-----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, UG44yMg6/ysjXnj9AKKLKYfQdNuyChiT2rgRaHTB/d+rp8g3r+SZs1fYc8C+VQUs 7a8B5jinAZuemo08Bi9Kqw== 0000950134-97-003747.txt : 19970514 0000950134-97-003747.hdr.sgml : 19970514 ACCESSION NUMBER: 0000950134-97-003747 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97602093 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 FOR QUARTER ENDED MARCH 31, 1997 1 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 March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-5550 TCI COMMUNICATIONS, INC. ---------------------------------------------------------- (Exact name of Registrant as specified in its charter) State of Delaware 84-0588868 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5619 DTC Parkway Englewood, Colorado 80111 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 267-5500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- All of the Registrant's common stock is owned by Tele-Communications, Inc. The number of shares outstanding of the Registrant's common stock as of April 30, 1997, was: Class A common stock - 811,655 shares; and Class B common stock - 94,447 shares. 2 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets (unaudited)
March 31, December 31, 1997 1996 ---------- ------------ Assets amounts in millions Cash $ 36 -- Trade and other receivables, net 302 308 Investments in affiliates, accounted for under the equity method, and related receivables (note 3) 307 317 Property and equipment, at cost: Land 72 74 Distribution systems 9,533 9,726 Support equipment and buildings 1,414 1,423 ------- ------- 11,019 11,223 Less accumulated depreciation 4,041 4,031 ------- ------- 6,978 7,192 ------- ------- Franchise costs 17,172 17,174 Less accumulated amortization 2,414 2,380 ------- ------- 14,758 14,794 ------- ------- Other assets, at cost, net of amortization 391 525 ------- ------- $22,772 23,136 ======= =======
(continued) I-1 3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets, continued (unaudited)
March 31, December 31, 1997 1996 ---------- ----------- Liabilities and Common Stockholder's Equity (Deficit) amounts in millions Accounts payable $ 100 191 Accrued interest 165 268 Accrued programming expense 251 232 Other accrued expenses 514 536 Debt (note 5) 13,906 14,318 Deferred income taxes 5,414 5,459 Other liabilities 81 84 -------- -------- Total liabilities 20,431 21,088 -------- -------- Minority interests in equity of consolidated subsidiaries 791 802 Redeemable preferred stock 232 232 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Preferred Securities") holding solely subordinated debt securities of the Company (note 6) 1,502 1,000 Common stockholder's equity (deficit): 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, issued and outstanding 94,447 shares -- -- Additional paid-in capital 2,128 2,234 Unrealized holding gains for available-for-sale securities, net of taxes 5 -- Accumulated deficit (783) (822) -------- -------- 1,351 1,413 Investment in Tele-Communications, Inc. ("TCI"), at cost (note 1) (1,143) (1,143) Intercompany receivable (note 7) (392) (256) -------- -------- Total common stockholder's equity (deficit) (184) 14 -------- -------- Commitments and contingencies (note 8) $ 22,772 23,136 ======== ========
See accompanying notes to consolidated financial statements. I-2 4 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Operations (unaudited)
Three months ended March 31, --------------------- 1997 1996 --------- ----------- amounts in millions Revenue $ 1,505 1,333 Operating costs and expenses: Operating 544 464 Selling, general and administrative 282 371 Adjustment to compensation relating to options and stock appreciation rights -- (4) Depreciation 217 236 Amortization 114 96 ------- ------- 1,157 1,163 ------- ------- Operating income 348 170 Other income (expense): Interest expense (272) (246) Interest income (note 7) 9 7 Share of losses of affiliates, net (note 3) (12) (60) Minority interests in earnings of consolidated subsidiaries, net (26) (4) Gain on disposition and exchange of assets, net 18 9 Other, net (4) (2) ------- ------- (287) (296) ------- ------- Earnings (loss) before income taxes 61 (126) Income tax benefit (expense) (22) 46 ------- ------- Net earnings (loss) 39 (80) Preferred stock dividend requirements (2) (2) ------- ------- Net earnings (loss) attributable to common stockholder $ 37 (82) ======= =======
See accompanying notes to consolidated financial statements. I-3 5 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statement of Common Stockholder's Equity (Deficit) Three months ended March 31, 1997 (unaudited)
Unrealized holding gains for available- Common stock Additional for-sale Investment ---------------- paid-in securities, Accumulated in Intercompany Class A Class B capital net of taxes deficit TCI receivable ------- ------- ---------- ------------ ----------- ---------- ------------ amounts in millions Balance at January 1, 1997 $ 1 -- 2,234 -- (822) (1,143) (256) Net earnings -- -- -- -- 39 -- -- Accreted dividends on redeemable preferred stock -- -- (2) -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- 5 -- -- -- Transfer of assets from TCI Communications, Inc. to TCI (note 7) -- -- (104) -- -- -- 33 Change in intercompany receivable -- -- -- -- -- -- (169) ------ -- ------ ------ ------ ------ ------ Balance at March 31, 1997 $ 1 -- 2,128 5 (783) (1,143) (392) ====== == ====== ====== ====== ====== ====== Total common stockholder's equity (deficit) ---------------- Balance at January 1, 1997 14 Net earnings 39 Accreted dividends on redeemable preferred stock (2) Change in unrealized holding gains for available-for-sale securities, net of taxes 5 Transfer of assets from TCI Communications, Inc. to TCI (note 7) (71) Change in intercompany receivable (169) ----- Balance at March 31, 1997 (184) =====
See accompanying notes to consolidated financial statements. I-4 6 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, ------------------ 1997 1996 ------ ------ amounts in millions (see note 2) Cash flows from operating activities: Net earnings (loss) $ 39 (80) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 331 332 Adjustment to compensation relating to options and stock appreciation rights -- (4) Payment of stock appreciation rights (1) (2) Share of losses of affiliates 12 60 Deferred income tax benefit (30) (47) Minority interests in earnings 26 4 Gain on disposition and exchange of assets, net (18) (9) Intercompany tax allocation 51 2 Payments of restructuring charges (16) -- Other noncash charges (credits) 2 (2) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables 5 46 Change in accrued interest (103) (54) Change in other accruals and payables (80) (17) ----- ------ Net cash provided by operating activities 218 229 ----- ------ Cash flows from investing activities: Capital expended for property and equipment (80) (389) Cash paid for acquisitions (68) (77) Cash received in exchanges 22 50 Cash proceeds from disposition of assets 140 40 Additional investments in and loans to affiliates and others -- (61) Repayment of loans by affiliates and others 52 5 Other investing activities (72) (20) ----- ------ Net cash used in investing activities (6) (452) ----- ------ Cash flows from financing activities: Borrowings of debt 284 1,112 Repayments of debt (695) (1,467) Proceeds from issuance of redeemable preferred stock -- 223 Proceeds from issuance of Trust Preferred Securities 490 486 Payment of redeemable preferred stock dividends (2) -- Payment of dividends on subsidiary preferred stock and Trust Preferred Securities (32) (1) Change in intercompany payable/receivable (221) (49) ----- ------ Net cash provided by (used in) financing activities (176) 304 ----- ------ Net increase in cash 36 81 Cash at beginning of period -- -- ----- ------ Cash at end of period $ 36 81 ===== ======
See accompanying notes to consolidated financial statements I-5 7 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements March 31, 1997 (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. TCIC is a subsidiary of TCI. 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, 1996. 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts have been reclassified for comparability with the 1997 presentation. 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 1496.65 shares of Series A TCI Group common stock ("TCI Group Stock"). In addition, TCIC owns 116,853,195 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, at cost. (continued) I-6 8 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 $375 million and $300 million for the three months ended March 31, 1997 and 1996, respectively. Also during these periods, cash paid for income taxes was not material. Significant noncash investing and financing activities are as follows:
Three months ended March 31, ------------------ 1997 1996 ------ ------- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 67 881 Liabilities assumed, net of current assets (2) 4 Deferred tax liability recorded in acquisitions -- (240) Minority interests in equity of acquired entities 3 (4) Common stock of TCI issued in acquisition contributed to TCIC -- (564) ----- ---- Cash paid for acquisitions $ 68 77 ===== ==== Cash received in exchanges: Aggregate cost basis of assets acquired $ 294 193 Historical cost of assets given up (305) (222) Gain recorded on exchange of assets (11) (21) ----- ---- Cash received in exchanges $ (22) (50) ===== ==== Transfer of net assets: Fair value of assets transferred to (from) TCI $ 90 (27) Deferred tax liability transferred from (to) TCI (19) 17 Minority interests in equity -- (14) Decrease in additional paid-in-capital resulting from transfer of net assets to TCI (104) -- Decrease in intercompany receivable resulting from transfer of net assets 33 24 ----- ---- $ -- -- ===== ==== Change in unrealized gains, net of deferred taxes, on available-for-sale securities $ 5 3 ===== ==== Accrued preferred stock dividends $ 2 2 ===== ====
(continued) I-7 9 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:
Three months ended Combined Operations March 31, ------------------- 1997 1996 -------- -------- amounts in millions Revenue $ 82 171 Operating expenses (50) (186) Depreciation and amortization (35) (22) ---- ---- Operating loss (3) (37) Interest expense (19) (7) Other, net 2 24 ---- ---- Net loss $(20) (20) ==== ====
Effective December 31, 1996, TCIC transferred its 30% ownership interest in Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum"), 31.1% ownership interest in Teleport Communications Group Inc. ("TCG") and certain other investments to TCI. Collectively, the carrying value of such investments was $1,116 million at December 31, 1996 and accounted for $61 million of TCIC's share of its affiliates' losses for the three months ended March 31, 1996. 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"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. (continued) I-8 10 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock of Cable Sub with a stated value of $100 per share. (5) Debt Debt is summarized as follows:
March 31, December 31, 1997 1996 --------- ------------ amounts in millions Parent company debt: Notes payable $ 8,002 8,031 Commercial paper 404 638 Other debt 28 -- ------- ------ 8,434 8,669 Debt of subsidiaries: Bank credit facilities 4,645 4,810 Notes payable 762 768 Convertible notes (a) 41 43 Other debt 24 28 ------- ------ $13,906 14,318 ======= ======
(a) These convertible notes, which are stated net of unamortized discount of $168 million and $178 million at March 31, 1997 and December 31, 1996, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. The notes are convertible, at the option of the holders, into shares of Series A TCI Group Stock and TCI Series A Liberty Media Group common stock. TCIC's bank credit facilities and various other debt instruments generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and dividend payments. As security for borrowings under one of TCIC's bank credit facilities, TCIC has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of TCIC. (continued) I-9 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 quoted 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 $13,906 million, was $14,042 million at March 31, 1997. 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 (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at March 31, 1997 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,250 million at March 31, 1997. During the three months ended March 31, 1997 and 1996, TCIC's net receipts pursuant to the Fixed Rate Agreements were $3 million and $5 million, respectively; and TCIC's net receipts pursuant to the Variable Rate Agreements were $1 million and $8 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 ------------ ------------- -------- -------------- -------------- -------- October 1997 7.1%-9.3% $ 180 April 1997 7.0% $ 200 December 1997 8.7% 230 September 1998 4.8%-5.4% 450 ------ April 1999 7.4% 50 $ 410 February 2000 5.8%-6.6% 300 ====== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 March 2027 9.7% 300 December 2036 9.7% 200 ------- $ 2,250 =======
TCIC is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, TCIC does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. The fair value of the interest rate exchange agreements is the estimated amount that TCIC would pay or receive to terminate the agreements at March 31, 1997, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. At March 31, 1997, TCIC would be required to pay an estimated $7 million to terminate the Fixed Rate Agreements and an estimated $47 million to terminate the Variable Rate Agreements. (continued) I-10 12 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC is required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper At March 31, 1997, TCIC had approximately $1.5 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support 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. (6) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of the Company In 1996 and 1997, the Company, through certain subsidiary trusts, (the "Trusts"), issued preferred securities as follows:
Subsidiary Trust Interest Rate Face Amount ---------------- ------------- ----------- in millions TCI Communications Financing I 8.72% $ 500 TCI Communications Financing II 10.00% 500 TCI Communications Financing III 9.65% 300 TCI Communications Financing IV 9.72% 200 ------ $1,500 ======
The Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") of the Company. The Subordinated Debt Securities have interest rates equal to the interest rate of the corresponding Trust Preferred Securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The Subordinated Debt Securities are unsecured obligations of the Company and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable. The Company effectively provides a full and unconditional guarantee of the Trusts' obligations under the Trust Preferred Securities. The Trust Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheets captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of the Company." Dividends accrued on the Trust Preferred Securities are included in minority interests in earnings of consolidated subsidiaries in the accompanying consolidated financial statements. (continued) I-11 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 is 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 TCI's business which produces and distributes programming services, ("Liberty"). Charges to TCIC (which are based upon customary rates charged to others) for such programming were $11 million and $27 million for the three months ended March 31, 1997 and 1996, respectively. Such amounts are included in operating expenses in the accompanying consolidated statements of operations. Liberty leases satellite transponder facilities from TCIC. Charges by TCIC for such arrangements for the three month periods ended March 31, 1997 and 1996, aggregated $2 million and $3 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 three months ended March 31, 1997 and 1996 were approximately $26 million and $18 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 1997 and 1998. (continued) I-12 14 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements At March 31, 1997, TCIC had a $199 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. Effective January 2, 1997, TCIC transferred its business of providing long-distance transport of video, voice and data traffic and other telecommunications services to TCI. Such transfer has been reflected as a net decrease in common stockholder's equity. Intercompany amounts at March 31, 1997 represent non-interest bearing intercompany advances aggregating $18 million from certain subsidiaries of TCI offset by the aforementioned $199 million intercompany receivable from TCI Starz, Inc. and interest-bearing loans to certain subsidiaries of TCI. Such interest-bearing loans plus accrued interest aggregated $211 million and $148 million at March 31, 1997 and December 31, 1996, respectively. Interest earned by TCIC on such intercompany loans aggregated $3 million and $2 million for the three months ended March 31, 1997 and 1996, respectively. (8) Commitments and Contingencies TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $175 million at March 31, 1997. 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. A certain company 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 the company's behalf. TCIC is a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution, and license agreements. As of March 31, 1997, the amount of such obligations or guarantees was approximately $97 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Certain key employees of TCIC hold restricted stock awards, options 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. (continued) I-13 15 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible TCIC may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. I-14 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, 1996. The following discussion focuses on material changes in the trends, risks and uncertainties affecting the Company's results of operations and financial condition. Reference should also be made to the Company's consolidated financial statements included herein. (1) Material changes in financial condition: During March 1997, the Company, through special purpose entities formed as Delaware business trusts, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC acquired all of the common stock of Cable Sub which owned Viacom's cable systems and related assets. The transaction was structured as a tax-free reorganization in which Cable Sub initially transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to New Viacom Sub. Cable Sub also transferred to New Viacom Sub the proceeds of the Loan Facility. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. For additional discussion of the Viacom Acquisition, see note 4 to the accompanying consolidated financial statements. At March 31, 1997, subsidiaries of the Company had approximately $1.5 billion of availability in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries of the Company were in compliance with the restrictive covenants contained in their credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with 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-15 17 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, compensation relating to stock appreciation rights and adjustments to compensation relating to stock appreciation rights) ($679 million and $498 million, for the three months ended March 31, 1997 and 1996, respectively) to interest expense ($272 million and $246 million, for the three months ended March 31, 1997 and 1996, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 250% and 202% for the three month period ended March 31, 1997 and 1996. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the relative predictability of its cable television operations and interest expense, almost half of which results from fixed rate indebtedness. However, the Company's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that the Company will be able to achieve such objective. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying consolidated statements of cash flows. Net cash provided by operating activities ($218 million and $229 million for the three months ended March 31, 1997 and 1996, respectively) reflects net cash from the operations of the Company available for the Company's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. 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. The Company's subsidiaries generally finance acquisitions and capital expenditures through net cash provided by operating and financing activities. Historically, amounts expended for acquisitions, investments and capital expenditures have exceeded net cash provided by operating activities. However, during the three months ended March 31, 1997, cash provided by operating activities exceeded cash used in investing activities. The Company has reevaluated its capital expenditure strategy and currently anticipates that it will expend significantly less for property and equipment in 1997 than it did in 1996. In this regard, the amount of capital expended by the Company for property and equipment was $80 million during the three months ended March 31, 1997, as compared to $389 million during the corresponding period in 1996. The Company currently estimates that it will spend approximately $750 million for capital expenditures during 1997. To the extent that net cash provided by operating activities exceeds net cash used in investing activities, the Company will use such excess cash to reduce outstanding debt. (continued) I-16 18 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (1) Material changes in financial condition (continued): TCIC is a direct obligor or guarantor of the payment of certain amounts that may be due pursuant to motion picture output, distribution, and license agreements. As of March 31, 1997, the amount of such obligations or guarantees was approximately $97 million. The future obligations of TCIC with respect to these agreements is not currently determinable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. TCIC has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $175 million at March 31, 1997. 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. A certain company 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 the company's behalf. 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. 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 (i) pays fixed interest rates ranging from 7.1% to 9.3% and receives variable interest rates on notional amounts of $410 million at March 31, 1997 and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,250 million at March 31, 1997. During the three months ended March 31, 1997 and 1996, the Company's net receipts pursuant to its Fixed Rate Agreements were $3 million and $5 million, respectively; and the Company's net receipts pursuant to the Variable Rate Agreements were $1 million and $8 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. (2) Material changes in results of operations: Revenue The operation of the Company's cable television systems is regulated at the federal, state and local levels. The Cable Television Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 (collectively, the "Cable Acts") established rules under which the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are regulated if a complaint is filed or if the appropriate franchise authority is certified. At March 31, 1997, 78% of the Company's basic customers were served by cable television systems that were subject to such rate regulation. (continued) I-17 19 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (2) Material changes in results of operations (continued): During the three months ended March 31, 1997, 73% of the Company's revenue was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit the Company's ability to increase its service rates. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"). Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, TCI distributed (the "Satellite Spin-off") to the holders of shares of Series A TCI Group Stock and Series B TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with those of the Company. Revenue increased 13% for the three months ended March 31, 1997, as compared to the corresponding period of 1996. Exclusive of an increase in revenue due to acquisitions (13%), and a decrease in revenue due to the Satellite Spin-off (6%), revenue increased 6%. Such increase was the result of an 11% increase in the Company's average basic rate, a 1% increase in the Company's average premium rate and a 3% decrease in the number of average premium subscribers. The number of average basic customers increased less than 1% from 1996 to 1997. Operating Costs and Expenses Operating expenses increased 17% for the three months ended March 31, 1997, respectively, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, net of dispositions, such expenses increased 9%. Programming expenses accounted for the majority of such increases. The Company cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. Selling, general and administrative expenses decreased 24% for the three months ended March 31, 1997, as compared to the corresponding period of 1996. Exclusive of the effects of acquisitions, net of dispositions, such expenses decreased 17%. Such decrease is due primarily to a reduction in salaries and related payroll expenses due to work force reductions in the fourth quarter of 1996, as well as reduced marketing and general overhead expenses. The decrease in the Company's depreciation expense in 1997 is the result of the net effect of a decrease due to the Satellite Spin-off partially offset by increases due to acquisitions and capital expenditures. The increase in the Company's amortization expense in 1997 is due to acquisitions. (continued) I-18 20 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) (2) Material changes in results of operations (continued): 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 and Expenses Included in share of losses of affiliates for the three months ended March 31, 1996 was $61 million, attributable to the Company's investment in Sprint Spectrum and TCG. Effective December 31, 1996, the Company transferred these investments to TCI. As such, the Company no longer reflects share of losses from such investments. Minority interests in earnings of consolidated subsidiaries aggregated $26 million for the three months ended March 31, 1997, as compared to $4 million for the corresponding period in 1996. Such change is due primarily to the accrual of dividends on the Trust Preferred Securities in 1997. See note 6 to the accompanying consolidated financial statements. Net Earnings (Loss) TCIC's net earnings (before preferred stock dividend requirements) of $39 million for the three months ended March 31, 1997 represented an increase of $119 million as compared to TCIC's net loss (before preferred stock dividend requirements) of $80 million for the corresponding period of 1996. Such increase is primarily the net result of an increase in operating income and a decrease in share of losses of affiliates partially offset by an increase in interest expense and an increase in the aforementioned dividends on Trust Preferred Securities reflected as minority share of earnings. I-19 21 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 March 31, 1997 to which TCIC or any of its consolidated subsidiaries is a party or of which any of its property is the subject. Item 6. Exhibit and Reports on Form 8-K. (a) Exhibit - (27) TCI Communications, Inc. Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended March 31, 1997:
Date of Item Report Reported Financial Statements Filed ------- -------- -------------------------- January 22, 1997 Item 5 None. March 11, 1997 Item 5 None.
II-1 22 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: May 13, 1997 By: /s/ Leo J. Hindery, Jr. -------------------------------------- Leo J. Hindery, Jr. President and Chief Executive Officer Date: May 13, 1997 By: /s/ Stephen M. Brett -------------------------------------- Stephen M. Brett Senior Vice President Date: May 13, 1997 By: /s/ Bernard W. Schotters -------------------------------------- Bernard W. Schotters Senior Vice President (Principal Financial Officer) Date: May 13, 1997 By: /s/ Gary K. Bracken -------------------------------------- Gary K. Bracken Senior Vice President and Controller (Principal Accounting Officer) II-2 23 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 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 MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000096903 TCI COMMUNICATIONS, INC. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 36 0 302 0 0 0 11,019 4,041 22,772 0 13,906 232 0 1 (185) 22,772 0 1,505 0 544 331 0 272 61 22 39 0 0 0 39 0 0
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