (continued) I-10 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During the six months ended June 30, 1997, TCG, a competitive local exchange carrier, issued 4,857,083 shares of Class A common stock at an average price per share of $19.25 for certain acquisitions. The total consideration paid by TCG through the issuance of common stock was approximately $93,000,000. As a result of TCG issuing additional shares, the Company's ownership interest in TCG was reduced from approximately 31% to approximately 30%. Accordingly, the Company recognized a gain amounting to $21 million (before deducting deferred income tax expense of approximately $8 million) representing the difference between the carrying amount of the Company's investment in TCG and the Company's proportionate share of TCG's net assets. Pursuant to an agreement among Liberty Media Corporation ("Liberty"), a subsidiary of TCI, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty and Mr. Diller pursuant to the BDTV Agreement, in which Liberty owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the Option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of Liberty in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger"). In order to effect the HSN Merger in compliance with the FCC Order, Liberty agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. (continued) I-11 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty and therefore, the financial results of HSN are no longer consolidated with the financial results of Liberty. Although Liberty no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. At March 31, 1997, the Company held a voting interest of approximately 50% in Flextech, a company engaged in the distribution and production of programming for multichannel video distribution systems in the United Kingdom ("UK"). In April 1997, Flextech and BBC Worldwide Limited formed two separate joint ventures (the "BBC Joint Ventures") and entered into certain related transactions. The consummation of the BBC Joint Ventures and related transactions resulted in, among other things, a reduction of the Company's ownership interest in Flextech to 35.9%. As a result of such dilution the Company recorded a $152 million increase to the carrying value of the Company's investment in Flextech, a $53 million increase to deferred income tax liability and a $99 million increase to equity. No gain was recognized due primarily to certain contingent obligations of the Company with respect to one of the BBC Joint Ventures. Telewest is a company that is currently operating and constructing cable television and telephone systems in the UK. Telewest contributed $73 million and $70 million of the Company's share of its affiliates' losses during the six months ended June 30, 1997 and 1996, respectively. In addition to the Company's investments in Telewest and Flextech, the Company has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, Flextech and such other equity method investments accounted for $49 million and $37 million of the Company's share of its affiliates' losses in 1997 and 1996, respectively. During the six months ended June 30, 1997, TSX Corporation ("TSX"), an equity affiliate of the Company, and Antec Corporation ("Antec") entered into a business combination with Antec being the surviving entity. In connection with such transaction, the Company recognized a $29 million gain (before deducting deferred income tax expense of approximately $12 million) representing the difference between the fair value of the Antec shares received ($52 million) and the carrying value of the Company's investment in TSX at the date of the transaction ($23 million). Upon completion of this transaction, the Company's ownership interest decreased from an approximate 45% interest in TSX to an approximate 16% ownership interest in Antec. The Company accounts for its investment in Antec using the cost method. Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of applicable partnership law for all debts of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) I-12 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Investment in Time Warner ------------------------- Through October 9, 1996, TCI owned shares of Turner Broadcasting System, Inc. ("TBS") common stock and shares of TBS preferred stock that were convertible into TBS common stock. On October 10, 1996, Time Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, the Company received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada, pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. Subsequent to the TBS/Time Warner Merger, Liberty Media Group and Time Warner revised the structure of the Contract Option. On June 24, 1997, under the new agreement, Liberty granted Time Warner a five year option to acquire the business of Southern through a purchase of assets. Liberty received 6.4 million shares of TW Exchange Stock in consideration for the grant. If Time Warner exercises the option, the purchase price for Southern's business would be approximately $213 million, payable in a form which is mutually acceptable of cash or Time Warner stock. At June 30, 1997, the Company's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2.8 billion based upon the market value of the marketable common stock into which it is convertible. (continued) I-13 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) Acquisitions ------------ In January 1997, the Company acquired the 50% ownership interest in TKR Cable Company ("TKR Cable") that the Company did not previously own and certain additional assets for aggregate consideration of approximately $970 million. The Company issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. On July 31, 1996, pursuant to certain agreements entered into among TCIC, a subsidiary of TCI; TCI; Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred 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 also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. Prior to the consummation of the Viacom Acquisition, Viacom offered 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"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B common stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock of Cable Sub with a stated value of $100 per share. Upon completion of the Viacom Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc. In June 1997, the Company entered into an agreement with Cablevision Systems Corporation ("Cablevision") pursuant to which the Company agreed to contribute certain of its cable television systems serving approximately 820,000 customers to Cablevision in exchange for approximately 12.2 million newly issued Cablevision Class A shares. Such shares represent approximately 33% of Cablevision's total outstanding shares. Cablevision will also assume approximately $669 million of TCI's debt. The transaction is subject to, among other matters, Cablevision shareholder and regulatory approvals. There is no assurance that the transaction will be consummated. (continued) I-14 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Debt ---- Debt is summarized as follows:
June 30, December 31, 1997 1996 --------------- ----------------- amounts in millions Notes payable (a) $ 9,061 9,308 Bank credit facilities (b) 4,923 4,813 Commercial paper 570 638 Convertible notes (c) 40 43 Other debt 149 124 ----------- ---------------- $ 14,743 14,926 =========== ================
(a) During the six months ended June 30, 1997, in order to reduce future interest costs, the Company redeemed certain notes payable which had an aggregate principal balance of $190 million and fixed interest rates ranging from 8.75% to 10.13% (the "1997 Redemption"). In connection with the 1997 Redemption, the Company recognized a loss on early extinguishment of debt of $11 million. Such loss related to prepayment penalties amounting to $7 million and the retirement of deferred loan costs. During the six months ended June 30, 1996, the Company redeemed certain notes payable which had an aggregate principle balance of $809 million and fixed interest rates ranging from 8.67% to 10.44% (the "1996 Redemption"). In connection with the 1996 Redemption, the Company recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. (b) During the second quarter of 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. In connection with such termination, the Company recognized a loss on early extinguishment of debt of $4 million related to the retirement of deferred loan costs. At June 30, 1997, subsidiaries of the Company had approximately $2.4 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. (c) These convertible notes, which are stated net of unamortized discount of $167 million at June 30, 1997 and $178 million at December 31, 1996, mature on December 18, 2021. The notes require, so long as conversion of the notes has not occurred, an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. During the six months ended June 30, 1997, certain of these notes were converted into 2,230,628 shares of Series A TCI Group Stock and 840,235 shares of Series A Liberty Group Stock. At June 30, 1997, the notes were convertible, at the option of the holders, into an aggregate of 34,853,145 shares of Series A TCI Group Stock and 13,069,918 shares of Series A Liberty Group Stock. (continued) I-15 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The bank credit facilities and various other debt instruments of the Company's subsidiaries generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. As security for borrowings under one of the Company's bank credit facilities, the Company has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of the Company. Also, as security for borrowings under another of the Company's credit facilities, the Company has pledged a portion of its Time Warner common stock with an estimated market value of $2.2 billion. The fair value of the debt of the Company's subsidiaries is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. At June 30, 1997, the fair value of the Company's debt was $14,796 million, as compared to a carrying value of $14,743 million on such date. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company has entered into various Interest Rate Swaps pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at June 30, 1997 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,050 million at June 30, 1997. During the six months ended June 30, 1997 and 1996, the Company's net payments pursuant to the Fixed Rate Agreements were $4 million and $8 million, respectively; and the Company's net receipts pursuant to the Variable Rate Agreements were $11 million and $8 million, respectively. The Company's Fixed Rate Agreements and Variable Rate Agreements expire as follows (dollar amounts in millions):
Fixed Rate Agreements Variable Rate Agreements --------------------- ------------------------ Expiration Interest rate Notional Expiration Interest rate Notional date to be paid amount date to be received amount ---------- ------------- -------- ---------- -------------- --------- October 1997 7.1%-9.3% $ 180 September 1998 4.8%-5.4% $ 450 December 1997 8.7% 230 April 1999 7.4% 50 ------- February 2000 5.8%-6.6% 300 $ 410 March 2000 5.8%-6.0% 675 ======= September 2000 5.1% 75 March 2027 9.7% 300 December 2036 9.7% 200 --------- $ 2,050 =========
The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps 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-16 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The fair value of the Interest Rate Swaps is the estimated amount that the Company would pay or receive to terminate the agreements at June 30, 1997, taking into consideration current interest rates and the current creditworthiness of the counterparties. At June 30, 1997, the Company would be required to pay an estimated $4 million to terminate the Fixed Rate Agreements and an estimated $25 million to terminate the Variable Rate Agreements. Certain of TCI's subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. (9) Company-Obligated Mandatorily Redeemable Preferred Securities of ---------------------------------------------------------------- Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC --------------------------------------------------------------------- In 1996 and 1997, the Company, through certain subsidiary trusts, (the "Trusts"), issued preferred securities as follows:
Subsidiary Trust Interest Rate Face Amount ---------------- ------------- ----------- in millions TCI Communications Financing I 8.72% $ 500 TCI Communications Financing II 10.00% 500 TCI Communications Financing III 9.65% 300 TCI Communications Financing IV 9.72% 200 ---------- $ 1,500 ==========
The Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") of TCIC. The Subordinated Debt Securities have interest rates equal to the interest rate of the corresponding Trust Preferred Securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Preferred Securities. The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of TCI Communications, Inc." Dividends accrued on the Trust Preferred Securities are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. (continued) I-17 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Stockholders' Equity -------------------- In August 1995, TCI issued the Liberty Group Stock which reflects the separate performance of TCI's assets which produces and distributes programming services ("Liberty Media Group"). As of June 30, 1997, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Cable and Communications unit, (ii) TCI's International Cable and Programming Unit, Tele-Communications International, Inc. ("TINTA") and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and assets are referred to as "TCI Group". Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group or to Liberty Media Group for purposes of preparing their combined financial statements, the change in the capital structure of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. On March 12, 1997, the TCI stockholders authorized the TCI Board of Directors to issue two new series of the Company's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of June 30, 1997, no shares of Telephony Group Stock have been issued. On May 14, 1997, the TCI Board of Directors authorized, subject to stockholder approval, the redesignation of Series A and Series B Telephony Group Stock as Tele-Communications, Inc. Series A and Series B TCI Ventures Group common stock ("TCI Ventures Group Stock"). The TCI Ventures Group Stock is intended to reflect the separate performance of the TCI Ventures Group, which will include substantially all of TCI Group's international and non-cable assets. TCI will amend the approved Telephony Group Stock to expand that group to track such assets, including TCI's investments in At Home Corporation, TINTA, United Video Satellite Group, Inc. and others. The tracking stock will be issued through an exchange offer whereby the Company's stockholders will have the opportunity to exchange their TCI Group Stock for TCI Ventures Group Stock in the ratio of one share of TCI Ventures Group Stock in exchange for each share of TCI Group Stock properly tendered. (continued) I-18 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Treasury Stock and Common Stock Held by Subsidiaries, at Cost -------------------------------------------------------------
June 30, 1997 December 31, 1996 ------------------------------- -------------------------------- Number of Number of shares Cost basis shares Cost basis --------------- ------------- --------------- -------------- (dollar amounts in millions) Treasury stock is summarized as follows: Series B TCI Group Stock 30,545,864 $ 530 -- $ -- Series A Liberty Group Stock 562,000 13 -- -- Common stock held by subsidiaries is summarized as follows: Series A TCI Group Stock 116,853,196 314 116,853,196 314 -------------- -------------- $ 857 $ 314 ============== ==============
In June 1996, the Company exchanged (the "Exchange") 30,545,864 shares of Series A TCI Group Stock ("TCOMA") for the same number of shares of Series B TCI Group Stock owned by the estate (the "Estate") of the former Chairman of the Board of Directors of the Company. Subsequent to the Exchange, the Estate sold (the "Sale") the shares of TCOMA received in the Exchange, together with approximately 1.5 million shares of TCOMA that the Estate previously owned (the "Option Shares"), to two investment banking firms (the "Investment Bankers") for approximately $530 million (the "Sale Price"). Subsequent to the Sale, TCI entered into an agreement with the Investment Bankers whereby TCI has the option, but not the obligation, to purchase the Option Shares at any time within two years (the "Option Period") from the date of the Sale. During the Option Period, the Company is to settle quarterly any increase or decrease, in the market value of the Option Shares. At TCI's option, such quarterly settlements may be satisfied with shares of TCOMA, or subject to certain conditions with cash or letters of credit. In addition, the Company is required to pay the Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due to the Company's ability to settle quarterly price fluctuations with shares of TCOMA, the Company will treat all amounts paid or received under this arrangement as increases or decreases to equity. Stock Options ------------- Estimated compensation relating to restricted stock awards, stock appreciation rights ("SARs") and options with tandem SARs awarded by the Company has been recorded through June 30, 1997, but 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. (continued) I-19 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other ----- At June 30, 1997, there were 125,616,994 shares of Series A TCI Group Stock and 29,915,040 shares of Series A Liberty Group Stock reserved for issuance under exercise privileges related to options, convertible debt securities and convertible preferred stock. Also, one share of Series A TCI Group Stock is reserved for each share of Series B TCI Group Stock, and one share of Series A Liberty Group Stock is reserved for each share of Series B Liberty Group Stock. Additionally, subsidiaries of TCI own an aggregate of 278,307 shares of TCI Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock"). Each share of Series F Preferred Stock is convertible into 1,496.65 shares of Series A TCI Group Stock. (11) Transactions with Officers and Directors ---------------------------------------- On March 4, 1997, an executive officer who is also a director of the Company received an advance from a wholly-owned subsidiary of the Company in the amount of $5,787,505. On March 5, 1997, such individual received a second advance from a wholly-owned subsidiary of the Company in the amount of $5,813,755. The terms of the advances were memorialized by a promissory note. The interest rate on such loans is 1% over the one-month LIBOR rate compounded annually. Principal outstanding on the note is due March 31, 1999 and interest is payable annually on March 1 of each year. The loan is unsecured. (12) Commitments and Contingencies ----------------------------- The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at June 30, 1997, these agreements require minimum payments aggregating approximately $815 million. The aggregate amount of the Film Licensing Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, the Company's aggregate payments under the Film Licensing Obligations could prove to be significant. The Company has made certain financial commitments related to the acquisition of sports program rights through 2004. At June 30, 1997, such commitments aggregated $209 million. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $468 million at June 30, 1997. With respect to the Company's guarantees of $166 million of such obligations, TCI has been indemnified for any loss, claim or liability that TCI may incur, by reason of such guarantees. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to the Company. (continued) I-20 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Certain key employees of the Company hold restricted stock awards, options 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. Estimates of compensation relating to phantom stock appreciation rights ("PSARs") granted to employees of a subsidiary of TCI have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. Effective January 1, 1994, these employees have a put right that requires such subsidiary to purchase their respective PSARs. The subsidiary may call the PSARs on or after January 1, 1996. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. 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-21 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES 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, 1996. The following discussion focuses on material changes in the trends, risks and uncertainties affecting the Company's results of operations and financial condition. Reference should also be made to the Company's consolidated financial statements included herein. (1) Material changes in financial condition: --------------------------------------- The Company is currently organized based upon four lines of business: Domestic Cable and Communications; Programming; TINTA; and Technology/Venture Capital. Within the Domestic Cable and Communications line of business, the Company operates three strategic business units: Cable, Telephony and Internet. The Company's organizational structure provides for financial and operational independence in the four operating units, each under the direction of its own chief executive officer, while maintaining the synergies and scale economies provided by a common corporate parent. While none of TINTA, the Technology/Venture Capital unit, the Telephony unit or the Internet unit is currently significant to the Company as a whole, the Company believes each unit has growth potential and each unit is unique enough in nature to warrant separate operational focus. During March 1997, the Company, through special purpose entities formed as Delaware business trusts, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. In January 1997, the Company acquired the 50% ownership interest in TKR Cable that the Company did not previously own and certain additional assets for aggregate consideration of approximately $970 million. The Company issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC acquired all of the common stock of Cable Sub which owned Viacom's cable systems and related assets. The transaction was structured as a tax-free reorganization in which Cable Sub initially transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to New Viacom Sub. Cable Sub also transferred to New Viacom Sub the proceeds of the Loan Facility. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. For additional discussion of the Viacom Acquisition, see note 7 to the accompanying consolidated financial statements. (continued) I-22 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (1) Material changes in financial condition (continued): --------------------------------------------------- In June 1997, the Company entered into an agreement with Cablevision pursuant to which the Company agreed to contribute certain of its cable television systems serving approximately 820,000 customers to Cablevision in exchange for approximately 12.2 million newly issued Cablevision Class A shares. Such shares represent approximately 33% of Cablevision's total outstanding shares. Cablevision will also assume approximately $669 million of TCI's debt. The transaction is subject to, among other matters, Cablevision shareholder and regulatory approvals. There is no assurance that the transaction will be consummated. During the second quarter of 1997 and 1996, in order to reduce future interest costs, the Company redeemed certain notes payable which had an aggregate principle balance of $190 million and $809 million, respectively. In connection with such redemptions, the Company recognized losses on early extinguishment of debt of $11 million and $62 million, respectively. Such losses related to prepayment penalties and the retirement of deferred loan costs. Also, during the second quarter of 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. In connection with such termination, the Company recognized a loss on early extinguishment of debt of $4 million related to the retirement of deferred loan costs. At June 30, 1997, subsidiaries of the Company had approximately $2.4 billion of availability in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries of the Company were in compliance with the restrictive covenants contained in their credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with the restrictive covenants after giving effect to such additional borrowings. Such restrictive covenants require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. See note 8 to the accompanying consolidated financial statements for additional information regarding the material terms of the subsidiaries' lines of credit. (continued) I-23 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (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, compensation relating to stock appreciation rights and adjustments to compensation relating to stock appreciation rights) ($1,454 million and $1,092 million for the six months ended June 30, 1997 and 1996, respectively) to interest expense ($583 million and $526 million for the six months ended June 30, 1997 and 1996, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 249% and 208% for the six months ended June 30, 1997 and 1996, respectively. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the relative predictability of its cable television operations and interest expense, 44% of which results from fixed rate indebtedness. However, the Company's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that the Company will be able to achieve such objective. 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 ($765 million and $528 million for the six months ended June 30, 1997 and 1996, 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. Prior to 1997, amounts expended by the Company for its investing activities generally have exceeded net cash provided by operating activities. The Company has reevaluated its capital expenditure strategy and currently anticipates that it will expend significantly less for property and equipment in 1997 than it did in 1996. In this regard, the amount of capital expended by the Company for property and equipment was $215 million during the six months ended June 30, 1997, as compared to $955 million during the corresponding period in 1996. The Company currently estimates that it will spend approximately $725 million for capital expenditures during 1997. To the extent that net cash provided by operating activities exceeds net cash used in investing activities in 1997, the Company currently anticipates that such excess cash will initially be used to reduce outstanding debt. In the event the Company is unable to achieve such objectives, management believes that net cash provided by operating activities, the ability of the Company and its subsidiaries to obtain additional financing (including the subsidiaries available lines of credit and access to public debt markets), issuances and sales of the Company's equity or equity of its subsidiaries, and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. See the Company's consolidated statements of cash flows included in the accompanying consolidated financial statements. (continued) I-24 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (1) Material changes in financial condition (continued): --------------------------------------------------- The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017. Based on customer levels at June 30, 1997, these agreements require minimum payments aggregating approximately $815 million. The aggregate amount of the Film Licensing Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, the Company's aggregate payments under the Film Licensing Obligations could prove to be significant. The Company has made certain financial commitments related to the acquisition of sports program rights through 2004. At June 30, 1997, such commitments aggregated $209 million. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $468 million at June 30, 1997. With respect to the Company's guarantees of $166 million of such obligations, TCI has been indemnified for any loss, claim or liability that TCI may incur, by reason of such guarantees. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to the Company. The Company'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), through net cash provided by their own operating activities and in certain circumstances through required capital contributions from their partners. 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 Swaps. Pursuant to the Interest Rate Swaps, the Company (i) pays fixed interest rates ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at June 30, 1997 and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,050 million at June 30, 1997. During the six months ended June 30, 1997 and 1996, the Company's net payments pursuant to the Fixed Rate Agreements were $4 million and $8 million, respectively; and the Company's net receipts pursuant to the Variable Rate Agreements were $11 million and $8 million, respectively. The Company is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps 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. See note 8 to the accompanying consolidated financial statements for additional information regarding Interest Rate Swaps. At June 30, 1997, after considering the net effect of the aforementioned Interest Rate Swaps, the Company had $6,448 million (or 44%) of fixed-rate debt and $8,295 million (or 56%) of variable-rate debt. Accordingly, in an environment of rising interest rates, the Company could experience an increase in its interest expense. (continued) I-25 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (1) Material changes in financial condition (continued): --------------------------------------------------- In June 1996, the Company exchanged 30,545,864 shares of TCOMA for the same number of shares of Series B TCI Group Stock owned by the Estate of the former Chairman of the Board of Directors of the Company. Subsequent to the Exchange, the Estate sold the shares of TCOMA received in the Exchange, together with approximately 1.5 million shares of TCOMA that the Estate previously owned, to two investment banking firms for approximately $530 million. Subsequent to the Sale, TCI entered into an agreement with the Investment Bankers whereby TCI has the option, but not the obligation, to purchase the Option Shares at any time within two years (the "Option Period") from the date of the Sale. During the Option Period, the Company is to settle quarterly any increase or decrease, in the market value of the Option Shares. At TCI's option, such quarterly settlements may be satisfied with shares of TCOMA, or subject to certain conditions with cash or letters of credit. In addition, the Company is required to pay the Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due to the Company's ability to settle quarterly price fluctuations with shares of TCOMA, the Company will treat all amounts paid or received under this arrangement as increases or decreases to equity. On March 12, 1997, the TCI stockholders authorized the TCI Board of Directors to issue two new series of the Company's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock. The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of June 30, 1997, no shares of Telephony Group Stock have been issued. On May 14, 1997, the TCI Board of Directors authorized, subject to stockholder approval, the redesignation of Series A and Series B Telephony Group Stock as Tele-Communications, Inc. Series A and Series B TCI Ventures Group common stock. The TCI Ventures Group Stock is intended to reflect the separate performance of the TCI Ventures Group, which will include substantially all of TCI Group's international and non-cable assets. TCI will amend the approved Telephony Group Stock to expand that group to track such assets, including TCI's investments in At Home Corporation, TINTA, United Video Satellite Group, Inc. and others. The tracking stock will be issued through an exchange offer whereby the Company's stockholders will have the opportunity to exchange their TCI Group Stock for TCI Ventures Group Stock in the ratio of one share of TCI Ventures Group Stock in exchange for each share of TCI Group Stock properly tendered. During the second quarter of 1997, Liberty Media Group repurchased 562,000 shares of Series A Liberty Group Stock in open market transactions at an aggregate cost of $13 million. Such shares are reflected as treasury stock in the accompanying consolidated financial statements. (continued) I-26 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (1) Material changes in financial condition (continued): ---------------------------------------------------- Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a wholly-owned TCI subsidiary. The merger was valued at $731 million. TCI exchanged 47.2 million shares of Series A TCI Group Stock for shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group Stock and 6.7 million shares of Liberty Group Stock. Liberty Media Group purchased from TCI Group the 6.7 million shares of Liberty Group Stock that were acquired in such transaction for $168 million in cash. (2) Material changes in results of operations: ------------------------------------------ Communications and Programming Services Revenue ----------------------------------------------- The operation of the Company's cable television systems is regulated at the federal, state and local levels. The Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 (collectively, the "Cable Acts") established rules under which the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are regulated if a complaint is filed or if the appropriate franchise authority is certified. Approximately 78% of the Company's basic customers were served by cable television systems that were subject to such rate regulation. During the six months ended June 30, 1997, 64% of the Company's revenue from Communications and Programming Services was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit the Company's ability to increase its service rates. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"). Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with those of the Company. Revenue from communications and programming services increased 11% for the three months ended June 30, 1997, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, revenue from the Company's domestic cable customers accounted for 3% of such increase primarily as a result of an 8% increase in basic revenue and an 8% decrease in premium revenue. The Company experienced a 10% increase in its average basic rate, a 2% decrease in the number of average basic customers, a 7% increase in its average premium rate and a 13% decrease in the number of average premium customers. The Company's revenue from domestic cable operations aggregated $1,605 million and $1,430 million for the three months ended June 30, 1997 and 1996, respectively. In addition, the Company's revenue from communications and programming services increased 11% due to acquisitions, decreased 5% due to the Satellite Spin-off and increased 4% due to the Company's domestic programming revenue (from Encore Media Corporation and QE+Ltd.), international cable revenue and other revenue. The remaining 2% decrease is due to the deconsolidation of the Company's sports programming businesses. (continued) I-27 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (2) Material changes in results of operations (continued): ----------------------------------------------------- Revenue from communications and programming services increased 12% for the six months ended June 30, 1997, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, revenue from the Company's domestic cable customers accounted for 4% of such increase primarily as a result of a 10% increase in basic revenue and a 5% decrease in premium revenue. The Company experienced an 11% increase in its average basic rate, a 1% decrease in the number of average basic customers, a 4% increase in its average premium rate and an 8% decrease in the number of average premium customers. The Company's revenue from domestic cable operations aggregated $3,161 million and $2,763 million for the six months ended June 30, 1997 and 1996, respectively. In addition, the Company's revenue from communications and programming services increased 13% due to acquisitions, decreased 5% due to the Satellite Spin-off and decreased 3% due to the deconsolidation of the Company's sports programming businesses. Increases in the Company's domestic programming revenue (from Encore Media Corporation and QE+Ltd.), international cable revenue and other revenue accounted for the remaining 3% increase. Net Sales From Electronic Retailing Services -------------------------------------------- As a result of the HSN Merger in December 1996, HSN is no longer a consolidated subsidiary of the Company. Accordingly, the Company no longer reports revenue or cost of sales related to electronic retailing services. See note 5 to the accompanying consolidated financial statements. Operating Costs and Expenses ---------------------------- Operating expenses increased 4% and 5% for the three months and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. Exclusive of the effects of acquisitions, net of dispositions, such expenses increased 6% and 7%, respectively. Programming expenses accounted for the majority of such increase. The Company cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. Selling, general and administrative expenses decreased 18% and 20% for the three months and six months ended June 30, 1997, as compared to the corresponding periods of 1996. Such decreases are primarily due to dispositions, including Satellite and HSN. Exclusive of the effects of dispositions, net of acquisitions, such expenses increased less than 1% and decreased 1%, respectively. The Company currently anticipates that marketing expense will increase for the six months ended December 31, 1997, as compared to the six months ended June 30, 1997. The change in the Company's depreciation expense in 1997 is the result of the net effect of a decrease due to the Satellite Spin-off offset by increases due to acquisitions and capital expenditures. The increase in amortization expense in 1997 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. (continued) I-28 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (2) Material changes in results of operations (continued): ------------------------------------------------------ Other Income and Expenses ------------------------- Interest expense aggregated $294 million and $583 million for the three months and six months ended June 30, 1997, respectively, as compared to $265 million and $526 million for the corresponding periods in 1996. The majority of such increase in interest expense is due to increased debt balances as a result of the Viacom Acquisition in August 1996. See note 7 to the accompanying consolidated financial statements. At June 30, 1997, the Company had an effective ownership interest of approximately 27% in Telewest, a company that is currently operating and constructing cable television and telephone systems in the UK. Telewest, which is accounted for under the equity method, had a carrying value at June 30, 1997 of $401 million and comprised $73 million and $70 million of the Company's share of its affiliates' losses during the six months ended June 30, 1997 and 1996, respectively. In addition to the Company's investments in Telewest and Flextech, the Company has other less significant investments accounted for under the equity method in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, Flextech and such other equity method investments had a carrying value of $560 million at June 30, 1997 and accounted for $49 million and $37 million of the Company's share of its affiliates' losses for the six months ended June 30, 1997 and 1996, respectively. Additionally, included in share of losses of affiliates for the six months ended June 30, 1997 and 1996 is $155 million and $79 million, respectively, attributable to the Sprint PCS Partnerships. Such 1996 amount includes $34 million associated with prior periods. The increase in the share of losses of the Sprint PCS Partnerships is attributed primarily to general and administrative costs associated with the start-up of operations and Sprint Spectrum's share of losses in APC. Minority interests in earnings of consolidated subsidiaries aggregated $56 million and $94 million for the three months and six months ended June 30, 1997, respectively, as compared to $6 million and $4 million for the corresponding periods in 1996. The majority of such change is due to the issuance of additional Trust Preferred Securities in May 1996 and March 1997 and the accrual of dividends on preferred securities issued in August 1996 by a subsidiary of the Company. During the six months ended June 30, 1997, as a result of TCG issuing additional shares of its Class A common stock for certain acquisitions, the Company's ownership interest in TCG was reduced from approximately 31% to approximately 30%. Accordingly, the Company recognized a gain amounting to $21 million (before deducting deferred income tax expense of approximately $8 million). See note 5 to the accompanying consolidated financial statements. Also, during the six months ended June 30, 1997, TSX, an equity affiliate of the Company, and Antec entered into a business combination with Antec being the surviving entity. In connection with such transaction, the Company recognized a $29 million gain (before deducting deferred income tax expense of approximately $12 million) representing the difference between the fair value of the Antec shares received and the carrying value of the Company's investment in TSX at the date of the transaction. Upon completion of this transaction, the Company's ownership interest decreased from an approximate 45% interest in TSX to an approximate 16% ownership interest in Antec. See note 5 to the accompanying consolidated financial statements. (continued) I-29 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (2) Material changes in results of operations (continued): ------------------------------------------------------ Net Loss -------- The Company's net loss (before preferred stock dividend requirements) of $154 million for the three months ended June 30, 1997 represents a change of $33 million, as compared to the Company's net loss (before preferred stock dividend requirements) of $187 million for the three months ended June 30, 1996. The Company's net loss (before preferred stock dividend requirements) of $212 million for the six months ended June 30, 1997 represents a change of $96 million, as compared to the Company's net loss (before preferred stock dividend requirements) of $308 million for the six months ended June 30, 1996. Such changes are primarily the net result of an increase in operating income, a decrease in loss on early extinguishment of debt and the gains recognized as a result of the TCG and TSX transactions discussed above partially offset by increases in share of losses of affiliates, dividends on preferred securities issued by certain subsidiaries of the Company reflected as minority interests in earnings of consolidated subsidiaries and interest expense. I-30 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets (unaudited)
June 30, December 31, 1997 1996 -------------- ------------- Assets amounts in millions - ------ Cash and cash equivalents $ 25 56 Trade and other receivables, net 542 423 Prepaid expenses 81 80 Prepaid program rights 47 17 Committed film inventory 111 116 Investments in affiliates, accounted for under the equity method, and related receivables (note 5) 2,468 2,457 Property and equipment, at cost: Land 75 77 Distribution systems 10,330 10,033 Support equipment and buildings 1,526 1,529 ------------ ------------ 11,931 11,639 Less accumulated depreciation 4,413 4,121 ------------ ------------ 7,518 7,518 ------------ ------------ Franchise costs 18,416 17,875 Less accumulated amortization 2,621 2,439 ------------ ------------ 15,795 15,436 ------------ ------------ Other assets, net of amortization 915 1,051 ------------ ------------ $ 27,502 27,154 ============ ============ (continued)
I-31 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets, continued (unaudited)
June 30, December 31, 1997 1996 ------------- -------------- Liabilities and Combined Equity amounts in millions - ------------------------------- Accounts payable $ 98 216 Accrued interest 272 274 Accrued programming expense 295 313 Other accrued expenses 1,020 787 Debt (note 7) 14,743 14,924 Deferred income taxes 5,355 5,430 Other liabilities 297 235 ------------- ------------- Total liabilities 22,080 22,179 ------------- ------------- Minority interests in equity of consolidated subsidiaries 1,324 1,454 Redeemable preferred stock 661 658 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC") (note 8) 1,500 1,000 Combined equity (note 9): Combined equity, including preferred stocks of Tele-Communications, Inc. ("TCI") 1,963 1,864 Cumulative foreign currency translation adjustment, net of taxes 15 26 Unrealized holding gains for available-for-sale securities, net of taxes 28 15 Due from Liberty Media Group (69) (42) ------------- ------------- Combined equity 1,937 1,863 ------------- ------------- Commitments and contingencies (note 12) $ 27,502 27,154 ============= =============
See accompanying notes to combined financial statements. I-32 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations (unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------- amounts in millions, except per share amounts Revenue $ 1,851 1,654 3,642 3,123 Operating costs and expenses: Operating 716 649 1,392 1,194 Programming charges from Liberty Media Group (note 10) 24 28 47 57 Selling, general and administrative 410 462 791 870 Charges to Liberty Media Group (note 10) (2) (6) (4) (12) Compensation (adjustment to compensation) relating to stock appreciation rights (notes 9 and 12) 41 (3) 51 (11) Depreciation 261 256 501 502 Amortization 145 117 278 222 -------- -------- -------- --------- 1,595 1,503 3,056 2,822 -------- -------- -------- --------- Operating income 256 151 586 301 Other income (expense): Interest expense (293) (258) (582) (513) Interest and dividend income 10 12 20 20 Share of losses of affiliates, net (note 5) (183) (98) (342) (221) Loss on early extinguishment of debt (note 7) (11) (66) (11) (66) Minority interests in earnings of consolidated subsidiaries, net (57) (6) (90) (1) Gain on sale of stock by equity investee (note 5) 21 -- 21 -- Gain on disposition of assets (note 5) 43 -- 62 8 Other, net (6) (5) (8) (1) -------- -------- -------- --------- (476) (421) (930) (774) -------- -------- -------- --------- Loss before income taxes (220) (270) (344) (473) Income tax benefit 60 79 110 146 -------- -------- -------- --------- Net loss (160) (191) (234) (327) Dividend requirements on preferred stocks (11) (9) (21) (18) -------- -------- -------- --------- Net loss attributable to common stockholders $ (171) (200) (255) (345) ======== ======== ======== ========= Loss attributable to common stockholders per common share (note 2) $ (.25) (.30) (.37) (.52) ======== ========= ========= =========
See accompanying notes to combined financial statements. I-33 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statement of Equity Six months ended June 30, 1997 (unaudited)
Unrealized Combined Cumulative holding equity, foreign gains for Due including currency available- from preferred translation for-sale Liberty stocks of adjustment, securities, Media Combined TCI net of taxes net of taxes Group equity --------- ------------ ------------ ------ -------- amounts in millions Balance at January 1, 1997 $ 1,864 26 15 (42) 1,863 Net loss (234) -- -- -- (234) Purchase of programming from Liberty Media Group -- -- -- 47 47 Cost allocations to Liberty Media Group -- -- -- (4) (4) Adjustment to allocation of compensation relating to stock appreciation rights -- -- -- (16) (16) Intergroup tax allocation to Liberty Media Group -- -- -- (22) (22) Net cash transfers to Liberty Media Group -- -- -- (32) (32) Change in unrealized gains for available-for-sale securities -- -- 13 -- 13 Foreign currency translation adjustment -- (11) -- -- (11) Accreted dividends on TCI preferred stock subject to mandatory redemption requirements (16) -- -- -- (16) Payment of TCI preferred stock dividends (10) -- -- -- (10) Issuance of TCI Group common stock for acquisition and investment 258 -- -- -- 258 Issuance of common stock by equity investee (note 5) 99 -- -- -- 99 Issuance of TCI common stock upon conversion of notes 2 -- -- -- 2 Issuance of TCI Group common stock to TCI Employee Stock Purchase Plan 6 -- -- -- 6 Repayment of intercompany amount due to Liberty/TINTA LLC (6) -- -- -- (6) ------- --- --- ---- ------ Balance at June 30, 1997 $ 1,963 15 28 (69) 1,937 ======= === === ==== ======
See accompanying notes to combined financial statements. I-34 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows (unaudited)
Six months ended June 30, ------------------- 1997 1996 ------- ------ amounts in millions (see note 4) Cash flows from operating activities: Net loss $ (234) (327) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 779 724 Compensation (adjustment to compensation) relating to stock appreciation rights 51 (11) Payments of obligation relating to stock appreciation rights (14) (2) Share of losses of affiliates, net 342 221 Loss on early extinguishment of debt 11 66 Minority interests in earnings of consolidated subsidiaries, net 90 1 Gain on sale of stock by equity investee (21) -- Gain on disposition of assets (62) (8) Intergroup tax allocation (22) (8) Deferred income tax benefit (138) (152) Payments of restructuring charges (19) -- Other noncash credits -- (3) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (127) 15 Change in prepaids (95) (22) Change in accruals and payables 157 (56) Change in accrued interest (2) 37 --------- --------- Net cash provided by operating activities 696 475 --------- --------- Cash flows from investing activities: Cash paid for acquisitions (206) (101) Capital expended for property and equipment (215) (949) Additional investments in and loans to affiliates and others (162) (574) Repayment of loans to affiliates 173 16 Proceeds from dispositions of assets 193 55 Cash received in exchanges 15 50 Change in due from Liberty Media Group 11 9 Other investing activities (120) (72) --------- --------- Net cash used in investing activities (311) (1,566) --------- --------- Cash flows from financing activities: Borrowings of debt 1,236 4,472 Repayments of debt (2,027) (4,547) Prepayment penalties (7) (60) Proceeds from issuance of common stock 3 -- Proceeds from issuance of Trust Preferred Securities 490 971 Proceeds from issuance of subsidiary preferred stock 48 223 Contributions by minority shareholders of subsidiaries 7 -- Distributions to minority shareholders of subsidiaries (10) -- Payment for repurchase of subsidiary common stock (42) -- Payment of preferred stock dividends (23) (23) Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (85) (12) Repayment of intercompany amount due to Liberty/TINTA LLC (6) -- --------- --------- Net cash provided (used) by financing activities (416) 1,024 --------- --------- Net decrease in cash and cash equivalents (31) (67) Cash and cash equivalents at beginning of period 56 77 --------- --------- Cash and cash equivalents at end of period $ 25 10 ========= =========
See accompanying notes to combined financial statements. I-35 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements March 31, 1997 (unaudited) (1) Basis of Presentation --------------------- The accompanying combined financial statements include the accounts of the subsidiaries and assets of TCI that are attributed to TCI Group, as defined below. All significant intercompany accounts and transactions have been eliminated. Preferred stock of TCI, which is owned by subsidiaries of TCI, eliminates in combination. Common stock of TCI held by subsidiaries is included in combined equity. On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's assets which produce and distribute cable television programming services ("Liberty Media Group"). Additionally, the stockholders, of TCI approved the redesignation of the previously authorized Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. 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. As of June 30, 1997, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit, Tele-Communications International, Inc. ("TINTA") and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and assets are collectively referred to as "TCI Group". Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of TCI Group and the market price of shares of the TCI Group Stock. In addition, net losses of any portion of TCI, dividends or distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce the funds of TCI legally available for dividends on all series of common stock. Accordingly, TCI Group financial information should be read in conjunction with the TCI financial information. (continued) I-36 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The accompanying interim combined financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These combined financial statements should be read in conjunction with the audited combined financial statements of TCI Group for the year ended December 31, 1996. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts have been reclassified for comparability with the 1997 presentation. (2) Loss Per Common Share --------------------- The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with potential dilutive securities, such as convertible debt, options and warrants, diluted EPS. Statement No. 128 is effective for annual and interim periods ending after December 31, 1997. TCI Group does not expect that Statement No. 128 will have a material impact on TCI Group's loss per share. The loss attributable to TCI Group Stock stockholders per common share was computed by dividing net loss attributable to TCI Group Stock stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period (682.9 million and 668.4 million for the three months ended June 30, 1997 and 1996, respectively; and 680.1 million and 663.2 million for the six months ended June 30, 1997 and 1996, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (3) Derivative Financial Instruments -------------------------------- TCI Group has entered into variable and fixed interest rate exchange agreements ("Interest Rate Swaps") which it uses to manage interest rate risk arising from TCI Group's financial liabilities. Such Interest Rate Swaps are accounted for as hedges; and accordingly, amounts receivable or payable under Interest Rate Swaps are recognized as adjustments to interest expense. Gains and losses on early terminations of Interest Rate Swaps are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining term of the derivative financial instruments. TCI Group does not use such instruments for trading purposes. (continued) I-37 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Derivative financial instruments that can be settled, at TCI Group's option, in shares of TCI Group's common stock are accounted for as equity instruments. Periodic settlements of amounts payable/receivable pursuant to such financial instruments are included in additional paid-in capital. From time to time, TCI Group uses certain derivative financial instruments to manage its foreign currency risks. Because TCI Group generally views its foreign operating subsidiaries and affiliates as long-term investments, TCI Group generally does not attempt to hedge existing investments in its foreign affiliates and subsidiaries. However, TCI Group may enter into forward contracts to reduce its exposure to short-term (generally no more than one year) movements in the exchange rates applicable to firm funding commitments that are denominated in currencies other than the U.S. dollar. When high correlation of changes in the market value of the forward contract and changes in the fair value of the firm commitment is probable, the forward contract is accounted for as a hedge. Changes in the market value of a forward contract that qualifies as a hedge and any gains or losses on early termination of such a forward contract are deferred and included in the measurement of the item (generally an investment in, or an advance to, a foreign affiliate) that results from the funding of such commitment. Market value changes in derivative financial instruments that do not qualify as hedges are recognized currently in the consolidated statements of operations. To date, TCI Group's use of forward contracts, as described above, has not had a material impact on TCI Group's financial position or results of operations. (4) Supplemental Disclosures to Combined Statements of Cash Flows ------------------------------------------------------------- Cash paid for interest was $589 million and $476 million for the six months ended June 30, 1997 and 1996, respectively. Cash paid for income taxes during these periods was not material. (continued) I-38 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Summary of cash paid for acquisitions and cash received in exchanges is as follows:
Six months ended June 30, ------------------- 1997 1996 --------- ------- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ (1,123) (1,275) Liabilities assumed, net of current assets 622 377 Deferred tax liability recorded in acquisitions 34 244 Minority interests in equity of acquired entities 3 92 Common stock and preferred stock issued in acquisitions 258 461 ---------- ---------- Cash paid for acquisitions $ (206) (101) ========== ========== Cash received in exchanges: Aggregate cost basis of assets acquired $ (395) (193) Historical cost of assets exchanged 399 222 Gain recorded on exchange of assets 11 21 ----------- ---------- Cash received in exchanges $ 15 50 ========== ==========
(5) Investments in Affiliates ------------------------- TCI Group has various investments accounted for under the equity method. The following table includes TCI Group's carrying value and percentage ownership of the more significant investments at June 30, 1997.
June 30, 1997 ------------------------------------------ Percentage Carrying Ownership Value -------------- --------------- amounts in millions Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and PhillieCo, L.P. 30% - 35% $ 703 Teleport Communications Group, L.P. ("TCG") 30% 271 Flextech p.l.c. ("Flextech") 35.9% 267 Telewest Communications plc ("Telewest") 27% 401 Various foreign equity investments (other than Telewest and Flextech) various 293 (continued)
I-39 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
Six months ended Combined Operations June 30, ------------------- --------------------------- 1997 1996 ------------- ------------ amounts in millions Revenue $ 1,334 1,186 Operating expenses (1,444) (1,090) Depreciation and amortization (479) (259) ---------- ---------- Operating loss (589) (163) Interest expense (302) (185) Other, net (152) (50) ---------- ---------- Net loss $ (1,043) (398) ========== ==========
TCI Group is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide, using the "Sprint(R)" brand (a registered trademark of Sprint Communications Company, L.P.) (the "PCS Ventures"). The PCS Ventures include Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum") and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and TCI Group. The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI Group. TCI Group has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35% interest as a partner in PhillieCo. During the six months ended June 30, 1997 and 1996, the Sprint PCS Partnerships contributed $155 million and $79 million, respectively, to TCI Group's share of affiliate losses. Such 1996 amount includes $34 million related to prior periods. (continued) I-40 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The Sprint PCS Partnerships have licenses, and have affiliated (or agreed to affiliate) with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or major trading areas) covering over 190 million "Pops" (or population equivalents) at December 31, 1996. Of the Sprint PCS Partnerships' licenses (which cover 30 (of 51) MTAs), 29 were acquired in an auction conducted by the Federal Communications Commission ("FCC") that ended in March 1995, for an aggregate license cost of approximately $2.1 billion and one PCS license (covering the Omaha MTA) was contributed to the Sprint PCS Partnerships by an affiliate of Cox in February 1997. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego and Orange County, California. The Sprint PCS Partnerships may invest in other entities that hold PCS licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million and currently operates a PCS system in Philadelphia, Pennsylvania. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. As of July 15, 1997, Sprint PCS had launched service in over 50 cities in the U.S. From inception through March 1997, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which TCI Group contributed an aggregate of approximately $0.9 billion). The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and to fund operating losses and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. TCI Group expects that the remaining approximately $1.2 billion of such amount (of which TCI Group's share is approximately $0.4 billion) will be contributed by the end of the first quarter of 1998 (although there can be no assurance that any additional capital will be contributed). TCI Group expects that the Sprint PCS Partnerships will require additional equity thereafter. Pursuant to an agreement entered into in connection with certain financings by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum may be required to make additional contributions to Sprint Spectrum to fund projected cash shortfalls to the extent that the amount of the partners' aggregate contributions to Sprint Spectrum (exclusive of certain amounts, including amounts invested in certain affiliates of Sprint Spectrum), following December 31, 1995 are less than $1.0 billion; however, based on the currently expected timing and use of the partners' contributions to Sprint Spectrum, TCI Group currently believes that such agreement will not result in TCI Group's being required to make any incremental capital contributions in addition to its pro rata portion of the aforementioned $4.2 billion amount. (continued) I-41 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements During the six months ended June 30, 1997, TCG, a competitive local exchange carrier, issued 4,857,083 shares of Class A common stock at an average price per share of $19.25 for certain acquisitions. The total consideration paid by TCG through the issuance of common stock was approximately $93,000,000. As a result of TCG issuing additional shares, TCI Group's ownership interest in TCG was reduced from approximately 31% to approximately 30%. Accordingly, TCI Group recognized a gain amounting to $21 million (before deducting deferred income tax expense of approximately $8 million). At March 31, 1997, TCI Group held a voting interest of approximately 50% in Flextech, a company engaged in the distribution and production of programming for multichannel video distribution systems in the United Kingdom ("UK"). In April 1997, Flextech and BBC Worldwide Limited formed two separate joint ventures (the "BBC Joint Ventures") and entered into certain related transactions. The consummation of the BBC Joint Ventures and related transactions resulted in, among other things, a reduction of TCI Group's ownership interest in Flextech to 35.9%. As a result of such dilution TCI Group recorded a $152 million increase to the carrying value of TCI Group's investment in Flextech, a $53 million increase to deferred income tax liability and a $99 million increase to equity. No gain was recognized due primarily to certain contingent obligations of TCI Group with respect to one of the BBC Joint Ventures. Telewest is a company that is currently operating and constructing cable television and telephone systems in the UK. Telewest contributed $73 million and $70 million of TCI Group's share of its affiliates' losses during the six months ended June 30, 1997 and 1996, respectively. In addition to TCI Group's investments in Telewest and Flextech, TCI Group has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, Flextech and such other equity method investments accounted for $49 million and $37 million of TCI Group's share of its affiliates' losses in 1997 and 1996, respectively. During the six months ended June 30, 1997, TSX Corporation ("TSX"), an equity affiliate of TCI Group, and Antec Corporation ("Antec") entered into a business combination with Antec being the surviving entity. In connection with this transaction, TCI Group recognized a $29 million gain (before deducting deferred income tax expense of approximately $12 million) representing the difference between the fair value of the Antec shares received ($52 million) and the carrying value of its investment in TSX at the date of the transaction ($23 million). Upon completion of this transaction, TCI Group's ownership interest decreased from an approximate 45% interest in TSX to an approximate 16% ownership interest in Antec. TCI Group accounts for its investment in Antec using the cost method. Certain of TCI Group's affiliates are general partnerships and any subsidiary of TCI Group that is a general partner in a general partnership is, as such, liable as a matter of applicable partnership law for all debts of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) I-42 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (6) Acquisitions ------------ In January 1997, TCI Group acquired the 50% ownership interest in TKR Cable Company ("TKR Cable") that TCI Group did not previously own and certain additional assets for aggregate consideration of approximately $970 million. TCI Group issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner, Inc. common stock valued at $41 million upon consummation of such acquisition. On July 31, 1996, pursuant to certain agreements entered into between TCI Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI Group acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred 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 also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCI Group and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. Prior to the consummation of the Viacom Acquisition, Viacom offered 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"). Immediately following the completion of the Exchange Offer, TCI Group acquired from Cable Sub shares of Cable Sub Class B common stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock of Cable Sub with a stated value of $100 per share. Upon completion of the Viacom Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc. In June 1997, TCI Group entered into an agreement with Cablevision Systems Corporation ("Cablevision") pursuant to which TCI Group agreed to contribute certain of its cable television systems serving approximately 820,000 customers to Cablevision in exchange for approximately 12.2 million newly issued Cablevision Class A shares. Such shares represent approximately 33% of Cablevision's total outstanding shares. Cablevision will also assume approximately $669 million of TCI Group's debt. The transaction is subject to, among other matters, Cablevision shareholder and regulatory approvals. There is no assurance that the transaction will be consummated. (continued) I-43 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (7) Debt ---- Debt is summarized as follows:
June 30, December 31, 1997 1996 ---------- ------------ amounts in millions Notes payable (a) $ 9,061 9,308 Bank credit facilities (b) 4,923 4,811 Commercial paper 570 638 Convertible notes (c) 40 43 Other debt 149 124 -------- -------- $ 14,743 14,924 ======== ========
(a) During the six months ended June 30, 1997, in order to reduce future interest costs, TCI Group redeemed certain notes payable which had an aggregate principal balance of $190 million and fixed interest rates ranging from 8.75% to 10.13% (the "1997 Redemption"). In connection with the 1997 Redemption, TCI Group recognized a loss on early extinguishment of debt of $11 million. Such loss related to prepayment penalties amounting to $7 million and the retirement of deferred loan costs. During the six months ended June 30, 1996, TCI Group redeemed certain notes payable which had an aggregate principle balance of $809 million and fixed interest rates ranging from 8.67% to 10.44% (the "1996 Redemption"). In connection with the 1996 Redemption, TCI Group recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. (b) During the second quarter of 1996, certain subsidiaries of TCI Group terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. In connection with such termination, TCI Group recognized a loss on early extinguishment of debt of $4 million related to the retirement of deferred loan costs. At June 30, 1997, subsidiaries of TCI Group had approximately $2 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. (c) These convertible notes, which are stated net of unamortized discount of $167 million and $178 million at June 30, 1997 and December 31, 1996, 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. At June 30, 1997, the notes were convertible, at the option of the holders, into an aggregate of 34,853,145 shares of Series A TCI Group Stock and 13,069,918 shares of Series A Liberty Group Stock. (continued) I-44 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The bank credit facilities and various other debt instruments attributable to TCI Group generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. As security for borrowings under one of TCI Group's bank credit facilities, TCI Group has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of TCI Group. The fair value of the debt attributable to TCI Group is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to TCI Group for debt of the same remaining maturities. At June 30, 1997, the fair value of TCI Group's debt was $14,796 million, as compared to a carrying value of $14,743 million on such date. In order to achieve the desired balance between variable and fixed rate indebtedness, TCI Group has entered into various Interest Rate Swaps pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at June 30, 1997 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,050 million at June 30, 1997. During the six months ended June 30, 1997 and 1996, TCI Group's net payments pursuant to the Fixed Rate Agreements were $4 million and $8 million, respectively; and TCI Group's net receipts pursuant to the Variable Rate Agreements were $11 million and $8 million, respectively. TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as follows (dollar amounts in millions):
Fixed Rate Agreements Variable Rate Agreements --------------------- ------------------------ Expiration Interest rate Notional Expiration Interest rate Notional date to be paid amount date to be received amount ---------- ------------- -------- ---------- -------------- -------- October 1997 7.1%-9.3% $ 180 September 1998 4.8%-5.4% $ 450 December 1997 8.7% 230 April 1999 7.4% 50 ------- February 2000 5.8%-6.6% 300 March 2000 5.8%-6.0% 675 $ 410 September 2000 5.1% 75 ======= March 2027 9.7% 300 December 2036 9.7% 200 --------- $ 2,050 =========
TCI Group is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, TCI Group does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. (continued) I-45 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The fair value of the Interest Rate Swaps is the estimated amount that TCI Group would pay or receive to terminate the agreements at June 30, 1997, taking into consideration current interest rates and the current creditworthiness of the counterparties. At June 30, 1997, TCI Group would be required to pay an estimated $4 million to terminate the Fixed Rate Agreements and an estimated $25 million to terminate the Variable Rate Agreements. Certain subsidiaries attributed to TCI Group are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI Group's subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. (8) Company-Obligated Mandatorily Redeemable Preferred Securities of ---------------------------------------------------------------- Subsidiary Trusts Holding Solely Subordinated Debt Securities of ---------------------------------------------------------------- TCIC ---- In 1996 and 1997, TCI Group, through certain subsidiary trusts, (the "Trusts"), issued preferred securities as follows:
Subsidiary Trust Interest Rate Face Amount ---------------- ------------- ----------- in millions TCI Communications Financing I 8.72% $ 500 TCI Communications Financing II 10.00% 500 TCI Communications Financing III 9.65% 300 TCI Communications Financing IV 9.72% 200 ---------- $ 1,500 ==========
The Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") of TCIC. The Subordinated Debt Securities have interest rates equal to the interest rate of the corresponding Trust Preferred Securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of TCI Group. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Preferred Securities. The Trust Preferred Securities are presented together in a separate line item in the accompanying combined balance sheet captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of TCI Communications, Inc." Dividends accrued on the Trust Preferred Securities are included in minority interests in earnings of consolidated subsidiaries in the accompanying combined financial statements. (continued) I-46 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (9) Combined Equity --------------- General ------- The rights of holders of the TCI Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the TCI Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. In June 1996, TCI Group exchanged (the "Exchange") 30,545,864 shares of Series A TCI Group Stock ("TCOMA") for the same number of shares of Series B TCI Group Stock owned by the estate (the "Estate") of the former Chairman of the Board of Directors of TCI. Subsequent to the Exchange, the Estate sold (the "Sale") the shares of TCOMA received in the Exchange, together with approximately 1.5 million shares of TCOMA that the Estate previously owned (the "Option Shares"), to two investment banking firms (the "Investment Bankers") for approximately $530 million (the "Sale Price"). Subsequent to the Sale, TCI Group entered into an agreement with the Investment Bankers whereby TCI Group has the option, but not the obligation, to purchase the Option Shares at any time within two years (the "Option Period") from the date of the Sale. During the Option Period, TCI Group is to settle quarterly any increase or decrease in the market value of the Option Shares. At TCI Group's option, such quarterly settlements may be satisfied with shares of TCOMA, or subject to certain conditions, with cash or letters of credit. In addition, the Company is required to pay the Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due to TCI Group's ability to settle quarterly price fluctuations with shares of TCOMA, TCI Group will treat all amounts paid or received under this arrangement as increases or decreases to equity. Stock Options and Stock Appreciation Rights ------------------------------------------- Estimates of compensation relating to restricted stock awards, options and/or stock appreciation rights ("SARs") granted to certain key employees of TCI Group have been recorded in the accompanying combined financial statements, but are subject to future adjustment based upon the market value of Series A TCI Group Stock and Series A Liberty Group Stock and, ultimately, on the final determination of market value when the rights are exercised or the restricted shares are vested. (10) Transactions with Liberty Media Group and Other Related Parties --------------------------------------------------------------- Certain TCI corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand-alone basis. During each of the six month periods ended June 30, 1997 and 1996, Liberty Media Group was allocated $1 million in corporate general and administrative costs by TCI Group. (continued) I-47 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Prior to July 1, 1997, TCI Group had a 50.1% partnership interest in QE+Ltd. ("QE+"), which distributes STARZ!, a first-run movie premium programming service launched in 1994. Entities attributed to Liberty Media Group held the remaining 49.9% partnership interest. Also prior to July 1, 1997, Encore Media Corporation ("Encore") (90% owned by Liberty Media Group) earned management fees from QE+ equal to 20% of managed costs, as defined. In addition, Liberty Media Group earned a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. Such Content Fees aggregated $4 million and $2 million for the six months ended June 30, 1997 and 1996, respectively. In July 1997, Liberty Media Group, TCI and John J. Sie, Chairman and Chief Executive Officer of Encore and JJS Communications, Inc. ("JJS"), a corporation wholly owned by Mr. Sie, entered into a series of transactions pursuant to which the businesses of Encore and STARZ! were contributed to a newly formed limited liability company ("Encore Media Group"). Prior to the formation of Encore Media Group, JJS owned 10% of Encore, which in connection with these transactions was exchanged for Liberty Group Stock. Upon consummation of the transactions, Liberty Media Group owns 80% of Encore Media Group and TCI Group owns 20%. Liberty Media Group received its 80% ownership interest in Encore Media Group in exchange for the contribution of its interests in QE+ and Encore, the issuance of a $307 million note payable due on or before December 29, 1997 (the "Note Payable") to TCI Group, the cancellation and forgiveness of amounts due for Content Fees and the termination of an option to increase its ownership interest in QE+. TCI Group received the remaining 20% interest in Encore Media Group and the aforementioned consideration from Liberty Media Group in exchange for TCI Group's ownership interest in QE+ and certain special capital contributions made by TCI Group to QE+. It is anticipated that Encore Media Group will borrow $400 million (the "Encore Loan Proceeds") by December 29, 1997 and distribute the Encore Loan Proceeds to Liberty Media Group and TCI Group in proportion to their ownership interests in Encore Media Group. In addition, TCI Group has entered into a 25 year affiliation agreement with a subsidiary of Encore Media Group pursuant to which TCI Group will pay fixed monthly amounts in exchange for unlimited access to substantially all of the existing Encore and STARZ! services. The fixed annual amounts increase annually from $270 million in 1998 to $360 million in 2004, and will increase with inflation thereafter. Upon consummation of the aforementioned transactions, the operations of STARZ! will be included in the consolidated financial results of Liberty Media Group. Entities included in Liberty Media Group lease satellite transponder facilities from TCI Group. Charges by TCI Group for such arrangements and other related operating expenses for the six months ended June 30, 1997 and 1996, aggregated $4 million and $7 million, respectively. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute programming to cable television operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. (continued) I-48 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Cash receipts of certain businesses attributed to Liberty Media Group are remitted to TCI Group and certain cash disbursements of Liberty Media Group are funded by TCI Group on a daily basis. Such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to be reflected as an Inter-Group Interest to Liberty Media Group. The Board could determine from time to time that debt of TCI Group not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. Subsequent to the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock are attributed entirely to TCI Group, and all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, are reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock are attributed entirely to TCI Group, and financial impacts of dividends or other distributions on Liberty Group Stock are attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock, the consideration for which is charged to Liberty Media Group, are reflected entirely in the combined financial statements of Liberty Media Group, and the financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group, are attributed entirely to TCI Group. Borrowings from or loans to Liberty Media Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. Because TCI Group and Liberty Media Group are both 100% owned by TCI, amounts due from Liberty Media Group have been classified as a component of combined equity. (continued) I-49 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements A tax sharing agreement (the "Tax Sharing Agreement") among TCI Group and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of a pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. federal, state, local and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, TCI Group will be responsible to TCI for its share of current consolidated income tax liabilities. TCI will be responsible to TCI Group to the extent that TCI Group's income tax attributes generated after the effective date are utilized by TCI to reduce its consolidated income tax liabilities. Accordingly, all tax attributes generated by TCI Group's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising TCI Group. (11) Transactions with Officers and Directors ---------------------------------------- On March 4, 1997, an executive officer and director of TCI received an advance from a wholly-owned subsidiary of TCI Group in the amount of $5,787,505. On March 5, 1997, such executive officer and director received a second advance from a wholly-owned subsidiary of TCI Group in the amount of $5,813,755. The terms of the advances were memorialized by a promissory note. The interest rate on such loans is 1% over the one-month LIBOR rate compounded annually. Principal outstanding on the note is due March 31, 1999 and interest is payable annually on March 1 of each year. The loan is unsecured. (12) Commitments and Contingencies ----------------------------- TCI Group has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $468 million at June 30, 1997. With respect to TCI Group's guarantees of $166 million of such obligations, TCI Group has been indemnified for any loss, claim or liability that TCI Group may incur, by reason of such guarantees. Although there can be no assurance, management of TCI Group believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCI Group. TCI Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through December 31, 2005 (the "Film Licensing Obligations"). Based on customer levels at June 30, 1997, these agreements require minimum payments aggregating $500 million. The aggregate amount of the Film Licensing Obligations is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, TCI Group's required aggregate payments under the Film Licensing Obligations could prove to be significant. (continued) I-50 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group has made certain financial commitments related to the acquisition of sports program rights through 2004. At June 30, 1997, such commitments aggregated $209 million. Certain key employees of TCI Group hold restricted stock awards, options 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 statement, 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. TCI Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible TCI Group may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. I-51 "TCI GROUP" (a combination of certain assets, as defined in note 1) Management's Discussion and Analysis of - --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The following discussion and analysis should be read in conjunction with TCI Group's Management's Discussion and Analysis of Financial Condition and Results of Operations included in Tele-Communications, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996. The following discussion focuses on material changes in trends, risks and uncertainties affecting TCI Group's results of operations and financial condition. Reference should also be made to TCI Group's combined financial statements included herein. (1) Material changes in financial condition: ---------------------------------------- On August 3, 1995, the TCI stockholders authorized the Board to issue the Liberty Group Stock. Additionally, stockholders of TCI approved the redesignation of the previously authorized Class A and Class B common stock of TCI into Series A and Series B TCI Group Stock. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty Media Group. 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. As of June 30, 1997, the TCI Group Stock reflects the separate performance of TCI Group, which is generally comprised of the subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit. Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of TCI Group and the market price of shares of the TCI Group Stock. In addition, net losses of any portion of TCI, dividends or distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce the funds of TCI legally available for dividends on all series of common stock. Accordingly, TCI Group financial information should be read in conjunction with the TCI and Liberty Media Group financial information. (continued) I-52 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Cash receipts of certain businesses attributed to Liberty Media Group are remitted to TCI Group and certain cash disbursements of Liberty Media Group are funded by TCI Group on a daily basis. Such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to be reflected as an Inter-Group Interest to Liberty Media Group. The Board could determine from time to time that debt of TCI Group not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. Borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. During March 1997, TCI Group, through special purpose entities formed as Delaware business trusts, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. In January 1997, TCI Group acquired the 50% ownership interest in TKR Cable that TCI Group did not previously own for aggregate consideration of approximately $970 million. TCI Group issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. On July 31, 1996, TCI Group consummated the Viacom Acquisition whereby TCI Group acquired all of the common stock of Cable Sub which owned Viacom's cable systems and related assets. The transaction was structured as a tax-free reorganization in which Cable Sub initially transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to New Viacom Sub. Cable Sub also transferred to New Viacom Sub the Loan Proceeds of a $1.7 billion loan facility. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. For additional discussion of the Viacom Acquisition, see note 6 to the accompanying TCI Group combined financial statements. (continued) I-53 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- In June 1997, TCI Group entered into an agreement with Cablevision pursuant to which TCI Group agreed to contribute certain of its cable television systems serving approximately 820,000 customers to Cablevision in exchange for approximately 12.2 million newly issued Cablevision Class A shares. Such shares represent approximately 33% of Cablevision's total outstanding shares. Cablevision will also assume approximately $669 million of TCI Group's debt. The transaction is subject to, among other matters, Cablevision shareholder and regulatory approvals. There is no assurance that the transaction will be consummated. During the second quarter of 1997 and 1996, in order to reduce future interest costs, TCI Group redeemed certain notes payable which had an aggregate principle balance of $190 million and $809 million, respectively. In connection with such redemptions, TCI Group recognized losses on early extinguishment of debt of $11 million and $62 million, respectively. Such losses related to prepayment penalties and the retirement of deferred loan costs. Also, during the second quarter of 1996, certain subsidiaries of TCI Group terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. In connection with such termination, TCI Group recognized a loss on early extinguishment of debt of $4 million related to the retirement of deferred loan costs. At June 30, 1997, TCI Group had approximately $2 billion of availability in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although TCI Group was in compliance with the restrictive covenants contained in its credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with the restrictive covenants after giving effect to such additional borrowings. Such restrictive covenants require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. See note 7 to the accompanying combined financial statements for additional information regarding the material terms of the lines of credit. (continued) I-54 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- One measure of liquidity is commonly referred to as "interest coverage." Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization, compensation relating to stock appreciation rights and adjustments to compensation relating to stock appreciation rights ($1,416 million and $1,014 million for the six months ended June 30, 1997 and 1996, respectively) to interest expense ($582 million and $513 million for the six months ended June 30, 1997 and 1996, respectively), is determined by reference to the combined statements of operations. TCI Group's interest coverage ratio was 243% and 198% for the six months ended June 30, 1997 and 1996, respectively. Management of TCI Group believes that the foregoing interest coverage ratio is adequate in light of the relative predictability of its cable television operations and interest expense, 44% of which results from fixed rate indebtedness. However, TCI Group's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that TCI Group will be able to achieve such objective. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying combined statements of cash flows. Net cash provided by operating activities generally ($696 million and $475 million for the six months ended June 30, 1997 and 1996, respectively) reflects net cash from the operations of TCI Group available for TCI Group's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. Prior to 1997, amounts expended by TCI Group for its investing activities have exceeded net cash provided by operating activities. TCI Group has reevaluated its capital expenditure strategy and currently anticipates that it will expend significantly less for property and equipment in 1997 than it did in 1996. In this regard, the amount of capital expended by TCI Group for property and equipment was $215 million during the six months ended June 30, 1997, as compared to $949 million during the corresponding period in 1996. TCI Group currently estimates that it will spend approximately $725 million for capital expenditures during 1997. To the extent that net cash provided by operating activities exceeds net cash used in investing activities in 1997, TCI Group currently anticipates that such excess cash will initially be used to reduce outstanding debt. In the event TCI Group is unable to achieve such objectives, management believes that net cash provided by operating activities, the ability of TCI Group to obtain additional financing (including the available lines of credit and access to public debt markets), issuances and sales of TCI's equity or equity of its subsidiaries, and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. See TCI Group's combined statements of cash flows included in the accompanying combined financial statements. (continued) I-55 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- TCI Group has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $468 million at June 30, 1997. With respect to TCI Group's guarantees of $166 million of such obligations, TCI Group has been indemnified for any loss, claim or liability that TCI Group may incur, by reason of such guarantees. Although there can be no assurance, management of TCI Group believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCI Group. TCI Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through December 31, 2005. Based on customer levels at June 30, 1997, these agreements require minimum payments aggregating approximately $500 million. The aggregate amount of the Film Licensing Obligations is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, TCI Group's required aggregate payments under the Film Licensing Obligations could prove to be significant. TCI Group has made certain financial commitments related to the acquisition of sports program rights through 2004. At June 30, 1997, such commitments aggregated $209 million. TCI Group's various partnerships and other affiliates accounted for under the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by TCI Group), through net cash provided by their own operating activities and in certain circumstances through required capital contributions from their partners. In order to achieve the desired balance between variable and fixed rate indebtedness and to diminish its exposure to extreme increases in variable interest rates, TCI Group has entered into various Interest Rate Swaps. Pursuant to the Interest Rate Swaps, TCI Group (i) pays fixed interest rates ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at June 30, 1997 and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,050 million at June 30, 1997. During the six months ended June 30, 1997 and 1996, TCI Group's net payments pursuant to the Fixed Rate Agreements were $4 million and $8 million, respectively; and TCI Group's net receipts pursuant to the Variable Rate Agreements were $11 million and $8 million, respectively. TCI Group is exposed to credit losses for the periodic settlements of amounts due under the Interest Rate Swaps in the event of nonperformance by the other parties to the agreements. However, TCI Group does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. See note 7 to the accompanying combined financial statements for additional information regarding Interest Rate Swaps. At June 30, 1997, after considering the net effect of the aforementioned Interest Rate Swaps, TCI Group had $6,448 million (or 44%) of fixed-rate debt and $8,295 million (or 56%) of variable-rate debt. Accordingly, in an environment of rising interest rates, TCI Group could experience an increase in its interest expense. (continued) I-56 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- In June 1996, TCI Group exchanged 30,545,864 shares of TCOMA for the same number of shares of Series B TCI Group Stock owned by the estate (the "Estate") of the former Chairman of the Board of Directors of TCI. Subsequent to the Exchange, the Estate sold the shares of TCOMA received in the Exchange, together with approximately 1.5 million shares of TCOMA that the Estate previously owned, to two investment banking firms for approximately $530 million. Subsequent to the Sale, TCI Group entered into an agreement with the Investment Bankers whereby TCI Group has the option, but not the obligation, to purchase the Option Shares at any time within two years from the date of the Sale. During the Option Period, TCI Group is to settle quarterly any increase or decrease, in the market value of the Option Shares. At TCI Group's option, such quarterly settlements may be satisfied with shares of TCOMA, or subject to certain conditions with cash or letters of credit. In addition, TCI Group is required to pay the Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due to TCI Group's ability to settle quarterly price fluctuations with shares of TCOMA, TCI Group will treat all amounts paid or received under this arrangement as increases or decreases to equity. On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of TCI's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of TCI's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of June 30, 1997, no shares of Telephony Group Stock have been issued. Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of TCI attributable to Telephony Group, in addition to the separate performance of TCI's domestic cable distribution business, telephony distribution and communications business (other than the investments attributed to Telephony Group), international cable, telephony and programming businesses, technology/venture capital business, and any other business of TCI not attributed to either Liberty Media Group or Telephony Group. (continued) I-57 "TCI GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- On May 14, 1997, the Board authorized, subject to shareholder approval, the redesignation of Series A and Series B Telephony Group Stock as Tele-Communications, Inc. Series A and Series B TCI Ventures Group common stock ("TCI Ventures Group Stock"). The TCI Ventures Group Stock is intended to reflect the separate performance of the TCI Ventures Group, which will substantially be all of TCI Group's international and non-cable assets. TCI will amend the approved Telephony Group Stock to expand that group to track such assets, including TCI's investments in At Home Corporation, TINTA, United Video Satellite Group, Inc. and others. The tracking stock will be issued through an exchange offer whereby TCI Group's shareholders will have the opportunity to exchange their TCI Group Stock for TCI Ventures Group Stock in the ratio of one share of TCI Ventures Group Stock in exchange for each share of TCI Group Stock properly tendered. Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a wholly-owned TCI subsidiary. The merger was valued at approximately $731 million. TCI exchanged 47.2 million shares of Series A TCI Group Stock for shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group Stock and 6.7 million shares of Liberty Group Stock. Immediately following the merger, Liberty Media Group purchased from TCI Group the 6.7 million shares of Liberty Group Stock that were acquired in such transaction for $168 million in cash. (2) Material changes in results of operations: ------------------------------------------ The operation of TCI Group's cable television systems is regulated at the federal, state and local levels. The Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 (collectively, the "Cable Acts") established rules under which TCI Group's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are regulated if a complaint is filed or if the appropriate franchise authority is certified. Approximately 78% of TCI Group's basic customers were served by cable television systems that were subject to such rate regulation. During the six months ended June 30, 1997, 66% of TCI Group's revenue was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit TCI Group's ability to increase its service rates. Through December 4, 1996, TCI Group had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"). Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, TCI distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included TCI Group's interest in Primestar, TCI Group's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with those of TCI Group. (continued) I-58 "TCI GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------ Revenue increased 12% for the three months ended June 30, 1997, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, revenue from TCI Group's domestic cable customers accounted for 3% of such increase primarily as a result of an 8% increase in basic revenue and an 8% decrease in premium revenue. TCI Group experienced a 10% increase in its average basic rate, a 2% decrease in the number of average basic customers, a 7% increase in its average premium rate and a 13% decrease in the number of average premium customers. In addition, TCI Group's revenue increased 12% due to acquisitions and decreased 5% due to the Satellite Spin-off. International cable revenue and other revenue accounted for the remaining 2% increase in revenue. Revenue increased 17% for the six months ended June 30, 1997, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, revenue from TCI Group's domestic cable customers accounted for 4% of such increase primarily as a result of a 10% increase in basic revenue and a 5% decrease in premium revenue. TCI Group experienced an 11% increase in its average basic rate, a 1% decrease in the number of average basic customers, a 4% increase in its average premium rate and a 8% decrease in the number of average premium subscribers. In addition, TCI Group's revenue increased 15% due to acquisitions and decreased 5% due to the Satellite Spin-off. International cable revenue and other revenue accounted for the remaining 3% increase in revenue. Operating Costs and Expenses ---------------------------- Operating expenses increased 10% and 17% for the three months and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. Exclusive of the effects of acquisitions, net of dispositions, such expenses increased 5% and 6%. Programming expenses accounted for the majority of such increases. TCI Group cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. Selling, general and administrative expenses decreased 11% and 9% for the three months and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. Exclusive of the effects of acquisitions, net of dispositions, such expenses decreased 3% for each period. Such decrease is due primarily to a reduction in salaries and related payroll expenses due to work force reductions in the fourth quarter of 1996, as well as reduced marketing and general overhead expenses. TCI Group currently anticipates that marketing expense will increase for the six months ended December 31, 1997, as compared to the six months ended June 30, 1997. The change in TCI Group's depreciation expense in 1997 is the result of the net effect of a decrease due to the Satellite Spin-off offset by increases due to acquisitions and capital expenditures. The increase in TCI Group's amortization expense in 1997 is due to acquisitions. Certain corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that would approximate the costs Liberty Media Group would incur for comparable services on a stand alone basis. During each of the six month periods ended June 30, 1997 and 1996, Liberty Media Group was allocated $1 million in corporate general and administrative costs by TCI Group. (continued) I-59 "TCI GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------ Prior to the determination of the Board to seek approval of stockholders to distribute the Liberty Group Stock, TCI did not have formalized intercompany allocation methodologies. In connection with such determination, management of TCI has determined that TCI general corporate expenses should be allocated to Liberty Media Group based on the amount of time TCI corporate employees (e.g. legal, corporate, payroll, etc.) expend on Liberty Media Group matters. TCI management evaluated several alternative allocation methods including assets, revenue, operating income, and employees. Management did not believe that any of these methods would reflect an appropriate allocation of corporate expenses given the diverse nature of TCI's operating subsidiaries, the relative maturity of certain of the operating subsidiaries, and the way in which corporate resources are utilized. TCI Group records compensation relating to stock appreciation rights and restricted stock awards granted to certain employees by TCI or TINTA. 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. Other Income and Expenses ------------------------- Interest expense aggregated $293 million and $582 million for the three months and six months ended June 30, 1997, respectively, as compared to $258 million and $513 million for the corresponding periods in 1996. The majority of such increase in interest expense is due to increased debt balances as a result of the Viacom Acquisition in August 1996. See note 6 to the accompanying combined financial statements. At June 30, 1997, TCI Group had an effective ownership interest of approximately 27% in Telewest, a company that is currently operating and constructing cable television and telephone systems in the UK. Telewest, which is accounted for under the equity method, had a carrying value at June 30, 1997 of $401 million and comprised $73 million and $70 million of TCI Group's share of its affiliates' losses during the six months ended June 30, 1997 and 1996, respectively. In addition to TCI Group's investments in Telewest and Flextech, TCI Group has other less significant investments accounted for under the equity method in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, Flextech and such other equity method investments had a carrying value of $560 million at June 30, 1997 and accounted for $49 million and $37 million of TCI Group's share of its affiliates' losses for the six months ended June 30, 1997 and 1996, respectively. Additionally, included in share of losses of affiliates for the six months ended June 30, 1997 and 1996, is $155 million and $79 million, respectively, attributable to the Sprint PCS Partnerships. Such 1996 amount includes $34 million associated with prior periods. The increase in the share of losses of the Sprint PCS Partnerships is attributed primarily to general and administrative costs associated with the start-up of operations and Sprint Spectrum's share of losses in APC. (continued) I-60 "TCI GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------ Minority interests in earnings of consolidated subsidiaries aggregated $57 million and $90 million for the three months and six months ended June 30, 1997, respectively, as compared to $6 million and $1 million for the corresponding periods in 1996. The majority of such change is due to the issuance of additional Trust Preferred Securities in May 1996 and March 1997 and the accrual of dividends on preferred securities issued in August 1996 by a subsidiary of TCI Group. During the six months ended June 30, 1997, as a result of TCG issuing additional shares of its Class A common stock for certain acquisitions, TCI Group's ownership interest in TCG was reduced from approximately 31% to approximately 30%. Accordingly, TCI Group recognized a gain amounting to $21 million (before deducting deferred income tax expense of approximately $8 million). Also, during the six months ended June 30, 1997, TSX, an equity affiliate of TCI Group, and Antec entered into a business combination with Antec being the surviving entity. In connection with such transaction, TCI Group recognized a $29 million gain (before deducting deferred income tax expense of approximately $12 million) representing the difference between the fair value of the Antec shares received and the carrying value of TCI Group's investment in TSX at the date of the transaction. Upon completion of this transaction, TCI Group's ownership interest decreased from an approximate 45% interest in TSX to an approximate 16% ownership interest in Antec. Net Loss -------- TCI Group's net loss (before preferred stock dividend requirements) of $160 million for the three months ended June 30, 1997 represents a change of $31 million, as compared to TCI Group's net loss (before preferred stock dividend requirements) of $191 million for the three months ended June 30, 1996. TCI Group's net loss (before preferred stock dividend requirements) of $234 million for the six months ended June 30, 1997 represents a change of $93 million, as compared to TCI Group's net loss (before preferred stock dividend requirements) of $327 million for the six months ended June 30, 1996. Such changes are the net result of an increase in operating income, a decrease in loss on early extinguishment of debt and the gains recognized as a result of the TCG and TSX transactions discussed above partially offset by increases in share of losses of affiliates, dividends on preferred securities issued by certain subsidiaries of TCI Group reflected as minority interests in earnings of consolidated subsidiaries and interest expense. I-61 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets (unaudited)
June 30, December 31, 1997 1996 -------- ------------ amounts in thousands Assets - ------ Cash and cash equivalents $ 359,641 317,359 Trade and other receivables, net 22,914 24,796 Prepaid program rights 32,031 32,063 Committed film inventory 18,643 20,092 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 561,332 545,121 Investment in Time Warner, Inc. ("Time Warner") (note 5) 2,322,541 2,016,799 Other investments, at cost, and related receivables (note 6) 82,092 81,537 Property and equipment, at cost: Land 39 39 Support equipment and buildings 18,461 17,756 ---------- ---------- 18,500 17,795 Less accumulated depreciation 9,062 7,846 ---------- ---------- 9,438 9,949 ---------- ---------- Other assets, at cost, net of amortization 9,959 11,236 ---------- ---------- $3,418,591 3,058,952 ========== ==========
(continued) I-62 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets, continued (unaudited)
June 30, December 31, 1997 1996 --------- ------------ amounts in thousands Liabilities and Combined Equity - ------------------------------- Accounts payable and accrued liabilities $ 27,234 19,397 Accrued compensation relating to phantom rights (note 9) 22,334 17,758 Program rights payable 34,299 33,700 Deferred revenue 7,684 6,166 Deferred option premium (note 5) 305,742 -- Debt (note 7) -- 1,620 Deferred income taxes 573,485 582,089 ----------- ----------- Total liabilities 970,778 660,730 ----------- ----------- Minority interests in equity of consolidated subsidiaries 12,934 1,052 Combined equity (note 8): Combined equity 2,365,972 2,355,021 Due to TCI Group 68,855 42,149 Unrealized gains on available-for-sale securities, net of taxes 52 -- ----------- ----------- 2,434,879 2,397,170 ----------- ----------- Commitments and contingencies (note 9) $ 3,418,591 3,058,952 =========== ===========
See accompanying notes to combined financial statements. I-63 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations (unaudited)
Three months ended Six months ended June 30, June 30, ------------------------------ ------------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------- amounts in thousands Revenue: Programming services: From TCI Group (note 8) $ 24,127 28,000 46,638 56,870 From others 35,545 49,732 72,393 185,878 Net sales from electronic retailing services -- 243,988 -- 499,601 ---------- ------------ ------------ ------------- 59,672 321,720 119,031 742,349 ---------- ------------ ------------ ------------- Cost of sales, operating costs and expenses: Cost of sales -- 151,679 -- 316,491 Operating 19,903 60,575 39,429 179,885 Selling, general and administrative 24,768 66,191 37,232 157,350 Charges by TCI Group (note 8) 2,354 5,550 4,433 11,321 Compensation relating to phantom rights and stock appreciation rights (notes 8 and 9) 14,466 7,119 20,040 5,711 Depreciation 611 3,962 1,216 9,057 Amortization 165 9,424 339 22,870 ---------- ------------ ------------ ------------- 62,267 304,500 102,689 702,685 ---------- ------------ ------------ ------------- Operating income (loss) (2,595) 17,220 16,342 39,664 Other income (expense): Interest expense (306) (6,022) (611) (12,501) Dividend and interest income, primarily from affiliates 8,212 2,206 19,247 4,371 Share of earnings of affiliates, net (note 4) 5,739 4,456 12,975 12,755 Minority interests in earnings of consolidated subsidiaries (2,295) (2,873) (11,909) (6,357) Gain (loss) on disposition of assets 581 (8,035) 581 (6,300) Loss on early extinguishment of debt (320) -- (320) -- Other, net 6 1,610 115 3,782 ---------- ------------ ------------ ------------- 11,617 (8,658) 20,078 (4,250) ---------- ------------ ------------ ------------- Earnings before income taxes 9,022 8,562 36,420 35,414 Income tax expense (2,481) (4,573) (14,267) (16,584) ---------- ------------ ------------ ------------- Net earnings $ 6,541 3,989 22,153 18,830 ========== ============ ============ ============= Earnings per common share (note 2) $ .03 .02 .09 .08 ========== ============ ============ =============
See accompanying notes to combined financial statements. I-64 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statement of Equity Six months ended June 30, 1997 (unaudited)
Unrealized holding gains on available- Total Combined Due to for-sale securities, combined equity TCI Group net of taxes equity -------- -------- --------------------- -------------- amounts in thousands Balance at January 1, 1997 $ 2,355,021 42,149 -- 2,397,170 Net earnings 22,153 -- -- 22,153 Contribution to combined equity for issuance of Liberty Group Stock to TCI Employee Stock Purchase Plan 2,054 -- -- 2,054 Purchase of Liberty Group Stock (13,256) -- -- (13,256) Sale of programming to TCI Group -- (47,038) -- (47,038) Cost allocations from TCI Group -- 4,433 -- 4,433 Compensation relating to stock appreciation rights -- 15,464 -- 15,464 Intergroup tax allocation -- 21,992 -- 21,992 Net cash transfers from TCI Group -- 31,855 -- 31,855 Change in unrealized holding gains on available-for-sale securities -- -- 52 52 ---------------- --------- ---------- --------------- Balance at June 30, 1997 $ 2,365,972 68,855 52 2,434,879 ================ ========= ========== ===============
See accompanying notes to combined financial statements. I-65 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows (unaudited)
Six months ended June 30, ------------------------- 1997 1996 --------- ----------- amounts in thousands (see note 3) Cash flows from operating activities: Net earnings $ 22,153 18,830 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,555 31,927 Compensation relating to phantom rights and stock appreciation rights 20,040 5,711 Share of earnings of affiliates, net (12,975) (12,755) Deferred income tax expense (benefit) (8,638) 5,660 Intergroup tax allocation 21,992 7,665 Minority interests in earnings 11,909 6,357 Loss (gain) on disposition of assets (581) 6,300 Loss on early extinguishment of debt 320 -- Payments of litigation settlements -- (3,125) Payments for restructuring charges -- (414) Noncash interest expense -- 3,378 Changes in operating assets and liabilities, net of acquisitions: Change in receivables 1,882 (29,672) Change in inventories -- 15,606 Change in prepaid expenses 1,449 4,105 Change in payables, accruals and deferred revenue 9,954 (6,687) --------------- ------------- Net cash provided by operating activities 69,060 52,886 --------------- ------------- Cash flows from investing activities: Cash proceeds from dispositions 581 47,045 Cash paid for acquisitions -- (55,000) Capital expended for property and equipment (705) (6,244) Additional investments in and loans to affiliates and others (16,112) (5,281) Return of capital from affiliates 11,700 1,500 Collections on loans to affiliates and others 707 866 Cash paid for cable distribution fees -- (17,665) Other investing activities 650 (8,983) --------------- ------------- Net cash used in investing activities (3,179) (43,762) --------------- ------------- Cash flows from financing activities: Borrowings of debt 2,020 201,889 Repayments of debt (3,640) (233,615) Contribution for issuance of Liberty Group Stock 2,054 -- Purchase of Liberty Group Stock (13,256) -- Change in cash transfers to TCI Group (10,750) (8,512) Contributions by minority shareholders of subsidiaries 8 314,391 Distributions to minority shareholders of subsidiaries (35) (65) --------------- ------------- Net cash provided (used) by financing activities (23,599) 274,088 --------------- ------------- Net increase in cash and cash equivalents 42,282 283,212 Cash and cash equivalents at beginning of period 317,359 41,225 --------------- ------------- Cash and cash equivalents at end of period $ 359,641 324,437 =============== =============
See accompanying notes to combined financial statements. I-66 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements June 30, 1997 (unaudited) (1) Basis of Presentation --------------------- The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that are attributed to Liberty Media Group, as defined below. All significant intercompany accounts and transactions have been eliminated. On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's assets which produce and distribute cable television programming services ("Liberty Media Group"). 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"). Liberty Media Group's assets include businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products. Liberty Media Group's assets also include businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. The issuance of 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. As of June 30, 1997, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and assets are collectively referred to as "TCI Group". Intercompany balances resulting from transactions with such units are reflected as borrowings from or loans to TCI Group. See note 8. Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to Liberty Media Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries will each continue to be responsible for their respective liabilities. Holders of Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. (continued) I-67 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of Liberty Media Group and the market price of shares of Liberty Group Stock. In addition, net losses of any portion of TCI, dividends and distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce funds of TCI legally available for dividends on all series of common stock. Accordingly, Liberty Media Group financial information should be read in conjunction with the TCI consolidated financial information. The accompanying interim combined financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These combined financial statements should be read in conjunction with the audited combined financial statements of Liberty Media Group for the year ended December 31, 1996. Certain amounts have been reclassified for comparability with the 1997 presentation. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) Earnings Per Common Share ------------------------- Earnings attributable to Liberty Media Group stockholders per common share was computed by dividing net earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares of Liberty Media Group Series A and Series B common stock outstanding during the period (249.7 million and 250.6 million for the three months ended June 30, 1997 and 1996, respectively; and 249.6 million and 248.7 million for the six months ended June 30, 1997 and 1996, respectively). Common stock equivalents were not included in the computation because their inclusion would be anti-dilutive to TCI. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No. 128"). Statement No. 128 requires the presentation of basic earnings per share ("EPS") and, for companies with potentially dilutive securities, such as convertible debt, options and warrants, diluted EPS. Statement No. 128 is effective for annual and interim periods ending after December 31, 1997. Liberty Media Group does not expect that Statement No. 128 will have a material impact on Liberty Media Group's earnings per share. (3) Supplemental Disclosures to Combined Statements of Cash Flows ------------------------------------------------------------- Cash paid for interest was $612,000 and $11,882,000 for the six months ended June 30, 1997 and 1996, respectively. Cash paid for income taxes during the six months ended June 30, 1997 and 1996 was $903,000 and $569,000, respectively. (continued) I-68 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (4) Investments in Affiliates ------------------------- Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
Six months ended June 30, ----------------------------------- 1997 1996 ---------------- ---------------- amounts in thousands Combined Operations ------------------- Revenue $ 2,552,690 1,577,155 Operating expenses (2,287,382) (1,380,344) Depreciation and amortization (121,990) (76,876) ---------------- ---------------- Operating income 143,318 119,935 Interest expense (66,510) (53,235) Other, net (108,489) (71,716) ---------------- ---------------- Net loss $ (31,681) (5,016) ================ ================
The following table reflects the carrying value of Liberty Media Group's investments, accounted for under the equity method, including related receivables:
June 30, December 31, 1997 1996 ----------- ------------ amounts in thousands Discovery Communications, Inc. ("Discovery") $ 117,912 117,724 QVC, Inc. ("QVC") 116,237 103,855 International Cable Channels Partnership, Ltd. ("ICCP") 9,649 9,411 Bet Holdings, Inc. ("BET") 23,038 20,225 Courtroom Television Network ("Court") (991) 2,160 Liberty/Fox U.S. Sports LLC ("Fox Sports") (a) (21,530) (21,964) Superstar/Netlink Group LLC ("Superstar/Netlink") (b) (38,560) (37,236) DMX Inc. ("DMX") 1,620 2,331 Home Shopping Network, Inc. ("HSN") (c) 144,216 141,921 BDTV INC. and BDTV II INC. (c) 201,021 199,701 Other 8,720 6,993 ------------- ---------------- $ 561,332 545,121 ============= ================
(a) As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and Tele-Communications International, Inc. ("TINTA"), a consolidated subsidiary of TCI, formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed Fox Sports into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. (continued) I-69 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Internationally, News Corp. and Liberty/TINTA LLC ("Liberty/TINTA"), a limited liability corporation owned 50% by Liberty Media Group and 50% by TINTA, formed a venture ("Fox Sports International") to operate previously existing sports services in Latin American and Australia and a variety of new sports services in selected areas throughout the world. Liberty/TINTA and News Corp. each own 50% of Fox Sports International. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed its interests in certain international sports programming services, various international sports and satellite transponder rights and cash. As of April 29, 1996, Liberty Media Group's sports programming businesses no longer consolidate with the financial results of Liberty Media Group. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. (b) On April 1, 1996, United Video Satellite Group, Inc. ("UVSG"), a consolidated subsidiary of TCI, and Liberty Media Group formed Superstar/Netlink, a limited liability company of UVSG's Superstar Satellite Entertainment combined with Netlink USA's ("Netlink") retail business. Liberty Media Group and UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail business no longer consolidates with the financial results of Liberty Media Group. (c) Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). (continued) I-70 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger"). In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN are no longer consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. The following table reflects Liberty Media Group's share of earnings (losses) of each of the aforementioned affiliates: Six months ended June 30, -------------------------- 1997 1996 ------------ ----------- amounts in thousands Discovery $ 188 8,864 QVC 12,382 8,962 ICCP (1,619) (1,141) BET 2,813 2,299 Court (3,151) (993) Superstar/Netlink 8,014 3,034 DMX (711) (12,045) HSN 2,295 -- BDTV-I and BDTV-II 1,319 -- Other (a) (8,555) 3,775 ------------ ---------- $ 12,975 12,755 ============ ========== (continued) I-71 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (a) Included in other investments is Liberty Media Group's 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership which distributes STARZ!, a first-run movie premium programming service launched in 1994. Entities attributed to TCI Group hold the remaining 50.1% partnership interest. Encore Media Corporation ("Encore") (90% owned by Liberty Media Group) earns management fees from QE+ equal to 20% of managed costs, as defined. In addition, Liberty Media Group earns a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. Such Content Fees aggregated $4,266,000 and $1,666,000 for the six months ended June 30, 1997 and 1996, respectively. During July 1997, Liberty Media Group, TCI and John J. Sie, Chairman and Chief Executive Officer of Encore and JJS Communications, Inc. ("JJS"), a corporation wholly owned by Mr. Sie, entered into a series of transactions pursuant to which the businesses of Encore and STARZ! were contributed to a newly formed limited liability company ("Encore Media Group"). Prior to the formation of Encore Media Group, JJS owned 10% of Encore, which in connection with these transactions was exchanged for Liberty Group Stock. Upon consummation of the transactions, Liberty Media Group owns 80% of Encore Media Group and TCI Group owns 20%. Liberty Media Group received its 80% ownership interest in Encore Media Group in exchange for the contribution of its interests in QE+ and Encore, the issuance of a $307 million note payable due on or before December 29, 1997 (the "Note Payable") to TCI Group, the cancellation and forgiveness of amounts due for Content Fees and the termination of an option to increase its ownership interest in QE+. TCI Group received the remaining 20% interest in Encore Media Group and the aforementioned consideration from Liberty Media Group in exchange for TCI Group's ownership interest in QE+ and certain special capital contributions made by TCI Group to QE+. It is anticipated that Encore Media Group will borrow $400 million (the "Encore Loan Proceeds") by December 29, 1997 and distribute the Encore Loan Proceeds to Liberty Media Group and TCI Group in proportion to their respective ownership interest in Encore Media Group (see note 7). In addition, TCI Group has entered into a 25 year affiliation agreement with Encore Media Group pursuant to which TCI Group will pay monthly fixed amounts in exchange for unlimited access to substantially all of the existing Encore and STARZ! services. Upon consummation of the aforementioned transactions, the operations of STARZ! will be included in the combined financial results of Liberty Media Group. Certain of Liberty Media Group's affiliates are general partnerships and any subsidiary of Liberty Media Group that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) I-72 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (5) Investment in Time Warner ------------------------- On October 10, 1996, Time Warner and Turner Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As security for borrowings under one of its credit facilities, Liberty Media Group has pledged a portion of its TW Exchange Stock. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada, pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. Subsequent to the TBS/Time Warner Merger, Liberty Media Group and Time Warner revised the structure of the Contract Option. On June 24, 1997, under the new agreement, Liberty Media Group granted Time Warner a five year option to acquire the business of Southern through a purchase of assets. Liberty Media Group received 5 million shares of TW Exchange Stock along with $66,666,700 (1.4 million shares) in additional shares of TW Exchange Stock in consideration for the grant. If Time Warner exercises the option, the purchase price for Southern's business would be $213,333,333, payable in a form which is mutually acceptable of cash or Time Warner common stock. At June 30, 1997, Liberty Media Group's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2.8 billion based upon the market value of the marketable common stock into which it is convertible. (continued) I-73 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (6) Other Investments ----------------- Other investments and related receivables are summarized as follows:
June 30, December 31, 1997 1996 -------- ------------ amounts in thousands Marketable equity securities, at fair value $ 1,342 790 Convertible debt, at cost, which approximates fair value 23,000 23,000 Other investments, at cost, and related receivables 57,750 57,747 ---------------- -------- $ 82,092 81,537 ================ ========
Management of Liberty Media Group estimates that the market value, calculated utilizing a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices, of all of Liberty Media Group's other investments aggregated $308 million and $162 million at June 30, 1997 and December 31, 1996, respectively. No independent external appraisals were conducted for those assets. (7) Debt ---- Debt at December 31, 1996 represents borrowings by Encore pursuant to a bank credit facility which provides for borrowings up to $50 million through September 30, 1999. On July 7, 1997 Encore Media Group obtained a new $625 million senior, secured facility (the "Senior Facility") in the form of a $225 million reducing revolving line of credit and a $400 million, 364-day revolving credit facility convertible to a term loan. Interest on the Senior Facility is tied to the bank's prime rate plus an applicable margin or the LIBOR rate plus an applicable margin. Encore Media Group is required to pay a commitment fee which varies based on a leverage ratio. The credit agreement for the Senior Facility contains certain provisions which limit Encore Media Group as to additional indebtedness, sale of assets, liens, guarantees, and distributions. Additionally, Encore Media Group must maintain certain specified financial ratios. The Senior Facility serves to replace the Encore bank credit facility which was terminated. (8) Combined Equity --------------- Stock Options and Stock Appreciation Rights ------------------------------------------- Estimates of the compensation relating to options and/or stock appreciation rights granted to employees of Liberty Media Group have been recorded in the accompanying combined financial statements, but are subject to future adjustment based upon the market value of Series A TCI Group Stock and Series A Liberty Group Stock (see note 1) and, ultimately, on the final determination of market value when the rights are exercised. The payable or receivable arising from the compensation related to the options and/or stock appreciation rights is included in the amount due to TCI. (continued) I-74 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Transactions with TCI and Other Related Parties ----------------------------------------------- Certain TCI corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand-alone basis. During the six months ended June 30, 1997 and 1996, Liberty Media Group was allocated $526,000 and $1,193,000, respectively, in corporate general and administrative costs by TCI. Entities included in Liberty Media Group lease satellite transponder facilities from TCI Group. Charges by TCI Group for such arrangements and other related operating expenses for the six months ended June 30, 1997 and 1996, aggregated $3,907,000 and $6,540,000, respectively. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute programming to cable television operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Cash receipts of certain businesses attributed to Liberty Media Group are remitted to TCI Group and certain cash disbursements of Liberty Media Group are funded by TCI Group on a daily basis. Such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to be reflected as an Inter-Group Interest to Liberty Media Group. The Board could determine from time to time that debt of TCI not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected in the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. Subsequent to the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, and all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, will to such extent be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions of Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group, and financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group will be attributed entirely to TCI Group. (continued) I-75 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. Because TCI Group and Liberty Media Group are both 100% owned by TCI, amounts due to TCI Group have been classified as a component of combined equity. A tax sharing agreement (the "Tax Sharing Agreement") among Liberty Media Group, TCI and certain subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of a pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. federal, state, local and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, Liberty Media Group is responsible to TCI for its share of current consolidated income tax liabilities. TCI is responsible to Liberty Media Group to the extent that Liberty Media Group's income tax attributes generated after the effective date are utilized by TCI to reduce its consolidated income tax liabilities. Accordingly, all tax attributes generated by Liberty Media Group's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising Liberty Media Group. (9) Commitments and Contingencies ----------------------------- Liberty Media Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at June 30, 1997, these agreements require minimum payments aggregating approximately $315 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. Liberty Media Group leases business offices, has entered into transponder lease agreements, and uses certain equipment under lease arrangements. Estimates of compensation relating to phantom rights granted to employees of a subsidiary of Liberty Media Group have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. I-76 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Management's Discussion and Analysis of - --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The following discussion and analysis should be read in conjunction with Liberty Media Group's Management's Discussion and Analysis of Financial Condition and Results of Operations included in Tele-Communications, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996. The following discussion focuses on material changes in trends, risks and uncertainties affecting Liberty Media Group's results of operations and financial condition. Reference should also be made to the Liberty Media Group combined financial statements included herein. (1) Material changes in financial condition: ---------------------------------------- In August 1995, TCI issued two new series of stock which reflect the separate performance of Liberty Media Group. While the Liberty Group Stock constitutes common stock of TCI, issuance of 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. As of June 30, 1997, the TCI Group Stock reflects the separate performance of TCI Group, which is generally comprised of the subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit. Intercompany balances resulting from transactions with such units are reflected as borrowings from or loans to TCI Group. See note 8 to the accompanying combined financial statements. Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to Liberty Media Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of the Liberty Group Stock does not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of Liberty Media Group and the market price of shares of Liberty Group Stock. In addition, net losses of any portion of TCI, dividends and distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce funds of TCI legally available for dividends on all series of common stock. Accordingly, Liberty Media Group financial information should be read in conjunction with the TCI consolidated financial information. (continued) I-77 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Cash receipts of certain businesses attributed to Liberty Media Group are remitted to TCI Group and certain cash disbursements of Liberty Media Group are funded by TCI Group on a daily basis. Such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to Liberty Media Group. The Board could determine from time to time that debt of TCI not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. Borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. During the second quarter of 1997, Liberty Media Group repurchased 562,000 shares of Series A Liberty Group Stock in open market transactions at an aggregate cost of $13,256,000. Such shares are reflected as a reduction of combined equity in the accompanying combined financial statements. Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a wholly-owned TCI subsidiary. The merger was valued at approximately $731 million. TCI exchanged 47.2 million shares of Series A TCI Group Stock for shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group Stock and 6.7 million shares of Liberty Group Stock. Liberty Media Group purchased from TCI Group the 6.7 million shares of Liberty Group Stock that were acquired in such transaction for $168 million in cash. The TBS/Time Warner Merger was consummated on October 10, 1996 whereupon Liberty Media Group received approximately 50.6 million shares of TW Exchange Stock in exchange for its TBS holdings. On June 24, 1997 Liberty Media Group granted Time Warner a five year option to acquire the business of Southern (the "Southern Option") through a purchase of assets. Liberty Media Group received 6.4 million shares of TW Exchange Stock in consideration for the grant. See note 5 to the accompanying combined financial statements. Liberty Media Group's sources of funds include its available cash balances, net cash provided by operating activities, cash distributions from affiliates, dividend and interest payments, asset sales, availability under certain credit facilities, and loans and/or equity contributions from TCI Group. To the extent cash needs of Liberty Media Group exceed cash provided by Liberty Media Group, TCI Group may transfer funds to Liberty Media Group. Conversely, to the extent cash provided by Liberty Media Group exceeds cash needs of Liberty Media Group, Liberty Media Group may transfer funds to TCI Group. (continued) I-78 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- Encore's loan agreement contains restrictions regarding transfers of funds to other members of Liberty Media Group in the form of loans, advances or cash dividends. However, other subsidiaries, principally Southern and Netlink's wholesale C-band satellite business are not restricted from making transfers of funds to other members of the group. The cash provided by operating activities of Southern is a significant source of cash available for distribution to Liberty Media Group as well as cash provided by operating activities of Netlink's wholesale C-band satellite business. However, Netlink's wholesale C-band satellite business, faces significant competition from other C-band distributors as well as direct broadcast satellite ("DBS") services, which were launched in 1994. Liberty Media Group believes that the entry of DBS will serve to decrease the size of the C-Band market in the short and long term. During 1996, the C-Band industry decreased 4% to 2.3 million subscribers. A significant deterioration of the C-Band market could have a material effect on Netlink's wholesale C-band satellite business and consequently, Liberty Media Group's cash provided by operating activities. While the decrease in the C-Band industry, as well as the exercise of the Southern Option, could have an adverse effect on Liberty Media Group's cash provided by operating activities, cash generated by Liberty Media Group's remaining operating activities, distributions from affiliates, dividend and interest payments and available cash balances should provide adequate cash to meet its obligations. As of June 30, 1997, Liberty Media Group holds approximately 57 million shares of TW Exchange Stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with Time Warner common stock. It is anticipated that Time Warner will continue to pay dividends on its common stock and consequently Liberty Media Group will receive dividends on the TW Exchange Stock it holds. However, there can be no assurance that such dividends will continue to be paid. On August 1, 1997, Liberty IFE, Inc., a wholly owned subsidiary of Liberty Media Group, which holds non-voting class C common stock of International Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23 million of IFE 6% convertible secured notes due 2004, convertible into Class C Stock, ("Convertible Notes"), contributed its Class C Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in exchange for $345 million in a new series of 30 year nonconvertible 9% preferred stock of FKW. During July 1997, Liberty Media Group, TCI, John J. Sie and JJS, entered into a series of transactions pursuant to which the businesses of Encore and STARZ! were contributed to Encore Media Group. Upon completion of the transaction, Liberty Media Group owns 80% of Encore Media Group and TCI Group owns 20%. JJS exchanged its interest in Encore for Liberty Group Stock. Liberty Media Group acquired its 80% ownership interest in Encore Media Group in exchange for the contribution of its interests in QE+ and Encore, the issuance of a $307 million note payable due on or before December 29, 1997 to TCI Group, the cancellation and forgiveness of amounts due for Content Fees and the termination of an option to increase its ownership interest in QE+. TCI Group acquired the remaining 20% interest in Encore Media Group and the aforementioned consideration from Liberty Media Group in exchange for TCI Group's ownership interest in QE+ and certain special capital contributions made by TCI Group to QE+. In addition, TCI Group has entered into a 25 year affiliation agreement with Encore Media Group pursuant to which TCI Group will pay monthly fixed amounts to Encore Media Group in exchange for unlimited access to substantially all of the existing Encore and STARZ! movies services. Upon formation of Encore Media Group, the operations of STARZ! are included in the combined financial results of Liberty Media Group. (continued) I-79 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- Encore Media Group obtained a new $625 million senior, secured facility (the "Senior Facility") in the form of a $225 million reducing revolving line of credit and a $400 million, 364-day revolving credit facility convertible to a term loan. Encore Media Group will borrow $400 million by December 29, 1997 and distribute it to Liberty Media Group and TCI Group in proportion to their ownership interests in Encore Media Group. The credit agreement for the Senior Facility contains certain provisions which limit Encore Media Group as to additional indebtedness, sale of assets, liens, guarantees, and distributions. Additionally, Encore Media Group must maintain certain specified financial ratios. The Senior Facility serves to replace the Encore bank credit facility which was terminated. Liberty Media Group has a revolving line of credit which provides for borrowings of up to $325 million. No borrowings were outstanding at June 30, 1997. Liberty Media Group intends to continue to develop its entertainment and information programming services and has made certain financial commitments related to the acquisition of programming. As of June 30, 1997, Liberty Media Group's future minimum obligation related to certain film licensing agreements was $315 million. The amount of the total obligation is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Continued development may require additional financing and it cannot be predicted whether Liberty Media Group will obtain such financing. If additional financing cannot be obtained, Liberty Media Group could attempt to sell assets but there can be no assurance that asset sales, if any, can be consummated at a price and on terms acceptable to Liberty Media Group. Further, Liberty Media Group and/or TCI could attempt to sell equity securities but, again, there can be no certainty that such a sale could be accomplished on acceptable terms. The FCC has initiated a number of rulemakings to implement various provisions of the Telecommunications Act of 1996 (the "1996 Telecom Act"). Among other things, the 1996 Telecom Act requires the FCC to establish rules and implementation schedules to ensure that video programming is fully accessible to the hearing impaired through closed captioning. On August 7, 1997, the FCC adopted new rules which will require substantial closed captioning over an eight to ten year phase-in period with only limited exemptions. As a result, Liberty Media Group's programming interests are expected to incur significant additional costs for closed captioning. (continued) I-80 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (1) Material changes in financial condition (continued): ---------------------------------------------------- Revisions in the FCC's leased access rules also may affect Liberty Media Group's programming interests. Section 612 of the Communications Act of 1934, as amended, requires a cable operator, depending upon the number of activated channels in its cable system, to set aside up to 15 percent of activated channels for leased access. On February 4, 1997 the FCC released revised rules for calculating the maximum rate for leased commercial access to tiered channels, which became effective April 11, 1997. The newly-adopted formula yields a lower maximum rate than the current rate such that the use of leased access may be expected to increase, thereby further restricting the channel capacity available for carriage of Liberty Media Group's programming services. Netlink has entered into an agreement in principle with representatives of the National Association of Broadcasters and of its television network affiliate members. Netlink's wholesale C-band satellite business uplinks the signals of broadcast television stations to C-Band packagers and marketers in the United States and Canada. In uplinking and selling the signals of broadcast television stations in the United States, Netlink's wholesale C-band satellite business is subject to certain FCC regulations and Copyright Act provisions. Pursuant to such regulations, Netlink's wholesale C-band satellite business may only distribute the signals of network broadcast stations to "unserved households" which are outside the Grade B contours of a primary station affiliated with such network. The parties to the agreement will identify by zip code those geographic areas which are "unserved" by network affiliated stations. Depending upon finalization of the agreement and such identification, Netlink's wholesale C-band satellite business may be required to disconnect a substantial number of existing subscribers which would have a material adverse effect upon the operations of the Netlink wholesale C-band business. Several recent copyright developments could have a significant impact upon Southern and/or Netlink's wholesale C-band satellite business. On August 1, 1997, the United States Copyright Office released a "Review of the Copyright Licensing Regimes Covering Retransmission of Broadcast Signals" in response to a request from the Chairman of the United States Senate Committee on the Judiciary. The United States Copyright Office recommended a number of significant changes in the laws regulating the copyright licensing of broadcast retransmissions which, if adopted, would have a significant impact upon Southern and Netlink's wholesale C-band satellite business. A proceeding also is pending before the Copyright Arbitration Royalty Panel under the United States Copyright Office to determine the copyright fees to be paid by satellite carriers under the Satellite Home Viewer Act. If the Copyright Arbitration Royalty Panel adopted the proposals of copyright owners, the copyright fees paid by Southern and Netlink for the retransmission of broadcast signals to home satellite dish owners would increase significantly. The resulting increases in retail prices may cause a decrease in the number of subscribers to Southern and Netlink wholesale C-band satellite services. (continued) I-81 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations ----------------------------------------- Liberty Media Group's programming services include production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products, ("Entertainment and Information Programming Services"). Through December 20, 1996, (the date of the HSN Merger) Liberty Media Group was also engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing ("Electronic Retailing Services"). To enhance the reader's understanding, separate financial data have been provided below for Electronic Retailing Services, which include a retail function, and other Entertainment and Information Programming Services. The table below sets forth, for the periods indicated, certain financial information and the percentage relationship that certain items bear to revenue. This summary provides trend data related to the normal recurring operations of Liberty Media Group. Corporate expenses have not been reflected in the following table but are included in the following discussion. Liberty Media Group holds significant equity investments the results of which are not a component of operating income, but are discussed below under "Other Income and Expense". Other items of significance are discussed separately under their own captions below.
Three months ended June 30, ------------------------------------- 1997 1996 ------------------ ----------------- dollar amounts in thousands Entertainment and Information - ----------------------------- Programming Services - -------------------- Revenue 100% $ 59,672 100% $ 77,732 Operating costs and expenses 76% 45,245 70% 54,136 Compensation relating to phantom rights -- -- 9% 6,932 Depreciation and amortization 1% 747 5% 4,007 ----- --------------- ----- -------------- Operating income 23% $ 13,680 16% $ 12,657 ===== ============= ===== ============= Electronic Retailing Services - ----------------------------- Revenue N/A N/A 100% $ 243,988 Cost of sales N/A N/A 62% 151,679 Operating costs and expenses N/A N/A 31% 76,422 Depreciation and amortization N/A N/A 4% 9,352 ----- -------------- Operating income N/A N/A 3% $ 6,535 ===== =============
(continued) I-82 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------
Six months ended June 30, ------------------------------------- 1997 1996 --------------- ----------------- dollar amounts in thousands Entertainment and Information - ----------------------------- Programming Services - -------------------- Revenue 100% $ 119,031 100% $ 242,748 Operating costs and expenses 66% 78,295 79% 191,350 Compensation relating to phantom rights 4% 4,576 3% 6,932 Depreciation and amortization 1% 1,498 5% 13,265 ----- --------- ----- --------- Operating income 29% $ 34,662 13% $ 31,201 ===== ========= ===== ========= Electronic Retailing Services - ----------------------------- Revenue N/A N/A 100% $ 499,601 Cost of sales N/A N/A 63% 316,491 Operating costs and expenses N/A N/A 31% 154,040 Depreciation and amortization N/A N/A 4% 18,610 ----- --------- Operating income N/A N/A 2% $ 10,460 ===== =========
Entertainment and Information Programming Services - -------------------------------------------------- As of April 1, 1996, upon formation of Superstar/Netlink, Netlink's retail operations no longer consolidate with the financial results of Liberty Media Group. Similarly, effective April 29, 1996, Liberty Media Group's regional sports programming businesses no longer consolidate with the financial results of Liberty Media Group. See note 4 to the accompanying combined financial statements. In addition, effective January 1, 1997, the operations for TV Network Corporation ("Intro") were discontinued and therefore, revenue from such operations was not realized in 1997. Consequently, revenue from Entertainment and Information Programming Services decreased 23% or $18 million and 51% or $124 million for the three months and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. Included in such decreases are increases in revenue from Encore of approximately $11 million and $25 million for the three months and six months ended June 30, 1997, respectively. Encore's thematic multiplex services increased the number of multiplex units from 8.9 million for the quarter ended June 30, 1996 to approximately 11.9 million units for the quarter ended June 30, 1997 accounting for $4 million and $10 million of Encore's increase in revenue for the three month and six month periods, respectively. Encore and "MOVIEplex" (a cable service which offers theme-by-day movies) units increased from approximately 9.4 million for the quarter ended June 30, 1996 to 20.1 million for the quarter ended June 30, 1997 resulting in an increase in revenue for Encore of approximately $4 million and $10 million for the three months and six months ended June 30, 1997 compared to the respective periods in 1996. The remaining increase in revenue from Encore was due to increased management fees from affiliates. (continued) I-83 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------ Operating costs and expenses from Entertainment and Information Programming Services decreased 16% or $9 million and 59% or $113 million for the three months and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. Because the operations of the regional sports programming businesses, the operations of Netlink's retail business and the operations of Intro were no longer included in Liberty Media Group's combined financial results during 1997, these businesses were primarily responsible for the decreases in operating costs and expenses in 1997. Operating expenses, excluding compensation relating to phantom rights, for Encore increased approximately $19 million and $31 million during the three months and six months ended June 30, 1997, respectively. Programming costs increased approximately $2 million and $6 million for Encore and the thematic multiplex services due to more recent programming being purchased. Encore incurred approximately $2 million for costs associated with transitioning to digital technology during the six months ended June 30, 1997. Increased marketing support resulting from higher subscribers and revenue accounted for $6 million and $10 million of the increases in operating expenses. Increased national advertising was responsible for approximately $10 million and $11 million of the increase. The remainder of the increases in Encore's operating expenses, excluding compensation relating to phantom rights was due to additional personnel and related costs supporting the overall growth of the company. Corporate Expenses - ------------------ Corporate expenses are not reflected in the preceding table. During 1997, corporate expense, excluding the impact of the stock appreciation rights, remained relatively comparable to the same periods of 1996. The amount of expense associated with stock appreciation rights is based on the market price of the underlying common stock as of the date of the financial statements. The expense is subject to future adjustment based on market price fluctuations and, ultimately, on the final determination of market value when the rights are exercised. Certain TCI Group corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of each year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand alone basis. During the six months ended June 30, 1997 and 1996, Liberty Media Group was allocated $526,000 and $1,193,000, respectively, in corporate general and administrative costs by TCI Group. (continued) I-84 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) (2) Material changes in results of operations (continued): ------------------------------------------------------ Other Income and Expense - ------------------------ Liberty Media Group's share of earnings from affiliates was $13 million and $6 million for the three months and six months ended June 30, 1997, compared to $13 million and $4 million for the corresponding periods of 1996. Liberty Media Group's share of earnings of affiliates attributable to its interest in Discovery decreased from $3 million and $9 million during the three and six months ended June 30, 1996 to less than $1 million for each of the same periods of 1997. Discovery's revenue increased 41% during the first six months of 1997 compared to the same period in 1996. However, earnings before interest, taxes, depreciation and amortization for Discovery decreased by 14%, principally because of costs associated with launching new services (primarily Animal Planet), continuing investments in international services and the acquisition of The Nature Company. This decrease in share of earnings was partially offset by an increase in share of earnings of Superstar/Netlink in 1997 of $2 million and $5 million with no corresponding amounts in 1996. Additionally, Liberty Media Group's share of earnings of affiliates attributable to its interest in QVC increased approximately $1 million and $3 million during the three months and six months ended June 30, 1997 compared to the same periods of 1996. QVC's revenue increased by 11% during the first six months of 1997, resulting in a corresponding 11% increase in earnings before interest, taxes, depreciation and amortization over the first six months of 1996. Dividend and interest income was $8 million and $19 million for the three months and six months ended June 30, 1997, compared to $2 million and $4 million for the same periods in 1996. Dividend income increased $3 million and $7 million during the quarter and six months ended June 30, 1997, compared to the corresponding periods of 1996, principally due to the dividends received on the TW Exchange Stock acquired in October 1996. Additionally, interest income on excess cash balances has increased $3 million and $8 million during the first quarter and six months of 1997, compared to 1996. I-85 TELE-COMMUNICATIONS, INC. PART II - OTHER INFORMATION Item 2. Change in Securities. On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued 139,513 shares of the Company's Series B TCI Group Common Stock (the "IP I Shares") to the IP Series B Trust I ("Trust"). An executive officer who is also a director of the Company is the trustee of the Trust. The IP I Shares were issued in connection with a partial closing under two Partnership Interest Purchase Agreements both dated as of June 10, 1997, pursuant to which the Company acquired on the IP Phase I Closing Date (a) a 1.103% limited partnership interest in InterMedia Partners, a California limited partnership, (b) a 75% limited partnership interest in InterMedia CM - LP, and (c) a 99.998% limited partnership interest in InterMedia Capital Management, L.P. in exchange for total consideration of the IP I Shares and cash and assumption of current liabilities in an aggregate amount of $5,848,024. Effective June 16, 1997, the Company issued 30,545,864 shares of Series A TCI Group Stock to the estate of the former Chairman of the Board of the Company in exchange for the same number of shares of Series B TCI Group Stock. Such shares were valued at $505 million at the time of issuance. Each of the above described issuances of equity securities was made pursuant to the private placement exemption from the Securities Act of 1933 (the "Act") afforded by Section 4(2) of the Act. Item 6. Exhibit and Reports on Form 8-K. (a) Exhibit - (27) Tele-Communications, Inc. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended June 30, 1997: None. II-1 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELE-COMMUNICATIONS, INC. Date: August 13, 1997 By: /s/ Leo J. Hindery, Jr. ------------------------ Leo J. Hindery, Jr. President and Chief Operating Officer Date: August 13, 1997 By: /s/ Stephen M. Brett --------------------- Stephen M. Brett Executive Vice President Date: August 13, 1997 By: /s/ Bernard W. Schotters ------------------------- Bernard W. Schotters Senior Vice President of TCI Communications, Inc. (Principal Financial Officer) Date: August 13, 1997 By: /s/ Gary K. Bracken -------------------- Gary K. Bracken Senior Vice President of TCI Communications, Inc. (Principal Accounting Officer) II-2 -----END PRIVACY-ENHANCED MESSAGE-----