-----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, Q8koYn7JDh78UIUWyVDWwjXhpakkjV4L7wJdAr3NuCgi3gWbEUXQQmpQB+rpUyv/ 7hwem85fWTlmGbzlfF24jA== 0000927356-96-001096.txt : 19961118 0000927356-96-001096.hdr.sgml : 19961118 ACCESSION NUMBER: 0000927356-96-001096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05550 FILM NUMBER: 96663294 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 1 FORM 10-Q 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 September 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-5550 TCI COMMUNICATIONS, INC. -------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) State of Delaware 84-0588868 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5619 DTC Parkway Englewood, Colorado 80111 - --------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 267-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ ---- All of the Registrant's common stock is owned by Tele-Communications, Inc. The number of shares outstanding of the Registrant's common stock as of October 31, 1996, was: Class A common stock - 811,655 shares; and Class B common stock - 94,447 shares. TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets (unaudited)
September 30, December 31, 1996 1995 ----------- ----------- Assets amounts in millions - ------ Cash $ 7 -- Trade and other receivables, net 274 262 Investments in affiliates, accounted for under the equity method, and related receivables (note 3) 1,472 1,062 Property and equipment, at cost: Land 72 63 Distribution systems 10,998 9,325 Support equipment and buildings 1,522 1,147 ------- ------ 12,592 10,535 Less accumulated depreciation 4,224 3,547 ------- ------ 8,368 6,988 ------- ------ Franchise costs 16,925 13,618 Less accumulated amortization 2,301 2,055 ------- ------ 14,624 11,563 ------- ------ Other assets, at cost, net of amortization 560 489 ------- ------ $25,305 20,364 ======= ======
(continued) I-1 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets, continued (unaudited)
September 30, December 31, 1996 1995 ----------- ------------- Liabilities and Common Stockholder's Equity amounts in millions - ------------------------------------------- Accounts payable $ 63 176 Accrued interest 168 226 Accrued programming expense 279 209 Other accrued expenses 869 856 Debt (note 5) 14,491 12,635 Deferred income taxes 5,491 4,261 Other liabilities 69 66 ------- ------ Total liabilities 21,430 18,429 ------- ------ Minority interests in equity of consolidated subsidiaries 821 206 Redeemable preferred stock 232 -- Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of the Company (note 6) 1,000 -- Common stockholder's equity: Class A common stock, $1 par value. Authorized 910,553 shares; issued and outstanding 811,655 shares 1 1 Class B common stock, $1 par value. Authorized 94,447 shares; issued and outstanding 94,447 shares -- -- Additional paid-in capital 3,679 3,122 Unrealized holding gains for available-for-sale securities, net of taxes 4 7 Accumulated deficit (630) (370) ------- ----- 3,054 2,760 Investment in Tele-Communications, Inc. ("TCI") (note 1) (1,143) (1,143) Intercompany payable (receivable) (note 7) (89) 112 ------- ----- Total common stockholder's equity 1,822 1,729 ------- ----- Commitments and contingencies (note 8) $25,305 20,364 ======= ======
See accompanying notes to consolidated financial statements. I-2 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Operations (unaudited)
Three months ended Nine months ended September 30, September 30, -------------------- ------------------- 1996 1995 1996 1995 ---------- -------- --------- -------- amounts in millions Revenue (notes 4 and 7) $1,648 1,310 4,554 3,741 Operating costs and expenses: Operating 532 406 1,482 1,155 Selling, general and administrative 525 378 1,430 1,045 Compensation relating to stock appreciation rights -- 2 -- 7 Adjustment to compensation relating to stock appreciation rights (8) -- (12) -- Depreciation 247 211 728 620 Amortization 112 91 311 254 ------ ----- ----- ----- 1,408 1,088 3,939 3,081 ------ ----- ----- ----- Operating income 240 222 615 660 Other income (expense): Interest expense (267) (249) (760) (713) Interest income (note 7) 12 8 31 25 Share of losses of affiliates, net (note 3) (47) (10) (150) (34) Loss on early extinguishment of debt (note 5) (7) -- (73) -- Minority interests in losses (earnings) of consolidated subsidiaries, net (28) (1) (43) 4 Gain on sale of stock by equity investee (note 3) 12 -- 12 -- Gain (loss) on disposition of assets 6 (1) 18 (2) Other, net -- (10) (3) (15) ------ ----- ----- ----- (319) (263) (968) (735) ------ ----- ----- ----- Loss before income taxes (79) (41) (353) (75) Income tax benefit 7 15 93 25 ------ ----- ----- ----- Net loss (note 4) (72) (26) (260) (50) Preferred stock dividend requirements (3) -- (7) -- ------ ----- ----- ----- Net loss attributable to common stockholder $ (75) (26) (267) (50) ====== ===== ===== =====
See accompanying notes to consolidated financial statements. I-3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statement of Common Stockholder's Equity Nine Months Ended September 30, 1996 (unaudited)
Unrealized holding gains for available- Total Additional for-sale Investment Intercompany common Common stock paid-in securities, Accumulated in payable stockholder's ------------------- Class A Class B capital net of taxes deficit TCI (receivable) equity ------- ------- ------------ ------------ ----------- ---------- ------------ ------------ amounts in millions Balance at January 1, 1996 $ 1 -- 3,122 7 (370) (1,143) 112 1,729 Net loss -- -- -- -- (260) -- -- (260) TCI Group common stock issued and debt assumed and subsequently repaid by TCI on behalf of the Company for acquisition reflected as contribution -- -- 564 -- -- -- -- 564 Accreted dividends on redeemable preferred stock -- -- (7) -- -- -- -- (7) Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- (3) -- -- -- (3) Intercompany liability assumed by TCI Communications, Inc. upon contribution of subsidiaries from TCI -- -- -- -- -- -- 137 137 Change in intercompany payable/ receivable -- -- -- -- -- -- (338) (338) ------ ------ ----- ---- ------ ------ ----- ------ Balance at September 30, 1996 $ 1 -- 3,679 4 (630) (1,143) (89) 1,822 ====== ====== ===== ==== ====== ====== ===== ======
I-4 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, -------------------- 1996 1995 -------- -------- amounts in millions (see note 2) Cash flows from operating activities: Net loss $ (260) (50) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,039 874 Compensation relating to stock appreciation rights -- 7 Adjustment to compensation relating to stock appreciation rights (12) -- Share of losses of affiliates 150 34 Loss on early extinguishment of debt 73 -- Deferred income tax benefit (95) (32) Minority interests in earnings (losses) 43 (4) Gain on sale of stock by equity investee (12) -- Loss (gain) on disposition of assets (18) 2 Other noncash credits (5) (6) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables 11 14 Change in accrued interest (59) (20) Change in other accruals and payables (72) 35 ------- ------- Net cash provided by operating activities 783 854 ------- ------- Cash flows from investing activities: Cash paid for acquisitions (35) (40) Capital expended for property and equipment (1,433) (1,123) Cash proceeds from disposition and exchanges of assets 139 25 Additional investments in and loans to affiliates and others (569) (736) Repayment of loans by affiliates and others 318 8 Other investing activities (58) (62) ------- ------- Net cash used in investing activities (1,638) (1,928) ------- ------- Cash flows from financing activities: Borrowings of debt 6,783 6,738 Repayments of debt (6,669) (5,523) Prepayment penalties (60) -- Issuance of redeemable preferred stock 223 -- Issuance of Trust Securities 971 -- Payment of redeemable preferred stock dividends (5) -- Payment of dividends on subsidiary preferred stock and Trust Securities (51) -- Change in intercompany payable/receivable (330) (147) ------- ------- Net cash provided by financing activities 862 1,068 ------- ------- Net increase (decrease) in cash 7 (6) Cash at beginning of period -- 6 ------- ------- Cash at end of period $ 7 -- ======= =======
See accompanying notes to consolidated financial statements. I-5 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements September 30, 1996 (unaudited) (1) General ------- The accompanying consolidated financial statements include the accounts of TCI Communications, Inc. ("TCIC" or the "Company") and those of all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. TCI owns 100% of the Company's common stock. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in TCIC's Annual Report on Form 10-K for the year ended December 31, 1995. TCIC, through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems. TCIC operates its cable television systems throughout the continental United States and Hawaii through its four regional operating divisions -- Central, Great Lakes, Southeast and West. 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 1996 presentation. In June 1996, TCIC announced its intention to pursue a tax-free spin-off (the "Satellite Spin-Off") of its direct broadcast satellite subsidiary, TCI Satellite Entertainment, Inc. ("SatCo"), to the holders of TCI Group Stock. At the time of the Satellite Spin-Off, SatCo's assets and operations will include TCIC's interest in PRIMESTAR Partners, L.P. ("Primestar") and TCIC's business of distributing Primestar programming. Although there is no assurance, the Satellite Spin-Off is anticipated to be completed in the fourth quarter of 1996. Upon completion of the Satellite Spin-Off, SatCo's operations will no longer be consolidated with TCIC's. (continued) I-6 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements On August 3, 1995, the TCI stockholders authorized the TCI Board of Directors to issue a new class of stock ("Liberty Group Stock") which is intended to reflect the separate performance of TCI's business unit which produces and distributes cable television programming services, ("Liberty"). While the Liberty Group Stock constitutes common stock of TCI, the issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed Liberty Group Stock representing one hundred percent of the equity value attributable to Liberty to its security holders of record on August 4, 1995. Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). TCIC owns an aggregate of 189,867 shares of TCI Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock"). Each share of Series F Preferred Stock is convertible into 1,287.51 shares of Series A TCI Group Stock. In addition, TCIC owns 100,524,364 shares of Series A TCI Group Stock. Such ownership of Series F Preferred Stock and Series A TCI Group Stock is reflected as investment in TCI in the accompanying consolidated balance sheets. In March of 1995, the Financial Accounting Standards Board 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 amount of its long-lived assets, franchise costs and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. The Company considers historical and expected future net operating losses to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). The Company deems Assets to be impaired if the Company is unable to recover the carrying value of such Assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair value. The Company generally measures fair value by considering sales prices for similar assets or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. (continued) I-7 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (2) Supplemental Disclosures to Consolidated Statements of Cash Flows ----------------------------------------------------------------- Cash paid for interest was $819 million and $733 million for the nine months ended September 30, 1996 and 1995, respectively. Also during these periods, cash paid for income taxes was $6 million and $8 million, respectively. Significant noncash investing and financing activities are as follows:
Nine months ended September 30, --------------------- 1996 1995 -------- -------- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $4,249 2,784 Liabilities assumed, net of current assets (1,714) (266) Deferred tax liability recorded in acquisitions (1,310) (920) Minority interests in equity of acquired entities (626) 47 Common stock issued and debt assumed and subsequently repaid by TCI on behalf of TCIC for acquisition reflected as a contribution to TCIC (564) -- Common stock of TCI issued in acquisition contributed to TCIC -- (234) Increase in intercompany payable resulting from common stock of TCI issued in acquisition -- (1,371) ------ ------ Cash paid for acquisitions $ 35 40 ====== ====== Exchange of consolidated subsidiaries for equity investment $ 274 -- ====== ====== Change in unrealized gains, net of deferred taxes, on available-for-sale securities $ 3 17 ====== ====== Turner Broadcasting System, Inc. stock received in acquisition transferred to Liberty $ -- 7 ====== ====== Net assets of TCIC transferred in the reorganization of TCI (the "Reorganization") in exchange for TCI common stock reflected as investment in TCI $ -- 12 ====== ====== Net assets of TCIC transferred in the Reorganization through intercompany $ -- 68 ====== ====== Retirement of TCI Class A common stock received in Reorganization $ -- 38 ====== ====== Increase in deferred tax liability due to implementation of Tax Sharing Agreement (see note 7) $ -- 76 ====== ======
(continued) I-8 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (3) Investments in Affiliates ------------------------- Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
Nine months ended Combined Operations September 30, ------------------- ------------------- 1996 1995 ------ ------ amounts in millions Revenue $ 540 329 Operating expenses (644) (303) Depreciation and amortization (73) (61) ----- ----- Operating loss (177) (35) Interest expense (29) (22) Other, net (31) (6) ----- ----- Net loss $(237) (63) ===== =====
TCIC has various investments accounted for under the equity method. The most significant investment held by TCIC at September 30, 1996 was its investment in a partnership ("Sprint Spectrum"), formed by TCIC, Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation ("Sprint") (carrying value of $783 million). See note 8. Additionally, TCIC has investments in Intermedia Capital Partners IV L.P. (carrying value of $287 million) and Teleport Communications Group, Inc. ("TCG") (carrying value of $277 million). 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, TCIC's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, TCIC recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). Certain of TCIC's affiliates are general partnerships and any subsidiary of TCIC that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts of that partnership in the event liabilities of that partnership were to exceed its assets. (4) Acquisition ----------- On July 31, 1996, pursuant to certain agreements entered into among TCIC, 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"). (continued) I-9 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements 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 borrowed under the Loan Facility. 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 (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. 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 TCIC since the date of acquisition. On a pro forma basis, TCIC's revenue and net loss would have been increased by $276 million and $57 million, respectively, for the nine months ended September 30, 1996; and revenue and net loss would have been increased by $327 million and $90 million, respectively, for the nine months ended September 30, 1995 had Cable Sub been consolidated with TCIC 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 TCIC operated Cable Sub since January 1, 1995. (continued) I-10 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (5) Debt ---- Debt is summarized as follows:
September 30, December 31, 1996 1995 --------------- -------------- amounts in millions Parent company debt: Notes payable $ 8,055 6,713 Bank credit facilities -- 179 Commercial paper 1,179 1,440 Other debt -- 1 ------- ------- 9,234 8,333 Debt of subsidiaries: Bank credit facilities 4,331 3,258 Notes payable 838 934 Convertible notes (a) 43 45 Commercial paper -- 29 Other debt 45 36 ------- ------- $14,491 12,635 ======= =======
(a) These convertible notes, which are stated net of unamortized discount of $181 million and $186 million at September 30, 1996 and December 31, 1995, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. The notes are convertible, at the option of the holders, into shares of Series A TCI Group Stock and Series A Liberty Group Stock. During the nine months ended September 30, 1996, TCIC 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 "Redemption"). In connection with the Redemption, TCIC 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. During the nine months ended September 30, 1996, TCIC terminated, at its 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, TCIC recognized a loss on early extinguishment of debt of $11 million related to the retirement of deferred loan costs. TCIC's bank credit facilities and various other debt instruments generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and dividend payments. As security for borrowings under one of TCIC's bank credit facilities, TCIC has pledged 100,524,364 shares of Series A TCI Group Stock held by a subsidiary of TCIC. (continued) I-11 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements The fair value of TCIC's debt is estimated based on current market prices for the same or similar issues or on the current rates offered to TCIC for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $14,491 million, was $14,888 million at September 30, 1996. In order to achieve the desired balance between variable and fixed rate indebtedness, TCIC has entered into various interest rate exchange agreements pursuant to which it pays (i) fixed interest rates (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% on notional amounts of $460 million at September 30, 1996 and (ii) variable interest rates (the "Variable Rate Agreements") on notional amounts of $2,450 million at September 30, 1996. During the nine months ended September 30, 1996 and 1995, TCIC's net payments pursuant to the Fixed Rate Agreements were $3 million and $1 million, respectively; and TCIC's net receipts pursuant to the Variable Rate Agreements were $11 million and less than $1 million, respectively. TCIC'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 ------------ ---------- ------ ------------ -------------- ------ November 1996 8.9% $150 April 1997 7.0% $ 200 October 1997 7.2%-9.3% 80 September 1998 4.8%-5.4% 450 December 1997 8.7% 230 April 1999 7.4% 100 ---- September 1999 7.2%-7.4% 300 $460 February 2000 5.8%-6.6% 650 ==== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 ------ $2,450 ======
TCIC is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, TCIC does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. The fair value of the interest rate exchange agreements is the estimated amount that TCIC would pay or receive to terminate the agreements at September 30, 1996, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. TCIC would pay an estimated $33 million at September 30, 1996 to terminate the agreements. TCIC is required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, TCIC pays fees, ranging from 1/4% to 1/2% per annum, on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. (continued) I-12 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (6) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary --------------------------------------------------------------------------- Trusts Holding Solely Subordinated Debt Securities of the Company ----------------------------------------------------------------- In January 1996, TCI Communications Financing I ("Trust I"), a wholly-owned subsidiary of the Company, issued $16 million in common securities to the Company 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 purpose 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 the Company. The 8.72% Subordinated Debt Securities are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will be mandatorily redeemable. The Company 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"), a wholly-owned subsidiary of the Company, issued $16 million in common securities to the Company, 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 the Company. The 10% Subordinated Debt Securities are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 10% Subordinated Debt Securities, the Trust II Preferred Securities will be mandatorily redeemable. The Company 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 the Company." 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 financial statements. (continued) I-13 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (7) Transactions with Related Parties --------------------------------- A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of pre-existing tax sharing arrangements and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. Federal, state, local and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, TCIC is responsible to TCI for its share of current consolidated income tax liabilities. TCI will be responsible to TCIC to the extent that TCIC's income tax attributes generated after the effective date are utilized by TCI to reduce its consolidated income tax liabilities. Accordingly, all tax attributes generated by TCIC's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising TCIC. TCIC purchases sports and other programming from certain subsidiaries of Liberty. Charges to TCIC (which are based upon customary rates charged to others) for such programming were $61 million and $53 million for the nine months ended September 30, 1996 and 1995, respectively. Such amounts are included in operating expenses in the accompanying consolidated statements of operations. In April of 1996, certain of such Liberty subsidiaries were contributed to a newly formed joint venture, of which Liberty owns a 50% interest. Liberty leases satellite transponder facilities from TCIC. Charges by TCIC for such arrangements for the nine month periods ended September 30, 1996 and 1995, aggregated $9 million and $11 million, respectively. TCI Starz, Inc., a subsidiary of TCI, has a 50.1% general partnership interest in QE+ Ltd Limited Partnership ("QE+"), which distributes STARZ!, a first-run movie premium programming service. Liberty holds the remaining 49.9% partnership interest. TCIC has entered into a long-term affiliation agreement with QE+ related to the distribution of the STARZ! service. Rates per subscriber specified in the agreement are based upon customary rates charged to other cable system operators. Payments to QE+ for the nine months ended September 30, 1996 and 1995 were approximately $38 million and $22 million, respectively. The affiliation agreement also provides that QE+ will not grant materially more favorable terms and conditions to other cable system operators unless such more favorable terms and conditions are made available to TCIC. The affiliation agreement also requires TCIC to make payments to QE+ with respect to a guaranteed minimum number of subscribers totaling approximately $339 million for the years 1996, 1997 and 1998. (continued) I-14 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements At September 30, 1996, TCIC had a $170 million intercompany receivable from TCI Starz, Inc. which represented the net effect of advances to TCI Starz, Inc., who in turn paid such amounts to QE+, offset by TCIC's purchase of programming from QE+. Such receivable is non-interest bearing for five years from the date of the advances. A consolidated subsidiary of Liberty, Home Shopping Network, Inc., pays a commission to TCIC for merchandise sales to customers who are subscribers of TCIC's cable systems. Aggregate commissions to TCIC were $5 million for each of the nine month periods ended September 30, 1996 and 1995. Such amounts are recorded in revenue in the accompanying consolidated statements of operations. Tele-Communications International, Inc. ("TINTA") has indemnified TCIC for any loss, claim or liability that TCIC may incur by reason of certain guarantees and credit enhancements made by TCIC on TINTA's behalf. Intercompany amounts at September 30, 1996 represent non-interest bearing intercompany advances, net aggregating $200 million from certain subsidiaries of TCI offset by the aforementioned $170 million intercompany receivable from TCI Starz, Inc. and interest-bearing loans to certain subsidiaries of TCI. Such interest-bearing loans plus accrued interest aggregated $119 million and $134 million at September 30, 1996 and December 31, 1995, respectively. Interest earned by TCIC on such intercompany loans aggregated $9 million for each of the nine month periods ended September 30, 1996 and 1995. Such interest amounts are included in interest income in the accompanying consolidated statements of operations. (8) Commitments and Contingencies ----------------------------- TCIC, Comcast, Cox and Sprint are partners in Sprint Spectrum, a partnership formed to engage in the business of providing wireless communications services on a nationwide basis. TCIC owns a 30% interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for personal communications services ("PCS") licenses for 29 markets in an auction conducted by the Federal Communications Commission ("FCC") that ended in March 1995. The aggregate license cost for these licenses was approximately $2.1 billion, all of which has been paid. Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or acquire PCS licenses from other holders, has invested in an entity ("APC") which holds the PCS license for the Washington-Baltimore market, has agreed to invest in the entity that will hold the PCS license for the Los Angeles-San Diego market, and may invest in other entities that hold PCS licenses. Subsidiaries of Cox, Sprint and TCIC are also partners in a partnership ("PhillieCo") that holds a PCS license for the Philadelphia market which was acquired at a license cost of $85 million. TCIC has a 35.3% interest in PhillieCo. (continued) I-15 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements The capital that Sprint Spectrum will require to fund the construction of the PCS systems, in addition to the license costs and investments described above, will be substantial. Pursuant to the business plan adopted by the partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide network, the partners are obligated to make additional cash capital contributions to Sprint Spectrum in the aggregate amount of approximately $1.9 billion during the two-year period that commenced January 1, 1996. TCIC has agreed to contribute approximately $0.6 billion of such aggregate amount, $0.2 billion of which was contributed during the nine months ended September 30, 1996. The business plan contemplates that Sprint Spectrum will require additional equity thereafter. TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $205 million at September 30, 1996. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to fulfill any of such obligations, that they will not be material to TCIC. In connection with the launch of STARZ!, TCIC became a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution, and license agreements. As of September 30, 1996, the amount of such obligations or guarantees was approximately $151 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon certain variable factors. Certain key employees of the Company hold restricted stock awards and options with tandem SARs to acquire shares of TCI and certain TCI subsidiaries' common stock. Estimates of the compensation related to the restricted stock awards and options and/or SARs have been recorded in the accompanying consolidated financial statements, but are subject to future adjustment based upon the market value of the respective common stock and, ultimately, on the final market value when the rights are exercised or the restricted stock awards are vested. TCIC has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. I-16 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Management's Discussion and Analysis of - --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The following discussion and analysis should be read in conjunction with the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The following discussion focuses on material changes in the trends, risks and uncertainties affecting the Company's results of operations and financial condition. (1) Material changes in financial condition: ---------------------------------------- TCIC, Comcast, Cox and Sprint are partners in Sprint Spectrum which was formed to engage in the business of providing wireless communications services on a nationwide basis. TCIC owns a 30% interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for PCS licenses for 29 markets in an auction conducted by the FCC that ended in March 1995. The aggregate license cost for these licenses was approximately $2.1 billion, all of which has been paid. Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or acquire PCS licenses from other holders, has invested in APC which holds the PCS license for the Washington-Baltimore market, has agreed to invest in the entity that will hold the PCS license for the Los Angeles-San Diego market, and may invest in other entities that hold PCS licenses. Subsidiaries of Cox, Sprint and TCIC are also partners in PhillieCo that holds a PCS license for the Philadelphia market which was acquired at a license cost of $85 million. TCIC has a 35.3% interest in PhillieCo. The capital that Sprint Spectrum will require to fund the construction of the PCS systems, in addition to the license costs and investments described above, will be substantial. Pursuant to the business plan adopted by the partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide network, the partners are obligated to make additional cash capital contributions to Sprint Spectrum in the aggregate amount of approximately $1.9 billion during the two-year period that commenced January 1, 1996. TCIC has agreed to contribute approximately $0.6 billion of such aggregate amount, $0.2 billion of which was contributed during the nine months ended September 30, 1996. The business plan contemplates that Sprint Spectrum will require additional equity thereafter. 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. (continued) I-17 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (1) Material changes in financial condition (continued): ---------------------------------------------------- Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of Viacom Common Stock the opportunity to exchange a portion of their shares of Viacom Common Stock for shares of Cable Sub Class A Stock. Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock for $350 million. 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 Exchangeable Preferred Stock. For additional discussion of the Viacom Acquisition, see note 4 to the accompanying consolidated financial statements. During the nine months ended September 30, 1996, the Company issued (i) 4.6 million shares of Series A Cumulative Exchangeable Preferred Stock in a public offering for net cash proceeds of $223 million and (ii) $2.06 billion of publicly-placed senior and medium term notes with interest rates ranging from 6.2% to 7.9% and maturity dates ranging through 2026. In addition, subsidiaries of the Company (special purpose entities formed as Delaware business trusts) issued 20 million preferred securities of 8.72% Trust Originated Preferred Securities for net cash proceeds of $486 million and 20 million preferred securities of 10% Trust Preferred Securities for net cash proceeds of $485 million. The Company used the proceeds from the aforementioned debt and equity issuances to retire overnight commercial paper and to repay certain variable and fixed-rate indebtedness. In connection with the prepayment of certain fixed-rate indebtedness, TCIC 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. The Company has a credit facility which matures in September of 1997. The outstanding balance of such facility was $387 million at September 30, 1996. The Company currently anticipates that it will refinance such borrowings, but there can be no assurance that it can do so on terms acceptable to the Company. During the second quarter of 1996, the Company terminated, at its option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. In connection with such termination, TCIC recognized a loss on early extinguishment of debt of $4 million. Such loss related to the retirement of deferred loan costs. The Company does not believe that such termination will adversely affect its future liquidity. At September 30, 1996, subsidiaries of the Company had approximately $1.7 billion of availability under 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 such restrictive covenants (which relate primarily to the maintenance of certain ratios of cash flow to total debt and cash flow to debt service, as defined in the credit facilities). See note 5 to the accompanying consolidated financial statements for additional information regarding the material terms of the subsidiaries' lines of credit. (continued) I-18 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (1) Material changes in financial condition (continued): ---------------------------------------------------- One measure of liquidity is commonly referred to as "interest coverage." Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization and other non-cash operating credits or charges)($1,642 million and $1,541 million, for the nine months ended September 30, 1996 and 1995, respectively) to interest expense ($760 million and $713 million, for the nine months ended September 30, 1996 and 1995, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 216% for each of the nine month periods ended September 30, 1996 and 1995. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the consistency and nonseasonal nature of its cable television operations and the relative predictability of the Company's interest expense, almost half of which results from fixed rate indebtedness. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying consolidated statements of cash flows. Net cash provided by operating activities ($783 million and $854 million for the nine months ended September 30, 1996 and 1995, respectively) reflects net cash from the operations of the Company available for the Company's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. Amounts expended by the Company for its investing activities exceed net cash provided by operating activities. However, management believes that net cash provided by operating activities, the ability of the Company and its subsidiaries to obtain additional financing (including the subsidiaries available lines of credit and access to public debt markets), issuances and sales of the Company's equity or equity of its subsidiaries, 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. In late April 1996, TCIC was notified by Moody's Investors Service, Inc. and Duff & Phelps Credit Rating Co. that those rating agencies had downgraded by one level their respective ratings of TCIC's senior debt to the first level below investment grade. Fitch Investors Service, L.P. reaffirmed its rating for TCIC's senior debt at the last level of investment grade. On October 18, 1996, Standard & Poor's Securities, Inc. ("Standard & Poor's") issued a press release stating that TCIC's senior debt would be placed on CreditWatch with negative implications. TCIC's senior debt is currently rated BBB- by Standard & Poor's (the last level of investment grade). A downgrade by Standard & Poor's of TCIC's senior debt would lower such debt to the first level below investment grade. These actions are expected to marginally increase TCIC's cost of borrowings under certain bank credit facilities, and may adversely affect TCIC's access to the public debt market and its overall cost of future borrowings. (continued) I-19 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (1) Material changes in financial condition (continued): ---------------------------------------------------- In order to achieve the desired balance between variable and fixed rate indebtedness and to diminish its exposure to extreme increases in variable interest rates, the Company has entered into various interest rate exchange agreements. Pursuant to the interest rate exchange agreements, the Company pays (i) fixed interest rates ranging from 7.2% to 9.3% on notional amounts of $460 million at September 30, 1996 and (ii) variable interest rates on notional amounts of $2,450 million at September 30, 1996. During the nine months ended September 30, 1996 and 1995, the Company's net payments pursuant to its fixed rate exchange agreements were $3 million and $1 million, respectively; and the Company's net receipts pursuant to the variable rate agreements were $11 million and less than $1 million, respectively. The Company is exposed to credit losses for the periodic settlements of amounts due under the interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $205 million at September 30, 1996. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCIC. In connection with the launch of STARZ!, TCIC became a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution, and license agreements. As of September 30, 1996, the amount of such obligations or guarantees was approximately $151 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon certain variable factors. The Company's various partnerships and other affiliates accounted for under the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by the Company) and through net cash provided by their own operating activities. (2) Material changes in results of operations: ----------------------------------------- Revenue ------- On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, TCIC's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. The regulations established bench mark rates in 1993, which were further reduced in 1994, to which the rates charged by cable operators for Regulated Services were required to conform. (continued) I-20 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (2) Material changes in results of operations (continued): ------------------------------------------------------ TCIC reduced its rates in 1993 and 1994 and limited its rate increases in 1995 and 1996 in response to FCC regulations. TCIC believes that it has complied, in all material respects, with the provisions of the 1992 Cable Act, including its rate setting provisions. However, TCIC's rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or by the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law. Because the 1996 Telecom Act does not deregulate cable programming service tier rates until 1999 (and basic service tier rates will remain regulated thereafter), TCIC believes that the 1993 and 1994 rate regulations have had and will continue to have a material adverse effect on its results of operations. Revenue increased 26% and 22% for the three months and nine months ended September 30, 1996, respectively, as compared to the corresponding periods of 1995. In TCIC's regulated cable systems, TCIC implemented rate increases for its Regulated Services in June 1996. As allowed by FCC regulations, such rate increases include amounts intended to recover increased programming costs incurred during the first five months of 1996 and not previously recovered, as well as interest on said amounts. The increase in revenue for the three months ended September 30, 1996 is due to the effect of certain acquisitions (including the Viacom Acquisition) (12%), increases in the rates charged to TCIC's subscribers due to inflation, programming cost increases (as discussed above) and channel additions (5%), growth in TCIC's satellite subscribers (4%), growth in subscriber levels within TCIC's cable television systems (3%) and growth in advertising sales and other revenue (2%). The increase in revenue for the nine months ended September 30, 1996 is due to the effect of certain acquisitions (including the Viacom Acquisition) (7%), increases in the rates charged to TCIC's subscribers due to inflation, programming cost increases (as discussed above) and channel additions (6%), growth in TCIC's satellite subscribers (5%), growth in subscriber levels within TCIC's cable television systems (2%) and growth in advertising sales and other revenue (2%). Included in TCIC's total revenue is revenue generated by TCIC's common carrier microwave assets amounting to $74 million and $57 million for the nine months ended September 30, 1996 and 1995, respectively, and $25 million and $20 million for the three months ended September 30, 1996 and 1995, respectively. (continued) I-21 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (2) Material changes in results of operations (continued): ------------------------------------------------------ Operating Costs and Expenses ---------------------------- Operating expenses increased 31% and 28% for the three months and nine months ended September 30, 1996, respectively, as compared to the corresponding periods of 1995. Exclusive of the effects of acquisitions (12% and 7%) and Primestar (3% and 5%) (see discussion below), such expenses increased 16% for each period. Programming costs and salary expenses represented the majority of such increases. TCIC cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. However, such programming costs have increased at a greater percentage than increases in revenue of Regulated Services. Selling general and administrative expenses ("SG&A") increased 39% and 37% for the three months and nine months ended September 30, 1996, respectively, as compared to the corresponding periods of 1995. Exclusive of the effects of acquisitions (11% and 7%) and Primestar (10% and 13%) (see discussion below), SG&A increased 18% and 17%, respectively. Such increases are due primarily to salaries and related payroll expenses and those expenses that vary with revenue and/or subscribers. Additionally, during the nine months ended September 30, 1996 and 1995, the Company incurred $34 million and $14 million, respectively, of costs related to newly created material support centers, initiatives to improve its customer service and the continued redesign of its computer and accounting systems. TCIC has an interest in Primestar, which provides programming and marketing support to its partners who distribute a multi-channel programming service via a medium power communications satellite to home satellite dish owners. During the three months and nine months ended September 30, 1996, TCIC's revenue and expenses related to such satellite service increased significantly over the corresponding periods in 1995, as the number of TCIC's Primestar subscribers increased from approximately 370,000 subscribers at September 30, 1995 to approximately 735,000 subscribers at September 30, 1996. During the three months ended September 30, 1996, revenue increased from $59 million to $110 million and operating, selling, general and administrative expenses increased from $54 million to $108 million, as compared to the three months ended September 30, 1995. During the nine months ended September 30, 1996, revenue increased from $120 million to $304 million and operating, selling, general and administrative expenses increased from $111 million to $295 million, as compared to the nine months ended September 30, 1995. TCIC incurs significant sales commission and installation costs when customers initially subscribe. Therefore, as long as TCIC continues to launch this new service and increase its Primestar subscriber base at such a rapid pace, management expects operating costs and expenses will increase as well. (continued) I-22 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (2) Material changes in results of operations (continued): ------------------------------------------------------ In June 1996, TCIC announced its intention to pursue a tax-free spin-off of SatCo to the holders of TCI Group Stock. At the time of the Satellite Spin-Off, SatCo's assets and operations will include TCIC's interest in Primestar and TCIC's business of distributing Primestar programming. Although there is no assurance, the Satellite Spin-Off is anticipated to be completed in the fourth quarter of 1996. Upon completion of the Satellite Spin-Off, SatCo's operations will no longer be consolidated with TCIC's. The increase in TCIC's depreciation expense in 1996 is due to acquisitions, as well as increased capital expenditures (which amounted to $1,433 million for the nine months ended September 30, 1996) incurred to upgrade and install optical fiber technology in TCIC's cable systems. The increase in amortization expense in 1996 is due to acquisitions. The Company records compensation relating to stock appreciation rights and restricted stock awards granted to certain employees. Such compensation is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Other Income (Expense) and Net Loss ----------------------------------- Included in share of losses of affiliates for the three months and nine months ended September 30, 1996 is $33 million and $112 million, respectively, attributable to Sprint Spectrum. Such amount for the nine month period includes $34 million associated with prior periods. Minority interests in earnings of consolidated subsidiaries primarily represents dividends on Trust Securities. Such dividends amounted to $23 million and $47 million for the three months and nine months ended September 30, 1996, respectively. See note 6 to the accompanying consolidated financial statements. As a result of the TCG IPO, the Company recognized a gain of $12 million during the third quarter of 1996. There is no assurance that the Company will realize similar gains in future periods. See note 3 to the accompanying consolidated financial statements. TCIC's net loss (before preferred stock dividend requirements) increased from $26 million for the three months ended September 30, 1995 to $72 million for the three months ended September 30, 1996. TCIC's net loss (before preferred stock dividend requirements) increased from $50 million for the nine months ended September 30, 1995 to $260 million for the nine months ended September 30, 1996. Such increases are primarily the result of the aforementioned increases in depreciation and amortization expense, the aforementioned share of losses from Sprint Spectrum, the dividends on Trust Securities discussed above, the loss on early extinguishment of debt resulting primarily from the prepayment of certain fixed-rate indebtedness and an increase in interest expense due to higher interest rates and debt levels. I-23 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) PART II - OTHER INFORMATION Item 1. Legal Proceedings. - ------ ----------------- There were no new material legal proceedings or material developments in previously reported legal proceedings during the quarter ended September 30, 1996 to which TCIC or any of its consolidated subsidiaries is a party or of which any of its property is the subject, except as follows: Cooper, et al. v. UCTC of Baltimore, Inc., et al. ------------------------------------------------- On October 24, 1994, plaintiffs, three current employees of United Cable Television of Baltimore Limited Partnership and two spouses of such current employees, filed suit in the Circuit Court for Baltimore City against UCTC of Baltimore, Inc., United Cable Television of Baltimore Limited Partnership, TCI East, Inc. and Tele-Communications, Inc. The suit alleged, inter alia, eight various tort claims, including assault, false ----- ---- imprisonment, intentional infliction of emotional distress, invasion of privacy by intrusion, invasion of privacy by false light, defamation by slander, defamation by libel and loss of consortium in connection with an incident that occurred October 26, 1993, at the Baltimore system. Each plaintiff sought $1,000,000 compensatory damages and $5,000,000 punitive damages per count. The loss of consortium claim was limited to four of the five plaintiffs. On November 1, 1994, plaintiffs also filed an action in United States District Court for the District of Maryland alleging discrimination on the basis of race in violation of 42 U.S.C. (S)1981 and loss of consortium. Both counts sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages for each plaintiff (the loss of consortium claim is limited to four of the five plaintiffs). The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. Miles Whittenburg, Jr., et al., v. Tele-Communications, Inc., et al. -------------------------------------------------------------------- On April 9, 1994, plaintiffs, six current employees of United Cable Television of Baltimore Limited Partnership and four spouses, filed suit in the Circuit Court for Baltimore City against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc., and United Cable Television of Baltimore Limited Partnership. The suit alleged, inter alia, nine various ---------- tort claims, including but not limited to, false imprisonment, assault, battery, intentional infliction of emotional distress, invasion of privacy by intrusion, invasion of privacy by false light, defamation by slander, defamation by libel, and loss of consortium in connection with an incident that occurred October 26, 1993, at the Baltimore system. Each of the nine counts in the complaint sought compensatory damages of $1,000,000 per plaintiff, and punitive damages of $5,000,000 per plaintiff. On October 24, 1994, plaintiffs also filed in the United States District Court for the District of Maryland, a lawsuit containing claims of discrimination on the basis of race in violation of 42 U.S.C. (S)1981 and loss of consortium. Both counts sought compensatory damages of $1,000,000 per plaintiff and punitive damages of $5,000,000 per plaintiff. The loss of consortium claims applied to eight of the plaintiffs. The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. (continued) II-1 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 1. Legal Proceedings (continued). - ------ ----------------------------- Elmer Lewis v. Tele-Communications, Inc., et al. ------------------------------------------------ On June 23, 1994, plaintiff filed suit in the United States District Court for the District of Maryland against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc. and United Cable Television of Baltimore Limited Partnership. On August 2, 1994, the suit was consolidated for all purposes with Tyrone Belgrave, et al. v. Tele-Communications, Inc. et al. The suit alleged, inter alia, false imprisonment, assault, employment ---------- defamation, intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, wrongful discharge and discrimination on the basis of race. The complaint also seeks divestiture of the Baltimore City cable franchise from the Company. Each of the ten counts in the complaint sought compensatory damages of $1,000,000 and punitive damages of $5,000,000. In a decision dated October 3, 1994, the Court granted defendants' motion to dismiss the intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, wrongful discharge and violation of cable franchise agreement claims. On February 4, 1995, the federal court dismissed the federal claims without prejudice and remanded the remaining state claims to Circuit Court for Baltimore City. On February 14, 1995, Lewis and his spouse filed an amended complaint in Circuit Court for Baltimore City against the current defendants (the amended complaint was consolidated with the Belgrave and Fannell plaintiffs). Lewis alleged -------- ------- assault, civil conspiracy to commit assault, battery, civil conspiracy to commit battery, false imprisonment, civil conspiracy to commit false imprisonment, intentional infliction of emotional distress, civil conspiracy to intentionally inflict emotional distress, invasion of privacy by intrusion, civil conspiracy to commit invasion of privacy by intrusion, defamation, civil conspiracy to defame, invasion of privacy by false light, and civil conspiracy to commit invasion of privacy by false light. Lewis and his spouse also allege loss of consortium. Each claim sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages per plaintiff. The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. (continued) II-2 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 1. Legal Proceedings (continued). - ------ ----------------------------- Tyrone Belgrave, et al., v. Tele-Communications, Inc., et al. ------------------------------------------------------------- On February 8, 1994, Tyrone Belgrave and 26 other current or former employees of United Cable Television of Baltimore Limited Partnership filed suit in the Circuit Court for Baltimore City against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc., and United Cable Television of Baltimore Limited Partnership. The action alleged, inter alia, false imprisonment, assault, employment defamation, intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, wrongful discharge and discrimination on the basis of race. The complaint also sought divestiture of the Baltimore City cable franchise from the Company. Six counts in the complaint each sought compensatory damages of $1,000,000 per plaintiff, and punitive damages of $5,000,000 per plaintiff. Three other counts in the complaint each sought compensatory damages for $1,000,000 per plaintiff and punitive damages of $5,000,000 per plaintiff. On March 29, 1994, the defendants removed the case to the United States District Court for the District of Maryland. In a decision dated October 3, 1994, the Court granted defendants motion to dismiss the intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, wrongful discharge and violation of cable franchise agreement claims. On February 9, 1995, the federal court dismissed the federal claims without prejudice and remanded the remaining state claims to the Circuit Court for Baltimore City. On February 14, 1995, 37 persons (the 27 original plaintiffs and 10 spouses of plaintiffs) filed an amended complaint in Circuit Court for Baltimore City against the current defendants. (The amended complaint was consolidated with the Lewis and Fannell plaintiffs). The 27 existing plaintiffs alleged assault, civil conspiracy to commit assault, battery, civil conspiracy to commit battery, false imprisonment, civil conspiracy to commit false imprisonment, intentional infliction of emotional distress, civil conspiracy to intentionally inflict emotional distress, invasion of privacy by intrusion, civil conspiracy to commit invasion of privacy by intrusion, defamation, civil conspiracy to defame, invasion of privacy by false light, and civil conspiracy to commit invasion of privacy by false light. Ten existing plaintiffs and their spouses alleged loss on consortium. Ten existing plaintiffs also alleged wrongful discharge and civil conspiracy to wrongfully terminate. Each claim sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages per plaintiff. The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. (continued) II-3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 1. Legal Proceedings (continued). - ------ ----------------------------- Euan Fannell v. Tele-Communications, Inc., et al. ------------------------------------------------ On February 8, 1994, Euan Fannell, the former general manager of UCTC of Baltimore, Inc. filed suit in the Circuit Court for Baltimore City against Tele-Communications, Inc., TCI East, Inc., UCTC of Baltimore, Inc., and United Cable Television of Baltimore Limited Partnership. The suit alleged, inter alia, employment defamation, intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, breach of contract, and discrimination on the basis of race. The complaint also sought divestiture of the Baltimore City cable franchise of the Company. The plaintiff sought $10,000,000 in compensatory damages and $50,000,000 in punitive damages with respect to the intentional infliction of emotional distress claim; and $10,000,000 in compensatory damages and $50,000,000 in punitive damages with respect to each of five other counts. On March 29, 1994, the defendants removed the case to the United States District Court for the District of Maryland and the case was subsequently consolidated with the Belgrave case. In a decision dated November 15, 1994, the federal court dismissed plaintiffs' intentional infliction of emotional distress, unreasonable intrusion upon seclusion, invasion of privacy by false light, and violation of cable franchise agreement claims. On February 9, 1995, the federal court dismissed the federal claims without prejudice and remanded the remaining state claims to the Circuit Court for Baltimore City. On February 14, 1995, plaintiff filed an amended complaint in Circuit Court for Baltimore City against the current defendants. The amended action alleged intentional infliction of emotional distress, civil conspiracy to intentionally inflict emotional distress, invasion of privacy by intrusion, civil conspiracy to commit invasion of privacy by intrusion, defamation, civil conspiracy to defame, invasion of privacy by false light, civil conspiracy to commit invasion of privacy by false light, wrongful discharge, civil conspiracy to wrongfully terminate, and breach of contract. With respect to all claims other than breach of contract, plaintiff sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages. With respect to the breach of contract claim, plaintiff seeks $100,000 plus prejudgment interest. The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. (continued) II-4 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 1. Legal Proceedings (continued). - ------ ----------------------------- Tony Jeffreys, et al v. Tele-Communications, Inc. et al. ------------------------------------------------------- On February 7, 1995, Tony Jeffreys and 41 current and former employees of United Cable Television of Baltimore Limited Partnership filed a complaint in Circuit Court for Baltimore City against Tele-Communications, Inc., UCT of Baltimore, Inc., United Cable Television of Baltimore Limited Partnership, UCTC of Baltimore, Inc. and TCI East, Inc. With two exceptions, these plaintiffs are also parties to identical claims asserted in the amended complaints filed on February 14, 1994 in the previously described Belgrave, Fannell and Lewis actions. The action alleged, in part, -------- ------- ----- that the defendants engaged U.S. Corporate Investigations, Inc. and Blackburn Associates and conspired to illegally terminate the employment of management personnel and employees of the Baltimore system which culminated in the October 26, 1993, incident described in earlier reports. Plaintiffs sought damages in connection with their claims of assault, civil conspiracy to commit assault, battery, civil conspiracy to commit battery, false imprisonment, civil conspiracy to commit false imprisonment, intentional infliction of emotional distress, civil conspiracy to intentionally inflict emotional distress, invasion of privacy by intrusion, civil conspiracy to commit invasion of privacy by intrusion, defamation as to plaintiff Fannell, defamation as to all plaintiffs except Fannell, civil conspiracy to defame, invasion of privacy by false light, civil conspiracy to commit invasion of privacy by false light, wrongful discharge, civil conspiracy to wrongfully terminate, breach of contract as to plaintiff Fannell, and loss of consortium. Each count sought $1,000,000 in compensatory damages and $5,000,000 in punitive damages per plaintiff. The parties have agreed to a settlement in principle. Such settlement represents the final resolution of this matter, and accordingly, it will not be reported in future filings. (continued) II-5 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 1. Legal Proceedings (continued). - ------ ----------------------------- Les Dunnaville v. United Artists Cable, et al. --------------------------------------------- On February 9, 1994, Les Dunnaville and Jay Sharrieff, former employees of United Cable Television of Baltimore Limited Partnership, filed an amended complaint in the Circuit Court for Baltimore City against United Cable Television of Baltimore Limited Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three company employees, Roy Harbert, Tony Peduto, and Richard Bushie (the suit was initially filed on December 3, 1993, but the parties agreed on December 30, 1993 that no responsive pleading would be due pending filing of an amended complaint). The action alleges, inter alia, intentional interference with contract, tortious ---------- interference with prospective advantage, defamation, false light, invasion of privacy, intentional infliction of emotional distress, civil conspiracy, violation of Maryland's Fair Employment Practices Act, and respondeat superior with respect to the individual defendants. Six counts in the complaint each seek compensatory damages of $1,000,000 and punitive damages of $1,000,000; the intentional infliction of emotional distress count seeks compensatory damages of $1,000,000 and punitive damages of $2,000,000; and the count which alleges violation of Maryland's Fair Employment Practices Act seeks damages of $500,000. By order dated May 18, 1994, the Court dismissed the respondeat superior claim. Defendants filed Motions for Summary Judgment in December 1995 and January 1996 on all remaining counts of plaintiffs' complaint. The Court granted summary judgment in the defendant's favor on March 15, 1996. The plaintiffs have appealed the Circuit Court ruling to the Maryland Court of Special Appeals and such appeal is pending. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. (continued) II-6 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Item 6. Exhibit and Reports on Form 8-K. - ------ ------------------------------- (a) Exhibit - (27) TCI Communications, Inc. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 1996:
Date of Item Report Reported Financial Statements Filed ------- -------- -------------------------- July 2, 1996 Item 5 None. August 5, 1996 Item 2 None. September 3, 1996 Item 5 None. September 11, 1996 Item 5 None.
II-7 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TCI COMMUNICATIONS, INC. Date: November 14, 1996 By: /s/ Brendan R. Clouston ----------------------------- Brendan R. Clouston President and Chief Executive Officer Date: November 14, 1996 By: /s/ Bernard W. Schotters ----------------------------- Bernard W. Schotters Senior VicePresident (Principal Financial Officer) Date: November 14, 1996 By: /s/ Gary K. Bracken ----------------------------- Gary K. Bracken Senior Vice President and Controller (Principal Accounting Officer) II-8 EXHIBIT INDEX The following exhibits are filed herewith or are incorporated by reference herein (according to the number assigned to them in Item 601 of Regulation S-K) as noted: (27) TCI Communications, Inc. Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000096903 TCI COMMUNICATIONS, INC. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 7 0 274 0 0 0 12,592 4,224 25,305 0 14,491 232 0 1 1,821 25,305 0 4,554 0 1,482 1,039 0 760 (353) (93) (260) 0 0 0 (260) 0 0
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