-----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, BwmhY8o6k8YIqZelLyfBoeTuLZPEYMEO6lx+XrhDVxz5XntFj1IVIL8EXrJs1JC8 a+9QhWw2YSkIZxxNEZLCGQ== 0000950134-97-002371.txt : 19970329 0000950134-97-002371.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950134-97-002371 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-05550 FILM NUMBER: 97567314 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-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 Securities registered pursuant to Section 12(b) of the Act: 8.72% Trust Originated Preferred Securities 10% Trust Preferred Securities 9.65% Capital Securities 9.72% Trust Preferred Securities Securities registered pursuant to Section 12(g) of the Act: Cumulative Exchangeable Preferred Stock, Series A 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) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. --- The aggregate market value of the Cumulative Exchangeable Preferred Stock, Series A held by nonaffiliates of TCI Communications, Inc., computed by reference to the last sales price of such stock, as of the close of trading on January 31, 1997, was $188,025,000. 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 January 31, 1997, was: Class A common stock - 811,655 shares; and Class B common stock - 94,447 shares. Documents Incorporated by Reference Portions of the Registrant's definitive Proxy Statement to be used in connection with the 1997 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 2 TCI COMMUNICATIONS, INC. 1996 ANNUAL REPORT ON FORM 10-K Table of Contents
Page ---- PART I Item 1. Business ...................................................... I- 1 Item 2. Properties .................................................... I-14 Item 3. Legal Proceedings ............................................. I-14 Item 4. Submission of Matters to a Vote of Security Holders ........... I-19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... II- 1 Item 6. Selected Financial Data ....................................... II- 2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. II- 3 Item 8. Financial Statements and Supplementary Data ................... II-13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. II-13 PART III Item 10. Directors and Executive Officers of the Registrant ............ III- 1 Item 11. Executive Compensation ........................................ III- 1 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................................... III- 1 Item 13. Certain Relationships and Related Transactions ................ III- 1 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................. IV- 1
3 PART I. Item 1. Business. (a) General Development of Business TCI Communications, Inc. ("TCIC" or the "Company"), through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems. The Company is a Delaware corporation and was incorporated on August 20, 1968. The Company and its predecessors have been engaged in the cable television business since the early 1950's. TCIC is a subsidiary of Tele-Communications, Inc. ("TCI"). 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. 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 $625,796,100 in aggregate face value of shares of 5% Class A Senior Cumulative Exchangeable Preferred Stock of Cable Sub. During 1996, TCIC issued 4.6 million shares of Series A Cumulative Exchangeable Preferred Stock in a public offering for net cash proceeds of $223 million. In addition, subsidiaries of TCIC issued $500 million in face value of 8.72% Trust Originated Preferred SecuritiesSM and $500 million in face value of 10% Trust Preferred Securities for aggregate net cash proceeds of $971 million. TCIC used the proceeds from such issuances to retire commercial paper and to repay certain other indebtedness. During March 1997, TCIC, through certain subsidiaries, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. TCIC used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. I-1 4 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 Tele-Communications, Inc. Series A TCI Group common stock and Tele-Communications, Inc. Series B TCI Group common 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. Effective December 31, 1996, TCIC transferred its investments in businesses which provide wireless communications services to residential and business customers nationwide and its investment in Teleport Communications Group Inc., which is a competitive local exchange carrier, to TCI. In addition, effective December 31, 1996, TCIC transferred certain assets related to its wireline residential telephony business to TCI. Effective January 2, 1997, TCIC transferred its business of providing long-distance transport of video, voice and data traffic and other telecommunications services, primarily to inter-exchange carriers on a wholesale basis using a digital broadband microwave network located throughout a 14 state region in the western United States, to TCI. (b) Financial Information about Industry Segments At December 31, 1996, the Company operated in the cable and communications services industry. (c) Narrative Description of Business General. Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. Cable operators have traditionally used coaxial cable for transmission of television signals to subscribers. Optical fiber is a technologically advanced transmission medium capable of carrying cable television signals via light waves generated by a laser. Optical fiber, when used as an alternative to coaxial cable, can improve system reliability and provide for additional capacity which should enable the provision of incremental revenue-producing services. During 1992, the Company began upgrading and installing optical fiber in its cable systems. I-2 5 At December 31, 1996, approximately 68% of the Company's cable television systems had bandwidth capacities ranging from 400 megahertz to 750 megahertz, which generally permit a cable television system to carry from 54 to 112 analog channels, respectively. Compressed digital video technology converts on average as many as fourteen analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which sends the signal back down to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal back into analog channels that can be viewed on a normal television set. The Company conducted a beta test of its digital cable television service in late 1996 and began offering such service to selected paying customers in three markets during the first quarter of 1997. Imedia, a small high technology firm, has developed a technology which represents a significant advancement in increasing the number of digital television programs delivered over a single satellite transponder or channel on a cable system. Without requiring any change in fielded digital receiving equipment in either the cable system headend or the customer's home, the introduction of Imedia's StatMux(TM) technology significantly increases the transportation capacity of the operator's system. The Company anticipates that it will incorporate such technology with its digital service in strategic cable systems during 1997. Service Charges. The Company offers a limited "basic service" ("Basic TV") (primarily comprised of local broadcast signals and public, educational and governmental access channels) and an "expanded" tier (primarily comprised of specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly fee for "basic service" generally ranges from $8.00 to $11.00, and the monthly service fee for the "expanded" tier generally ranges from $13.00 to $18.00. The Company offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films, as well as live and taped sports events, concerts and other programming. The Company offers Pay-TV services for a monthly fee generally ranging from $9.00 to $15.00 per service, except for certain movie or sports services (such as various regional sports networks and certain Pay-TV channels) offered at $1.00 to $5.00 per month, pay-per-view movies offered separately generally at $4.00 per movie and certain pay-per-view events offered separately at $10.00 to $50.00 per event. Charges are usually discounted when multiple Pay-TV services are ordered. As further enhancements to their cable services, customers may generally rent converters and/or a remote control device for a monthly charge ranging from $0.10 to $5.00 each, as well as purchase a channel guide for a monthly charge ranging from $1.50 to $2.00. Also a nonrecurring installation charge (which is limited by the Federal Communications Commission's ("FCC's") rules which regulate hourly service charges for each individual cable system) of up to $60.00 is usually charged. Monthly fees for basic and Pay-TV services to commercial customers vary widely depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty. As noted below, the Company's service offerings and rates were affected by rate regulations issued by the FCC in 1993 and 1994. See Regulation and Legislation below. I-3 6 Customer Data. TCIC operates its cable television systems either through its operating divisions or through certain other subsidiaries or affiliated companies. Basic and Pay-TV cable served by TCIC and its consolidated subsidiaries are summarized as follows (amounts in millions):
Basic TV customers at December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Managed through TCIC's operating divisions (1) 13.4 11.9 10.7 9.8 9.4 Other non-managed subsidiaries 0.5 0.6 0.5 0.5 0.5 ------- ------- ------- ------- ------- 13.9 12.5 11.2 10.3 9.9 ======= ======= ======= ======= =======
Pay TV subscriptions at December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Managed through TCIC's operating divisions (1) 14.7 13.4 11.5 9.5 8.8 Other non-managed subsidiaries 0.4 0.4 0.4 0.4 0.5 ------- ------- ------- ------- ------- 15.1 13.8 11.9 9.9 9.3 ======= ======= ======= ======= =======
- --------------------- (1) Reflects approximately 100,000 customers in 1995 and 1994 owned by another subsidiary of TCI. TCIC operates cable television systems throughout the continental United States and Hawaii. Local Franchises. Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise. Franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to subscribers; rate regulation; provision of service to certain institutions; provision of channels for public access and commercial leased-use; and maintenance of insurance and/or indemnity bonds. The Company's franchises also typically provide for periodic payments of fees, not to exceed 5% of revenue, to the governmental authority granting the franchise. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee. Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. I-4 7 In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. The Company believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. Most of the Company's present franchises had initial terms of approximately 10 to 15 years. The duration of the Company's outstanding franchises presently varies from a period of months to an indefinite period of time. Approximately 1,200 of the Company's franchises expire within the next five years. This represents approximately twenty-seven percent of the franchises held by the Company and involves approximately 4.5 million basic subscribers. The Company owns and operates the National Digital Television Center ("NDTC") in Denver. This facility provides services to the cable television and satellite entertainment industries which include production, digital video compression, satellite uplinking and transponder management as well as signal authorization and encryption. The NDTC's "Headend in the Sky" ("HITS") provides cable operators with the ability to securely encrypt and control viewer access for analog and digital subscribers from a single centralized location. In addition to HITS, the NDTC contains 20,000 square feet of video production space and operates post production facilities in New York, Hollywood and Hong Kong. Competition. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theatres, video cassettes and other sources of information and entertainment including directly competitive cable television operations and Internet service providers. Both the 1992 Cable Act and the Telecommunications Act of 1996 ("1996 Telecom Act") are designed to increase competition in the cable television industry. See Regulation and Legislation below. There are alternative methods of distributing the same or similar video programming offered by cable television systems. Further, these technologies have been encouraged by Congress and the FCC to offer services in direct competition with existing cable systems. I-5 8 DBS. During 1996, the Company has experienced a competitive impact from medium power and high power direct broadcast satellites ("DBS") that use high frequencies to transmit signals that can be received by dish antennas ("HSDs") much smaller in size than traditional HSDs. The Primestar partners distribute a multi-channel programming service via a medium power communications satellite to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the Company provided this satellite delivered service. DirecTv, Inc., United States Satellite Broadcasting Corporation and EchoStar Communications Corp. ("Echostar"), transmit from high power satellites and generally use smaller dishes to receive their signals. Alphastar, Inc. began offering medium power service in the second quarter of 1996. On February 24, 1997, The News Corporation Limited ("News Corp.") and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar and that the companies will combine their DBS businesses into a new company, which will operate under the name Sky. The two companies contend that Sky, which is scheduled to launch in early 1998, will offer 500 channels of digital television on a nationwide basis (not all of which would be available to each subscriber), Internet services and local broadcast network television signals, capable of reaching more than 50% of all television households upon the launch of Sky and 75% of all television households by the end of 1998. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. Estimated DBS customers nationwide increased from approximately 2.2 million at the end of 1995 to approximately 4.4 million at the end of 1996, and the Company expects that competition from DBS will continue to increase. DBS has advantages and disadvantages as an alternative means of distributing video signals to the home. Among the advantages are that the capital investment (although initially high) for the satellite and uplinking segment of a DBS system is fixed and does not increase with the number of subscribers receiving satellite transmissions; that DBS is not currently subject to local regulation of service and prices or required to pay franchise fees; and that the capital costs for the ground segment of a DBS system (the reception equipment) are directly related to, and limited by, the number of service subscribers. DBS's disadvantages presently include limited ability to tailor the programming package to the interests of different geographic markets, such as providing local news, other local origination services and local broadcast stations; signal reception being subject to line of sight angles; and technology which requires a customer to rent or own one set-top box (which is significantly more expensive than a cable converter) for each television on which they wish to view DBS programming. Although the effect of competition from these DBS services cannot be specifically predicted, it is clear there has been significant growth in DBS subscribers and the Company assumes that such DBS competition will be substantial in the near future as developments in technology continue to increase satellite transmitter power and decrease the cost and size of equipment needed to receive these transmissions and enable DBS to overcome the aforementioned disadvantages. Further, the extensive national advertising of DBS programming packages, including certain sports packages not currently available on cable television systems, will likely continue the growth in DBS subscribers. I-6 9 Telephone Company Entry. The 1996 Telecom Act eliminated the statutory and regulatory restrictions that prevented local telephone companies from competing with cable operators for the provision of video services by any means. See Regulation and Legislation section. The 1996 Telecom Act allows local telephone companies, including the regional bell operating companies ("RBOCs"), to compete with cable television operators both inside and outside their telephone service areas. The Company expects that it will face substantial competition from telephone companies for the provision of video services, whether it is through wireless cable, or through upgraded telephone networks. The Company assumes that all major telephone companies have already entered or soon will enter the business of providing video services. The Company is aware that telephone companies have already built, or are in the process of building, competing cable system facilities in a few of the Company's franchise areas. Most major telephone companies have greater financial resources than the Company, and the 1992 Cable Act ensures that telephone company providers of video services will have access to acquiring all of the significant cable television programming services. The specific manner in which telephone company provision of video services will be regulated is described under Regulation and Legislation below. Additionally, the 1996 Telecom Act eliminates certain federal restrictions on utility holding companies and thus frees all utility companies to provide cable television services. The Company expects this could result in another source of significant competition in the delivery of video services. Although long distance telephone companies had no legal prohibition on the provision of video services, they have historically not been providers of such services in competition with cable systems. However, such companies may prove to be a source of competition in the future. The long distance companies are expected to expand into local markets with local telephone and other offerings (including video services) in competition with the regional bell operating companies. MMDS/LMDS. Another alternative method of distribution is multi-channel multi-point distribution systems ("MMDS"), which deliver programming services over microwave channels received by customers with special antennas. MMDS systems are less capital intensive, are not required to obtain local franchises or pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. The 1992 Cable Act also ensures that MMDS operators have the opportunity to acquire all significant cable television programming services. Although there are relatively few MMDS systems in the United States currently in operation, virtually all markets have been licensed or tentatively licensed. The FCC has taken a series of actions intended to facilitate the development of wireless cable systems as an alternative means of distributing video programming, including reallocating the use of certain frequencies to these services and expanding the permissible use of certain channels reserved for educational purposes. The FCC's actions enable a single entity to develop an MMDS system with a potential of up to 35 analog channels, and thus compete more effectively with cable television. Developments in digital compression technology will significantly increase the number of channels that can be made available from MMDS. Further, in 1995, several large telephone companies acquired significant ownership in numerous MMDS companies. This infusion of money into the MMDS industry was expected to accelerate its growth and its competitive impact. However, in 1996 telephone company support of MMDS appeared to diminish as both Bell Atlantic Corporation and NYNEX Corporation suspended their investments in two major MMDS companies. Finally, an emerging technology, local multipoint distribution services ("LMDS"), could also pose a significant threat to the cable television industry, if and when it becomes established. LMDS, sometimes referred to as cellular television, could have the capability of delivering more than 100 channels of video programming to a customer's home. The potential impact of LMDS is difficult to assess due to the recent development of the technology and the absence of any current fully operational LMDS systems. I-7 10 Within the cable television industry, cable operators may compete with other cable operators or others seeking franchises for competing cable television systems at any time during the terms of existing franchises or upon expiration of such franchises in expectation that the existing franchise will not be renewed. The 1992 Cable Act promotes the granting of competitive franchises. An increasing number of cities are exploring the feasibility of owning their own cable systems in a manner similar to city-provided utility services. Private Cable. The Company also competes with Master Antenna Television ("MATV") systems and Satellite MATV ("SMATV") systems, which provide multi-channel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities. Further, the FCC is now considering new rules that would restrict or eliminate the ability of cable operators to maintain ownership of cable wiring inside multi-unit buildings, thereby potentially making it less expensive for SMATV competitors to reach those customers. In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. As the cable television industry has developed additional programming, its advertising revenue has increased. Cable operators sell advertising spots primarily to local and regional advertisers. The Company has no basis upon which to estimate the number of cable television companies and other entities with which it competes or may potentially compete. There are a large number of individual and multiple system cable television operators in the United States but, measured by the number of basic customers, the Company is the largest provider of cable television services. The full extent to which other media or home delivery services will compete with cable television systems may not be known for some time and there can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future. Regulation and Legislation. The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. On February 8, 1996, the President signed into law the 1996 Telecom Act. This new law alters the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it reduces the scope of cable rate regulation. The 1996 Telecom Act requires the FCC to implement numerous rulemakings, the final outcome of which cannot yet be determined. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect the Company's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of the Company's cable systems. I-8 11 Cable Rate Regulation. The 1992 Cable Act imposed extensive rate regulation on the cable television industry. All cable systems are subject to rate regulation, unless they face "effective competition" in their local franchise area. Under the 1992 Cable Act, the incumbent cable operator can demonstrate "effective competition" by showing either low penetration (less than 30% of the local population subscribes to basic service) or the presence (measured collectively as 50% availability, 15% subscriber penetration) of other multichannel video programming distributors ("MVPDs"). The 1996 Telecom Act expands the existing definition of "effective competition" to create a special test for a competing MVPD (other than a DBS distributor) affiliated with a local exchange carrier ("LEC"). There is no penetration minimum for a LEC affiliate to qualify as an effective competitor, but it must offer comparable programming services in the franchise area. Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or "LFAs") are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier ("BST"), which typically contains local broadcast stations and public, educational and government access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. The FCC itself directly administers rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if an LFA first receives at least two complaints from local subscribers within 90 days of a CPST rate increase and then files a formal complaint with the FCC. When new CPST rate complaints are filed, the FCC now considers only whether the incremental increase is justified and will not reduce the previously established CPST rate. Under the FCC's rate regulations, the Company was required to reduce its BST and CPST rates in 1993 and 1994, and has since had its rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with delays in implementing rate increases. Operators also have the opportunity of bypassing this "benchmark" in favor of traditional cost-of-service regulation in cases where the latter methodology appears favorable. However, the FCC significantly limited the inclusion in the rate base of acquisition costs in excess of the historical cost of tangible assets. As a result, the Company pursued cost of service justifications in only a few cases. Premium cable services offered on a per channel or per program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. It also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC. I-9 12 Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the 1996 Telecom Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The 1996 Telecom Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that LFAs can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase in period beginning in 2001, if the cable operator provides telecommunications service, as well as cable service, over its plant. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the 1996 Telecom Act intended to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. Review of the FCC's initial interconnection order is now pending before the Eighth Circuit Court of Appeals. Telephone Company Entry Into Cable Television. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable company cross-ownership ban and the FCC's video dialtone regulations. This will allow local LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service. Under the 1996 Telecom Act, a LEC providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless the LEC elects to provide its programming via an "open video system" ("OVS"). LECs providing service through an OVS can proceed without a traditional cable franchise, although an OVS operator will be subject to general rights-of-way management regulations and can be required to pay franchise fees to the extent it provides cable services. To be eligible for OVS status, the LEC itself cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures between cable operators and LECs in the same market. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition. The "rural exemption" permits buyouts where the purchased system serves an area with fewer than 35,000 inhabitants outside an urban area, and the cable system plus any other system in which the LEC has an interest do not represent 10% or more of the LEC's telephone service area. The 1996 Telecom Act also provides the FCC with the power to grant waivers of the buyout prohibition in cases where: (1) the cable operator or LEC would be subject to undue economic distress; (2) the system or facilities would not be economically viable; or (3) the anticompetitive effects of the proposed transaction are clearly outweighed by the effect of the transaction in meeting community needs. The LFA must approve any such waiver. I-10 13 Electric Utility Entry Into Telecommunications/Cable Television. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of homes nationwide that a cable operator may reach through cable systems in which it holds an attributable interest (attributable for these purposes is defined as a 5% or greater ownership interest or the existence of any common directors), with an increase to 35% if the additional cable systems are minority controlled. However, the FCC stayed the effectiveness of its ownership limits pending the appeal of a September 16, 1993 decision by the United States District Court for the District of Columbia which, among other things, found unconstitutional the provision of the 1992 Cable Act requiring the FCC to establish such ownership limits. If the ownership limits are determined on appeal to be constitutional, they may affect the Company's ability to acquire interests in additional cable systems. The FCC also adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest (using the same attribution standards as were adopted for its limits on the number of homes nationwide that a cable operator may reach through its cable systems) to 40% of the first 75 activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. Channels beyond the first 75 activated channels are not subject to such limitations, and the rules do not apply to local or regional programming services. The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The 1996 Telecom Act also eliminates the three year holding period required under the 1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect "must carry," and more popular stations typically elect "retransmission consent." Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse affect on the Company's business. Additionally, cable systems are required to obtain retransmission consent for all "distant" commercial television stations (except for commercial satellite-delivered independent "superstations" such as WTBS). The constitutionality of the must carry requirements has been challenged and is awaiting a decision from the U.S. Supreme Court. I-11 14 Access Channels. LFAs can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its channel capacity (either 10% or 15%) for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. In February of 1997, the FCC released revised rules which mandate a modest rate reduction and could make commercial leased access a more attractive option for third party programmers. "Anti-Buy Through" Provisions. Federal law requires each cable system to permit subscribers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in December 2002, but the FCC may extend that period if deemed necessary. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring cable operators over competitors and requires such programmers to sell their programming to other multichannel video distributors (such as DBS and MMDS). This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to the Company. Other FCC Regulations. In addition to the FCC regulations noted above, there are other FCC regulations covering such areas as equal employment opportunity, subscriber privacy, programming practices (including, among other things, syndicated program exclusivity, network program nonduplication, local sports blackouts, indecent programming, lottery programming, political programming, sponsorship identification, and children's programming advertisements), registration of cable systems and facilities licensing, maintenance of various records and public inspection files, frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards, and consumer electronics equipment compatibility. The FCC is expected to impose new Emergency Alert System requirements on cable operators in 1997. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Two pending FCC proceedings of particular competitive concern involve inside wiring and navigational device or converter boxes. The former FCC proceeding is considering ownership of cable wiring located inside multiple dwelling unit ("MDU") complexes. If the FCC concludes that such wiring belongs to, or can be unilaterally acquired by the MDU complex owner, it will become easier for MDU complex owners to terminate service from the incumbent cable operator in favor of a new entrant. The latter FCC proceeding is considering whether cable customers should be permitted to purchase cable converters from third party vendors. If the FCC concludes that third party sale of converters is required, and does not make appropriate allowances for signal piracy concerns, it may become more difficult for cable operators to combat theft of service. I-12 15 Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect the Company's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The 1996 Telecom Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. Proposed Changes in Regulation. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated and there can be no assurance that the Company's business will not be affected adversely by future legislation, new regulation or deregulation. I-13 16 GENERAL Legislative, administrative and/or judicial action may change all or portions of the foregoing statements relating to competition and regulation. The Company has not expended material amounts during the last three fiscal years on research and development activities. There is no one customer or affiliated group of customers to whom sales are made in an amount which exceeds 10% of the Company's consolidated revenue. Compliance with Federal, state and local provisions which have been enacted or adopted regulating the discharge of material into the environment or otherwise relating to the protection of the environment has had no material effect upon the capital expenditures, results of operations or competitive position of the Company. At December 31, 1996, the Company had approximately 30,500 employees. Of these employees, approximately 1,200 were located in its corporate headquarters and most of the balance were located at the Company's various facilities in the communities in which the Company owns and/or operates cable television systems. (d) Financial Information about Foreign & Domestic Operations and Export Sales The Company has neither material foreign operations nor export sales. Item 2. Properties. The Company owns its executive offices in a suburb of Denver, Colorado. It leases most of its regional and local operating offices. The Company owns many of its head-end and antenna sites. Its physical cable television properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. The Company's cable television facilities are, in the opinion of management, suitable and adequate by industry standards. Physical properties of the Company are not held subject to any major encumbrance. Item 3. Legal Proceedings. There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject, except as follows: On September 30, 1994, an action captioned The Carter Revocable Trust by H. Allen Carter and Sharlynn Carter as Trustees v. Tele-Communications, Inc.; IR-Daniels Partners III; Daniels Ventures, Inc.; Cablevision Equities IV; Daniels & Associates, Inc.; and John V. Saeman, 94-N-2253, was filed in the United States District Court for the District of Colorado. The suit alleges that all the defendants violated disclosure requirements under the Securities Exchange Act of 1934, and that defendants IR-Daniels Partners III (now known as IR-TCI Partners III), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.) and Daniels & Associates, Inc. (now known as TCI Cablevision Associates, Inc. or "D&A") breached a fiduciary duty to plaintiff and other limited partners of American Cable TV Investors 3 (the "ACT 3 Partnership"), in connection with (i) the sale to TCI Communications, Inc. of ACT 3 Partnership's ownership interest in the Redlands System and (ii) the sale to affiliates of TCIC of ACT 3 Partnership's ownership interests in other cable television systems (the "ACT 3 Transactions"). I-14 17 Plaintiff brought this action on behalf of himself and on behalf of all persons who were limited partners of the ACT 3 Partnership as of the close of business on October 1, 1993 and who had their proxies solicited by the defendants in connection with the ACT 3 Transactions that allegedly "resulted in the dissolution of the ACT 3 Partnership and the loss of their limited partnership interests." Plaintiff seeks unspecified damages that allegedly include, but are not limited to (i) the difference between the value of ACT 3 Partnership's interest in the Redlands System (as a percentage of the appraised value of that system as determined by a 1992 appraisal) and the amount paid by TCIC for the ACT 3 Partnership's interest in the Redlands System, plus the amount of a fee paid to D&A, and (ii) the difference between the fair market value of the limited partnership interests owned by members of a putative class and value received by members of the putative class pursuant to the ACT 3 Transactions. Plaintiff also seeks interest and consequential damages. Plaintiffs moved for class certification which was granted by the Court on November 3, 1995. Factual discovery in this case is complete. Defendants have filed a Motion for Summary Judgment within the scheduling deadlines ordered by the Court. The case is set for trial on September 29, 1997. Management of the Company 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. On September 30, 1994, an action captioned WEBBCO v. Tele-Communications, Inc.; IR-Daniels Partners II; Daniels Ventures, Inc.; Cablevision Equities III; Daniels & Associates, Inc.; and John V. Saeman, 94-N-2254, was filed in the United States District Court for the District of Colorado. The suit alleges that all the defendants violated disclosure requirements under the Securities Exchange Act of 1934, and that defendants IR-Daniels Partners II (now known as IR-TCI Partners II), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.) and D&A breached a fiduciary duty to plaintiff and other limited partners of American Cable TV Investors 2 (the "ACT 2 Partnership"), in connection with the sale to TCIC of ACT 2 Partnership's ownership interest in the Redlands System (the "ACT 2 Transaction"). Plaintiff brought this action on behalf of himself and on behalf of all persons who were limited partners of the ACT 2 Partnership as of the close of business on October 1, 1993 and who had their proxies solicited by the defendants in connection with the ACT 2 Transaction that allegedly "resulted in the dissolution of the ACT 2 Partnership and the loss of their limited partnership interests." Plaintiff seeks unspecified damages that allegedly include, but are not limited to (i) the difference between the value of ACT 2 Partnership's interest in the Redlands System (as a percentage of the appraised value of that system as determined by a 1992 appraisal) and the amount paid by TCIC for ACT 2 Partnership's interest in the Redlands System, plus the amount of a fee paid to D&A, and (ii) the difference between the fair market value of the limited partnership interests owned by members of a putative class and value received by members of the putative class pursuant to the ACT 2 Transaction. Plaintiff also seeks interest and consequential damages. Plaintiffs moved for class certification which was granted by the Court on November 3, 1995. Factual discovery in this case is complete. Defendants have filed a Motion for Summary Judgment within the scheduling deadlines ordered by the Court. The case is set for trial on September 29, 1997. Management of the Company 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. I-15 18 Intellectual Property Development Corporation v. UA-Columbia Cablevision of Westchester, Inc. and Tele-Communications, Inc. On September 1, 1994, plaintiff filed suit in federal court in New York for the alleged infringement of a patent for an invention used in broadcasting systems with fiber optic transmission lines. Plaintiff seeks injunctive relief and unspecified treble damages. The patent at issue expired on January 16, 1996, thereby eliminating any claim for injunctive relief by plaintiff. The issues now center around whether defendants owe past damages up to the time the patent expired. Discovery is currently ongoing. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition of this action should not have a material adverse effect upon the financial condition of the Company. Interactive Network, Inc. Shareholder Litigation. In January of 1995, two class action complaints ("Actions") were filed against Interactive Network, Inc. ("Interactive") and certain of its then current and former officers and directors (collectively the "Interactive Defendants") in the United States District Court for the Northern District of California which sought unspecified damages for alleged violations of the disclosure requirements of the federal securities laws. The Actions were filed on behalf of a class of shareholders that purchased the stock of Interactive during the period August 15, 1994 through November 22, 1994. Pursuant to an order of the Court, the Actions were consolidated and in April 1995, a Consolidated Amended Class Action Complaint captioned In re Interactive Network Inc. Securities Litigation ("Consolidated Case") was filed in the same court which again sought damages against the Interactive Defendants for violations of the disclosure requirements of the federal securities laws, which violations allegedly occurred during the period May 2, 1994 through March 31, 1995. On June 17, 1996, a Third Amended Consolidated Class Action Complaint was filed in the Consolidated Case against the Interactive Defendants and also added Tele-Communications, Inc., TCI Communications, Inc., TCI Development Corporation and Gary Howard as defendant parties (collectively, the "TCI Defendants"). The Third Amended Consolidated Class Action Complaint which was served upon the TCI Defendants (except Gary Howard) on June 28, 1996, continues to seek damages against the Interactive Defendants for violation of disclosure requirements of the federal securities laws and also seeks similar unspecified damages against the TCI Defendants predicated upon the allegation that they were "controlling persons" of Interactive at the time the alleged wrongs took place. During a mandatory settlement conference on November 19, 1996, plaintiffs estimated their alleged damages at $25 million. 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. I-16 19 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 Bushey (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 Defendants' favor on March 18, 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. Donald E. Watson v. Tele-Communications, Inc., et al. On March 10, 1995, Donald Watson, doing business under the name of Tri-County Cable, filed suit in Superior Court for the District of Columbia against TCI, TCI East, Inc., District Cablevision Limited Partnership, District Cablevision, Inc., TCI of D.C., Inc., TCI of Maryland, Inc., TCI Development Corporation, United Cable Television of Baltimore Limited Partnership, TCI of Pennsylvania, Inc. and two individuals, Richard Bushey and Roy Harbert. The action alleges breach of settlement agreement, intentional misrepresentations, tortious interference with prospective advantage, tortious interference with contract, tortious interference with economic relations, and discrimination on the basis of race. Three counts in the Complaint seek compensatory damages of $2,500,000 and punitive damages of $25,000,000; one count seeks compensatory damages of $2,500,000 and punitive damages of $40,000,000; and two counts each seek compensatory damages of $20,000,000 and punitive damages of $40,000,000. 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. I-17 20 Louis Beverly v. Tele-Communications, Inc., et al. On July 27, 1995, Louis Beverly, a former employee of United Cable Television of Baltimore Limited Partnership filed a complaint in United States District Court for the District of Maryland against Tele-Communications, Inc., United Artists Cable of Baltimore, Inc., United Cable Television of Baltimore Limited Partnership, UCTC of Baltimore, Inc., and TCI East, Inc. The plaintiff alleges, in part, that his termination on September 11, 1987, was the result of racial discrimination. Plaintiff filed five counts, including race discrimination (Title VII), violation of 42 USC 1981, defamation, invasion of privacy (false light), and assault and battery. Each count seeks $3,000,000 in compensatory and $6,000,000 in punitive damages, an award of all bonuses and other compensation lost due to defendants' actions as well as attorneys' fees, costs, and pre-judgment interest. On February 14, 1996, the Court granted defendants' Motion dismissing Tele-Communications, Inc., and TCI East, Inc. as parties, along with various counts asserted by the plaintiffs including 42 USC 1981, defamation, invasion of privacy, and assault and battery. United Artists Cable of Baltimore was also dismissed from the Title VII claim for race discrimination. Currently, the only damages available to plaintiff are those which existed prior to the amendment to the Civil Rights Act of 1991. As the case currently stands, the remaining defendants are faced with one count without exposure to punitive damages. Based upon the facts available, management believes that, although no assurances 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. Clarence L. Elder, both individually and as the group Representative vs. Tele-Communications, Inc. et al. On December 11, 1995, plaintiff filed suit in the Circuit Court for Baltimore City, Case No. 95345001/CL205580 against UCTC L.P. Company, UCTC of Baltimore, Inc., UTI Purchase Company, Inc. and Tele-Communications, Inc. The allegations made in the complaint pertain to plaintiff's interest in United Cable Television of Baltimore Limited Partnership. Plaintiff claims he was wrongfully denied certain preference distributions, rights to purchase stock, rights to escrow funds, and tax distributions. Plaintiff claims entitlement to compensatory damages in excess of $70,000,000 plus punitive damages in excess of $450,000,000. Plaintiff asserts claims for: breach of contract; negligent misrepresentation; negligence; unjust enrichment; conversion; fraud; and breach of fiduciary duty. The Court granted defendants Motion for Summary Judgment and plaintiff has filed an appeal. 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. I-18 21 C. Lamont Smith, et al. v. Mile Hi Cable Partners, et al. On December 9, 1996, C. Lamont Smith and The Black Movie Channel, LLC filed suit in the District Court for the City and County of Denver against subsidiaries of Tele-Communications, Inc. (TCI Communications, Inc.; Mile Hi Cable Partners, LP; Liberty Media Corporation and Encore Media Corporation); Black Entertainment Television; Steve Santamaria; Media Management Group, Inc. and Virginia Butler. Plaintiffs assert, in part, that the defendants misappropriated plaintiffs' concept for the development of a 24 hours a day, seven days a week, cable or satellite premium channel which would broadcast movies made by or featuring African Americans, as well as educational programming and community oriented programming of interest to both the Hispanic and Black communities. Plaintiffs claim anticipated annual net profits from such a network would exceed $600 million. Plaintiffs also assert that the franchise agreement with the City and County of Denver has been breached for alleged implied covenants of good faith and fair dealing under the Denver franchise; promissory estoppel and breach of implied contract; misappropriation of confidential information and trade secrets; breach of confidence; breach of fiduciary duty; as well as unjust enrichment; fraud; negligent misrepresentation; non-disclosure and concealment; civil conspiracy; and violation of the Colorado Antitrust Act of 1992. Plaintiffs seek an award of consequential, special and restitutionary damages in an unspecified amount as well as exemplary damages, prejudgment interest, expert witness fees, attorneys fees and costs. 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. Item 4. Submission of Matters to a Vote of Security Holders. None. I-19 22 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. All of TCI Communications, Inc.'s (the "Company") common stock is owned by Tele-Communications, Inc. The Company has not paid cash dividends on its common stock and has no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by the board of directors in light of the Company's earnings, financial condition and other relevant considerations. The Company is a holding company and its assets consist almost entirely of investments in its subsidiaries. As a holding company, the Company's ability to pay dividends on any classes of its stock is dependent on the earnings of, or other funds available to, the Company's subsidiaries and the distribution or other payment of such earnings or other funds to the Company in the form of dividends, loans or other advances, payment or reimbursement of management fees and expenses and repayment of loans and advances from the Company. Certain of the Company's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds by such subsidiaries to the Company in the form of dividends, loans, or advances, and require that such subsidiaries' indebtedness to the Company be subordinate to the indebtedness under such loan agreements. The amount of net assets of subsidiaries subject to such restrictions exceeds the Company's consolidated net assets. II-1 23 Item 6. Selected Financial Data. The following tables present selected information relating to the financial condition and results of operations of TCI Communications, Inc. (the "Company") for the past five years. The following data should be read in conjunction with TCI Communications, Inc.'s consolidated financial statements.
December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ---------- ---------- ---------- --------- amounts in millions Summary Balance Sheet Data: Property and equipment, net $ 7,192 6,988 5,579 4,935 4,562 Franchise costs, net $ 14,794 11,563 9,297 9,197 9,300 Total assets $ 23,136 20,364 15,880 16,527 16,315 Debt $ 14,318 12,635 10,712 9,900 10,285 Minority interests in equity of consolidated subsidiaries $ 802 206 271 285 280 Redeemable preferred stock $ 232 -- -- 18 110 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of the Company $ 1,000 -- -- -- -- Stockholder's(s') equity $ 14 1,729 683 2,116 1,728 Common shares outstanding (net of shares held by subsidiaries in 1993 and 1992): Class A common stock 1 1 1 403 382 Class B common stock -- -- -- 47 48
Years ended December 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- -------- amounts in millions Summary Statement of Operations Data: Revenue $ 5,954 4,878 4,116 3,977 3,463 Operating income $ 753 803 818 916 864 Interest expense $(1,041) (962) (777) (731) (718) Earnings (loss) from continuing operations $ (452) (120) 94 (5) 8 Net earnings (loss) attributable to common stockholder(s) $ (461) (120) 94 (7) (22)
II-2 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Summary of Operations As of January 27, 1994, TCI Communications, Inc. (formerly Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation ("Liberty") entered into a definitive merger agreement to combine the two companies (the "TCI/Liberty Combination"). The transaction was consummated on August 4, 1994 and was structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company. Due to the significant economic interest held through its ownership of Liberty preferred stock and Liberty common stock and other related party considerations, Old TCI accounted for its investment in Liberty under the equity method prior to the TCI/Liberty Combination. In connection with the TCI/Liberty Combination, Old TCI changed its name to TCI Communications, Inc. ("TCIC" or the "Company") and TCI/Liberty Holding Company changed its name to Tele-Communications, Inc. ("TCI"). TCIC is a subsidiary of TCI. During the fourth quarter of 1994, TCI reorganized (the "Reorganization") it's operating structure. Upon Reorganization, certain of the assets of TCIC were transferred to the other operating units. The most significant transfers were as follows: (i) Turner Broadcasting System, Inc. and Discovery Communications, Inc. were transferred to the Programming unit and (ii) Telewest Communications, plc ("Telewest UK") was transferred to the International Cable Programming unit ("TINTA"). In the first quarter of 1995, TCIC transferred certain additional assets to TINTA. The table below sets forth, for the periods presented, the percentage relationship that certain items bear to revenue. This summary provides trend data relating to the normal recurring operations of the Company. Other items of significance are discussed under separate captions below.
Years ended December 31, ------------------------------------------------------------------- 1996 1995 1994 -------------------- -------------------- ------------------- dollar amounts in millions Revenue 100% $ 5,954 100% $ 4,878 100% $ 4,116 Operating 36 2,117 33 1,611 33 1,369 Selling, general and administrative 27 1,607 25 1,224 23 946 Compensation (adjustment to compensation) relating to options and stock appreciation rights -- (12) -- 17 -- (5) Restructuring charges -- 36 -- -- -- -- Depreciation and amortization 24 1,453 25 1,223 24 988 --- --------- --- --------- --- ---------- Operating income 13% $ 753 17% $ 803 20% $ 818 === ========= === ========= === ==========
II-3 25 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 (the "1992 Cable Act") and the Telecommunications Act of 1996 (together with the 1992 Cable Act, 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 December 31, 1996, 78% of the Company's basic customers were served by cable television systems that were subject to such rate regulation. During the year ended December 31, 1996, 66% 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 Tele-Communications, Inc. Series A TCI Group common stock and Tele-Communications, Inc. Series B TCI Group common stock ("TCI Group Stock") all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. See note 6 to the accompanying consolidated financial statements for the effect of the Satellite Spin-Off on the Company's results of operations and financial position. Revenue increased 22% and 19% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior years. In the Company's regulated cable systems, the Company implemented rate increases for its Regulated Services in June 1996. As allowed by Federal Communications Commission regulations, such rate increases included 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 1996 increase in revenue is due to the effect of certain acquisitions (9%), increases in the rates charged to the Company's customers due to inflation, programming cost increases as previously discussed and channel additions (7%), growth in the Company's satellite customers through the date of the Satellite Spin-off (3%), net growth in basic customer levels within the Company's cable television systems (1%) and an increase in the Company's advertising sales and other revenue (2%). The 1995 increase in revenue is due to the effect of certain acquisitions (8%), growth in the Company's satellite customers (4%), increases in the rates charged to the Company's customers from inflation, programming cost increases and channel additions (4%), net growth in basic customer levels within the Company's cable television systems (3%) and an increase in the Company's advertising sales and other revenue (2%), net of a decrease in revenue due to the transfer of Netlink USA to the Programming unit in the Reorganization (2%). II-4 26 Operating expenses increased 31% and 18% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior year. Exclusive of the effects of acquisitions (9% and 8%, respectively) and Primestar (3% and 4%, respectively), such expenses increased 19% and 6%, respectively. Programming expenses accounted for the majority of such increase. In this regard, programming expenses represented $1,250 million (59%), $979 million (61%) and $845 million (62%) of operating expenses during 1996, 1995 and 1994, respectively. The Company cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. However, such programming costs have increased at a greater percentage than increases in revenue of Regulated Services. Selling, general and administrative expenses ("SG&A") increased 31% and 29% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior year. Exclusive of the effects of acquisitions (9% and 9%, respectively) and Primestar (9% and 13%, respectively), SG&A increased 13% and 7%, respectively. Such increases are due primarily to salaries and related payroll expenses and those expenses that vary with revenue and/or subscribers. During the fourth quarter of 1995, the Company incurred $25 million in expenses related to payment of bonuses to the majority of its employees. During the fourth quarter of 1996, the Company restructured certain of its operating and accounting functions (the "Restructuring"). In connection with the Restructuring, the Company recognized a charge of $36 million, of which $27 million related to work force reductions and $9 million related to the consolidation of the Company's accounting activities. As of December 31, 1996, $8 million of such restructuring charges had been paid. The Company anticipates that the majority of the remaining charges will be paid during the six months ended June 30, 1997. The increase in the Company's depreciation expense in 1996 and 1995 is due to acquisitions, as well as increased capital expenditures due to a program to upgrade and install optical fiber technology in the Company's cable systems. The increase in amortization expense in 1996 and 1995 is due to acquisitions. The Company records compensation relating to variable plan options, 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 Expense TCIC's interest expense increased $79 million or 8% during 1996 as compared to 1995 and $185 million or 24% during 1995 as compared to 1994. The increase in 1996 is the net result of increased debt balances partially offset by lower weighted average interest rates. The 1995 increase is the result of higher interest rates and debt balances. TCIC's weighted average interest rate on borrowings was 7.8%, 8.1% and 7.5% during 1996, 1995 and 1994, respectively. Included in share of losses of affiliates for the year ended December 31, 1996 is $168 million and $47 million attributable to Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum") and Teleport Communications Group Inc. ("TCG"), respectively. Such amount for Sprint Spectrum includes $34 million associated with prior periods. Effective December 31, 1996, TCIC transferred its 30% ownership interest in Sprint Spectrum and 31.1% ownership in TCG to TCI. As such, TCIC will no longer reflect share of losses from such investments. II-5 27 TCIC had an investment in Telewest UK in 1994, a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest UK, which was accounted for under the equity method, comprised $40 million of TCIC's share of its affiliates' losses in 1994. In addition, TCIC had other less significant investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other investments accounted for $44 million of TCIC's share of its affiliates' losses in 1994. In connection with the Reorganization, TCIC's ownership in the aforementioned entities was transferred to TINTA effective December 1, 1994, and accordingly, TCIC will no longer incur the aforementioned losses associated with such investments. Prior to the Reorganization, TCI and US WEST, Inc. each exchanged their respective 50% ownership interest in Telewest UK for 302,250,000 ordinary shares and 76,500,000 convertible preference shares of Telewest Communications plc ("Telewest Communications") (the "Telewest Exchange"). Following the completion of the Telewest Exchange, Telewest Communications conducted an initial public offering in November of 1994 in which it sold 243,740,000 ordinary shares for aggregate net proceeds of (pound)401 million (the "Telewest IPO"). Upon completion of the Telewest Exchange and the Telewest IPO, TCI and US WEST, Inc. each became the owners of 36% of the ordinary shares and 38% of the total outstanding ordinary and convertible preference shares of Telewest Communications. As a result of the Telewest IPO and the associated dilution of TCI's ownership interest of Telewest Communications, TCIC recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million) in 1994. 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). During the year ended December 31, 1996, TCIC redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, 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. Also, during the year ended December 31, 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 $9 million related to the retirement of deferred loan costs. During 1996, 1995 and 1994, TCIC recorded losses of $71 million, $6 million and $9 million, respectively, from early extinguishments of debt. There may be additional losses associated with early extinguishments of debt in the future. Minority interests in earnings of consolidated subsidiaries aggregated $72 million for the year ended December 31, 1996, as compared to minority interests in losses of consolidated subsidiaries of $11 million and $6 million in 1995 and 1994, respectively. Such change in 1996 is due primarily to the accrual of dividends on preferred securities issued by certain subsidiaries of TCIC. II-6 28 Net Earnings (Loss) TCIC's net loss (before preferred stock dividend requirements) of $452 million for the year ended December 31, 1996 represents an increase of $332 million as compared to TCIC's net loss of $120 million for 1995. Such increase is due primarily to the aforementioned share of losses from Sprint Spectrum and an increase in share of losses from TCG, the accrual of dividends on preferred securities discussed above, an increase in interest expense due to increased debt balances partially offset by lower weighted average interest rates and the loss on early extinguishment of debt resulting primarily from the prepayment of certain fixed-rate indebtedness. TCIC's net loss of $120 million for the year ended December 31, 1995 represented a decrease of $214 million as compared to TCIC's net earnings of $94 million for the corresponding period of 1994. Such decrease is the net result of an increase in interest expense due to higher debt levels, the dilution of share of earnings of Liberty due to the TCI/Liberty Combination, TCIC's recognition of a nonrecurring gain resulting from the Telewest IPO in 1994 and a decrease in operating income. Inflation has not had a significant impact on TCIC's results of operations during the three-year period ended December 31, 1996. Liquidity and Capital Resources 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. The Viacom Acquisition has been accounted for by the purchase method and accordingly, TCIC recorded Cable Sub's assets and liabilities at fair value. II-7 29 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 $625,796,100 in aggregate face value of shares of 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. In addition to the Viacom Acquisition, TCIC consummated certain other acquisitions during 1996. See note 2 to the accompanying consolidated financial statements for additional information regarding assets acquired and liabilities assumed in connection with all acquisitions. During the year ended December 31, 1996, the Company, through certain subsidiaries, issued (i) 4.6 million shares of Series A Cumulative Exchangeable Preferred Stock in a public offering for net cash proceeds of $223 million, (ii) $500 million in face value of 8.72% Trust Originated Preferred SecuritiesSM for net cash proceeds of $486 million (through a special purpose entity formed as a Delaware business trust) (iii) $500 million in face value of 10% Trust Preferred Securities for net cash proceeds of $485 million (through a special purpose entity formed as a Delaware business trust) and (iv) $2.06 billion of publicly-placed senior and medium term notes with interest rates ranging from 6.1% to 7.9% and maturity dates ranging through 2026. The Company used the proceeds from the aforementioned debt and equity issuances to retire commercial paper and to repay certain other indebtedness. 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. II-8 30 The Company is a holding company and its assets consist almost entirely of investments in its subsidiaries. As a holding company, the Company's ability to pay dividends on the preferred stock is dependent on the earnings of, or other funds available to, the Company's subsidiaries and the distribution or other payment of such earnings or other funds to the Company in the form of dividends, loans or other advances, payment or reimbursement of management fees and expenses. The Company's subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay the dividends on the preferred stock of TCIC or to make any funds available therefor, whether by dividends, loans or other payments. The payment of dividends or the making of loans and advances to the Company by its subsidiaries may be subject to statutory or regulatory restrictions, are contingent upon the earnings of those subsidiaries and are subject to various business considerations. Further, certain of the Company's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds by such subsidiaries to the Company in the form of dividends, loans, or advances, and require that such subsidiaries' indebtedness to the Company be subordinate to the indebtedness under such loan agreements. The amount of net assets of subsidiaries subject to such restrictions exceeds the Company's consolidated net assets. The Company's subsidiaries currently have the ability to transfer funds to the Company in amounts exceeding the Company's dividend requirement on the preferred stock. Net cash provided by operating activities of subsidiaries which are not restricted from making transfers to the parent company have been and are expected to continue to be sufficient to enable the parent company to meet its cash obligations. Moreover, almost all of the consolidated liabilities of the Company have been incurred by its subsidiaries. Therefore, the Company's rights, and the extent to which the holders of the Company's preferred stock will be able to participate in the distribution of assets of any subsidiary upon the latter's liquidation or reorganization, will be subject to prior claims of the subsidiary's creditors, including trade creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary (in which case the claims of the Company would still be subject to the prior claims of any secured creditor of such subsidiary and of any holder of indebtedness of such subsidiary that is senior to that held by the Company). During the second quarter of 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. The Company does not believe that such terminations will adversely affect its future liquidity. At December 31, 1996, subsidiaries of the Company had approximately $1.4 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries 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) after giving effect to such additional borrowings. See note 7 to the accompanying consolidated financial statements for additional information regarding the material terms of the subsidiaries' lines of credit. II-9 31 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, adjustment to compensation relating to stock appreciation rights and restructuring charges) ($2,230 million, $2,043 million and $1,801 million in 1996, 1995 and 1994, respectively) to interest expense ($1,041 million, $962 million and $777 million in 1996, 1995 and 1994, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 214%, 212% and 232% for 1996, 1995 and 1994, respectively. 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. However, the Company's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There can be no assurance that the Company will 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 ($1,247 million, $1,263 million and $1,142 million in 1996, 1995 and 1994, 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. The Company's subsidiaries generally finance acquisitions and capital expenditures through net cash provided by operating and financing activities. Historically, amounts expended for acquisitions and capital expenditures have exceeded net cash provided by operating activities. In this regard, the amount of capital expended by the Company for property and equipment was $1,930 million, $1,665 million and $1,235 million in 1996, 1995 and 1994, respectively. 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. To the extent that net cash provided by operating activities exceeds net cash used in investing activities in 1997, the Company currently anticipates that such excess cash will initially be used to reduce outstanding debt. II-10 32 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 and 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. On January 24, 1997, Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior debt is currently rated BBB- by Standard & Poor's (the last level of investment grade) with a negative outlook. 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. 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. TCIC has guaranteed notes payable and other obligations of Satellite and affiliated companies with outstanding balances of approximately $175 million at December 31, 1996. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCIC. Satellite 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 Satellite's behalf. The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film License Obligations"). Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating approximately $120 million. The aggregate amount of the Film License Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. 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. II-11 33 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 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 (the "Fixed Rate Agreements") and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996 (the "Variable Rate Agreements"). During the year ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million) and $36 million, respectively. During the year ended December 31, 1996, the Company terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. The Company will amortize the termination settlement over the remainder of the original terms of the terminated Variable Rate Agreements. 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. At December 31, 1996, after considering the net effect of the aforementioned interest rate exchange agreements, the Company had $6,741 million (or 47%) of fixed-rate debt with a weighted average interest rate of 8.4% and $7,577 million (or 53%) of variable-rate debt with a weighted average interest rate of 6.3%. Approximately twenty-seven percent of the franchises held by the Company, involving approximately 4.5 million basic customers, expire within five years. There can be no assurance that the franchises for the Company's systems will be renewed as they expire, although the Company believes that its cable television systems generally have been operated in a manner which satisfies the standards established by the Cable Communications Policy Act of 1984, as supplemented by the renewal provisions of the 1992 Cable Act, for franchise renewal. However, in the event they are renewed, the Company cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with the renewals. To date they have not varied significantly from the original terms. II-12 34 During 1996, the Company has experienced a competitive impact from medium power and high power direct broadcast satellites ("DBS") that use high frequencies to transmit signals that can be received by dish antennas ("HSDs") much smaller in size than traditional HSDs. The Primestar partners distribute a multi-channel programming service via a medium power communications satellite to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the Company provided this satellite service. DirecTv, Inc., United States Satellite Broadcasting Corporation and EchoStar Communications Corp. ("EchoStar"), transmit from high power satellites and generally use smaller dishes to receive their signals. Alphastar, Inc. began offering medium power service in the second quarter of 1996. On February 24, 1997, News Corp. and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar and that the companies will combine their DBS businesses into a new company, which will operate under the name Sky. The two companies contend that Sky, which is scheduled to launch in early 1998, will offer 500 channels of digital television on a nationwide basis (not all of which would be available to each subscriber), Internet services and local broadcast network television signals, capable of reaching more than 50% of all television households upon the launch of Sky and 75% of all television households by the end of 1998. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. Estimated DBS customers nationwide increased from approximately 2.2 million at the end of 1995 to approximately 4.4 million at the end of 1996, and the Company expects that competition from DBS will continue to increase. However, the Company is unable to predict what effect such competition will have on the Company's financial position. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of TCI Communications, Inc. are filed under this Item, beginning on Page II-14. The financial statement schedules required by Regulation S-X are filed under Item 14 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. II-13 35 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders TCI Communications, Inc.: We have audited the accompanying consolidated balance sheets of TCI Communications, Inc. and subsidiaries (a subsidiary of Tele-Communications, Inc.) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCI Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-14 36 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets December 31, 1996 and 1995
1996 1995 ------- ------ Assets amounts in millions Trade and other receivables, net $ 308 262 Investments in affiliates, accounted for under the equity method, and related receivables (notes 4 and 6) 317 1,062 Property and equipment, at cost: Land 74 63 Distribution systems 9,726 9,325 Support equipment and buildings 1,423 1,147 ------- ------ 11,223 10,535 Less accumulated depreciation 4,031 3,547 ------- ------ 7,192 6,988 ------- ------ Franchise costs 17,174 13,618 Less accumulated amortization 2,380 2,055 ------- ------ 14,794 11,563 ------- ------ Other assets, at cost, net of amortization 525 489 ------- ------ $23,136 20,364 ======= ======
(continued) II-15 37 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Balance Sheets, continued
1996 1995 -------- -------- Liabilities and Common Stockholder's Equity amounts in millions Accounts payable $ 191 176 Accrued interest 268 226 Accrued programming expense 232 209 Other accrued expenses 536 856 Debt (note 7) 14,318 12,635 Deferred income taxes (note 11) 5,459 4,261 Other liabilities 84 66 -------- -------- Total liabilities 21,088 18,429 -------- -------- Minority interests in equity of consolidated subsidiaries 802 206 Redeemable preferred stock (note 8) 232 -- Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of the Company (note 9) 1,000 -- Common stockholder's equity (notes 6 and 10): 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 2,234 3,122 Unrealized holding gains for available- for-sale securities, net of taxes -- 7 Accumulated deficit (822) (370) -------- -------- 1,413 2,760 Investment in Tele-Communications, Inc. ("TCI"), at cost (notes 1 and 3) (1,143) (1,143) Intercompany payable (receivable) (note 12) (256) 112 -------- -------- Total common stockholder's equity 14 1,729 -------- -------- Commitments and contingencies (note 14) $ 23,136 20,364 ======== ========
See accompanying notes to consolidated financial statements. II-16 38 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------- ------- amounts in millions Revenue (notes 5 and 12) $ 5,954 4,878 4,116 Operating costs and expenses: Operating 2,117 1,611 1,369 Selling, general and administrative 1,607 1,224 946 Compensation (adjustment to compensation) relating to options and stock appreciation rights (12) 17 (5) Restructuring charges 36 -- -- Depreciation 1,029 848 685 Amortization 424 375 303 ------- ------- ------- 5,201 4,075 3,298 ------- ------- ------- Operating income 753 803 818 Other income (expense): Interest expense (1,041) (962) (777) Interest income (note 12) 40 34 35 Share of earnings of Liberty Media Corporation ("Old Liberty") (note 3) -- -- 128 Share of losses of other affiliates, net (note 4) (241) (43) (114) Loss on early extinguishment of debt (note 7) (71) (6) (9) Minority interests in losses (earnings) of consolidated subsidiaries, net (72) 11 6 Gain (loss) on disposition of assets 47 9 (5) Gain on sale of stock by equity investee (note 4) 12 -- 161 Other, net (18) (15) (17) ------- ------- ------- (1,344) (972) (592) ------- ------- ------- Earnings (loss) before income taxes (591) (169) 226 Income tax benefit (expense)(note 11) 139 49 (132) ------- ------- ------- Net earnings (loss) (note 5) (452) (120) 94 Preferred stock dividend requirements (9) -- -- ------- ------- ------- Net earnings (loss) attributable to common stockholder $ (461) (120) 94 ======= ======= =======
See accompanying notes to consolidated financial statements. II-17 39 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Common Stockholder's Equity Years ended December 31, 1996, 1995 and 1994
Unrealized holding Cumulative gains for foreign available- Additional currency for-sale Common stock paid-in translation securities, Class A Class B capital adjustment net of taxes ------- ------- ------- ---------- ------------ amounts in millions Balance at December 31, 1993 $ 482 47 2,293 (29) -- Unrealized holding gains for available-for-sale securities as of January 1, 1994, net of taxes -- -- -- -- 297 Net earnings -- -- -- -- -- Conversion of redeemable preferred stock 1 -- 17 -- -- Issuance of common stock upon conversion of notes 3 -- -- -- -- Exchange of TCI Communications, Inc. ("TCIC") common stock and Old Liberty common stock and preferred stock owned by subsidiaries of TCIC for TCI common stock and preferred stock in the TCI/Liberty Combination (note 3) -- -- -- -- -- Reclassification and change of common stock (note 3) (485) (47) 532 -- -- Foreign currency translation adjustment -- -- -- 24 -- Reduction in unrealized holding gains for available-for-sale securities, net of taxes (note 1) -- -- -- -- (141) Change in intercompany payable/receivable -- -- -- -- -- Effect of Reorganization (note 1) -- -- -- 5 (154) ----- --- ----- --- ---- Balance at December 31, 1994 $ 1 -- 2,842 -- 2 ----- --- ----- --- ---- Total Investment Intercompany common Accumulated Treasury in payable stockholder's deficit stock TCI (receivable) equity ------- ----- --- ------------ ------ amounts in millions Balance at December 31, 1993 (344) (333) -- -- 2,116 Unrealized holding gains for available-for-sale securities as of January 1, 1994, net of taxes -- -- -- -- 297 Net earnings 94 -- -- -- 94 Conversion of redeemable preferred stock -- -- -- -- 18 Issuance of common stock upon conversion of notes -- -- -- -- 3 Exchange of TCI Communications, Inc. ("TCIC") common stock and Old Liberty common stock and preferred stock owned by subsidiaries of TCIC for TCI common stock and preferred stock in the TCI/Liberty Combination (note 3) -- 333 (651) -- (318) Reclassification and change of common stock (note 3) -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- 24 Reduction in unrealized holding gains for available-for-sale securities, net of taxes (note 1) -- -- -- -- (141) Change in intercompany payable/receivable -- -- -- (265) (265) Effect of Reorganization (note 1) -- -- (451) (545) (1,145) ----- --- ------- ----- ------ Balance at December 31, 1994 (250) -- (1,102) (810) 683 ----- --- ------- ----- ------
(continued) II-18 40 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Common Stockholder's Equity, continued Years ended December 31, 1996, 1995 and 1994
Unrealized holding Cumulative gains for foreign available- Common stock Additional currency for-sale ------------ paid-in transaction securities, Class A Class B capital adjustment net of taxes ------- ------- ------- ---------- ------------ amounts in millions Balance at December 31, 1994 $ 1 -- 2,842 -- 2 Net loss -- -- -- -- -- Effect of Reorganization (note 1) -- -- -- -- -- Effect of implementation of Tax Sharing Agreement (note 11) -- -- -- -- -- Retirement of TCI Class A common stock received in Reorganization -- -- 37 -- -- TCI Class A common stock issued in acquisition of remaining minority interest of Heritage Communications, Inc. contributed to TCIC -- -- 234 -- -- Contribution of investments from subsidiaries of TCI to TCIC -- -- 9 -- -- Issuance of TCI Class A common stock and TCI preferred stock in acquisition (note 5) -- -- -- -- -- Turner Broadcasting System, Inc. stock received in acquisition transferred to a subsidiary of TCI -- -- -- -- -- Proceeds from issuance of TCI Class A common stock to public -- -- -- -- -- Proceeds from issuance of TCI Class A common stock in private offering -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- 5 Change in intercompany payable/receivable -- -- -- -- -- ------- ------- --------- ---------- --------- Balance at December 31, 1995 $ 1 -- 3,122 -- 7 ------ ------- --------- ---------- --------- Total Investment Intercompany common Accumulated Treasury in payable stockholder's deficit stock TCI (receivable) equity ------- ----- --- ------------ ------ amounts in millions Balance at December 31, 1994 (250) -- (1,102) (810) 683 Net loss (120) -- -- -- (120) Effect of Reorganization (note 1) -- -- (4) (77) (81) Effect of implementation of Tax Sharing Agreement (note 11) -- -- -- (76) (76) Retirement of TCI Class A common stock received in Reorganization -- -- (37) -- -- TCI Class A common stock issued in acquisition of remaining minority interest of Heritage Communications, Inc. contributed to TCIC -- -- -- 58 292 Contribution of investments from subsidiaries of TCI to TCIC -- -- -- -- 9 Issuance of TCI Class A common stock and TCI preferred stock in acquisition (note 5) -- -- -- 1,313 1,313 Turner Broadcasting System, Inc. stock received in acquisition transferred to a subsidiary of TCI -- -- -- (7) (7) Proceeds from issuance of TCI Class A common stock to public -- -- -- 401 401 Proceeds from issuance of TCI Class A common stock in private offering -- -- -- 30 30 Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- 5 Change in intercompany payable/receivable -- -- -- (720) (720) --------- ------- --------- ----------- ----------- Balance at December 31, 1995 (370) -- (1,143) 112 1,729 ---------- ------- ---------- ---------- -----------
(continued) II-19 41 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Common Stockholder's Equity, continued Years ended December 31, 1996, 1995 and 1994
Unrealized holding Cumulative gains for foreign available- Common stock Additional currency for-sale ------------ paid-in transaction securities, Class A Class B capital adjustment net of taxes ------- ------- ------- ---------- ------------ amounts in millions Balance at December 31, 1995 $ 1 -- 3,122 -- 7 Net loss -- -- -- -- -- TCI Group common stock issued and debt assumed by TCI on behalf of TCIC for acquisition reflected as contribution -- -- 564 -- -- Accreted dividends on redeemable preferred stock -- -- (9) -- -- Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- (3) Intercompany liability assumed by TCIC upon contribution of subsidiaries from TCI -- -- -- -- -- Spin-off of TCI Satellite Entertainment, Inc. (note 6) -- -- (305) -- -- Recognition of unrecognized holding gain on available-for-sale securities -- -- -- -- (4) Transfer of investments from TCIC to TCI (note 4) -- -- (1,138) -- -- Change in intercompany payable/receivable -- -- -- -- -- ------- ------- --------- ---------- --------- Balance at December 31, 1996 $ 1 -- 2,234 -- -- ====== ======= ========= ========== ========= Total Investment Intercompany common Accumulated Treasury in payable stockholder's deficit stock TCI (receivable) equity ------- ----- --- ------------ ------ amounts in millions Balance at December 31, 1995 (370) -- (1,143) 112 1,729 Net loss (452) -- -- -- (452) TCI Group common stock issued and debt assumed by TCI on behalf of TCIC for acquisition reflected as contribution -- -- -- -- 564 Accreted dividends on redeemable preferred stock -- -- -- -- (9) Change in unrealized holding gains for available-for-sale securities, net of taxes -- -- -- -- (3) Intercompany liability assumed by TCIC upon contribution of subsidiaries from TCI -- -- -- 140 140 Spin-off of TCI Satellite Entertainment, Inc. (note 6) -- -- -- (100) (405) Recognition of unrecognized holding gain on available-for-sale securities -- -- -- -- (4) Transfer of investments from TCIC to TCI (note 4) -- -- -- -- (1,138) Change in intercompany payable/receivable -- -- -- (408) (408) --------- ------- --------- ---------- ----------- Balance at December 31, 1996 (822) -- (1,143) (256) 14 ========= ======= ========= ========== ===========
See accompanying notes to consolidated financial statements. II-20 42 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------ ------ amounts in millions (see note 2) Cash flows from operating activities: Net earnings (loss) $ (452) (120) 94 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,453 1,223 988 Compensation (adjustment to compensation) relating to options and stock appreciation rights (12) 17 (5) Payments of stock appreciation rights (2) (4) -- Restructuring charges 36 -- -- Payments of restructuring charges (8) -- -- Share of earnings of Old Liberty -- -- (128) Share of losses of affiliates 241 43 114 Loss on early extinguishment of debt 71 6 9 Minority interests in earnings (losses) of consolidated subsidiaries, net 72 (11) (6) Loss (gain) on disposition of assets (47) (9) 5 Gain on sale of stock by equity investee (12) -- (161) Deferred income tax expense (benefit) (159) (56) 45 Other noncash credits (7) (15) (3) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (66) (52) 16 Change in accrued interest 41 42 22 Change in other accruals and payables 98 199 152 ------- ------ ------ Net cash provided by operating activities 1,247 1,263 1,142 ------- ------ ------ Cash flows from investing activities: Cash paid for acquisitions (421) (259) (494) Capital expended for property and equipment (1,930) (1,665) (1,235) Cash proceeds from disposition of assets 174 49 36 Additional investments in and loans to affiliates and others (629) (764) (384) Repayment of loans by affiliates and others 646 8 145 Other investing activities (46) (82) (71) ------- ------ ------ Net cash used in investing activities (2,206) (2,713) (2,003) ------- ------ ------ Cash flows from financing activities: Borrowings of debt 7,348 7,719 4,409 Repayments of debt (7,039) (6,020) (3,348) Prepayment penalties (60) -- -- Issuance of redeemable preferred stock 223 -- -- Issuance of Trust Securities 971 -- -- Change in intercompany payable/receivable (391) (249) (189) Payment of dividends on subsidiary preferred stock and Trust Securities (86) (6) (6) Payment of redeemable preferred stock dividends (7) -- -- ------- ------ ------ Net cash provided by financing activities 959 1,444 866 ------- ------ ------ Net increase (decrease) in cash -- (6) 5 Cash at beginning of year -- 6 1 ------- ------ ------ Cash at end of year $ -- -- 6 ======= ====== ======
See accompanying notes to consolidated financial statements. II-21 43 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of TCI Communications, Inc. (formerly Tele-Communications, Inc. or "Old TCI") and those of all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. TCIC is a subsidiary of TCI. Nature of Operations TCIC (the "Company"), 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. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Investments All marketable equity securities held by TCIC are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of stockholder's equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% but are not considered marketable securities are generally carried at cost. For those investments in affiliates in which TCIC's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize TCIC's share of the net earning or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of TCIC's investment in, advances to and commitments for the investee. TCIC's share of net earnings or losses of affiliates includes the amortization of the difference between TCIC's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to TCIC's ownership interest in such affiliates. Changes in TCIC's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in TCIC's consolidated statements of operations. (continued) II-22 44 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Long-Lived Assets (a) Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1996, 1995 and 1994, interest capitalized was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (b) Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by TCIC in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. In March of 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal years beginning after December 15, 1995. Statement No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and either the undiscounted future cash flows estimated to be generated by those assets or the fair market value 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. TCIC adopted Statement No. 121 effective January 1, 1996. Such adoption did not have a significant effect on the financial position or results of operations of the Company. (continued) II-23 45 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Pursuant to Statement No. 121, the Company periodically reviews the carrying amounts of its long-lived assets, franchise costs and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. The Company considers historical and expected future net operating losses to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). The Company deems Assets to be impaired if the Company is unable to recover the carrying value of such Assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair value. The Company generally measures fair value by considering sales prices for similar assets or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Interest Rate Derivatives Amounts receivable or payable under derivative financial instruments used to manage interest rate risks arising from TCIC's financial liabilities are recognized as interest expense. Gains and losses on early terminations of derivatives are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining terms of the derivative financial instrument. TCIC does not use such instruments for trading purposes. Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause TCIC to repurchase such holders' common equity. Included in minority interests in equity of consolidated subsidiaries is $672 million and $49 million in 1996 and 1995, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. The current dividend requirements on these preferred stocks aggregate $37 million per annum and such dividend requirements are reflected as minority interests in the accompanying consolidated statements of operations. (continued) II-24 46 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Investment in TCI On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes cable television programming services ("Liberty"). Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty. 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 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. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, the Company continues to account for stock-based employee compensation pursuant to APB Opinion No. 25. The Company has included the disclosures required by Statement No. 123 in note 10. Reorganization During the fourth quarter of 1994, TCI reorganized (the "Reorganization") it's operating structure. Upon Reorganization, certain of the assets of TCIC were transferred to the other operating units. The most significant transfers were as follows: (i) equity securities of Turner Broadcasting System, Inc. ("TBS") and Discovery Communications, Inc. were transferred to the Programming unit and (ii) Telewest Communications plc ("Telewest UK") was transferred to the International Cable Programming unit ("TINTA"). In conjunction with the Reorganization, TCIC reduced its unrealized gain on available-for-sale securities by $154 million, as a result of the transfer of TBS common stock. In the first quarter of 1995, TCIC transferred certain additional assets to TINTA. (continued) II-25 47 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain amounts have been reclassified for comparability with the 1996 presentation. (2) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $1,000 million, $920 million and $754 million for the years ended December 31, 1996, 1995 and 1994, respectively. Also, during these years, cash paid for income taxes was $8 million, $8 million and $14 million, respectively. Significant noncash investing and financing activities are reflected in the following table. See also note 6 for the impact of the spin-off of TCI Satellite Entertainment, Inc.
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 4,508 2,979 539 Liabilities assumed, net of current assets (1,419) (250) (13) Deferred tax liability recorded in acquisitions (1,354) (913) -- Minority interests in equity of acquired entities 16 48 (32) Preferred stock of subsidiary issued in acquisition (626) -- -- Common stock of TCI issued in acquisition contributed to TCIC (564) (234) -- Increase in intercompany payable resulting from common stock of TCI issued in acquisition -- (1,371) -- Increase in intercompany payable resulting from TCI contributing subsidiaries to TCIC (140) -- -- ------- ------ ---- Cash paid for acquisitions $ 421 259 494 ======= ====== ====
(continued) II-26 48 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements
Years ended December 31, ------------------------- 1996 1995 1994 ---- ---- ---- amounts in millions Transfer of net assets to TCI: Fair value of assets, primarily investments in affiliates $ 1,128 97 1,637 Liabilities, net of current assets 5 (1) (335) Deferred tax asset (liability) 5 (8) (130) Minority interests in equity -- -- (27) Decrease in additional paid-in capital resulting from transfer of net assets to TCI (1,138) -- -- Cumulative foreign currency translation adjustment -- -- 5 Unrealized holding gains for available- for-sale securities, net of taxes -- -- (154) Investment in TCI -- (4) (451) Decrease in intercompany payable resulting from transfer of net assets to TCI -- (84) (545) ------- --- ------ $ -- -- -- ======= === ====== Reversal of deferred tax liability recorded in TCI/Liberty Combination (note 3) $ -- -- 38 ======= === ======
(3) TCI/Liberty Combination As of January 27, 1994, Old TCI and Old Liberty entered into a definitive merger agreement to combine the two companies (the "TCI/Liberty Combination"). The transaction was consummated on August 4, 1994 and was structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Old Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company. In connection with the TCI/Liberty Combination, Old TCI changed its name to TCI Communications, Inc. and TCI/Liberty Holding Company changed its name to Tele-Communications, Inc. In connection with the Reorganization, the assets of Old Liberty which produce and distribute cable television programming services were contributed to a new subsidiary of TCI, "New Liberty". Old Liberty and New Liberty are referred to collectively herein as "Liberty". Due to the significant economic interest held by TCIC through its ownership of Liberty preferred stock and Liberty common stock and other related party considerations, TCIC accounted for its investment in Liberty under the equity method prior to the TCI/Liberty Combination. Accordingly, TCIC did not recognize any income relating to dividends, including preferred stock dividends, and TCIC recorded the earnings or losses generated by Liberty (by recognizing 100% of Liberty's earnings or losses before deducting preferred stock dividends) through the date the TCI/Liberty Combination was consummated. (continued) II-27 49 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (4) Investments in Affiliates 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 $215 million of TCIC's share of its affiliates' losses in 1996. 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). Summarized unaudited financial information for affiliates accounted for under the equity method (including Sprint Spectrum, TCG and certain other affiliates transferred to TCI) is as follows:
December 31, ------------ 1996 1995 ---- ---- Combined Financial Position amounts in millions Property and equipment, net $ 368 637 Franchise costs, net 824 152 Other assets, net 162 3,180 ------ ----- Total assets $1,354 3,969 ====== ===== Debt $ 909 896 Due (from) to TCIC -- 137 Other liabilities 278 289 Owners' equity 167 2,647 ------ ----- Total liabilities and equity $1,354 3,969 ====== =====
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Combined Operations amounts in millions Revenue $ 954 547 651 Operating expenses (1,187) (559) (688) Depreciation and amortization (344) (97) (139) ------- ---- ---- Operating loss (577) (109) (176) Interest expense (135) (39) (46) Other, net (85) (12) 128 ------- ---- ---- Net loss $ (797) (160) (94) ======= ==== ====
(continued) II-28 50 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC had an investment in Telewest UK, a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest UK, which was accounted for under the equity method, contributed $40 million of TCIC's share of its affiliates' losses in 1994. In addition, TCIC had other less significant investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other investments accounted for $44 million of TCIC's share of its affiliates' losses in 1994. In connection with the Reorganization, TCIC's ownership in the aforementioned entities was transferred to TINTA effective December 1, 1994. As a result of the Telewest UK's November 1994 initial public offering and the associated dilution of TCI's ownership interest of Telewest UK, TCIC recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million). Effective December 1, 1994, such ownership of Telewest was transferred to TINTA in the Reorganization. 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. (5) Acquisitions 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) II-29 51 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 (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share. 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, and TCIC recorded Cable Sub's assets and liabilities at fair value. On a pro forma basis, TCIC's revenue and net loss would have been increased by $280 million and $55 million, respectively, for the year ended December 31, 1996; and revenue and net loss would have been increased by $440 million and $115 million, respectively, for the year ended December 31, 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. As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable") consummated a transaction, whereby TeleCable was merged into TCIC. The TeleCable acquisition has been accounted for by the purchase method. The aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of approximately $300 million of TeleCable's net liabilities and the issuance to TeleCable's stockholders of approximately 42 million shares of TCI Class A common stock and 1 million shares of TCI Convertible Preferred Stock, Series D with an aggregate initial liquidation value of $300 million. (continued) II-30 52 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (6) Spin-Off of TCI Satellite Entertainment, Inc. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which the Company accounted for under the equity method. Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, TCI distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. Summarized financial information of Satellite as of December 4, 1996 and for the period from January 1, 1996 through the date of the Satellite Spin-off is as follows (amounts in millions):
Financial Position Cash, receivables and other assets $ 104 Investment in PRIMESTAR Partners L.P. 32 Property and equipment, net 1,111 ------- $ 1,247 ======= Accounts payable and accrued liabilities $ 60 Due to PRIMESTAR Partners L.P. 458 Due to TCI 324 Equity 405 ------- $ 1,247 ======= Operations Revenue $ 377 Operating expenses (373) Depreciation (166) ------- Loss before income tax benefit (162) Income tax benefit 53 ------- Net loss $ (109) =======
(continued) II-31 53 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (7) Debt Debt is summarized as follows:
Weighted average December 31, interest rate at ----------------------- December 31, 1996 1996 1995 ----------------- ------------- ---------- amounts in millions Parent company debt: Notes payable 8.1% $ 8,031 6,713 Commercial paper 6.1% 638 1,440 Bank credit facilities -- -- 179 Other debt -- 1 ------- ------- 8,669 8,333 Debt of subsidiaries: Bank credit facilities 6.6% 4,810 3,258 Notes payable 9.7% 768 934 Convertible notes (a) 9.5% 43 45 Commercial paper -- -- 29 Other debt 28 36 ------- ------- $14,318 12,635 ======= =======
(a) These convertible notes, which are stated net of unamortized discount of $178 million and $186 million on December 31, 1996 and 1995, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. At December 31, 1996, the notes were convertible, at the option of the holders, into an aggregate of 37,083,773 shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty Group Stock. During the year ended December 31, 1996, in order to reduce future interest costs, TCIC redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, 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 year ended December 31, 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 $9 million related to the retirement of deferred loan costs. (continued) II-32 54 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements 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. The fair value of TCIC's debt is estimated based on the 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 $14,318 million, was $15 billion at December 31, 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 (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, TCIC's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and TCIC's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million) and $36 million, respectively. During the year ended December 31, 1996, TCIC terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. After giving effect to TCIC's interest rate exchange agreements, approximately 47% of TCIC's indebtedness bears interest at fixed rates. 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 7.2%-9.3% $ 80 April 1997 7.0% $ 200 December 1997 8.7% 230 September 1998 4.8%-5.4% 450 ---- April 1999 7.4% 50 $310 February 2000 5.8%-6.6% 300 ==== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 ------ $1,750 ======
(continued) II-33 55 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, TCIC does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. The fair value of the interest rate exchange agreements is the estimated amount that TCIC would pay or receive to terminate the agreements at December 31, 1996, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. At December 31, 1996, TCIC would be required to pay an estimated $15 million to terminate the Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate Agreements. TCIC is required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. At December 31, 1996, TCIC had approximately $1.4 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. Annual maturities of debt for each of the next five years are as follows:
Parent Total ------ ----- amounts in millions 1997 $715* $1,212* 1998 233 459 1999 432 712 2000 434 759 2001 357 1,070
*Includes $638 million of commercial paper. (8) Redeemable Preferred Stock In January 1996, TCIC issued 4,600,000 shares of a series of TCIC preferred stock designated Cumulative Exchangeable Preferred Stock, Series A, ("Series A Preferred Stock") with a stated value of $50 per share in a public offering for net cash proceeds of $223 million. Dividends accrue cumulatively and are payable quarterly in arrears on each January 15, April 15, July 15 and October 15 or, if any such date is not a business day, on the next succeeding business day, at the rate per annum of 4.25% of the stated value per share when, as and if declared by the Board of Directors. The Company may elect to make dividend payments (i) in cash, (ii) by delivery of Series A TCI Group Stock or (iii) by any combination of the foregoing forms of consideration elected by the Board of Directors in its sole discretion. (continued) II-34 56 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Each of the 4,600,000 shares of Series A Preferred Stock is exchangeable, commencing January 15, 2001, at the option of the holder (unless previously redeemed), in whole or in part, for 2.119 shares of Series A TCI Group Stock, subject to adjustment in certain events. The value of the shares of Series A TCI Group Stock received upon any exchange will vary depending upon the market price of the Series A TCI Group Stock at the time of such exchange. The Series A Preferred Stock is not redeemable prior to January 15, 2001. At any time and from time to time on or after that date, the Company may redeem any or all of the outstanding shares of Series A Preferred Stock, initially at a redemption price of $50.94 per share and thereafter at prices declining ratably on each January 15 to $50 per share on and after January 15, 2005, plus accrued and unpaid dividends to the date of redemption. The Company may elect to make any optional redemption payment (i) in cash, (ii) by delivery of Series A TCI Group Stock or (iii) by any combination of the foregoing forms of consideration elected by the Board of Directors in its sole discretion. The Series A Preferred Stock is subject to mandatory redemption by the Company on January 15, 2006, at a redemption price of $50 per share, plus accrued and unpaid dividends to the date of redemption. The Company may elect to make any mandatory redemption payment (i) in cash, (ii) by delivery of Series A TCI Group Stock or (iii) by any combination of the foregoing forms of consideration elected by the Board of Directors in its sole discretion. The Company may elect to make dividend payments, redemption payments (optional or mandatory) or payments on any dissolution, liquidation or winding up of the Company to holders of Series A Preferred Stock (i) in cash, (ii) by delivery of Series A TCI Group Stock or (iii) by any combination of the foregoing forms of consideration elected by the Board of Directors in its sole discretion. If the Company elects to make any such payment, in whole or in part, through the delivery of shares of Series A TCI Group Stock (the portion paid through the delivery of shares being referred to herein as the "Stock Portion"), each holder will receive a number of shares of Series A TCI Group Stock determined by dividing the dollar amount of such Stock Portion by the Cash Equivalent Amount. Any portion of a dividend, redemption or liquidation payment that is not paid through the delivery of shares of Series A TCI Group Stock will be paid in cash. The "Cash Equivalent Amount" means an amount equal to 95% of the Average Market Price of a share of Series A TCI Group Stock. The "Average Market Price" is defined as the average of the closing sale prices for a share of Series A TCI Group Stock on the Nasdaq National Market for the 10 consecutive trading days ending on the third trading day prior to (i) in the case of dividends, the relevant record date and (ii) in the case of a redemption or the dissolution, liquidation or winding up of the Company, the date of the redemption or liquidation payment. The market price of the Series A TCI Group Stock may vary between the date of determination of the Cash Equivalent Amount and the subsequent delivery of shares. (continued) II-35 57 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements If the Company elects to make a dividend, redemption or liquidation payment with shares of Series A TCI Group Stock, the number of such shares that a holder of Series A Preferred Stock will receive in connection with such dividend, redemption of liquidation payment will vary depending on the Average Market Price of the Series A TCI Group Stock at the time of the record date for such dividend or at the time of such redemption or liquidation payment, as the case may be. In the case of a dividend or redemption payment that is made through delivery of shares of Series A TCI Group Stock, if the market value of such shares on the dividend payment date or the redemption date is more than 5% lower than the Average Market Price upon which the Cash Equivalent Amount is determined and the holder sells such shares of Series A TCI Group Stock at such lower price, (x) in the case of such dividend, the holder's actual dividend yield for the dividend period in respect of which such dividend was paid would be lower than the stated dividend yield on the Series A Preferred Stock and (y) in the case of such redemption, the actual sales proceeds received by such holder would be lower than the stated redemption price for the Series A Preferred Stock. In addition, in connection with any such sale the holder is likely to incur commissions and other transaction costs. (continued) II-36 58 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements The Series A Preferred Stock and the Company's common stock will vote as a single class in any general election of directors of the Company. The Series A Preferred Stock will have 2.6% of the combined voting power of all outstanding classes of capital stock of the Company entitled to vote in any general election of directors of the Company. If at any time accrued dividends on the Series A Preferred Stock are in arrears and unpaid for six or more quarterly dividend periods (whether or not consecutive), holders of the Series A Preferred Stock will have the right to elect two additional directors to the Company's Board of Directors, voting as a separate class with the holders of any Parity Stock (as defined herein) upon which like voting rights have been conferred and are vested, until such dividend arrearage is eliminated. The holders of Series A Preferred Stock will have no other voting rights, except that the affirmative vote of at least 66 2/3% of the Series A Preferred Stock (voting separately as a class) will be required before (i) the Company may amend, alter or repeal any provision of the Company's Restated Certificate of Incorporation which would adversely affect the powers, preferences or rights of the holders of the shares of Series A Preferred Stock, (ii) the Company or the Board of Directors may authorize the creation of or issue any class or series of preferred stock of the Company (the "Preferred Stock") that ranks senior to the Series A Preferred Stock as to dividend payments, payments on redemption or payments of amounts distributable upon the dissolution, liquidation or winding up of the Company ("Senior Stock") or (iii) the Company may effect a reclassification of the Series A Preferred Stock, in each case subject to certain exceptions. However, the Company may create additional classes and series of Preferred Stock, ranking pari passu with the Series A Preferred Stock as to dividend payments, payments on redemption or payments of amounts distributable upon the dissolution, liquidation or winding up of the Company ("Parity Stock") and additional classes and series of junior stock, increase the number of authorized shares of Preferred Stock (other than Series A Preferred Stock) or decrease (but not below the number of authorized shares then outstanding) the number of authorized shares of Preferred Stock (other than Series A Preferred Stock) without the consent of any holder of Series A Preferred Stock. (9) 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"), an indirect 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 purposes of issuing Trust I Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 8.72% Subordinated Deferrable Interest Notes due January 31, 2045 (the "8.72% Subordinated Debt Securities") of 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. (continued) II-37 59 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements In May 1996, TCI Communications Financing II ("Trust II"), an indirect 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 statements of operations. (10) Stockholder's Equity Holders of the Class A common stock have 100 votes per share and holders of the Class B common stock have 1,000 votes per share. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock. At December 31, 1996 all of the common stock of TCIC is owned by TCI. Employee Benefit Plans TCI has several employee stock purchase plans (the "Plans") to provide employees an opportunity for ownership in TCI and to create a retirement fund. Terms of the Plans generally provide for employees to contribute up to 10% of their compensation to a trust for investment in TCI Group Stock and Liberty Group Stock. TCI, by annual resolution of the Board of Directors, generally contributes up to 100% of the amount contributed by employees. Certain of TCIC's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $34 million, $27 million and $19 million for 1996, 1995 and 1994, respectively. (continued) II-38 60 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Stock Options TCIC had granted or assumed certain options and/or stock appreciation rights. All such options and/or stock appreciation rights previously granted by TCIC were assumed by TCI in conjunction with the TCI/Liberty Combination. Additionally, in 1995, certain officers and other key employees of TCIC were granted options with tandem stock appreciation rights and were awarded restricted stock of Series A TCI Group Stock, Series A Liberty Group Stock and/or Series A TINTA common stock. Estimates of the compensation relating to the stock appreciation rights granted and/or restricted stock awarded to employees of TCIC have been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon market value and, ultimately, on the final determination of market value when the rights are exercised or vested. Had TCIC accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. The following table presents the number and weighted average exercise price ("WAEP") of certain options in tandem with SARs to purchase TCI Class A common stock, Series A TCI Group Stock and Series A Liberty Group Stock granted to certain officers and other key employees of the Company:
TCI TCI TCI Series A Class A Series A Liberty common TCI Group Group stock WAEP stock WAEP stock WAEP ------- ---- --------- ---- -------- ---- Outstanding at January 1, 1994 3,274,336 $ 16.40 -- -- Granted 1,453,000 22.00 -- -- Exercised (217,483) 17.26 -- -- Canceled (45,625) 20.13 -- -- --------- --------- --------- Outstanding at December 31, 1994 4,464,228 18.14 -- -- Converted from Class A options (4,444,514) 18.16 4,444,514 $13.58 -- Adjustment for distribution -- -- 1,657,511 $12.11 Granted -- 3,142,000 17.00 -- -- Exercised (9,714) 10.30 (414,764) 12.40 (138,004) 11.03 Canceled (10,000) 17.25 (90,500) 13.07 (33,936) 11.66 --------- --------- --------- Outstanding at December 31, 1995 -- 7,081,250 15.17 1,485,571 12.22 Exercised -- (141,300) 12.78 (63,355) 11.96 Canceled -- (118,200) 15.17 (25,200) 12.47 --------- --------- --------- Outstanding at December 31, 1996 -- 6,821,750 13.09 1,397,016 12.22 ========= ========= ========= Exercisable at December 31, 1994 1,099,678 15.61 -- -- ========= ========= ========= Exercisable at December 31, 1995 -- 1,729,090 12.67 653,432 11.29 ========= ========= ========= Exercisable at December 31, 1996 -- 3,020,068 11.93 904,424 11.68 ========= ========= ========= Vesting Period 4-5 yrs 4-5 yrs ========= =========
On December 13, 1995, TCI awarded 205,000 restricted shares of Series A TCI Group common stock to certain officers and other key employees of the Company. Such restricted shares vest as to 50% on December 13, 2000 and as to the remaining 50% on December 13, 2001. (11) Income Taxes TCI files a consolidated federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than 80% each file a separate income tax return. TCIC and all of its 80% or more owned subsidiaries, subsequent to the TCI/Liberty Combination, is included in the consolidated federal income tax return of TCI. Income tax expense for TCIC is based on those items in the consolidated calculation applicable to TCIC. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in intercompany payable or receivable included as a component of stockholder's equity. (continued) II-39 61 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain of the elements of pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. federal, state, local and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, 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. In connection with the implementation of the Tax Sharing Agreement, TCIC recorded an increase to its deferred income tax liability and a decrease to its intercompany payable of $76 million in 1995. Income tax benefit (expense) for the years ended December 31, 1996, 1995 and 1994 consists of:
Current Deferred Total ------- -------- ----- amounts in millions Year ended December 31, 1996: Intercompany allocation $ (12) 137 125 State and local (8) 22 14 ----- ---- ---- $ (20) 159 139 ===== ==== ==== Year ended December 31, 1995: Intercompany allocation $ 1 46 47 State and local (8) 10 2 ----- ---- ---- $ (7) 56 49 ===== ==== ==== Year ended December 31, 1994: Intercompany allocation $ (73) (35) (108) State and local (14) (10) (24) ----- ---- ---- $ (87) (45) (132) ===== ==== ====
(continued) II-40 62 Tci COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Income tax benefit (expense) differs from the amounts computed by applying the federal income tax rate of 35% as a result of the following:
Years ended December 31, --------------------------- 1996 1995 1994 ---- ---- ---- amounts in millions Computed "expected" tax benefit (expense) $ 207 59 (79) Amortization not deductible for tax purposes (17) (18) (12) Minority interest in losses (earnings) of consolidated subsidiaries 1 4 (1) Recognition of losses of consolidated partnership -- -- (10) State and local income taxes, net of federal income tax benefit 7 2 (21) Valuation allowance for net operating loss carryforward -- (6) -- Valuation allowance for foreign corporation -- -- (9) Gain recognized for tax purposes on sale of investments (61) -- -- Other 2 8 -- ----- ---- ---- $ 139 49 (132) ===== ==== ====
(continued) II-41 63 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, ------------ 1996 1995 ---- ---- amounts in millions Deferred tax assets: Net operating loss carryforwards $ 509 470 Less - valuation allowance (88) (88) Investment tax credit carryforwards 116 116 Less - valuation allowance (41) (41) Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 149 169 Future deductible amounts principally due to non-deductible accruals 25 25 Other 9 11 ------- ------ Net deferred tax assets 679 662 ------- ------ Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,163 1,161 Franchise costs, principally due to differences in amortization 4,491 3,403 Investment in affiliates, due principally to undistributed earnings of affiliates 335 191 Leases capitalized for tax purposes 73 53 Other 76 115 ------- ------ Total gross deferred tax liabilities 6,138 4,923 ------- ------ Net deferred tax liability $ 5,459 4,261 ======= ======
The valuation allowance for deferred tax assets as of December 31, 1996 was $129 million. Such balance did not change from December 31, 1995. The tax attributes disclosed above are those determined pursuant to the Tax Sharing Agreement. (continued) II-42 64 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements At December 31, 1996, TCIC had net operating loss carryforwards for income tax purposes aggregating approximately $995 million of which, if not utilized to reduce taxable income in future periods, $132 million expires in 2003, $115 million in 2004, $342 million in 2005, $230 million in 2006, $72 million in 2010 and $104 million in 2011. Certain subsidiaries of TCIC had additional net operating loss carryforwards for income tax purposes aggregating approximately $236 million and these net operating losses are subject to certain rules limiting their usage. Pursuant to the Tax Sharing Agreement, the Company has not received benefit for approximately $42 million of the net operating loss carryforward disclosed above. TCI is responsible to the Company to the extent such amounts are utilized by TCI in future periods. At December 31, 1996, TCIC had remaining available investment tax credits of approximately $61 million which, if not utilized to offset future federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of TCIC had additional investment tax credit carryforwards aggregating approximately $55 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. At July 1, 1995, TCIC also had available alternative minimum tax credit carryforwards ("Alt Min Carryforwards") of $76 million. Pursuant to the Tax Sharing Agreement, for as long as TCIC is included in TCI's consolidated Federal income tax return, any benefit attributable to the Alt Min Carryforwards will be reserved to TCI. Accordingly, TCIC's deferred tax liability at December 31, 1996 has not been reduced for such future deductible amounts. In the event that TCI's ownership of TCIC goes below 80% and TCIC is no longer included in TCI's consolidated federal income tax return, and TCIC subsequently realizes a benefit from the Alt Min Carryforwards, TCIC will be required to pay to TCI the amount of such realized benefit plus any associated interest thereon. Certain of the federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the Internal Revenue Service ("IRS") for the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues related to the years 1981 through 1991 have been resolved in TCIC's favor. The IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the opinion of management, any additional tax liability, not previously provided for, resulting from the IRS Examinations or the IRS Appeals, ultimately determined to be payable, should not have a material adverse effect on the consolidated financial position of TCIC. (continued) II-43 65 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements (12) Transactions with Related Parties 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 $76 million, $73 million and $59 million for the years ended December 31, 1996 and 1995 and 1994, 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 years ended December 31, 1996, 1995 and 1994, aggregated $12 million, $15 million and $8 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 launched in 1994. Liberty holds the remaining 49.9% partnership interest. TCIC has entered into a long-term affiliation agreement with QE+ with respect to the distribution of the STARZ! service. Rates per subscriber specified in the agreement are based upon customary rates charged to other cable system operators. Payments to QE+ for 1996 and 1995 were approximately $52 million and $31 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. At December 31, 1996, TCIC had an $203 million intercompany receivable from TCI Starz, Inc. which represented the net effect of advances to TCI Starz, Inc., who in turn paid such amount 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 former consolidated subsidiary of Liberty, Home Shopping Network, Inc. ("HSN") paid a commission to TCIC for merchandise sales to customers who are subscribers of TCIC's cable systems. Aggregate commissions to TCIC were $7 million, $6 million and $7 million for the years ended December 31, 1996, 1995 and 1994, respectively. Such amounts are recorded in revenue in the accompanying consolidated statements of operations. Effective December 20, 1996, Liberty entered into a series of transactions whereby it decreased its ownership interest in HSN such that Liberty no longer consolidates HSN. (continued) II-44 66 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Intercompany amounts at December 31, 1996 represent non-interest bearing intercompany advances aggregating $95 million from certain subsidiaries of TCI offset by the aforementioned $203 million intercompany receivable from TCI Starz, Inc. and interest-bearing loans to certain subsidiaries of TCI. Such interest-bearing loans plus accrued interest aggregated $148 million and $134 million at December 31, 1996 and 1995, respectively. Interest earned by TCIC on such intercompany loans aggregated $12 million for each of the years ended December 31, 1996, 1995 and 1994. Such interest amounts are included in interest income in the accompanying consolidated statements of operations. (13) Transactions with Officers and Directors Effective January 31, 1996, a director of the Company purchased one-third of the Company's interest in two limited partnerships and obtained two ten-year options to purchase the Company's remaining partnership interests. The purchase price for the one-third partnership interests was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a wholly-owned subsidiary of the Company) Series C Cumulative Compounding Preferred Stock owned by such director, and the purchase price for the ten-year options was $100 for each option. All options are exercisable for cash in the aggregate amount of $3,000,000. On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an executive officer of TCI was transferred all of TCI's right title and interest in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock of WestMarc owned by TCI. Such preferred stock has a liquidation value of $1,999,500 and is subject to forfeiture by such officer in the event of certain circumstances from the date of grant through December 13, 2005. Effective December 1, 1996, an executive officer of TCI and an executive officer of TCIC were each granted options representing 1.0% of TCI's common equity in TCI Telephony Services, Inc., a consolidated subsidiary of TCI, ("Telephony Services"). The aggregate exercise price for each such option is equal to 1.0% of (i) TCI's cumulative investment in Telephony Services as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax benefits generated by Telephony Services (up to $500 million) as and when used by TCI. Each such executive officer was also granted a similar option representing 1.0% of TCI's common equity in TCI Wireline, Inc., another consolidated subsidiary of TCI, ("Wireline"). The aggregate exercise price for each such Wireline option is equal to 1.0% of TCI's cumulative investment in Wireline as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise. Any exercise by one of such executive officers of all or part of one of such options (as to either the Telephony Services option or the Wireline option) would need to be accompanied by the exercise by such executive officer of a pro rata portion of the other such option. All of such options vest 20% per annum beginning February 1, 1997, and expire on February 1, 2006. (continued) II-45 67 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements On the date of the Satellite Spin-off, TCI granted options to two of its executive officers to purchase 1.0% and an option to an employee of TCIC to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise price for each such option is equal to 1.0% or 0.5%, as applicable, of TCI's net investment in Satellite on the date of the Satellite Spin-off. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Estimated compensation relating to the aforementioned restricted stock award and options has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Had TCIC accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. (14) Commitments and Contingencies On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the Federal Communications Commission ("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. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. 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 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. (continued) II-46 68 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements TCIC has guaranteed notes payable and other obligations of Satellite and affiliated companies with outstanding balances of approximately $175 million at December 31, 1996. Although there can be no assurance, management of TCIC believes that it will not be required to meet its obligations under such guarantees, or if it is required to fulfill any of such obligations, that they will not be material to TCIC. Satellite 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 Satellite's behalf. In connection with the launch of STARZ! in 1994, 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 December 31, 1996, the maximum amount of such obligations or guarantees was approximately $120 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 leases business offices, has entered into converter lease agreements, pole rental agreements, transponder lease agreements and uses certain equipment under lease arrangements. Minimum rental expense under such arrangements amounted to $147 million, $112 million and $76 million in 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions):
Years ending December 31, 1997 $ 115 1998 110 1999 108 2000 97 2001 91 Thereafter 263
It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1997. (continued) II-47 69 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Notes to Consolidated Financial Statements Certain key employees of TCIC hold restricted stock awards, options and options with tandem SARs to acquire shares of 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 pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of the respective common stock and, ultimately, on the final market value when the rights are exercised or the restricted stock awards are vested. Had TCIC accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. 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. (15) Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- amounts in millions 1996 Revenue: As previously reported $ 1,402 1,504 1,648 Adjustment to reclassify franchise fee revenue (65) (70) (74) Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) ------- ------ ------ As adjusted $ 1,333 1,430 1,571 1,620 ======= ====== ====== ====== Operating income: As previously reported $ 174 201 240 Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) ------- ------ ------ As adjusted $ 170 197 237 149 ======= ====== ====== ====== Net loss: As previously reported $ (77) (111) (72) Adjustment to reflect optical fiber leases as capital leases (3) (3) (2) ------- ------ ------ As adjusted $ (80) (114) (74) (184) ======= ====== ====== ====== 1995: Revenue: As previously reported $ 1,169 1,262 1,310 1,377 Adjustment to reclassify franchise fee revenue (55) (60) (63) (62) ------- ------ ------ ------ As adjusted $ 1,114 1,202 1,247 1,315 ======= ====== ====== ====== Operating income $ 230 208 222 143 Net earnings (loss) $ 4 (28) (26) (70)
II-48 70 PART III. The information required by Part III (Items 10, 11, 12 and 13) has been incorporated herein by reference to the Company's definitive Proxy Statement (the "1997 Proxy Statement") to be used in connection with the 1997 Annual Meeting of Stockholders as set forth below, in accordance with General Instruction G(3) of Form 10-K. Item 10. Directors and Executive Officers of the Registrant. Information relating to directors and executive officers of the Company is set forth in the sections entitled "Election of Directors Proposal" and "Concerning Management" in the 1997 Proxy Statement and is incorporated herein by reference. Item 11. Executive Compensation. Information regarding compensation of officers and directors of the Company is set forth in the section entitled "Executive Compensation" in the 1997 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding ownership of certain of the Company's securities is set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions with the Company is set forth in the section entitled "Certain Relationships and Related Transactions" in the 1997 Proxy Statement and is incorporated herein by reference. III-1 71 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements Included in Part II of this Report: Page No. Independent Auditors' Report II-14 Consolidated Balance Sheets, December 31, 1996 and 1995 II-15 to II-16 Consolidated Statements of Operations, Years ended December 31, 1996, 1995 and 1994 II-17 Consolidated Statements of Stockholder's Equity, Years ended December 31, 1996, 1995 and 1994 II-18 to II-20 Consolidated Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994 II-21 Notes to Consolidated Financial Statements, December 31, 1996, 1995 and 1994 II-22 to II-48 IV-1 72 (a) (2) Financial Statement Schedules Included in Part IV of this Report:
(i) Financial Statement Schedules required to be filed: Page No. Independent Auditors' Report IV-11 Schedule I - Condensed Information as to the Financial Position of the Registrant, December 31, 1996 and 1995; Condensed Information as to the Operations and Cash Flows of the Registrant, Years ended December 31, 1996, 1995 and 1994 IV-12 to IV-14 Schedule II - Valuation and Qualifying Accounts, Years ended December 31, 1996, 1995 and 1994 IV-15 (ii) Separate financial statements for Sprint Spectrum Holding Company, L.P. and Subsidiaries Consolidated Financial Statements Independent Auditors' Report IV-16 Report of Independent Accountants IV-17 Consolidated Balance Sheets IV-18 Consolidated Statements of Operations IV-19 Consolidated Statements of Changes in Partners' Capital IV-20 Consolidated Statements of Cash Flows IV-21 Notes to Consolidated Financial Statements IV-22 to IV-35
IV-2 73 (a) (3) Exhibits Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K): 3 - Articles of Incorporation and Bylaws: 3.1 Restated Certificate of Incorporation, dated as of January 11, 1996, as amended on January 11, 1996 and February 6, 1996. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-5550). 3.2 Bylaws as adopted August 4, 1994. Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10 - Material Contracts: 10.1 Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Form S-4 Registration Statement (Commission File No. 33-54263). 10.2 Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.* Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended Decmeber 31, 1995 (Commission File No. 0-20421). 10.3 Tele-Communications, Inc. 1996 Stock Incentive Plan. * Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.4 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.5 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10.6 Restricted Stock Award Agreement, made as of December 10, 1992, among Tele-Communications, Inc., Donne F. Fisher and WestMarc Communications, Inc.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550).
IV-3 74 10 - Material contracts, continued: 10.7 Consulting Agreement, dated as of January 1, 1996, between Tele-Communications, Inc. and Donne F. Fisher. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.8 Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.9 Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.10 Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and a director of Tele-Communications, Inc. relating to assumption of options and related stock appreciation rights granted outside of an employee benefit plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.11 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights granted under Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1993 Non- Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.12 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights under Tele- Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1992 Non- Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.13 Form of Indemnification Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550).
(continued) IV-4 75 10 - Material contracts, continued: 10.14 Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10.15 Qualified Employee Stock Purchase Plan of Tele-Communications, Inc., as amended.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-57635). 10.16 Form of Restricted Stock Award Agreement for 1995 Award of Series A TCI Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Form of Restricted Stock Award Agreement for 1995 Award of Series A Liberty Media Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.17 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.18 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.19 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.20 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421).
(continued) IV-5 76 10 - Material contracts, continued: 10.21 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.22 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.23 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.24 Restricted Stock Award Agreement, made as of July 1, 1996, among Tele-Communications, Inc., Brendan Clouston and WestMarc Communi-cations, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421). 10.25 Option Agreement, dated as of December 4, 1996, by and between TCI Satellite Entertainment, Inc. and Brendan R. Clouston.* Incorporated herein by reference to the TCI Satellite Entertainment, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-21317). 10.26 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Telephony Services, Inc., Grantee and Tele-Communications, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421). 10.27 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Wireline, Inc., Grantee and Tele-Communications, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421).
(continued) IV-6 77 10 - Material contracts, continued: 10.28 Employee Stock Purchase Plan for Bargaining Unit Employees of United Cable Television of Baltimore Limited Partnership.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60839). 10.29 Employee Stock Purchase Plan for Bargaining Unit Employees of Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60843). 10.30 Employee Stock Purchase Plan for Bargaining Unit Employees of UACC Midwest, Inc. d/b/a TCI of Central Indiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64827). 10.31 The Settlement Plan and Rabbi Trust Agreement Entered into Pursuant to Thomas Adams, Mark Adamski, et. al. v. TCI of Northern New Jersey, Inc. and the Tele-Communications, Inc. Employee Stock Purchase Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64829). 10.32 Employee Stock Purchase Plan for Bargaining Unit Employees of TCI of Northern New Jersey, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64831). 10.33 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Subscription Agreement, dated as of July 24, 1995, among Viacom International, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Implementation Agreement, dated as of July 24, 1995, between Viacom International, Inc. and Viacom International Services, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated July 26, 1995 (Commission File No. 0-5550). 10.34 Amended and Restated Agreement of Limited Partnership of MajorCo, L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership. Second Amended and Restated Joint Venture Formation Agreement, dated as of January 31, 1996, by and between Sprint Corporation, Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Parents Agreement, dated as of January 31, 1996, by Tele-Communications, Inc. and Sprint Corporation. Incorporated herein by reference to Tele-Communications, Inc.'s Current Report on Form 8-K, dated February 9, 1996 (Commission File No. 0-20421).
(continued) IV-7 78 10 - Material contracts, continued: 10.35 Agreement of Purchase and Sale of Partnership Interest, dated as of January 31, 1996, among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.36 Consent and Amendment of Amended Agreement of Partnership for Halcyon Communications Partners, dated as of January 31, 1996, by and among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.37 Assignment and Assumption Agreement, made as of January 31, 1996, between ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.38 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and ECP Holdings, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.39 Agreement of Purchase and Sale of Partnership Interests, dated as of January 31, 1996, among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.40 Consent and First Amendment of Amended and Restated Agreement of Limited Partnership for Halcyon Communications Limited Partnership, dated as of January 31, 1996, by and among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.41 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Utah, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421).
(continued) IV-8 79 10 - Material contracts, continued: 10.42 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Utah, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.43 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Nevada, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.44 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Nevada, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.45 Assignment and Assumption Agreement, made as of January 31, 1996, between American Televenture of Minersville, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.46 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and American Televenture of Minersville, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.47 Assignment and Assumption Agreement, made as of January 31, 1996, between TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.48 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TEMPO Cable, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 21- Subsidiaries of TCI Communications, Inc. 23.1- Consent of KPMG Peat Marwick LLP. 23.2- Consent of Deloitte & Touche LLP. 23.3- Consent of Price Waterhouse LLP. 27- Financial data schedule
*Constitutes management contract or compensatory arrangement. IV-9 80 (b) Report on Form 8-K filed during the quarter ended December 31, 1996:
Item Date of Report Reported Financial Statements Filed -------------- -------- -------------------------- December 17, 1996 Item 5 None.
IV-10 81 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders TCI Communications, Inc.: Under date of March 24, 1997, we reported on the consolidated balance sheets of TCI Communications, Inc. and subsidiaries (a subsidiary of Tele-Communications, Inc.) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in the December 31, 1996 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 IV-11 82 Schedule I Page 1 of 3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Condensed Information as to the Financial Position of the Registrant December 31, 1996 and 1995
Assets 1996 1995 - ------ ---- ---- amounts in millions Investments in and advances to consolidated subsidiaries - eliminated upon consolidation $ 9,299 10,348 Other assets, at cost, net of amortization 213 116 ------- ------ $ 9,512 10,464 ======= ====== Liabilities and Stockholder's Equity Accrued liabilities $ 597 402 Debt 8,669 8,333 ------- ------ Total liabilities 9,266 8,735 Redeemable preferred stock 232 -- Stockholder's equity (see detail on page II-16) 14 1,729 ------- ------ $ 9,512 10,464 ======= ====== Guarantees $ 22 22 ======= ======
IV-12 83 Schedule I Page 2 of 3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Condensed Information as to the Operations of the Registrant Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----- ----- ---- amounts in millions Management costs reimbursed by subsidiaries $ 247 152 115 ----- ---- ---- Operating expenses (income): Selling, general and administrative 184 116 103 Compensation (adjustment to compensation) relating to options and stock appreciation rights (12) 17 (5) Interest expense 707 624 471 Interest income, principally from consolidated subsidiaries (707) (625) (472) Restructuring charges 5 -- -- Depreciation and amortization 31 19 13 Loss on early extinguishment of debt 40 -- -- Loss (gain) on disposition of assets (1) 1 5 ----- ---- ---- 247 152 115 ----- ---- ---- Earnings from operations before share of losses (earnings) of consolidated subsidiaries -- -- -- Share of losses (earnings) of consolidated subsidiaries 452 120 (94) ----- ---- ---- Net loss (earnings) 452 120 (94) Preferred stock dividend requirements 9 -- -- ----- ---- ---- Net loss (earnings) attributable to common stockholder $ 461 120 (94) ===== ==== ====
IV-13 84 Schedule I Page 3 of 3 TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Condensed Information as to Cash Flows of the Registrant Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- amounts in millions Cash flows from operating activities: Earnings before share of losses (earnings) of consolidated subsidiaries $ -- -- -- Adjustments to reconcile earnings before share of losses (earnings) of consolidated subsidiaries to net cash provided by operating activities: Depreciation and amortization 31 19 13 Compensation (adjustment to compensation) relating to options and stock appreciation rights (12) 17 (5) Payments of stock appreciation rights (2) (4) -- Loss on early extinguishment of debt 40 -- -- Loss (gain) on disposition of assets (1) 1 5 Amortization of debt discount 4 1 1 Change in accrued liabilities 195 77 43 ------- ------ ------ Net cash provided by operating activities 255 111 57 ------- ------ ------ Cash flows from investing activities: Reduction in or additional investments in and advances to consolidated subsidiaries, net (258) (2,592) (1,376) Capital expended for property and equipment (120) -- -- Cash Proceeds on disposition of assets 7 -- -- Other investing activities (6) (52) (45) ------- ------ ------ Net cash used in investing activities (377) (2,644) (1,421) ------- ------ ------ Cash flows from financing activities: Borrowings of debt 1,617 5,255 2,227 Repayments of debt (1,285) (3,651) (678) Prepayment penalties (35) -- -- Issuance of redeemable preferred stock 223 -- -- Change in intercompany payable/receivable (391) 929 (189) Payment of redeemable preferred stock dividends (7) -- -- ------- ------ ------ Net cash provided by financing activities 122 2,533 1,360 ------- ------ ------ Net decrease in cash -- -- (4) Cash at beginning of year -- -- 4 ------- ------ ------ Cash at end of year $ -- -- -- ======= ====== ====== Supplemental disclosure of cash flow information - Cash paid during the year for interest $ 738 576 448 ======= ====== ======
See also note 2 to the consolidated financial statements. IV-14 85 Schedule II TCI COMMUNICATIONS, INC. AND SUBSIDIARIES (A Subsidiary of Tele-Communications, Inc.) Valuation and Qualifying Accounts Years ended December 31, 1996, 1995 and 1994
Additions Deductions Balance at Charged to Write-offs Balance beginning profit net of at end Description of year and loss recoveries of year - ----------- ------- -------- ---------- ------- amounts in millions Year ended December 31, 1996: Allowance for doubtful receivables - trade $ 24 112 (111) 25 ======== === ==== == Year ended December 31, 1995: Allowance for doubtful receivables - trade $ 15 76 (67) 24 ======== === ==== == Year ended December 31, 1994: Allowance for doubtful receivables - trade $ 19 57 (61) 15 ======== === ==== ==
IV-15 86 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT Partners of Sprint Spectrum Holding Company, L.P. Kansas City, Missouri We have audited the accompanying consolidated balance sheets of Sprint Spectrum Holding Company, L.P. and subsidiaries (the "Partnership"), development stage enterprises, as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 1996, for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 financial statements of American PCS, L.P. ("APC") an investment of the Partnership which is accounted for by use of the equity method. The Partnership's share of APC's net loss for the year ended December 31, 1996 was $96,850,000 and is included in the accompanying consolidated financial statements. The financial statements of APC were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for APC, is based solely on the reports of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Sprint Spectrum Holding Company, L.P. and subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for the years then ended and for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Sprint Spectrum Holding Company, L.P. and its subsidiaries are in the development stage as of December 31, 1996. /s/ DELOITTE & TOUCHE LLP Kansas City, Missouri March 14, 1997 IV-16 87 REPORT OF INDEPENDENT ACCOUNTANTS In our opinion, the balance sheet and the related statements of loss, of changes in partners capital and cash flows (not presented separately herein) present fairly, in all material respects, the financial position of American PCS, L.P. at December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnerships management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Washington, DC March 7, 1997 IV-17 88 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents .......................... $ 69,988 $ 1,123 Accounts receivable, net ........................... 3,310 -- Receivable from affiliates ......................... 12,901 340 Inventory .......................................... 72,414 -- Prepaid expenses and other assets, net ............. 14,260 188 Note receivable--unconsolidated partnership ........ 226,670 655 ------------ ------------ Total current assets ............................. 399,543 2,306 INVESTMENT IN PCS LICENSES, net ....................... 2,122,908 2,124,594 INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ............ 179,085 85,546 PROPERTY, PLANT AND EQUIPMENT, net .................... 1,408,680 31,897 MICROWAVE RELOCATION COSTS, net ....................... 135,802 -- OTHER ASSETS, net ..................................... 77,383 -- ------------ ------------ TOTAL ASSETS .......................................... $ 4,323,401 $ 2,244,343 ============ ============ LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Advances from partners ............................. $ 167,818 $ -- Accounts payable ................................... 196,146 41,950 Payable to affiliate ............................... 5,626 7,598 Accrued expenses ................................... 81,230 1,700 Current maturities of long-term debt ............... 49 -- ------------ ------------ Total current liabilities ........................ 450,869 51,248 LONG-TERM COMPENSATION OBLIGATION ..................... 11,356 1,856 CONSTRUCTION OBLIGATIONS .............................. 714,934 -- LONG-TERM DEBT ........................................ 686,192 -- COMMITMENTS AND CONTINGENCIES LIMITED PARTNER INTEREST IN CONSOLIDATED SUBSIDIARY ......................................... 13,397 13,170 PARTNERS' CAPITAL AND ACCUMULATED DEFICIT: Partners' capital .................................. 3,003,484 2,291,806 Deficit accumulated during the development stage ... (556,831) (113,737) ------------ ------------ Total partners' capital .......................... 2,446,653 2,178,069 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL ............... $ 4,323,401 $ 2,244,343 ============ ============
See notes to consolidated financial statements IV-18 89 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
CUMULATIVE PERIOD FROM PERIOD FROM OCTOBER 24, 1994 OCTOBER 24, 1994 (DATE OF (DATE OF YEAR ENDED YEAR ENDED INCEPTION) TO INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 1996 ------------ ------------ ---------------- ---------------- OPERATING REVENUES: Service ................................ $ 33 $ -- $ -- $ 33 Equipment .............................. 4,142 -- -- 4,142 ------------ ------------ ---------------- ---------------- Total operating revenues ............. 4,175 -- -- 4,175 OPERATING EXPENSES: Cost of service ........................ 21,928 -- -- 21,928 Cost of equipment ...................... 14,148 -- -- 14,148 Selling ................................ 38,345 145 -- 38,490 General and administrative ............. 274,352 66,195 3,294 343,841 Depreciation and amortization .......... 11,275 211 38 11,524 ------------ ------------ ---------------- ---------------- Total operating expenses ............. 360,048 66,551 3,332 429,931 ------------ ------------ ---------------- ---------------- LOSS FROM OPERATIONS ...................... (355,873) (66,551) (3,332) (425,756) OTHER INCOME (EXPENSE): Interest income ........................ 8,593 460 24 9,077 Interest expense, net .................. (323) -- -- (323) Other income ........................... 1,586 38 -- 1,624 Equity in loss of unconsolidated ....... (96,850) (46,206) -- (143,056) partnership Limited partner interest in net loss of consolidated subsidiary ........... (227) 1,830 -- 1,603 ------------ ------------ ---------------- ---------------- Total other income (expense) ......... (87,221) (43,878) 24 (131,075) ------------ ------------ ---------------- ---------------- NET LOSS .................................. $ (443,094) $ (110,429) $ (3,308) $ (556,831) ============ ============ ================ ================
See notes to consolidated financial statements IV-19 90 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (IN THOUSANDS)
PARTNERS' ACCUMULATED CAPITAL DEFICIT TOTAL ----------- ----------- ----------- BALANCE, October 24, 1994 .......... $ -- $ -- $ -- Contributions of capital ........... 123,438 -- 123,438 Net loss ........................... -- (3,308) (3,308) ----------- ----------- ----------- BALANCE, December 31, 1994 ......... 123,438 (3,308) 120,130 Contributions of capital ........... 2,168,368 -- 2,168,368 Net loss ........................... -- (110,429) (110,429) ----------- ----------- ----------- BALANCE, December 31, 1995 ......... 2,291,806 (113,737) 2,178,069 Contributions of capital ........... 711,678 -- 711,678 Net loss ........................... -- (443,094) (443,094) ----------- ----------- ----------- BALANCE, December 31, 1996 ......... $ 3,003,484 $ (556,831) $ 2,446,653 =========== =========== ===========
See notes to consolidated financial statements IV-20 91 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
CUMULATIVE PERIOD FROM PERIOD FROM OCTOBER 24, 1994 OCTOBER 24, 1994 (DATE OF (DATE OF YEAR ENDED DECEMBER 31, INCEPTION) TO INCEPTION) TO ---------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 1994 1996 ------------ ------------ ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .......................................... $ (443,094) $ (110,429) $ (3,308) $ (556,831) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in loss of unconsolidated partnership ... 96,850 46,206 -- 143,056 Limited partner interest in net loss of consolidated subsidiary ...................... 227 (1,830) -- (1,603) Depreciation and amortization .................. 11,275 211 38 11,524 Amortization of debt discount and issuance costs ............................... 14,008 -- -- 14,008 Loss on disposal of non-network equipment ...... -- 31 -- 31 Changes in assets and liabilities: Receivables ................................. (15,871) (340) -- (16,211) Inventory ................................... (72,414) -- -- (72,414) Prepaid expenses and other assets ........... (21,608) (178) (10) (21,796) Accounts payable and accrued expenses ....... 231,754 47,503 3,745 283,002 Long-term compensation obligation ........... 9,500 1,856 -- 11,356 ------------ ------------ ---------------- ---------------- Net cash provided by (used in) operating activities .................... (189,373) (16,970) 465 (205,878) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .............................. (683,886) (31,763) (451) (716,100) Proceeds on sale of equipment ..................... -- 37 -- 37 Microwave relocation costs ........................ (123,354) -- -- (123,354) Purchase of PCS licenses .......................... -- (2,006,156) (118,438) (2,124,594) Investment in unconsolidated partnerships ......... (190,390) (131,752) -- (322,142) Loan to unconsolidated partnership ................ (231,964) (655) -- (232,619) Payment received on loan to unconsolidated partnership ..................................... 5,950 -- -- 5,950 ------------ ------------ ---------------- ---------------- Net cash used in investing activities ..... (1,223,644) (2,170,289) (118,889) (3,512,822) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from partners ............................ 167,818 -- -- 167,818 Proceeds from issuance of long-term debt .......... 674,201 -- -- 674,201 Payments on long-term debt ........................ (24) -- -- (24) Debt issuance costs ............................... (71,791) -- -- (71,791) Partner capital contributions ..................... 711,678 2,183,368 123,438 3,018,484 ------------ ------------ ---------------- ---------------- Net cash provided by financing activities .............................. 1,481,882 2,183,368 123,438 3,788,688 ------------ ------------ ---------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. 68,865 (3,891) 5,014 69,988 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...... 1,123 5,014 -- -- ------------ ------------ ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............ $ 69,988 $ 1,123 $ 5,014 $ 69,988 ============ ============ ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - Interest paid, net of amount capitalized ..... $ 323 $ -- $ -- $ 323 NON-CASH INVESTING ACTIVITIES: - Capital expenditures and microwave relocation costs of $807,241 for the year ended December 31, 1996 are net of construction obligations of $714,934.
See notes to consolidated financial statements IV-21 92 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Sprint Spectrum Holding Company, L.P. (the "Company" and "Holdings") is a limited partnership formed in Delaware on March 28, 1995, by Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc. (formerly known as TCI Telephony Services, Inc. as successor to TCI Network Services), Cox Telephony Partnership and Comcast Telephony Services (together the "Partners"). Holdings was formed pursuant to a reorganization of the operations of an existing partnership, WirelessCo, L.P. ("WirelessCo") which transferred certain operating functions to Holdings. The Partners are subsidiaries of Sprint Corporation ("Sprint"), Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox", and together with Sprint, TCI and Comcast, the "Parents"), respectively. The Company and certain other affiliated partnerships offer services as Sprint PCS. The Partners of the Company have the following ownership interests as of December 31, 1996 and 1995: Sprint Enterprises, L.P. 40% TCI Spectrum Holdings, Inc. 30% Cox Telephony Partnership 15% Comcast Telephony Services 15%
Each Partner's ownership interest consists of a 99% general partner interest and a 1% limited partnership interest. The Company is consolidated with certain subsidiaries, including NewTelco, L.P. and Sprint Spectrum L.P. which, in turn, has several subsidiaries. Sprint Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint Spectrum Finance Corporation ("FinCo"), and WirelessCo. MinorCo, L.P. ("MinorCo") held the remaining ownership interests in NewTelco, L.P., Sprint Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo at December 31, 1996. RealtyCo and EquipmentCo were organized on May 15, 1996 for the purpose of holding PCS network-related real estate interests and assets. FinCo was formed on May 20, 1996 to be a co-obligor of the debt obligations discussed in Note 5. VENTURE FORMATION AND AFFILIATED PARTNERSHIPS - A Joint Venture Formation Agreement (the "Formation Agreement"), dated as of October 24, 1994, and subsequently amended as of March 28, 1995, and January 31, 1996, was entered into by the Parents, pursuant to which the Parents agreed to form certain entities to (i) provide national wireless telecommunications services, including acquisition and development of personal communications service ("PCS") licenses, (ii) develop a PCS wireless system in the Los Angeles-San Diego Major Trading Area ("MTA") and (iii) take certain other actions. On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional partnerships were formed consisting of Holdings, MinorCo, NewTelco, L.P., and Sprint Spectrum L.P. The Partners' IV-22 93 ownership interests in WirelessCo were initially held directly by the Partners as of October 24, 1994, the formation date of WirelessCo, but were subsequently contributed to Holdings and then to Sprint Spectrum L.P. on March 28, 1995. Prior to July 1, 1996, substantially all wireless operations of Sprint Spectrum L.P. and subsidiaries were conducted at Holdings and substantially all operating assets and liabilities, with the exception of the interest in an unconsolidated subsidiary and the ownership interest in PCS licenses, were held at Holdings. As of July 1, 1996, Holdings transferred these net assets, and assigned agreements related to the wireless operations to which it was a party to Sprint Spectrum L.P., EquipmentCo and RealtyCo. SPRINT SPECTRUM HOLDING COMPANY, L.P. (FORMERLY KNOWN AS MAJORCO, L.P.) PARTNERSHIP AGREEMENT - The Amended and Restated Agreement of Limited Partnership of MajorCo, L.P. (the "MajorCo Agreement"), dated as of January 31, 1996, among Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast Telephony Services and Cox Telephony Partnership provides that the purpose of the Company is to engage in wireless communications services. The MajorCo Agreement provides for the governance and administration of partnership business, allocation of profits and losses (including provisions for special and curative allocations), tax allocations, transactions with partners, disposition of partnership interests and other matters. The MajorCo Agreement generally provides for the allocation of profits and losses according to each Partner's proportionate percentage interest, after giving effect to special allocations. After special allocations, profits are allocated to partners to the extent of and in proportion to cumulative net losses previously allocated. Losses are allocated, after considering special allocations, according to each Partner's allocation of net profits previously allocated. The MajorCo Agreement provides for a planned capital amount to be contributed by the Partners ("Total Mandatory Contributions"), which represents the sum of $4.2 billion, which includes agreed upon values attributable to the contributions of certain additional PCS licenses by a Partner. The Total Mandatory Contributions amount is required to be contributed in accordance with capital contribution schedules to be set forth in approved annual budgets. The partnership board of Holdings may request capital contributions to be made in the absence of an approved budget or more quickly than provided for in an approved budget, but always subject to the Total Mandatory Contributions limit. The proposed budget for fiscal 1997 has not yet been approved by the partnership board. An additional Amended and Restated Capital Contribution Agreement (the "Amended Agreement") was executed effective October 2, 1996. The Amended Agreement recognizes that through December 31, 1995, approximately $2.2 billion of the Total Mandatory Contributions had been contributed to Sprint Spectrum L.P., and designates that $1.0 billion of the balance of the Total Mandatory Contributions amount shall be contributed to Sprint Spectrum L.P. At December 31, 1996, approximately $3.0 billion of the Total Mandatory Contributions had been contributed by the Partners to Holdings and its affiliated partnerships, of which $2.6 billion had been contributed to Sprint Spectrum L.P. PARENT UNDERTAKING - Each Parent has entered into an agreement which provides for certain undertakings by each Parent in favor of other Partners and which addresses certain obligations of the Parent pertaining to items including provision of services, confidentiality, foreign ownership, purchasing, restrictions on disposition and certain other matters. IV-23 94 DEVELOPMENT STAGE ENTERPRISES - The Company and its subsidiaries are development stage enterprises. The success of the Company's development is dependent on a number of business factors, including securing financing to complete network construction and fund initial operations, successfully deploying the PCS network and attaining profitable levels of market demand for Company products and services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements have been prepared from the date of inception, October 24, 1994, for WirelessCo, and from the dates of inception, for other consolidated subsidiaries, through December 31, 1996. The assets, liabilities, results of operations and cash flows of entities in which the Company has a controlling interest have been consolidated. All significant intercompany accounts and transactions have been eliminated. MinorCo, the limited partner, has been allocated approximately $227,000 in income and $1,830,000 of losses incurred by NewTelco, L.P. for the years ended December 31, 1996 and 1995, respectively, as losses in excess of the general partner's capital account (which consisted of $1,000) are to be allocated to the limited partner to the extent of its capital account. TRADEMARK AGREEMENT - Sprint(R) is a registered trademark of Sprint Communications Company, L.P. and is licensed to the Company on a royalty-free basis pursuant to a trademark license agreement between the Company and Sprint. REVENUE RECOGNITION - Operating revenues for PCS services are recognized as service is rendered. Operating revenues for equipment sales are recognized at the time the equipment is sold to a customer or an unaffiliated agent. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Under the Company's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are included in Accounts payable in the consolidated balance sheets. ACCOUNTS RECEIVABLE - Accounts receivable are net of an allowance for doubtful accounts of approximately $202,000 at December 31, 1996. No allowance was recorded for the year ended December 31, 1995. INVENTORY - Inventory consists of wireless communication equipment (primarily handsets). Inventory is stated at lower of cost or replacement cost. Gains and losses on the sales of handsets are recognized at the time of sale. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Construction work in progress represents costs incurred to design and construct the PCS network. Repair and maintenance costs are charged to expense as incurred. When network equipment is retired, or otherwise disposed of, its book value, net of salvage, is charged to accumulated depreciation. When non-network equipment is sold, retired or abandoned, the cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Property, plant and equipment are IV-24 95 depreciated using the straight-line method based on estimated useful lives of the assets. Depreciable lives range from 3 to 20 years. INVESTMENT IN PCS LICENSES AND OTHER INTANGIBLES - During 1994 and 1995, the Federal Communications Commission ("FCC") auctioned PCS licenses in specific geographic service areas. The FCC grants licenses for terms of up to ten years, and generally grants renewals if the licensee has complied with its license obligations. The Company believes it has and will continue to meet all requirements necessary to secure renewal of its PCS licenses. The Company has also incurred costs associated with microwave relocation in the construction of the PCS network. Amortization of PCS licenses and microwave relocation costs will commence as each service area becomes operational, over estimated useful lives of 40 years. Amortization expense of $1,711,000 is included in Depreciation and amortization expense in the consolidated statement of operations for the year ended December 31, 1996. No amortization expense was recorded in 1995 or 1994. Interest expense capitalized pertaining to the acquisition of the PCS licenses has been included in Property, plant and equipment. The ongoing value and remaining useful life of intangible assets are subject to periodic evaluation. The Company currently expects the carrying amounts to be fully recoverable. Impairments of intangibles and long-lived assets are assessed based on an undiscounted cash flow methodology. CAPITALIZED INTEREST - Interest costs associated with the construction of capital assets incurred during the period of construction are capitalized. The total capitalized in 1996 was approximately $30,461,000. There were no amounts capitalized in 1995 or 1994. DEBT ISSUANCE COSTS - Included in Other assets are costs associated with obtaining financing. Such costs are capitalized and amortized to interest expense over the term of the related debt instruments using the effective interest method. Amortization expense for the year ended December 31, 1996 was approximately $1,944,000. MAJOR CUSTOMER - The Company markets its products through multiple distribution channels, including Company-owned retail stores and third-party retail outlets. Sales to one third-party retail customer exceeded 10% of Equipment revenue in the consolidated statement of operations for the year ended December 31, 1996. INCOME TAXES - The Company has not provided for federal or state income taxes since such taxes are the responsibility of the individual Partners. FINANCIAL INSTRUMENTS - The carrying value of the Company's short-term financial instruments, including cash and cash equivalents, receivables from customers and affiliates and accounts payable approximates fair value. The fair value of the Company's long-term debt is based on quoted market prices for the same issues or current rates offered to the Company for similar debt. A summary of the fair value of the Company's long-term debt at December 31, 1996 is included in Note 5. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IV-25 96 RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 financial statement presentation. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 ---------- ---------- Land ....................................................... $ 905 $ -- Buildings and leasehold improvements ....................... 86,467 -- Office furniture and fixtures .............................. 68,210 2,902 Network equipment .......................................... 255,691 -- Telecommunications plant - construction work in progress ... 1,006,990 29,200 ---------- ---------- 1,418,263 32,102 Less accumulated depreciation .............................. (9,583) (205) ---------- ---------- $1,408,680 $ 31,897 ========== ==========
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS AMERICAN PCS, L.P. - On January 9, 1995, WirelessCo acquired a 49% limited partnership interest in American PCS, L.P. ("APC"). American Personal Communications II, L.P. ("APC II") holds a 51% partnership interest in APC and is the general managing partner. The investment in APC is accounted for under the equity method. Concurrently with the execution of the partnership agreement, the Company entered into an affiliation agreement with APC which provides for the reimbursement of certain allocable costs and payment of affiliate fees. Effective August 31, 1996, WirelessCo's interest in APC, the existing loans to APC, and obligations to provide additional funding to APC were transferred to Holdings pursuant to an amendment to the partnership agreement. Summarized financial information is as follows (in thousands):
December 31, December 31, 1996 1995 ------------ ------------ Total assets ..................................... $ 331,556 $ 237,326 Total liabilities ................................ 450,690 171,180 Total revenues ................................... 71,838 5,153 Net loss ......................................... 202,626 51,551
The partnership agreement between the Company and APC II specifies that losses are allocated based on percentage ownership interests and certain other factors. In January 1997, the Company and APC II amended the APC partnership agreement with respect to the allocation of profits and losses. For financial reporting purposes, profits and losses are to be allocated in proportion to Holdings' and APC IV-26 97 II's respective partnership interests, except for costs related to stock appreciation rights and interest expense attributable to the FCC interest payments which shall be allocated entirely to APC II. Holding's investment in APC was approximately $75,546,000 at December 31, 1995. Holdings share of the losses of APC for the year ended December 31, 1996, totaling approximately $96,850,000, has exceeded its investment balance by approximately $20,554,000. The unamortized excess of the Company's investment over its equity in the underlying net assets of APC at the date of acquisition was approximately $10,139,000. This excess investment has been eliminated as a result of the recognition of Holding's equity in APC's losses. Amortization included in equity in loss of unconsolidated partnership prior to such elimination totaled approximately $128,000 and $240,000 for the years ended December 31, 1996 and 1995, respectively. The call option in APC acquired on January 9, 1995, provides the Company with the right to purchase an additional interest in APC from APC II in annual increments beginning five years after the initial PCS network build-out is completed. The first increment, an additional 20% of the APC II ownership interest, can be acquired in each of the fifth through seventh years with the remaining interest available for purchase in the eighth through tenth year. APC II also has the right to put a portion of its ownership interest to the Company on an annual basis beginning after the completion of the initial PCS network build-out, through the fifth anniversary date the greater of (i) one-fifth of APC II's initial percentage interest of 51% in APC or (ii) the portion of APC II's interest equal to APC II's obligation for annual FCC payments to be made by APC. The exercise price of the call and put options are based on the Fair Value, as defined, of APC at the date of exercise. The amount recorded at December 31, 1996 and 1995 for such option, net of accumulated amortization, was $9,250,000 and $10,000,000, respectively. As of December 31, 1996, APC II has not exercised any put options. The Company is committed to arrange or provide certain funding for procurement of APC's CDMA network. APC is under a contractual obligation to repay any amounts provided by the Company, plus interest. During the initial five year build-out period, which began in December 1994, APC II and the Company are obligated as follows: (a) APC II is obligated to make capital contributions in an amount equal to the aggregate principal and interest payments to the FCC, provided APC II has sufficient cash flows or can obtain financing from a third party; (b) if APC II is unable to meet such obligation, the Company is required to contribute the shortfall, upon ten days prior notice. Under certain circumstances, APC II has the right and is obligated to exercise its put right to the extent necessary to fund additional capital contributions; (c) the Company is required to contribute to APC cash necessary for operations up to an amount of approximately $98 million; and (d) the Company is obligated to fund the cash requirements of APC in excess of that described in (a), (b), and (c) above, in the form of either loans or additional capital up to $275 million. As of December 31, 1996, $98 million of equity had been contributed and approximately $232 million of partner advances had been extended, fulfilling the Company's obligations under (c) and (d) above. In January 1997, additional advances of $20 million were extended. All advances were repaid in full in February 1997 and no further obligation for (c) and (d) above exists. COX COMMUNICATIONS PCS, L.P. - On December 31, 1996, the Company acquired a 49% limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner interest and is the general and managing partner. The investment in Cox PCS is accounted for under the equity method. As of December 31, 1996, approximately $168 million in equity, including $2.45 million to PCS Leasing Co, L.P. IV-27 98 ("LeasingCo"), a wholly owned subsidiary of Cox PCS, had been contributed to Cox PCS by the Company. The excess of the Company's investment over its equity in the underlying net assets on December 31, 1996 was approximately $32.7 million. A portion of the initial contribution totaling approximately $23 million was payable at December 31, 1996. Under the terms of the partnership agreement, CPP and the Company are obligated as follows: (a) if the FCC consents to the assumption and recognition of the license payment obligations by Cox PCS, CPP is obligated to make capital contributions in an amount equal to such liability and related interest; (b) if the FCC does not consent, Cox PCS is obligated to reimburse Cox Communications, Inc. for interest payments exceeding the amount that would have been payable by Cox Communications, Inc. to the FCC had the interest rate been 5.875% through the date that Cox Communications, Inc. completes refinancing of the FCC liability; (c) the Company is obligated to make capital contributions of approximately $369,908,000 to Cox PCS; (d) the Company is not obligated to make any cash capital contributions upon the assumption by Cox PCS of the FCC payment obligations until CPP has contributed cash in an amount equal to the aggregate principal and interest of such obligations; and, (e) CPP and the Company are obligated to make additional capital contributions in an amount equal to such partner's percentage interest times the amount of additional capital contributions being requested. Additionally, the Company acquired a 49% limited partner interest in LeasingCo. LeasingCo is a limited partnership formed to acquire, construct or otherwise develop equipment and other personal property to be leased to Cox PCS. The Company is not obligated to make additional capital contributions beyond the initial funding of approximately $2,450,000. Concurrently with the execution of the partnership agreement, the Company entered into an affiliation agreement with Cox PCS which provides for the reimbursement of certain allocable costs and payment of affiliate fees. For the year ended December 31, 1996, allocable costs of approximately $7,339,000 are netted against the related operating expense captions in the accompanying consolidated statement of operations and in receivables from affiliates in the consolidated balance sheet. In addition, the Company purchases certain equipment, such as handsets, on behalf of Cox PCS. Receivables from affiliates for handsets and related equipment were approximately $6 million at December 31, 1996. 5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consists of the following at of December 31, 1996 (in thousands): 11% Senior Notes due in 2006 ........................................ $250,000 12 1/2% Senior Discount Notes due in 2006, net of unamortized discount of $214,501 .............................. 285,499 Credit facility - term loan ......................................... 150,000 Other ............................................................... 742 -------- Total debt .......................................................... 686,241 Less current maturities ............................................. 49 -------- Long-term debt ...................................................... $686,192 ========
IV-28 99 SENIOR NOTES AND SENIOR DISCOUNT NOTES - In August 1996, Sprint Spectrum L.P. and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250 million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior Notes"), and $500 million aggregate principal amount at maturity of 12 1/2% Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a discount to their aggregate principal amount at maturity and generated proceeds of approximately $273 million. Cash interest on the Senior Notes will accrue at a rate of 11% per annum and is payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 1997. Cash interest will not accrue or be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per annum and will be payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 2002. On August 15, 2001, the Issuers will be required to redeem an amount equal to $384.772 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding ($192 million in aggregate principal amount at maturity, assuming all of the Senior Discount Notes remain outstanding at such date). The Notes are redeemable at the option of the Issuers, in whole or in part, at any time on or after August 15, 2001 at the redemption prices set forth below, respectively, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12 month period beginning on August 15 of the years indicated below:
SENIOR DISCOUNT SENIOR NOTES NOTES REDEMPTION REDEMPTION YEAR PRICE PRICE ---- ------------ --------------- 2001 ....................................... 105.500% 110.000% 2002 ....................................... 103.667% 106.500% 2003 ....................................... 101.833% 103.250% 2004 and thereafter ........................ 100.000% 100.000%
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the originally issued principal amount of the Notes. The redemption price of the Senior Notes is equal to 111.0% of the principal amount of the Senior Notes so redeemed, plus accrued and unpaid interest, if any, to the redemption date with the net proceeds of one or more public equity offerings, provided that at least 65% of the originally issued principal amount of Senior Notes would remain outstanding immediately after giving effect to such redemption. The redemption price of the Senior Discount Notes is equal to 112.5% of the accreted value at the redemption date of the Senior Discount Notes so redeemed, with the net proceeds of one or more public equity offerings, provided that at least 65% of the originally issued principal amount at maturity of the Senior Discount Notes would remain outstanding immediately after giving effect to such redemption. The Notes contain certain restrictive covenants, including (among other requirements) limitations on additional indebtedness, limitations on restricted payments, limitations on liens, and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. IV-29 100 BANK CREDIT FACILITY - Sprint Spectrum L.P. (the "Borrower") entered into an agreement with The Chase Manhattan Bank ("Chase") as administrative agent for a group of lenders for a $2 billion bank credit facility dated October 2, 1996. The proceeds of this facility are to be used to finance working capital needs, subscriber acquisition costs, capital expenditures and other general Borrower purposes. The facility consists of a revolving credit commitment of $1.7 billion and a $300 million term loan commitment, $150 million of which was drawn down subsequent to closing and $150 million of which was to be drawn within 90 days after closing. The amount available under the revolving credit facility was $450 million on December 31, 1996. There were no borrowings under the revolving credit facility as of December 31, 1996. The availability will be increased upon the achievement of certain financial and operating conditions as defined in the agreement. Commitment fees for the revolving portion of the agreement are payable quarterly based on average unused revolving commitments. The revolving credit commitment expires July 13, 2005. Availability will be reduced in quarterly installments ranging from $75 million to $175 million commencing January 2002. Further reductions may be required after January 1, 2000, to the extent that the Borrower meets certain financial conditions. Subsequent to December 31, 1996, the Borrower drew down $200 million under the revolving credit facility. The term loans are due in sixteen consecutive quarterly installments beginning January 2002 in aggregate principal amounts of $125,000 for each of the first fifteen payments with the remaining aggregate outstanding principal amount of the term loans due as the last installment. Interest on the term loans and/or the revolving credit loans is at the applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR Loans"), at the Company's option. The interest rate may be adjusted downward for improvements in the bond rating and/or leverage ratios. Interest on ABR Loans and Eurodollar Loans with interest period terms in excess of 3 months is payable quarterly. Interest on Eurodollar Loans with interest period terms of less than 3 months is payable on the last day of the interest period. As of December 31, 1996, the interest rate on the first $150 million term loan was 8.19%. Borrowings under the Bank Credit Facility are secured by the Company's interests in WirelessCo, RealtyCo and EquipmentCo and certain other personal and real property (the "Shared Lien"). The Shared Lien equally and ratably secures the Bank Credit Facility, the Vendor Financing (Note 6) and certain other indebtedness of the Company. The credit facility is jointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners. The Bank Credit Facility agreement and Vendor Financing agreements (Note 6) contain certain restrictive financial and operating covenants, including (among other requirements) maximum debt ratios (including debt to total capitalization), limitations on capital expenditures, limitations on additional indebtedness and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. The loss of the right to use the Sprint trademark, the termination or non-renewal of any FCC license that reduces population coverage below specified limits, or changes in controlling interest in the Company, as defined, among other provisions, constitute events of default. IV-30 101 The estimated fair value of the Company's long-term debt at December 31, 1996 is as follows (in thousands):
Carrying Estimated Amount Fair Value -------- ---------- 11% Senior Notes $250,000 $270,625 12 1/2% Senior Discount Notes 285,499 337,950 Credit facility - term loan 150,000 151,343
At December 31, 1996, scheduled maturities of long-term debt during each of the next five years are as follows (in thousands): 1997 $ 49 1998 54 1999 60 2000 66 2001 192,459
6. COMMITMENTS AND CONTINGENCIES OPERATING LEASES - Minimum rental commitments as of December 31, 1996, for all noncancelable operating leases, consisting principally of leases for cell and switch sites and office space, are as follows (in thousands): 1997 $ 68,616 1998 61,186 1999 57,407 2000 38,356 2001 13,468
Gross rental expense for cell and switch sites aggregated approximately $13,097,000 for the year ended December 31, 1996. Gross rental expense for office space approximated $11,432,000, $687,000 and $105,000 for the years ended December 31, 1996 and 1995, and the period from October 24, 1994 (date of inception) through December 31, 1994, respectively. Certain leases contain renewal options that may be exercised from time to time and are excluded from the above amounts. PROCUREMENT CONTRACTS - On January 31, 1996, the Company entered into procurement and services contracts with AT&T Corp. (subsequently assigned to Lucent Technologies, Inc., "Lucent") and Northern Telecom, Inc. ("Nortel" and together with Lucent, the "Vendors") for the engineering and construction of a PCS network. Each contract provides for an initial term of ten years with renewals for additional one-year periods. The Vendors must achieve substantial completion of the PCS network within an established time frame and in accordance with criteria specified in the procurement contracts. Pricing for the initial equipment, software and engineering services has been established in the procurement contracts. The procurement contracts provide for payment terms based on delivery dates, substantial completion dates, and final acceptance dates. In the event of delay in the completion IV-31 102 of the PCS network, the procurement contracts provide for certain amounts to be paid to the Company by the Vendors. The minimum commitments for the initial term are $0.8 billion and $1.0 billion from Lucent and Nortel, respectively, which include, but are not limited to, all equipment required for the establishment and installation of the PCS network. HANDSET PURCHASE AGREEMENTS - In June, 1996, the Company entered into a three-year purchase and supply agreement with a vendor for the purchase of handsets and other equipment totaling approximately $500 million. During 1996, the Company purchased $85 million under the agreement. The total purchase commitment must be satisfied by April 30, 1998. In September, 1996, the Company entered into a second three-year purchase and supply agreement for the purchase of handsets and other equipment totaling more than $600 million. Purchases under the second agreement will commence on or after April 1, 1997, and the total purchase commitment must be satisfied during the three-year period after the initial handset purchase. VENDOR FINANCING - As of October 2, 1996, the Company entered into financing agreements with Nortel and Lucent for multiple drawdown term loan facilities totaling $1.3 billion and $1.8 billion, respectively. The proceeds of such facilities are to be used to finance the purchase of goods and services provided by the Vendors. Nortel has committed to provide financing in two phases. During the first phase, Nortel will finance up to $800 million. Once the full $800 million has been utilized and the Company obtains additional equity commitments and/or subordinated unsecured loans of at least $400 million and achieves certain operating conditions, Nortel will finance up to an additional $500 million. The amount available under the Nortel facility was $1.3 billion on December 31, 1996. In addition, the Company will be obligated to pay origination fees on the date of the initial draw down loan under the first and second phases. The Nortel agreement terminates on the earliest of (a) the date the availability under the commitments is reduced to zero, (b) December 31, 2000, or (c) March 31, 1997 if no borrowings under the agreements have been drawn. Lucent has committed to financing up to $1.5 billion through December 31, 1997, and up to an aggregate of $1.8 billion thereafter. The Company pays a facility fee on the daily amount of loans outstanding under the agreement, payable quarterly. The Lucent agreement terminates June 30, 2001. Subsequent to December 31, 1996, the Company borrowed approximately $274 million under the Lucent facility. Certain amounts included under Construction Obligations on the consolidated balance sheet may be financed under the Vendor Financing agreements. The principal amounts of the loans drawn under both the Nortel and Lucent agreements are due in twenty consecutive quarterly installments, commencing on the date which is thirty-nine months after the last day of such "Borrowing Year" (defined in the agreements as any one of the five consecutive 12-month periods following the date of the initial drawdown of the loan). The aggregate amount due each year is equal to percentages ranging from 10% to 30% multiplied by the total principal amount of loans during each Borrowing Year. The agreements provide two borrowing rate options. During the first phase of the Nortel agreement and throughout the term of the Lucent agreement "ABR Loans" bear interest at the greater of the IV-32 103 prime rate or 0.5% plus the Federal Funds effective rate, plus 2%. "Eurodollar Loans" bear interest at the London interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the discretion of the Company), plus 3%. During the second phase of the Nortel agreement, ABR Loans bear interest at the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear interest at the LIBOR rate plus 2.5%. Interest from the date of each loan through one year after the last day of the Borrowing Year is added to the principal amount of each loan. Thereafter, interest is payable quarterly. Borrowings under the Vendor Financing are secured by the Shared Lien (Note 5). The Vendor Financing is jointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners. SERVICE AGREEMENT - The Company has entered into an agreement with a vendor to provide PCS call record and retention services. Monthly rates per subscriber are variable based on overall subscriber volume. If subscriber fees are less than specified annual minimum charges, the Company will be obligated to pay the difference between the amounts paid for processing fees and the annual minimum. Annual minimums range from $20 million to $60 million through 2001. The agreement extends through December 31, 2001, with two automatic, two-year renewal periods, unless terminated by the Company. The company may terminate the agreement prior to the expiration date, but would be subject to specified termination penalties. 8. EMPLOYEE BENEFITS Employees performing services for the Company were employed by Sprint Corporation through December 31, 1995. Amounts paid to Sprint Corporation relating to pension expense and employer contributions to the Sprint Corporation 401(k) plan for these employees approximated $323,000 in 1995. No expense was incurred through December 31, 1994. The Company maintains short-term and long-term incentive plans. All salaried employees are eligible for the short-term incentive plan commencing at date of hire. Short-term incentive compensation is based on incentive targets established for each position based on the Company's overall compensation strategy. Targets contain both an objective Company component and a personal objective component. Charges to operations for the short-term plan approximated $12,332,000 and $3,491,000 for the years ended December 31, 1996 and 1995, respectively. No expense was incurred through December 31, 1994. LONG-TERM COMPENSATION OBLIGATION - Effective July 1, 1996, a long-term compensation plan was adopted. Employees meeting certain eligibility requirements are considered to be participants in the plan. Participants will receive 100% of the pre-established targets for the period from July 1, 1995 to June 30, 1996 (the "Introductory Term"). Participants may elect a payout of the amount due or convert 50% or 100% of the award to appreciation units. Unless converted to appreciation units, payment for the Introductory Term will be made in the third quarter of 1998. Appreciation units vest 25% per year commencing on the second anniversary of the date of grant. Participants have until March 15, 1997 to make payout or conversion elections. For the years ended December 31, 1996 and 1995, $9.5 million and $1.9 million, respectively, has been expensed. The ultimate liability will be based on actual payout vs. conversion elections and the final results of an independent valuation of the IV-33 104 Company as of June 30, 1997. The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" for 1996. No significant difference would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied. SAVINGS PLAN - Effective January, 1996, the Company established a savings and retirement program (the "Savings Plan") for certain employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code. Most permanent full-time, and certain part-time, employees are eligible to become participants in the plan after one year of service or upon reaching age 35, whichever occurs first. Participants make contributions to a basic before tax account and supplemental before tax account. The maximum contribution for any participant for any year is 16% of such participant's compensation. For each eligible employee who elects to participate in the Savings Plan and makes a contribution to the basic before tax account, the Company makes a matching contribution. The matching contributions equal 50% of the amount of the basic before tax contribution of each participant up to the first 6% that the employee elects to contribute. Contributions to the Savings Plan are invested, at the participants discretion, in several designated investment funds. Distributions from the Savings Plan generally will be made only upon retirement or other termination of employment, unless deferred by the participant. Expense under the Savings Plan approximated $1,125,000 in 1996. PROFIT SHARING (RETIREMENT) PLAN - Effective January, 1996, the Company established a profit sharing plan for its employees. Employees are eligible to participate in the plan after completing one year of service. Profit sharing contributions are based on the compensation, age, and years of service of the employee. Profit sharing contributions are deposited into individual accounts of the Company's 401(k) plan. Vesting occurs once a participant completes five years of service. For the year ended December 31, 1996, expense under the profit sharing plan approximated $726,000. 9. RELATED PARTY TRANSACTIONS BUSINESS SERVICES - The Company reimburses Sprint Corporation for certain accounting and data processing services, for participation in certain advertising contracts, for certain cash payments made by Sprint Corporation on behalf of the Company and other management services. The Company is allocated the costs of such services based on direct usage. Allocated expenses of approximately $11,900,000 and $2,646,000 are included in Selling and General and administrative expense in the consolidated statement of operations for 1996 and 1995, respectively. No reimbursement was made through December 31, 1994. PAGING SERVICES - In 1996, the Company commenced paging services pursuant to agreements with Paging Network Equipment Company ("PageNet") and Sprint Communications Company, L.P. ("Sprint Communications"). For the year ended December 31, 1996, Sprint Communications received agency fees of approximately $4.9 million. ADVANCES FROM PARTNERS - In December 1996, the Partners advanced approximately $168 million to the Company, which was contributed to Cox PCS (Note 4). The advances bear interest at the prime rate (8.25% at December 31, 1996) and were repaid in February 1997. IV-34 105 10. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 and 1995 is as follows (in thousands):
1996 First Second Third Fourth ---- ----- ------ ----- ------ Operating revenues ................. $ -- $ -- $ -- $ 4,175 Operating expenses ................. 30,978 46,897 87,135 195,038 Net loss ........................... 67,425 90,770 101,497 183,402 1995 ---- Operating revenues ................. $ -- $ -- $ -- $ -- Operating expenses ................. 3,655 4,589 11,844 46,463 Net loss ........................... 6,789 9,718 19,488 74,434
IV-35 106 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 28, 1997 By /s/ Leo J. Hindery, Jr. -------------------------- Leo J. Hindery, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ John C. Malone Chairman of the Board March 28, 1997 - --------------------------------------- and Director John C. Malone /s/ Donne F. Fisher Director March 28, 1997 - --------------------------------------- Donne F. Fisher /s/ Leo J. Hindery, Jr. President, Chief Executive March 28, 1997 - --------------------------------------- Officer and Director Leo J. Hindery, Jr. /s/ Stephen M. Brett Senior Vice President March 28, 1997 - --------------------------------------- and Secretary Stephen M. Brett /s/ Brendan R. Clouston Senior Vice President March 28, 1997 - --------------------------------------- and Chief Financial Officer Brendan R. Clouston (Principal Financial Officer) /s/ Gary K. Bracken Senior Vice President and March 28, 1997 - --------------------------------------- Controller Gary K. Bracken (Principal Accounting Officer)
IV-36 107 EXHIBIT INDEX Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K): 3 - Articles of Incorporation and Bylaws: 3.1 Restated Certificate of Incorporation, dated as of January 11, 1996, as amended on January 11, 1996 and February 6, 1996. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-5550). 3.2 Bylaws as adopted August 4, 1994. Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10 - Material Contracts: 10.1 Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Form S-4 Registration Statement (Commission File No. 33-54263). 10.2 Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.* Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended Decmeber 31, 1995 (Commission File No. 0-20421). 10.3 Tele-Communications, Inc. 1996 Stock Incentive Plan. * Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.4 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.5 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10.6 Restricted Stock Award Agreement, made as of December 10, 1992, among Tele-Communications, Inc., Donne F. Fisher and WestMarc Communications, Inc.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550).
(continued) 108 10 - Material contracts, continued: 10.7 Consulting Agreement, dated as of January 1, 1996, between Tele-Communications, Inc. and Donne F. Fisher. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.8 Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.9 Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.10 Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and a director of Tele-Communications, Inc. relating to assumption of options and related stock appreciation rights granted outside of an employee benefit plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.11 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights granted under Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1993 Non- Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.12 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights under Tele- Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1992 Non- Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.13 Form of Indemnification Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550).
(continued) 109 10 - Material contracts, continued: 10.14 Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-5550). 10.15 Qualified Employee Stock Purchase Plan of Tele-Communications, Inc., as amended.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-57635). 10.16 Form of Restricted Stock Award Agreement for 1995 Award of Series A TCI Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Form of Restricted Stock Award Agreement for 1995 Award of Series A Liberty Media Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.17 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.18 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.19 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.20 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421).
(continued) 110 10 - Material contracts, continued: 10.21 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.22 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.23 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.24 Restricted Stock Award Agreement, made as of July 1, 1996, among Tele-Communications, Inc., Brendan Clouston and WestMarc Communi-cations, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421). 10.25 Option Agreement, dated as of December 4, 1996, by and between TCI Satellite Entertainment, Inc. and Brendan R. Clouston.* Incorporated herein by reference to the TCI Satellite Entertainment, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-21317). 10.26 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Telephony Services, Inc., Grantee and Tele-Communications, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421). 10.27 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Wireline, Inc., Grantee and Tele-Communications, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-20421).
(continued) 111 10 - Material contracts, continued: 10.28 Employee Stock Purchase Plan for Bargaining Unit Employees of United Cable Television of Baltimore Limited Partnership.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60839). 10.29 Employee Stock Purchase Plan for Bargaining Unit Employees of Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60843). 10.30 Employee Stock Purchase Plan for Bargaining Unit Employees of UACC Midwest, Inc. d/b/a TCI of Central Indiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64827). 10.31 The Settlement Plan and Rabbi Trust Agreement Entered into Pursuant to Thomas Adams, Mark Adamski, et. al. v. TCI of Northern New Jersey, Inc. and the Tele-Communications, Inc. Employee Stock Purchase Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64829). 10.32 Employee Stock Purchase Plan for Bargaining Unit Employees of TCI of Northern New Jersey, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64831). 10.33 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Subscription Agreement, dated as of July 24, 1995, among Viacom International, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Implementation Agreement, dated as of July 24, 1995, between Viacom International, Inc. and Viacom International Services, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated July 26, 1995 (Commission File No. 0-5550). 10.34 Amended and Restated Agreement of Limited Partnership of MajorCo, L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership. Second Amended and Restated Joint Venture Formation Agreement, dated as of January 31, 1996, by and between Sprint Corporation, Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Parents Agreement, dated as of January 31, 1996, by Tele-Communications, Inc. and Sprint Corporation. Incorporated herein by reference to Tele-Communications, Inc.'s Current Report on Form 8-K, dated February 9, 1996 (Commission File No. 0-20421).
(continued) 112 10 - Material contracts, continued: 10.35 Agreement of Purchase and Sale of Partnership Interest, dated as of January 31, 1996, among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.36 Consent and Amendment of Amended Agreement of Partnership for Halcyon Communications Partners, dated as of January 31, 1996, by and among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.37 Assignment and Assumption Agreement, made as of January 31, 1996, between ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.38 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and ECP Holdings, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.39 Agreement of Purchase and Sale of Partnership Interests, dated as of January 31, 1996, among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.40 Consent and First Amendment of Amended and Restated Agreement of Limited Partnership for Halcyon Communications Limited Partnership, dated as of January 31, 1996, by and among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.41 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Utah, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421).
(continued) 113 10 - Material contracts, continued: 10.42 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Utah, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.43 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Nevada, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.44 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Nevada, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.45 Assignment and Assumption Agreement, made as of January 31, 1996, between American Televenture of Minersville, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.46 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and American Televenture of Minersville, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.47 Assignment and Assumption Agreement, made as of January 31, 1996, between TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.48 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TEMPO Cable, Inc. Incorporated herein by reference to the Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 21- Subsidiaries of TCI Communications, Inc. 23.1- Consent of KPMG Peat Marwick LLP. 23.2- Consent of Deloitte & Touche LLP. 23.3- Consent of Price Waterhouse LLP. 27- Financial data schedule
*Constitutes management contract or compensatory arrangement. EX-21 2 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 A table of the subsidiaries of TCI Communications, Inc. as of December 31, 1996, is set forth below, indicating as to each the state or the jurisdiction of incorporation or organization and the names under which such subsidiaries do business (Trade Names). Subsidiaries not included in the table are inactive or, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Alabama T.V. Cable, Inc. AL American Cable Of Redlands Joint Venture [jv] CO American Cable TV Investors 2 [lp] CA American Cable TV Investors 3 [lp] CA American Cable TV Investors 4, Ltd. [lp] CO American Cable TV Investors 5, Ltd. [lp] CO Amercian Cable TV of Lower Delaware Amercian Cable TV of St. Mary's County American Microwave & Communications, Inc. MI American Movie Classics Investment, Inc. CO American TeleVenture of Minersville, Inc. CO Ames Cablevision, Inc. IA TCI of Central Iowa Antares Satellite Corporation CO ARP Partnership [gp] DE Athena Cablevision Corporation of Knoxville TN Athena Cablevision of Tennessee and Kentucky, Inc. TN Athena Realty, Inc. NV Atlantic American Cablevision of Florida, Inc. FL TCI Cablevision of Pasco County TCI Media Services Atlantic American Cablevision, Inc. DE Atlantic American Holdings, Inc. FL Atlantic Cablevision of Florida, Inc. FL Baton Rouge Cablevision Associates, L.P. [lp] CO Bay Area Interconnect [gp] CA Bay Cable Advertising BCA Beatrice Cable TV Company NE TCI Cable of Beatrice Bellevue Cablevision, Inc. DE TCI Media Services Billings Tele-Communications, Inc. OR Bob Magness, Inc. WY Bresnan Communications Company Limited Partnership [lp] MI Brigand Pictures, Inc. NY Broadview Television Company WA Brookhaven Cable TV, Inc. NY TCI Cable of Brookhaven
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Brookings Cablevision [gp] CO Brookside Antenna Company OH Cable Accounting, Inc. CO Cable AdNet Partners [gp] DE Cable Adnet Hudson Valley Cable Group TCI Media Services Cable Advertising Partners[gp] CA Cable Network Television, Inc. NV Cable Shopping Investment, Inc. CO Cable Television Advertising Group, Inc. WY Cable Television of Gary, Inc. IN Cable TV of Marin, Inc. CA Cable TV Puget Sound, Inc. WA TCI of Washington Cabletime, Inc. CO Cablevision Associates of Gary Joint Venture[jv] IN Cablevision IV, Ltd. (Corp) IA Cablevision of Arcadia/Sierra Madre, Inc. DE Cablevision of Baton Rouge, Ltd. [lp] CO Cablevision V, Inc. IA Cablevision VI, Inc. IA TCI Cablevision of the Rockies, Inc. TCI of the Heartlands Cablevision VII, Inc. IA TCI Cablevision of the Rockies, Inc. TCI of the Heartlands TCI of Eastern Iowa TCI Media Services Capital Region Cable Advertising Interconnect, L.P. [lp] NY Capital Region Cable Advertising Network CAT Partnership [gp] DE CATV Facility Co., Inc. CO Channel 3 Everett, Inc. WA Channel 64 Acquisition, Inc. DE Chicago Cable Network Joint Venture [jv] IL Cincinnati Cable Advertising Interconnect, L.P. DE Clear View Cable Systems, Inc. CA Clinton Cablevision [gp] IA Clinton TV Cable Company, Inc. IA Coconut Creek Cable T.V., Inc. FL TCI of North Broward Colorado Cablevision Company [lp] CO TCI of Colorado Colorado Terrace Tower II Corporation CO Com-Cable TV, Inc. DE Command Cable of Eastern Illinois LP NJ TCI Cablevision of Southern Illinois Communication Investment Corporation VA Communications & Cable of Chicago, Inc. IL Chicago Cable TV Communications Services, Inc. KS TCI Cablevision of Central Texas TCI Cablevision of East Oklahoma
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Cablevision of North Texas TCI Cablevision of Northeast Texas TCI Cablevision of Oklahoma (CSI), Inc. TCI Cablevision of Texas (CSI), Inc. TCI Communications Services, Inc. TCI Media Services TCI of Arkansas TCI of Arkansas (CSI), Inc. TCI of Kansas (CSI), Inc. TCI of Louisiana TCI of Louisiana (CSI), Inc. Community Cable Television (gp) WY TCI Cablevision of Southwest Texas TCI Cablevision of West Oakland County Community Realty, Inc. NV Nevada Community Realty, Inc. Community Telecable of Bellevue, Inc. WA TCI of Washington Community Telecable of Seattle, Inc. WA Community Television Systems, Inc. DE TCI Cablevision of South Central Connecticut Connecticut Cable Advertising, L.P. DE Connecticut Cable Advertising, L.P. DE Consumer Entertainment Services, Inc. WY Contra Costa Cable Co. WA Corsair Pictures, Inc. DE Brigand Pictures, Inc. Crockett Cable System, Inc. WA Daniels Communication Partners Limited Partnership [lp] DE Daniels Hauser-Holdings [gp] CO Davis County Cablevision, Inc. UT DCP-85, Ltd. [lp] CO DigiVentures, LLC DE Direct Broadcast Satellite Services, Inc. DE Discovery Programming Investment, Inc. CO District Cablevision Limited Partnership [lp] DC TCI Media Services East Arkansas Cablevision, Inc. AR TCI Media Services TCI of Arkansas East Arkansas Investments, Inc. CO Eastex Microwave, Inc. TX ECP Holdings, Inc. OK Elbert County Cable Partners, L. P. [lp] CO TCI of Colorado Everett Cablevision, Inc. WA TCI of Washington FAB Communications, Inc. OK Far-West Communications, Inc. OR TCI of Oregon Foothills Cablevision, Ltd. [lp] CO Four Flags Cable TV [jv] MI Four Flags Cablevision [jv] MI General Communications and Entertainment Company, Inc. DE
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Gill Bay Interconnect, Inc. CA Greater Birmingham Interconnect[gp] AL GBI Guide Investments, Inc. CO H-C-G Cablevision, Inc. CA Halcyon Communications Limited Partnership[lp] OK TCI Cablevision of East Oklahoma Halcyon Communications Partners [gp] OK Harbor Communications Joint Venture [jv] WA Harris County Cable TV, Inc. VA Hawkeye Communications of Clinton, Inc. IA Heritage Cable Partners, Inc. IA Heritage Cablevision Associates, a Limited Partnership [lp] IA TCI of Bedford TCI of Michiana Heritage Cablevision of California, Inc. DE TCI of San Jose Heritage Cablevision of Colorado, Inc. CO TCI Cablevision of Southern Colorado, Inc. Heritage Cablevision of Dallas, Inc. IA Bay Cablevision Cable Oakland TCI Cablevision of California TCI Cablevision of New Castle County TCI Media Services TCI of Colorado TCI of Fort Collins Heritage Cablevision of Delaware, Inc. DE Heritage Cablevision of Maine II, Inc. ME Heritage Cablevision of Massachusetts, Inc. MA TCI Cablevision of Andover Heritage Cablevision of South East Massachusetts, Inc. MA Heritage Cablevision of Tennessee, Inc. TN TCI of Colorado Heritage Cablevision of Texas, Inc. IA TCI Cablevision of South Texas Heritage Cablevision, Inc. TX Heritage Cablevision, Inc. IA TCI Media Services TCI of the Heartlands TCI of Central Iowa TCI of Southern Iowa TCI of Northern Iowa TCI of Eastern Iowa Heritage Cablevue, Inc. DE TCI Cablevision of New England Heritage Communications Products Corp. IA Heritage Communications, Inc. IA Heritage Investments, Inc. IA Heritage Media Corporation Heritage ROC Holdings Corp. IA Heritage/Indiana Cablevision II, Inc. CO Heritage/Indiana Cablevision, Inc. IA Hillcrest Cablevision Company OH Home Sports Network, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Independence Cable TV Company [jv] MI TCI Cablevision of Oakland County, Inc. InterMedia Capital Management II, L.P. CA Intermedia Capital Partners IV, L.P.(ICP-IV) CA Intermedia Partners Limited Partnership (IP-I) CA International Telemeter Corporation NV IR-TCI Partners II, L.P. [lp] CA IR-TCI Partners III, L.P. [lp] CA IR-TCI Partners IV, L. P. [lp] CO IR-TCI Partners V, L. P. [lp] CO Knox Cable T.V., Inc. TN KTMA-TV, Inc. TX LaSalle Telecommunications, Inc. IL Chicago Cable TV-IV Lawrence County Cable Partners CO Liberty - CSI, Inc. CO Liberty Cable Partner, Inc. WY Liberty Capital Corp. WY Liberty Command II, Inc. CO Liberty Command, Inc. CO Liberty of Northern Indiana, Inc. DE Liberty of Paterson II, Inc. CO Liberty of Paterson, Inc. NV LVO Cable Properties, Inc. OK LVOC Management, Inc. OK Margate Video Systems, Inc. FL TCI Media Services TCI of North Broward Marin Cable Television, Inc. CA Miami Tele-Communications, Inc. FL Micro-Relay, Inc. MD Mid-Kansas, Inc. KS Mile Hi Cable Partners, L.P. [lp] CO TCI of Colorad Mississippi Cablevision, Inc. MS TCI of North Mississippi TCI of Kansas Moonlight Bowl, Inc. CA Mountain Cable Network, Inc. NV Mountain Cable Advertising TCI Media Services Mountain States General Partner Co. CO Mountain States Limited Partner Co. CO Mountain States Video [gp] CO TCI Media Services Mountain States Video Communications Co., Inc. CO TCI of Colorado Mountain States Video, Inc. CO TCI of Colorado TCI Media Services MSV Subsidiary, Inc. CO Muskegon Cable TV Co. [gp] MI Narragansett Cablevision Corporation RI Heritage Cablevision of Narragansett
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION National Digital Television Center, Inc. DE Newport News Cablevision Associates, L. P. [lp] CO Newport News Cablevision Ltd. [lp] CO Northern Video, Inc. MN TCI of Central Minnesota Northwest Cable Advertising [gp] NY TV Mart TCI Media Services Northwest Illinois Cable Corporation DE Northwest Illinois TV Cable Co. DE TCI Cablevision of Galesburg/Monmouth Northwest Illinois TV Cable Company [lp] IL NTT, Inc. TX Ohio Cablevision Network, Inc. IA TCI Cablevision of Northwestern Ohio Ottumwa Cablevision, Inc. IA TCI of Southen Iowa Pacific Microwave Joint Venture [jv] CA Parkland Cablevision, Inc. FL TCI of North Broward Pennsylvania Educational Communications Systems PA Pittsburg Cable TV, Inc. KS TCI of Pittsburg Portland Cable Advertising, L.P. [lp] DE Preview Magazine Corporation NY Prime Cable II Systems, Inc. TX Robert Fulk, Ltd. DE Robin Cable Systems of Sierra Vista, L.P. CA TCI of Southern Arizona Robin Cable Systems of Tucson, an Arizona Limited Partnership AZ TCI Media Services TCI of Tucson Tucson Cablevision S/D Cable Partners Ltd. [lp] CO TCI Cablevision of Princeton, L.P. TCI Cablevision of Rock Falls, L.P. San Leandro Cable Television, Inc. CA TCI Cablevision of Hayward Santa Fe Cablevision Company NM TCI Cablevision of Santa Fe TCI Media Services Santa Fe Cablevison Co. [lp] NM Satellite Services of Puerto Rico, Inc. DE Satellite Services, Inc. DE SCC Programs, Inc. IL Semaphore Partners [gp] CO Silver Spur Land and Cattle Co. WY Silver Spur Ranch Skyview TV, Inc. MT South Chicago Cable, Inc. IL Chicago Cable TV-V TCI Chicago South Florida Cable Advertising[gp] FL Southwest TeleCable, Inc. TX Southwest Washington Cable, Inc. WA Southwestern Satellite, Inc. TX SSI 2, Inc. NV St. Louis Tele-Communications, Inc. MO TCI Cablevision of St. Louis
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Tampa Bay Interconnect [gp] FL TBI TCC Spectrum, Inc. DE TCI-UC, INC. DE TCI AIT, Inc. CO TCI American Cable Holdings II, L.P. [lp] CO TCI American Cable Holdings, L.P. [lp] CO TCI of Washington TCI Baton Rouge Ventures, Inc. CO TCI Bay Interconnect, Inc. CA TCI Cable Adnet, Inc. CO TCI Cable Management Corporation CO TCI Media Services TCI Cable Partners of St. Louis, L.P. CO TCI of Illinois TCI Cablevision Associates, Inc. DE TCI Cablevision of Alabama, Inc. AL TCI Media Services TCI Cablevision of Arizona, Inc. AZ TCI Customer Satisfaction Center TCI Cablevision of Baker/Zachary, Inc. DE TCI of Louisiana TCI Cablevision of California, Inc. CA TCI Media Services TCI Cablevision of Canon City, Ltd. [lp] CO TCI Cablevision of Colorado, Inc. CO TCI Customer Satisfaction Center TCI Media Services TCI of Colorado TCI Cablevision of Dallas, Inc. TX TCI Media Services TCI Cablevision of Florida, Inc. FL TCI Media Services TCI of Colorado TCI Southeast - South Region TCI Cablevision of Georgia, Inc. GA TCI Media Services TCI of Louisiana TCI Cablevision of Great Falls, Inc. DE TCI Cablevision of Idaho, Inc. ID TCI Customer Satisfaction Center TCI Cablevision of Kentucky, Inc. KY TCI Cablevision of Kiowa, Inc. CO TCI Cablevision of Leesville, Inc. DE TCI Cablevision of Maryland, Inc. MD TCI Media Services TCI Cablevision of Massachusetts, Inc. MA TCI Cablevision of Michigan, Inc. MI TCI North Central Region TCI Cablevision of Minnesota, Inc. MN TCI of Minnesota TCI Cablevision of Missouri, Inc. MO TCI Media Services TCI Cablevision of Montana, Inc. MT TCI Media Services TCI Cablevision of Nebraska, Inc. NE TCI Media Services TCI Cablevision of Nevada, Inc. NV TCI Media Services TCI Cablevision of New Hampshire, Inc. NH TCI Cablevision of New Mexico, Inc. NM TCI Media Servies TCI Cablevision of North Central Kentucky, Inc. KY TCI Cablevision of Ohio, Inc. OH TCI Media Services TCI Cablevision of Okanogan Valley, Inc. WA TCI of Washington
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Cablevision of Oklahoma, Inc. OK TCI Cablevision of Oregon, Inc. OR TCI Media Services TCI of Oregon TCI Cablevision of Pasco County [gp] FL TCI Media Services TCI Cablevision of Pinellas County, Inc. FL TCI Cablevision of Sierra Vista II, Inc. CO TCI Cablevision of Sierra Vista, Inc. CO TCI Cablevision of South Dakota, Inc. SD TCI Media Services TCI Cablevision of St. Bernard, Inc. LA TCI of Louisiana TCI Cablevision of Texas, Inc. TX TCI Media Services TCI Cablevision of Tucson, Inc. CO TCI Cablevision of Tuscon II, Inc. CO TCI Cablevision of Twin Cities, Inc. WA TCI of Washington' TCI Cablevision of Utah, Inc. UT TCI Media Services TCI Cablevision of Vermont, Inc. DE TCI Cablevision of Washington, Inc. WA TCI Media Services TCI of Washington TV Mart TCI Cablevision of Wisconsin, Inc. WI TCI Media Services TCI Cablevision of Wyoming, Inc. WY TCI Media Services TCI Cablevision of Yakima Valley, Inc. WA TCI of Washington TCI Cablevision of Yakima, Inc. WA TCI of Washington TCI Central, Inc. DE TCI Challenger, Inc. CO TCI Communications Financing I DE TCI Communications Financing II DE TCI Communications Financing III DE TCI Communications Financing IV DE TCI Communications Financing V DE TCI Communications Financing VI DE TCI Development Corporation CO TCI Digital TV, Inc. CO TCI East, Inc. DE TCI Fleet Services, Inc. CO TCI Great Lakes, Inc. DE TCI Hits At Home, Inc. CO TCI Hits, Inc. CO TCI Holdings II, Inc. CO TCI Holdings, Inc. CO TCI Investments, Inc. CO TCI IP, Inc. DE TCI IP-1, Inc. CO TCI K-1, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Liberty, Inc. DE TCI Materials Management, Inc. CO TCI Microwave, Inc. DE TCI National Digital Television Center - Hong Kong, Inc. DE TCI News, Inc. CO TCI News-Damn Right, Inc. CO TCI News-Presidential, Inc. CO TCI North Central, Inc. DE TCI Northeast, Inc. DE TCI of Arkansas, Inc. AR TCI of Arlington, Inc. OK TCI of Beckley, Inc. WV TCI Media Services TCI of Bloomington/Normal, Inc. VA TCI of Cleveland, Inc. TN TCI Media Services TCI of Columbus, Inc. GA TCI Media Services TCI of Connecticut, Inc. CT TCI of Council Bluffs, Inc. IA TCI of D.C., Inc. DC TCI of Dayton, Inc. DE TCI of Decatur, Inc. AL TCI Media Services TCI of Delaware, Inc. DE TCI of Greensburg [gp] CO TCI of Greenville, Inc. SC TCI Media Services TCI of Hawaii, Inc. CO TCI TCI of Houston, Inc. CO TCI Media Services TCI of Illinois, Inc. IL TCI Cablevision of Dubuque, Inc. TCI Media Services TCI of Indiana, Inc. IN TCI Media Services TCI Midwest Region TCI of Iowa, Inc. IA TCI Cablevision of Dubuque, Inc. TCI Media Services TCI Southeast - Northwest Region TCI of Kansas, Inc. KS TCI Cablevision of Stillwater TCI Cablevision of Tulsa TCI of Kokomo, Inc. CO TCI of Lee County, Inc. AL TCI of Lexington, Inc. KY TCI Media Services TCI of Maine, Inc. ME TCI of Mississippi, Inc. MS TCI of New Jersey, Inc. NV TCI of New York, Inc. NY TCI Media Services TCI Northeast Region TCI Telemarketing TCI of North Broward, Inc. FL
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI of North Central Kentucky, Inc. KY TCI of North Dakota, Inc. ND TCI of Northern California, Inc. CA TCI of Northern New Jersey, Inc. WA TCI Cablevision of Cental Colorado TCI Cablevision of Northeastern Oregon TCI Cablevision of the Treasure Coast TCI Media Services TCI of Northern New Jersey TCI of Oregon TCI of Washington TCI of Overland Park, Inc. KS TCI of Pennsylvania, Inc. PA TCI East Region TCI Media Services TCI of California TCI of Piedmont, Inc. SC TCI of Plano, Inc. TX TCI of Princeton, Inc. VA TCI of Racine, Inc. WI TCI Media Services TCI of Radcliff, Inc. KY TCI Media Services TCI of Rhode Island, Inc. RI TCI of Richardson, Inc. TX TCI of Roanoke Rapids, Inc. VA TCI of Selma, Inc. AL TCI of South Carolina, Inc. SC TCI of Southern Maine, Inc. ME TCI of Southern Minnesota, Inc. DE TCI Media Services TCI of Southern Minnesota TCI of Southern Washington [gp] WA TCI of Washington TCI of Spartanburg, Inc. SC TCI of Springfiled, Inc. MO TCI Media Services TCI of Tacoma, Inc. DE TCI of Washington TCI of Tennessee, Inc. TN TCI of the Blufflands, Inc. DE TCI Cable of La Crosse TCI Media Services TCI of Southern Minnesota TCI of Tualatin Valley, Inc. OR TCI of Oregon TCI of Virginia, Inc. VA TCI Media Services TCI of Watertown, Inc. IA TCI of West Virginia, Inc. WV TCI Media Services TCI of Wytheville, Inc. VA TCI Oscar I, Inc. CO TCI Pacific Communications, Inc DE TCI Media Services TCI Pacific Microwave, Inc. CO Pacific Microwave TCI Pacific, Inc. DE
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI PCS Holdings, Inc. DE TCI Private Ventures, Inc. CO TCI Realty Investments Company DE TCI Southeast Divisional Headquarters, Inc. AL TCI Southeast, Inc. DE TCI Sports, Inc. NV TCI Sports[gp] UT TCI STS, Inc. CO TCI STS-MTVI, Inc. TX TCI Summitrack of Texas, Inc. CO TCI Telecom, Inc. DE TCI Teleport of Houston, Inc. TX TCI TKR Cable I, Inc. DE TCI TKR Cable II, Inc. DE TCI TKR Cable III, Inc. DE TCI TKR Limited Partnership [lp] CO TCI TKR of Alabama, Inc. DE TCI Media Services TCI of Alabama TCI TKR of Central Florida, Inc. FL TCI Media Services TCI of Central Florida TCI TKR of Dallas, Inc. DE TCI TKR of Florida, Inc. DE TCI TKR of Georgia, Inc. DE TCI Media Services TCI of Georgia TCI TKR of Hollywood, Inc. DE TCI of Hollywood TCI TKR of Houston, Inc. TX TCI Cablevision of Houston TCI TKR of Jefferson County, Inc. KY TKR Cable of Greater Louisville, Inc. TCI TKR of Kentucky, Inc. DE TCI TKR of Metro Dade, Inc. DE TCI TKR of Northern Kentucky, Inc. KY TKR Cable of Northern Kentucky, Inc. TCI TKR of South Dade, Inc. FL TCI of South Dade TCI TKR of South Florida, Inc. DE TCI Media Services TCI of South Florida TCI TKR of Southeast Texas, Inc. DE TCI TKR of Southern Kentucky, Inc. DE TKR Cable of Southern Kentucky, Inc. TCI TKR of the Gulf Plains, Inc. DE TCI of the Gulf Plains TCI TKR of The Metroplex, Inc. TX TCI Cablevision of the Metroplex TCI TKR of Wyoming, Inc. WY TCI TKR, INC. DE TCI TVC, Inc. CA TCI UA I, Inc. CO TCI UA, Inc. DE TCI VCI, Inc. CA TCI Ventures Five, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Ventures Four, Inc. CO TCI Ventures, Inc. CO TCI Washington Associates, L.P. DE TCI West, Inc. DE TCI Woodlands Ventures, Inc. CO The Woodlands Security Company TCI/CA Acquisition Sub Corp. CO TCI/CI Merger Sub Corp. DE TCID-Commercial Music, Inc. CO TCID-ICP III, Inc. CO TCID-IP III, Inc. CO TCID-IP IV, Inc. CO TCID-IP V, Inc. CO TCID-SVHH, Inc. DE TCID Data Transport, Inc. CO TCID KHC, Inc. CO TCID NEA, Inc. CO TCID Networks, Inc. DE TCID of Carson, Inc. CA TCID of Chicago, Inc. IL TCID of Florida, Inc. FL TCI Cablevision of Pasco County TCI Media Services TCID of Michigan, Inc. NV TCID of South Chicago, Inc. IL TCID Partners II, Inc. CO TCID Partners, Inc. CO TCID VFC, Inc. CO TCID Video Enterprises, Inc. CO TCID X*PRESS, Inc. CO TCIP, Inc. CO Tele-Communications of Colorado, Inc. CO TCI Colorado Community Cable Television, Inc. Tele-Communications of South Suburbia, Inc. IL Tele-Vue Systems, Inc. WA TCI of Washington TCI of Houston Telecommunications Cable Systems, Inc. LA TCI Media Services TCI of Louisiana TCI Southeast - Southwest Region Telenois, Inc. IL Televents Group Joint Venture [gp] CO TCI of Central Iowa TCI of Eastern Iowa TCI of the Heartlands Televents Group, Inc. NV Televents of Colorado, Inc. CO Televents of East County, Inc. WY TCI Cablevision of East County Televents of Florida, Inc. WY
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Televents of Powder River, Inc. WY Televents of San Joaquin, Inc. WY TCI Cablevision of San Joaquin Televents of Wyoming, Inc. WY Televents, Inc. NV TCI Cablevision of Contra Costa County Televester, Inc. DE Television Cable Service, Inc. TX TCI Cablevision of Abilene TCI Cablevision of East Texas TCI Cablevision of Perryton TCI Cablevision of West Texas TCI Media Services Television Signal Corporation CA TEMPO Cable, Inc. OK TCI Cablevision of Central Oklahoma, Inc. TCI Cablevision of Nocona TCI Cablevision of Oklahoma (Tempo), Inc. TCI Cablevision of Texas (Tempo), Inc. TCI of Arkansas (Tempo), Inc. TEMPO Development Corporation OK TEMPO Television, Inc. OK The Chicago Cable Interconnect[gp] IL GCCI The Detroit Cable Interconnect L.P. DE The Detroit Cable Interconnect Limited Partners The Greater Philadelphia Cable Advertising Interconnect[gp] PA PCA Trans-Muskingum, Incorporated WV Tribune-United Cable of Oakland County [jv] MI TCI Cablevision of Oakland County, Inc. Tribune Company Cable of Michigan, Inc. DE Tribune-United Cable of Oakland County [jv] Tulsa Cable Television, Inc. OK TCI Cablevision of Tulsa TCI Media Services UA-Columbia Alpine Tower, Inc. NJ UA-Columbia Cablevision of Massachusetts, Inc. MA TCI Cablevision of North Attlebboro/Taunton UA-Columbia Cablevision of New Jersey, Inc. NJ UA-Columbia Cablevision of Westchester, Inc. NY TCI Media Services TCI Cable of Westchester TCI of Northern New Jersey UA Think, Inc. CO UACC Midwest, Inc. DE TCI Media Services TCI of South Mississippi TCI Cablevision of Asheville TCI Cablevision of Decatur TCI Cablevision of Central Illinois TCI of Central Indiana TCI of Evansville TCI Cablevision of West Michigan, Inc. TCI Cablevision of Merced County TCI Cablevision of Santa Cruz County TCI Cablevision of Tracy
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Cablevision of Vacaville TCI Cablevision of Walnut Creek TCI Cablevision of Northshore UAII Merger Corp. DE UAII Sub No. 24, Inc. DE UATC Merger Corp. NY UCT Aircraft, Inc. CO UCT Video, Inc. CO UCTC LP Company DE UCTC of Baltimore, Inc. DE UCTC of Los Angeles County, Inc. DE TCI Cablevision of Los Angeles County United Advertising Network, Inc. CO United Artists Broadcast Properties, Inc. DE United Artists Cable Holdings, Inc. CO United Artists Cable Investments, Inc. DE United Artists Cablesystems Corporation DE United Artists Entertainment Company DE United Artists Holdings, Inc. DE United Artists Investments, Inc. CO United Artists K-1 Investments, Inc. CO United Artists Operator Services Corporation CO United Artists Payphone Corporation CO United Artists Preferred Investment, Inc. CO United Artists Republic Investments, Inc. CO United Artists Satellite, Inc. CO United Artists TeleCommunications, Inc. DE United Cable Ad-Link, Inc. CO United Cable Advertising, Inc. CO United Cable Investment of Baltimore, Inc. MD United Cable Productions, Inc. CO United Cable Realty Co. of California, Inc. CO United Cable Shopping Channel, Inc. CO United Cable T.V. of Oakland County, Inc. MI TCI Cablevision of Oakland County, Inc. United Cable Television Acquisition Corporation CO TCI of Colorado United Cable Television Corp. of Eastern Connecticut CT TCI Cablevision of Central Connecticut United Cable Television Corporation DE TCI Cable of the Midlands TCI Cablevisi of Hayward TCI Cablevision of Treasure Valley TCI Media Services United Cable Television Corporation of Michigan MI TCI Cablevision of Woodhaven, Inc. United Cable Television Corporation of Northern Illinois IL TCI Cablevision of Northern Illinois United Cable Television Financing Corporation CO United Cable Television Investments, Ltd. CO United Cable Television of Alameda, Inc. CA UCT of Alameda, Inc. #2
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Cablevision of Alameda United Cable Television of Baldwin Park, Inc. CO TCI Cablevision of Los Angeles County United Cable Television of Baltimore Limited Partnership [lp] CO TCI Communications of Baltimore TCI Media Services United Cable Television of Bossier City, Inc. DE TCI Media Services TCI of Louisiana United Cable Television of California, Inc. CA TCI Cablevision of Cupertion/Los Altos TCI Cablevision of Davis United Cable Television of Chaska, Inc. CO United Cable Television of Colorado, Inc. CO TCI of Colorado United Cable Television of Cupertino, Inc. CA TCI of Cupertino/Los Altos Colorado United Cable Television of East San Fernando Valley, Ltd. [lp] CO United Cable Television of Eastern Shore, Inc. DE TCI of Eastern Shore TCI Media Services United Cable Television of Hillsborough, Inc. CO TCI Cablevision of Hayward United Cable Television of Illinois Valley, Inc. IL TCI Cablevision of Illinois Valley United Cable Television of Los Angeles, Inc. CA TCI Cablevision of Los Angeles County United Cable Television of Mid-Michigan, Inc. DE TCI Cablevision of Mid-Michigan, Inc. United Cable Television of Northern Indiana, Inc. DE TCI of Northern Indiana United Cable Television of Oakland County, Ltd. [lp] CO United Cable Television of Pico Rivera, Inc. CO United Cable Television of Santa Cruz, Inc. CO TCI Cablevisionof Santa Cruz County United Cable Television of Sarpy County, Inc. NE TCI Cable of the Midlands TCI Media Services United Cable Television of Scottsdale, Inc. AZ TCI Cable of Scottsdale United Cable Television of Southern Illinois, Inc. DE TCI Cablevision of Southern Illinois United Cable Television of Western Colorado, Inc. CO TCI Cablevision of Western Colorado, Inc. TCI Media Services United Cable Television Real Estate Corporation CO United Cable Television Services Corporation OK TCI Cablevision of Central Connecticut TCI Media Services United Cable Television Services of Colorado, Inc. CO United Cable Video Investment, Inc. CO United Carphone Corporation CO United CATV, Inc. MD TCI Cablevision of Annapolis TCI Media Services United Community Antenna System, Inc. WA TCI of Washington United Corporate Communications Company CO United Entertainment Corporation CO United Hockey, Inc. CO United Microwave Corporation DE United of Oakland, Inc. DE TCI Cablevision of Oakland County, Inc. Tribune/United Cable of Oakland County United Paging Corporation CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION United Tribune Paging Corporation CO United's Home Video Centers, Inc. CO Universal Telecom, Inc. MD Upper Valley Telecable Company, Inc. ID TCI Cablevision of Idaho (UVTC), Inc. TCI Media Services US Cable of Allamuchy, LP NJ US Cable of Paterson (gp) NJ UTI Purchase Company CO Vacationland Cablevision, Inc. WI TCI of South Central Wisconsin Valley Cable TV, Inc. TX Vista Television, Inc. WA TCI of Washington VSC Cable, Inc. DE W.A.V., Inc. CA Waltham Tele-Communications [gp] MA TCI Cablevision of Waltham Waltham Tele-Communications, Inc. CO Wasatch Community T.V., Incorporated UT Wentronics, Inc. NM TCI Cablevision of Western Colorado, Inc. TCI Cablevision of Casper TCI Cablevision of Gallup TCI Cablevision of Moab TCI Media Services Western Community TV, Inc. MT Western New York Cable Advertising L.P.[lp] NY Western Satellite 2, Inc. CO WestMarc Cable Group, Inc. DE WestMarc Cable Holding, Inc. DE TCI Media Services TCI of Central Minnesota TCI of Northern Iowa TCI of Northern Minnesota TCI of the Valley WestMarc Communications of Minnesota, Inc. DE TCI of Central Minnesota TCI of Southern Minnesota WestMarc Communications, Inc. NV WestMarc Development II, Inc. CO WestMarc Development III, Inc. CO WestMarc Development IV, Inc. CO WestMarc Development Joint Venture[gp] CO TCI Cablevision of Greater Michigan, Inc. TCI Cablevision of Northwestern Connecticut TCI Cablevision of Cape Cod TCI Cablevision of Nantucket TCI Media Services TCI Twin State Cable TV TCI/Twin Valley Cable TCI Cable of Vermont
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Media Services WestMarc Development, Inc. CO TCI Cablevision of Greater Michigan, Inc. WestMarc Realty, Inc. CO WTCI Uplink, Inc. PA
Page 17 of 17 EX-23.1 3 CONSENT OF KPMG 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders TCI Communications, Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 33-60982, 33-63139, 33-64127, 33-64329, 33-64525 and 333-16985) on Form S-3 of TCI Communications, Inc. of our reports dated March 24, 1997, relating to the consolidated balance sheets of TCI Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and all related schedules, which reports appear in the December 31, 1996 annual report on Form 10-K of TCI Communications, Inc. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Denver, Colorado March 27, 1997 EX-23.2 4 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.2 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements (Nos. 33-60982, 33-63139, 33-64127, 33-64329, 33-64525 and 333-16985) on Form S-3 of TCI Communications, Inc. of our report dated March 14, 1997 on the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries (which expresses an unqualified opinion and includes an explanatory paragraph referring to the developmental stage of Sprint Spectrum Holding Company, L.P. and subsidiaries) for each of the two years in the period ended December 31, 1996, for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996 appearing in the Annual Report on Form 10-K of TCI Communications, Inc. for the year ended December 31, 1996. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Kansas City, Missouri March 24, 1997 EX-23.3 5 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements (Nos. 33-60982, 33-63139, 33-64127, 33-64329, 33-64525 and 333-16985) on Form S-3 of TCI Communications, Inc. of our report dated March 7, 1997 on the financial statements of American PCS, L.P. (a Delaware Limited Partnership) as of and for the year ended December 31, 1996 referred to in the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries, which appear in the Annual Report on Form 10-K of TCI Communications, Inc. for the year ended December 31, 1996. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Washington, D.C. March 25, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN TCI COMMUNICATIONS, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000096903 TCI COMMUNICATIONS, INC. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 308 0 0 0 11,223 4,031 23,136 0 14,318 232 0 1 13 23,136 0 5,954 0 2,117 1,453 0 1,041 (591) (139) (452) 0 0 0 (452) 0 0
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