-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, jaqY1+xd3Roi1me8FZ8ePGI/NzzXL0fYm5/rT/IEXWhmT4jMs3csDBzQrqtz5+7K 2yptsmpCVIZN5FnDMcRlZA== 0000950134-94-001489.txt : 19941208 0000950134-94-001489.hdr.sgml : 19941208 ACCESSION NUMBER: 0000950134-94-001489 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941207 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELE COMMUNICATIONS INC /CO/ CENTRAL INDEX KEY: 0000925692 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841260157 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20421 FILM NUMBER: 94563680 BUSINESS ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 90111 FORMER COMPANY: FORMER CONFORMED NAME: TCI LIBERTY HOLDING CO DATE OF NAME CHANGE: 19940620 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TCI COMMUNICATIONS INC CENTRAL INDEX KEY: 0000096903 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 840588868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-05550 FILM NUMBER: 94563678 BUSINESS ADDRESS: STREET 1: TERRACE TOWER II STREET 2: 5619 DTC PKWY CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: TERRACE TOWER II STREET 2: 5619 DTC PKWY CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: TELE COMMUNICATIONS INC DATE OF NAME CHANGE: 19920703 10-Q/A 1 FORM 10-Q (AMENDMENT #2) FOR PERIOD ENDED 9/30/94 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 F O R M 10-Q/A (Amendment No. 2) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Numbers 0-20421 and 0-5550 TELE-COMMUNICATIONS, INC. and TCI COMMUNICATIONS, INC. ---------------------------------------------------------- (Exact name of Registrants as specified in their charters) State of Delaware 84-1260157 and 84-0588868 - ------------------------------------------ ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Nos.) incorporation or organization) 5619 DTC Parkway Englewood, Colorado 80111 - ------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (303) 267-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of Tele-Communications, Inc.'s common stock (net of shares held in treasury), as of October 31, 1994, was: Class A common stock - 485,117,335 shares; and Class B common stock - 85,976,717 shares. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELE-COMMUNICATIONS, INC. (Registrant) Date: December 7, 1994 By: /s/ Stephen M. Brett ------------------------------- Stephen M. Brett Executive Vice President and Secretary TCI COMMUNICATIONS, INC. (Registrant) By: /s/ Stephen M. Brett ------------------------------- Stephen M. Brett Senior Vice President and General Counsel 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) Management's Discussion and Analysis of Financial Condition and Results of Operations (1) Material changes in financial condition: On August 4, 1994, TCIC and Liberty consummated the Mergers. The transaction was structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of TCI. TCIC shareholders received one share of TCI for each of their shares. Liberty common shareholders received 0.975 of a share of TCI for each of their common shares. TCI has not assumed any of TCIC's or Liberty's indebtedness or other obligations that were outstanding at the time the Mergers were consummated. The Mergers were accounted for using predecessor cost due to related party considerations. On August 5, 1994, Liberty, Comcast and QVC announced that they had entered into the QVC Merger Agreement pursuant to which Comcast and Liberty would acquire QVC. In accordance with the QVC Merger Agreement, Comcast and Liberty commenced a tender offer for all shares of stock of QVC at a net cash price of $46 per share of QVC common stock and a net cash price of $460 per share of QVC preferred stock. Following expiration of the tender offer, a corporation controlled by both Comcast and Liberty will merge with QVC and any remaining shares of QVC will be converted into cash at the same price as offered in the tender offer. The total cost of the acquisition of the QVC stock not currently owned by Comcast or Liberty will be approximately $1.42 billion. Comcast and Liberty have agreed to fund approximately $267 million and $20 million, respectively, of the acquisition with the balance expected to be provided through debt financing which, after the merger, will be an obligation of QVC. The transaction is conditioned upon Comcast and Liberty obtaining the requisite financing on satisfactory terms to purchase all of the outstanding shares of QVC, upon receipt of certain governmental approvals and other customary conditions. Liberty expects that the funds required to make Liberty's $20 million cash contribution will come from a combination of working capital and general corporate funds and existing credit facilities of Liberty and/or TCIC. As of August 8, 1994, TCI, TCIC and TeleCable entered into a merger agreement, whereby TeleCable will be merged with and into TCIC. The aggregate purchase price of $1.6 billion will be paid with shares of TCI Class A common stock (currently estimated to be approximately 42 million shares), assumption of liabilities amounting to approximately $300 million and 1 million shares of a new TCI convertible preferred stock with an aggregate initial liquidation value of $300 million. Such preferred stock shall accrue dividends at 5-1/2% per annum, shall be convertible at the option of its holders into 10 million shares of TCI Class A common stock and shall be redeemable by TCI after 5 years or the holder can cause TCI to redeem after 10 years. The merger requires the approval of the shareholders of TeleCable and various franchise and other governmental authorities. (continued) I-28 4 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (1) Material changes in financial condition (continued): Subsequent to September 30, 1994, subsidiaries of the Company, Comcast, Cox and Sprint formed WirelessCo to engage in the business of providing wireless communications services on a nationwide basis. Through WirelessCo, the partners intend to bid for PCS licenses in PCS Auctions to be conducted by the FCC. WirelessCo has applied for eligibility to bid for licenses in 39 of the 51 MTAs for which PCS licenses will be auctioned by the FCC commencing in December 1994. WirelessCo may also invest in, affiliate with or acquire licenses from successful bidders in the PCS Auctions. The Company owns a 30% interest in WirelessCo. Subsidiaries of Cox, Sprint and the Company have also formed a separate partnership, in which the Company owns a 35.3% interest, to bid for PCS licenses for the Philadelphia MTA. The Company cannot predict the cost of obtaining licenses in the PCS Auctions or the likelihood that WirelessCo and the Philadelphia partnership will be successful bidders for any of the PCS licenses for which they have applied to bid. If the respective bidding strategies of WirelessCo and the Philadelphia partnership are successful, however, the capital required to fund the license costs and the construction of the PCS systems will be substantial and the Company's share thereof would represent a material increase in its capital requirements. The Company anticipates that it would finance its share of the required capital through borrowings under existing new credit facilities, although there can be no assurance that additional financing would be available on terms desired by the Company. The Cable Partners and Sprint have also agreed upon the basis upon which they would negotiate a definitive agreement for the formation of NewTelco to engage in the business of providing local wireline communications services to residences and businesses on a nationwide basis, using cable television facilities of the Cable Partners and other cable television operators that agree to affiliate with NewTelco. The parties intend that the Cable Partners would contribute their interests in TCG and its affiliated entities and other competitive access businesses to NewTelco. The Company currently owns an approximately 29.9% interest in TCG and would own a 30% interest in NewTelco. The modification or repeal of existing regulatory and legislative barriers to competition in the local telephony market will be necessary in order for NewTelco to provide its proposed services in most states. Formation of NewTelco is subject to certain conditions including the negotiation of a definitive partnership agreement and contribution agreement. The contributions of TCG and other competitive access businesses to NewTelco will be subject, among other things, to the receipt of necessary regulatory and other consents and approvals. (continued) I-29 5 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (1) Material changes in financial condition (continued): The Company is a holding company and its assets consist solely of investments in its subsidiaries. The Company's rights, and therefore the extent to which the holders of the Company's Preferred Stocks will be able to participate in the distribution of assets of any subsidiary upon the latter's liquidation or reorganization, will be subject to prior claims of the subsidiary's creditors, including trade creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary (in which case the claims of the Company would still be subject to the prior claims of any secured creditor of such subsidiary and of any holder of indebtedness of such subsidiary that is senior to that held by the Company). The Company's ability to pay dividends on any classes or series of Preferred Stock is dependent upon the ability of the Company's subsidiaries to distribute amounts to the Company in the form of dividends, loans or advances or in the form of repayment of loans and advances from the Company. The subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay the dividends on any class or series of preferred stock or to make any funds available therefor, whether by dividends, loans or their payments. The payment of dividends, loans or advances to the Company by its subsidiaries may be subject to statutory or regulatory restrictions, is contingent upon the cash flows generated by those subsidiaries and is subject to various business considerations. Further, certain of the Company's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds by such subsidiaries to the Company in the form of dividends, loans, or advances and require that such subsidiaries' indebtedness to the Company be subordinate to the indebtedness under such loan agreements. The Company's subsidiaries currently have the ability to transfer funds to the Company in amounts exceeding the Company's dividend requirement on any class or series of preferred stock. The amount of net assets of subsidiaries subject to such restrictions exceeds the Company's consolidated net assets. The Company's subsidiaries generally finance acquisitions and capital expenditures through net cash provided by operating and financing activities. Although amounts expended for acquisitions and capital expenditures exceed net cash provided by operating activities, the borrowing capacity resulting from such acquisitions, construction and internal growth has been and is expected to continue to be adequate to fund the shortfall. See the Company's consolidated statements of cash flows included in the accompanying consolidated financial statements. Subsidiaries of the Company had approximately $1.9 billion in unused lines of credit at September 30, 1994, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries of the Company were in compliance with the restrictive covenants contained in their credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with the restrictive covenants (which relate primarily to the maintenance of certain ratios of cash flow to total debt and cash flow to debt service, as defined in the credit facilities) after giving effect to such additional borrowings. TCI has not assumed any of TCIC's or Liberty's indebtedness or other obligations that were outstanding at the time the Mergers were consummated. See note 8 to the accompanying consolidated financial statements for additional information regarding the material terms of the subsidiaries' lines of credit. (continued) I-30 6 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (1) Material changes in financial condition (continued): One measure of liquidity is commonly referred to as "interest coverage". Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization and other noncash credits or charges) ($1,339 million and $1,409 million for the nine months ended September 30, 1994 and 1993, respectively) to interest expense ($568 million and $549 million for the nine months ended September 30, 1994 and 1993, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 236% and 257% for the nine months ended September 30, 1994 and 1993, respectively. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the consistent and nonseasonal nature of its cable television operations and the relative predictability of the Company's interest expense, more than half of which results from fixed rate indebtedness. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. In July 1994, Rainbow purchased a 49.9% general partnership interest in AMC from Liberty under the terms of a buy/sell provision contained in the AMC partnership agreement for total cash proceeds of $180 million. Liberty used a portion of these proceeds to repay debt to TCI totaling $105 million of principal plus $7 million of accrued interest. The Company's various partnerships and other affiliates accounted for under the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by the Company) and through net cash provided by their own operating activities. Approximately thirty-five percent of the franchises held by TCIC, involving approximately 3.8 million basic subscribers, expire within five years. There can be no assurance that the franchises for TCIC's systems will be renewed as they expire although TCIC believes that its cable television systems generally have been operated in a manner which satisfies the standards established by the Cable Communications Policy Act of 1984, as amended (the "1984 Cable Act") for franchise renewal. However, in the event they are renewed, TCIC cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with such renewals. To date, they have not varied significantly from the original terms. The Company is obligated to pay fees for the license to exhibit certain qualifying films that are released theatrically by various motion picture studios from January 1, 1993 through December 31, 2002. The aggregate minimum liability under certain of the license agreements is approximately $368 million. The aggregate amount of the Film License Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films produced by the motion picture studios, the amount of United States theatrical film rentals for such qualifying films, and certain other factors. Nevertheless, the Company's aggregate payments under the Film License Obligations could prove to be significant. (continued) I-31 7 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (1) Material changes in financial condition (continued): The Company is upgrading and installing optical fiber in its cable systems at a rate such that in three years TCIC anticipates that it will be serving the majority of its customers with state-of-the-art fiber optic cable systems. Through September 30, 1994, TCIC's capital expenditures amounted to $944 million. However, the Company is continually reevaluating its capital expenditures and such expenditures are subject to change based upon the effects to the Company's liquidity arising from rate regulation. The Company competes with operators of alternative methods of distribution of the same or similar video programming as that offered by its cable systems. Technologies competitive with cable television have been encouraged by Congress and the FCC to offer services in direct competition with existing cable systems. One such competitor is direct broadcast satellite ("DBS"). DBS services are offered directly to subscribers owning home satellite dishes that vary in size depending upon the power of the satellite; one DBS operator recently began offering nationwide video services that can be received by a satellite that measures approximately eighteen inches in diameter. DBS operators can acquire the right to distribute over satellite all of the significant cable television programming currently available on the Company's cable systems. As the cost declines of equipment needed to receive these transmissions, it is expected that the Company will experience increased and substantial competition from DBS operators. The 1984 Cable Act, the regulations of the FCC and the Modification of Final Judgment entered in United States v. AT&T currently prohibit Regional Bell operating companies from providing video programming and other information services directly to subscribers in their telephone service areas (except in limited circumstances in rural areas). In separate decisions, four United States District Courts have held that the cross-entry prohibition in the 1984 Cable Act is unconstitutional as a violation of the telephone companies First Amendment right to free expression. All four decisions have been appealed (or are expected to be appealed). If the current cross-entry restrictions are removed to relaxed, the Company could face increased competition from telephone companies which, in most cases, have greater financial resources than the Company. The FCC has authorized the provision of so-called "video-dialtone" services by which independent video programmers may deliver services to the home over telephone-provided circuits, thereby by-passing the local cable system or other video providers. Although local exchange telephone carriers, providing "video-dialtone" under the existing rules are allowed only a limited financial interest in programming services and must limit their role largely to that of a traditional "common carrier," the current status of these rules is uncertain under the court decisions referred to above. Numerous local exchange telephone carriers have filed applications with the FCC for authorization to construct video-dialtone systems and to provide such services. This alternative means of distribution of video services to consumer's homes, could eventually become a substantial competitor to the Company's cable and other video delivery systems. (continued) I-32 8 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (1) Material changes in financial condition (continued): 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) and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. (2) Material changes in results of operations: On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, the Company's Regulated Services are subject to the jurisdiction of local franchising authorities and the FCC. Based on its analysis and interpretation of the FCC's 1993 and 1994 rate regulations, the Company estimates that the implementation of such regulations will result in an aggregate annualized reduction of revenue and operating income ranging from $280 million to $300 million. The estimated annualized reduction in revenue assumes that the FCC will not require further reductions beyond the current regulations and is prior to any possible mitigating factors (none of which is assured) such as (i) the provision of alternate service offerings (ii) the implementation of rate adjustments to non-regulated services and (iii) the utilization of cost-of-service methodologies, as described below. Subject to certain limitations, the FCC's rate regulations generally permit cable operators to adjust rates to account for inflation and increases in certain external costs, including increases in programming costs and compulsory copyright fees and any increase in the number of regulated channels. (continued) I-33 9 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (2) Material changes in results of operations (continued): Cable operators may justify rates higher than the benchmark rates established by the FCC through demonstrating unusually high costs based upon a cost-of-service showing. Under this methodology, cable operators may be allowed to recover through the rates they charge for Regulated Services, their normal operating expenses plus an interim rate of return of 11.25%, which rate may be subject to change in the future. The Company believes that it has complied, in all material respects, with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the Company's rates for Regulated Services are subject to adjustment upon review, as described above. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to the later of September 1, 1993, or one year prior to the certification date of the applicable franchise authority. The amount of refunds, if any, which could be payable by the Company in the event that any system's rates were to be successfully challenged, is not considered to be material. Based on the foregoing, the Company believes that the 1993 and 1994 rate regulations have had a material effect on its results of operations. The "must carry" provisions mandate that cable companies within a broadcast television station's reach, retransmit its signal. On July 2, 1993, the FCC voted to extend "must carry" rules to broadcast television stations with shop-at-home formats. "Must carry" requirements went into effect on October 6, 1993, and HSN, a consolidated subsidiary of Liberty, experienced growth in carriage as a result. The new law was challenged in the courts, and on June 27, 1994, the United States Supreme Court in Turner Broadcasting System, Inc. v. F.C.C. vacated the Federal District Court's decision upholding the law as constitutional because genuine issues of material fact remained unresolved. The "must carry" statute and regulations remain in place pending the outcome of further proceedings before the Federal District Court. If "must carry" ultimately is ruled unconstitutional, a portion of this growth in cable carriage may be reversed and HSN's revenues may be adversely effected. (continued) I-34 10 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (2) Material changes in results of operations (continued): Revenue increased by approximately 10% for the nine months ended September 30, 1994 compared to the corresponding period of 1993. Such increase was the result of the Mergers (7%), the growth in subscriber levels within the Company's cable television systems (4%), the effect of certain acquisitions (2%) and certain new services (1%), net of a decrease in revenue (4%) due to rate reductions required by rate regulation implemented pursuant to the 1992 Cable Act. In the third quarter of 1994, the Company experienced a decrease in the price charged for those services that are subject to rate regulation under the 1992 Cable Act. Operating costs and expenses increased by 18% for the nine months ended September 30, 1994 compared to the corresponding period of 1993. The consolidation of Liberty in the Mergers resulted in an increase of $205 million in operating, selling, general and administrative expenses. Due to the aforementioned program to upgrade and install optical fiber in its cable systems, the Company's capital expenditures and depreciation expense have increased. Additionally, the Company incurred $30 million of programming and marketing costs associated with the launch in 1994 of a new premium programming service to its subscribers. The Company cannot determine whether and to what extent increases in the cost of programming will effect its operating costs. Additionally, the Company cannot predict how these increases in the cost of programming will affect its revenue but intends to recover additional costs to the extent allowed by the aforementioned FCC rate regulations. The Company recorded an adjustment of $8 million in 1994 to reduce its liability for compensation relating to stock appreciation rights resulting from a decline in the market price of the Company's Class A common stock. The Company is a shareholder of TeleWest Communications plc (formerly TCI/US West Cable Communications Group) ("TeleWest UK"), a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). TeleWest UK, which is accounted for under the equity method, had a carrying value at September 30, 1994 of $296 million and accounted for $32 million and $17 million of the Company's share of its affiliates' losses in 1994 and 1993, respectively. In February 1994, the Company acquired a consolidated investment in Flextech plc ("Flextech"), a programming and video distribution company located in the UK. Flextech accounted for $135 million of the Company's total assets and $65 million of the Company's equity investments at September 30, 1994 and has generated losses in 1994 of $18 million (before deducting the minority interests' 40% share of such losses). In addition, the Company has other less significant investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia and certain other foreign countries. In the aggregate, such other investments had a carrying value of $46 million at September 30, 1994 and accounted for $14 million of the Company's share of its affiliates' losses in 1994. In connection with its investments in the above-described foreign entities, the Company is exposed to the risk that unfavorable and potentially volatile fluctuations in exchange rates with respect to the UK pound and other foreign currencies will cause the Company to experience unrealized foreign currency translation losses. To a much lesser extent, the Company is exposed to the risk that unfavorable and potentially volatile foreign currency fluctuations will cause the Company to experience realized and unrealized losses with respect to transactions denominated in currencies other than the respective functional currencies of the Company and its various foreign affiliates. Because the Company views its foreign assets as long-term investments, the Company generally does not hedge its exposure to short-term movements in foreign currencies. Due to the difficulty in accurately predicting the timing and amount of future cash inflows and outflows associated with the Company's foreign investments, the Company presently does not believe that it is prudent to hedge its exposure to currency risk on a long-term basis. The Company's net earnings (before preferred stock dividends)of $25 million for the three months ended September 30, 1994 represented an increase of $90 million as compared to the Company's net loss (before preferred stock dividends) of $65 million for the corresponding period of 1993. Such increase is principally the result of the effect of improved share of earnings from Liberty prior to the Mergers (principally resulting from the gain recognized by Liberty upon the sale of its investment in AMC) and the reduction in income tax expense (principally resulting from the required recognition in the third quarter of 1993 of the cumulative effect of the change in the Federal income tax rate from 34% to 35%), net of the effect of the aforementioned reduction in rates charged for Regulated Services. (continued) I-35 11 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly TCI/Liberty Holding Company) (2) Material changes in results of operations (continued): The Company's net earnings (before preferred stock dividends) of $63 million for the nine months ended September 30, 1994 represented an increase of $49 million as compared to the Company's net earnings (before preferred stock dividends) of $14 million for the corresponding period of 1993. Such increase is principally the result of the aforementioned increase in share of earnings of Liberty prior to the Mergers, the decrease in income tax expense, net of the aforementioned reduction in rates charged for Regulated Services and the decrease in gain on disposition of assets. I-36 12 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) Management's Discussion and Analysis of Financial Condition and Results of Operations (1) Material changes in financial condition: On August 4, 1994, TCIC and Liberty consummated the Mergers. The transaction was structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of TCI. TCIC shareholders received one share of TCI for each of their shares. Liberty common shareholders received 0.975 of a share of TCI for each of their common shares. TCI has not assumed any of TCIC's indebtedness or other obligations that were outstanding at the time the Mergers were consummated. As of August 8, 1994, TCI, TCIC and TeleCable entered into a merger agreement, whereby TeleCable will be merged into TCIC. The aggregate purchase price of $1.6 billion will be paid with shares of TCI Class A common stock (currently estimated to be approximately 42 million shares), assumption of liabilities amounting to approximately $300 million and 1 million shares of a new TCI convertible preferred stock with an aggregate initial liquidation value of $300 million. Such preferred stock shall accrue dividends at 5-1/2% per annum, shall be convertible at the option of its holders into 10 million shares of TCI Class A common stock and shall be redeemable by TCI after 5 years or the holder can cause TCI to redeem after 10 years. The merger requires the approval of the shareholders of TeleCable and various franchise and government authorities. Subsequent to September 30, 1994, subsidiaries of TCI, Comcast, Cox and Sprint formed WirelessCo to engage in the business of providing wireless communications services on a nationwide basis. Through WirelessCo, the partners intend to bid for PCS licenses in PCS Auctions to be conducted by the FCC. WirelessCo has applied for eligibility to bid for licenses in 39 of the 51 MTAs for which PCS licenses will be auctioned by the FCC commencing in December 1994. WirelessCo may also invest in, affiliate with or acquire licenses from successful bidders in the PCS Auctions. The Company owns a 30% interest in WirelessCo. Subsidiaries of Cox, Sprint and the Company have also formed a separate partnership, in which the Company owns a 35.3% interest, to bid for PCS licenses for the Philadelphia MTA. The Company cannot predict the cost of obtaining licenses in the PCS Auctions or the likelihood that WirelessCo and the Philadelphia partnership will be successful bidders for any of the PCS licenses for which they have applied to bid. If the respective bidding strategies of WirelessCo and the Philadelphia partnership are successful, however, the capital required to fund the license costs and the construction of the PCS systems will be substantial and the Company's share thereof would represent a material increase in its capital requirements. The Company anticipates that it would finance its share of the required capital through borrowings under existing and new credit facilities, although there can be no assurance that additional financing would be available on terms desired by the Company. (continued) I-54 13 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (1) Material changes in financial condition (continued): The Cable Partners and Sprint have also agreed upon the basis upon which they would negotiate a definitive agreement for the formation of NewTelco to engage in the business of providing local wireline communications services to residences and businesses on a nationwide basis, using cable television facilities of the Cable Partners and other cable television operators that agree to affiliate with NewTelco. The parties intend that the Cable Partners would contribute their interests in TCG and its affiliated entities and other competitive access businesses to NewTelco. The Company currently owns an approximately 29.9% interest in TCG and would own a 30% interest in NewTelco. The modification or repeal of existing regulatory and legislative barriers to competition in the local telephony market will be necessary in order for NewTelco to provide its proposed services in most states. Formation of NewTelco is subject to certain conditions including the negotiation of a definitive partnership agreement and contribution agreement. The contributions of TCG and other competitive access businesses to NewTelco will be subject, among other things, to the receipt of necessary regulatory and other consents and approvals. TCIC generally finances acquisitions and capital expenditures through net cash provided by operating and financing activities. Although amounts expended for acquisitions and capital expenditures exceed net cash provided by operating activities, the borrowing capacity resulting from such acquisitions, construction and internal growth has been and is expected to continue to be adequate to fund the shortfall. See TCIC's consolidated statements of cash flows included in the accompanying consolidated financial statements. TCIC had approximately $1.8 billion in unused lines of credit at September 30, 1994, excluding amounts related to lines of credit which provide availability to support commercial paper. Although TCIC was in compliance with the restrictive covenants contained in its credit facilities at said date, additional borrowings under the credit facilities are subject to TCIC's continuing compliance with the restrictive covenants (which relate primarily to the maintenance of certain ratios of cash flow to total debt and cash flow to debt service, as defined in the credit facilities) after giving effect to such additional borrowings. See note 7 to the accompanying consolidated financial statements for additional information regarding the material terms of TCIC's lines of credit. One measure of liquidity is commonly referred to as "interest coverage". Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization and other noncash credits or charges) ($1,325 million and $1,409 million for the nine months ended September 30, 1994 and 1993, respectively) to interest expense ($566 million and $549 million for the nine months ended September 30, 1994 and 1993, respectively), is determined by reference to the consolidated statements of operations. TCIC's interest coverage ratio was 234% and 257% for the nine months ended September 30, 1994 and 1993, respectively. Management of TCIC believes that the foregoing interest coverage ratio is adequate in light of the consistent and nonseasonal nature of its cable television operations and the relative predictability of TCIC's interest expense, more than half of which results from fixed rate indebtedness. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. (continued) I-55 14 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (1) Material changes in financial condition (continued): In July 1994, Rainbow purchased a 49.9% general partnership interest in AMC from Liberty under the terms of a buy/sell provision contained in the AMC partnership agreement for total cash proceeds of $180 million. Liberty used a portion of these proceeds to repay debt to TCIC totaling $192 million of principal plus $7 million of accrued interest. TCIC'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 TCIC) and through net cash provided by their own operating activities. Certain subsidiaries' loan agreements contain restrictions regarding transfers of funds to the parent company in the form of loans, advances or cash dividends. The amount of net assets of such subsidiaries exceeds TCIC's consolidated net assets. However, net cash provided by operating activities of other subsidiaries which are not restricted from making transfers to the parent company have been and are expected to continue to be sufficient to enable the parent company to meet its cash obligations. Approximately thirty-five percent of the franchises held by TCIC, involving approximately 3.8 million basic subscribers, expire within five years. There can be no assurance that the franchises for TCIC's systems will be renewed as they expire although TCIC believes that its cable television systems generally have been operated in a manner which satisfies the standards established by the 1984 Cable Act for franchise renewal. However, in the event they are renewed, TCIC cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with such renewals. To date, they have not varied significantly from the original terms. TCIC competes with operators of alternative methods of distribution of the same or similar video programming as that offered by its cable systems. Technologies competitive with cable television have been encouraged by Congress and the FCC to offer services in direct competition with existing cable systems. One such competitor is DBS. DBS services are offered directly to subscribers owning home satellite dishes that vary in size depending upon the power of the satellite; one DBS operator recently began offering nationwide video services that can be received by a satellite that measures approximately eighteen inches in diameter. DBS operators can acquire the right to distribute over satellite all of the significant cable television programming currently available on TCIC's cable systems. As the cost declines of equipment needed to receive these transmissions, it is expected that TCIC will experience increased and substantial competition from DBS operators. The 1984 Cable Act, the regulations of the FCC and the Modifications of Final Judgment entered in United States v. AT&T currently prohibit Regional Bell operating companies from providing video programming and other information services directly to subscribers in their telephone service areas (except in limited circumstances in rural areas). In separate decisions, four United States District Courts have held that the cross-entry prohibition in the 1984 Cable Act is unconstitutional as a violation of the telephone companies First Amendment right to free expression. All four decisions have been appealed (or are expected to be appealed). If the current cross-entry restrictions are removed or relaxed, TCIC could face increased competition from telephone companies which, in most cases, have greater financial resources than TCIC. (continued) I-56 15 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (1) Material changes in financial condition (continued): The FCC has authorized the provision of so-called "video-dialtone" services by which independent video programmers will deliver services to the home over telephone-provided circuits, thereby by-passing the local cable systems or other video providers. Although local exchange telephone carriers providing "video-dialtone" under the existing rules are allowed only a limited financial interest in programming services and must limit their role largely to that of a traditional "common carrier," the current status of these rules is uncertain under the court decisions referred to above. Numerous local exchange telephone carriers have filed applications with the FCC for authorization to construct video-dialtone systems and to provide such services. This alternative means of distribution of video services to consumer's homes, could eventually become a substantial competitor to TCIC's cable and other video delivery systems. TCIC is obligated to pay fees for the license to exhibit certain qualifying films that are released theatrically by various motion picture studios from January 1, 1993 through December 31, 2002. The aggregate minimum liability under certain of the license agreements is approximately $105 million. The aggregate amount of the Film License Liability under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films produced by the motion picture studios, the amount of United States theatrical film rentals for such qualifying films, and certain other factors. Nevertheless, TCIC's aggregate payments under the Film License Liability could prove to be significant. TCIC is upgrading and installing optical fiber in its cable systems at a rate such that in three years TCIC anticipates that it will be serving the majority of its customers with state-of-the-art fiber optic cable systems. Through September 30, 1994, TCIC's capital expenditures amounted to $944 million. However, TCIC is continually reevaluating its capital expenditures and such expenditures are subject to change based upon the effects to TCIC's liquidity arising from rate regulation. Subsequent to September 30, 1994, the Company was reorganized based upon four lines of business: Domestic Cable and Communications; Programming; International Cable and Programming; and Technology/Venture Capital. Upon reorganization, certain of the assets of TCIC were transferred to the other operating units (e.g. TBS, QVC, Discovery, TeleWest UK, etc.). Management believes that net cash provided by operating activities, TCIC's ability to obtain additional financing (including its available lines of credit and its access to public debt markets) and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. (continued) I-57 16 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (2) Material changes in results of operations: On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, TCIC's Regulated Services are subject to the jurisdiction of local franchising authorities and the FCC. Based on its analysis and interpretation of the FCC's 1993 and 1994 rate regulations, TCIC estimates that the implementation of such regulations will result in an aggregate annualized reduction of revenue and operating income ranging from $280 million to $300 million. The estimated annualized reduction in revenue assumes that the FCC will not require further reductions beyond the current regulations and is prior to any possible mitigating factors (none of which is assured) such as (i) the provision of alternate service offerings (ii) the implementation of rate adjustments to non-regulated services and (iii) the utilization of cost-of-service methodologies, as described below. Subject to certain limitations, the FCC's rate regulations generally permit cable operators to adjust rates to account for inflation and increases in certain external costs, including increases in programming costs and compulsory copyright fees and any increase in the number of regulated channels. Cable operators may justify rates higher than the benchmark rates established by the FCC through demonstrating unusually high costs based upon cost-of-service showing. Under this methodology, cable operators may be allowed to recover through the rates they charge for Regulated Services, their normal operating expenses plus an interim rate of return of 11.25%, which rate may be subject to change in the future. (continued) I-58 17 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (2) Material changes in results of operations (continued): TCIC believes that it has complied, in all material respects, with the provisions of the 1992 Cable Act, including its rate setting provisions. However, TCIC's rates for Regulated Services are subject to adjustment upon review, as described above. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to the later of September 1, 1993, or one year prior to the certification date of the applicable franchise authority. The amount of refunds, if any, which could be payable by TCIC in the event that any system's rates were to be successfully challenged, is not considered to be material. Based on the foregoing, TCIC believes that the 1993 and 1994 rate regulations have had a material effect on its results of operations. Revenue increased by approximately 4% for the nine months ended September 30, 1994 compared to the corresponding period of 1993. Such increase was the result of growth in subscriber levels within TCIC's cable television systems (4%), the effect of certain acquisitions (2%) and certain new services (2%), net of a decrease in revenue (4%) due to rate reductions required by rate regulation implemented pursuant to the 1992 Cable Act. In the third quarter of 1994, TCIC experienced a decrease in the price charged for those services that are subject to rate regulation under the 1992 Cable Act. Operating costs and expenses have increased by 9% for the nine months ended September 30, 1994 compared to the corresponding period of 1993. Due to the aforementioned program to upgrade and install optical fiber in its cable systems, capital expenditures and depreciation expense have increased. Additionally, TCIC incurred $30 million of programming and marketing costs associated with the launch in February 1994 of a new premium programming service to its subscribers. TCIC cannot determine whether and to what extent increases in the cost of programming will effect its operating costs. Additionally, TCIC cannot predict how these increases in the cost of programming will affect its revenue but intends to recover additional costs to the extent allowed by the aforementioned FCC rate regulations. TCIC recorded an adjustment of $6 million in 1994 to reduce its liability for compensation relating to stock appreciation rights resulting from a decline in the market price of TCI's Class A common stock. At September 30, 1994, TCIC had an investment in TeleWest UK, a company that is currently operating and constructing cable television and telephone systems in the UK. TeleWest UK, which is accounted for under the equity method, had a carrying value at September 30, 1994 of $296 million and accounted for $32 million and $17 million of TCIC's share of its affiliates' losses in 1994 and 1993, respectively. In February 1994, TCIC acquired a consolidated investment in Flextech, a programming and video distribution company located in the UK. Flextech accounted for $135 million of TCIC's total assets and $65 million of TCIC's equity investments at September 30, 1994 and has generated losses in 1994 of $18 million (before deducting the minority interests' 40% share of such losses). In addition, at September 30, 1994, TCIC had other less significant investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia and certain other foreign countries. In the aggregate, such other investments had a carrying value of $46 million at September 30, 1994 and accounted for $14 million of TCIC's share of its affiliates' losses in 1994. As previously discussed, the Company was restructured subsequent to September 30, 1994. In connection with such restructuring, TCIC's ownership in the aforementioned entities will be transferred to another operating unit and TCIC will no longer be exposed to the risk associated with unfavorable fluctuations in foreign currency exchange rates. (continued) I-59 18 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (formerly Tele-Communications, Inc.) (2) Material changes in results of operations continued): TCIC's net earnings of $23 million for the three months ended September 30, 1994 represented an increase of $88 million as compared to TCIC's net loss (before preferred stock dividends) of $65 million for the corresponding period of 1993. Such increase is principally the result of the effect of improved share of earnings from Liberty prior to the Mergers (principally resulting from the gain recognized by Liberty upon the sale of its investment in AMC) and the reduction in income tax expense (principally resulting from the required recognition in the third quarter of 1993 of the cumulative effect of the change in the Federal income tax rate from 34% to 35%), net of the effect of the aforementioned reduction in rates charged for Regulated Services. TCIC's net earnings of $61 million for the nine months ended September 30, 1994 represented an increase of $47 million as compared to TCIC's net earnings (before preferred stock dividends) of $14 million for the corresponding period of 1993. Such increase is principally the result of the aforementioned increase in share of earnings of Liberty prior to the Mergers, the decrease in income tax expense, net of the aforementioned reduction in rates charged for Regulated Services and the decrease in gain on disposition of assets. I-60 -----END PRIVACY-ENHANCED MESSAGE-----