<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: March 19, 1999
AT&T CORP.
<TABLE>
<S> <C> <C>
A New York Commission File I.R.S. Employer
Corporation No. 1-1105 No.13-4924710
</TABLE>
32 Avenue of the Americas, New York, New York 10013-3412
Telephone Number (212) 387-5400
<PAGE> 2
AT&T Corp.
ITEM 2. ACQUISITION OF ASSETS
On March 9, 1999 AT&T Corp. (AT&T) completed the acquisition of
Tele-Communications, Inc. (TCI) through a merger. In the merger, AT&T issued (1)
0.7757 AT&T common shares for each share of TCI Group Series A tracking stock,
(2) 0.8533 AT&T common shares for each share of TCI Group Series B tracking
stock, (3) one share of newly created Liberty Media Group Class A or Class B
tracking stock for each outstanding TCI Liberty Media Group Class A or Class B
tracking stock, (4) 0.52 share of newly created Liberty Media Group Class A or
Class B tracking stock for each outstanding TCI Ventures Group Class A or Class
B tracking stock, and (5) a cash payment in lieu of any fractional AT&T common
share or newly created Liberty Media Group tracking share. In the merger, AT&T
also exchanged AT&T common shares or newly created Liberty Media Group tracking
shares for shares of TCI convertible preferred stock. In total, AT&T issued
approximately 439 million common shares (excluding Liberty Media Group tracking
shares).
ITEM 5 OTHER EVENTS.
AT&T is making available the combined financial results of Liberty/Ventures
Group (a combination of certain assets of Tele-Communications Inc.,) for the
year ended December 31, 1998. Filed as Exhibit 99 to this 8-K is the following
information:
1. Report of Independent Accountants.
2. Combined Balance Sheets at December 31, 1998 and 1997.
3. Combined Statements of Operations and Comprehensive Earnings for the
years ended December 31, 1998, 1997 and 1996.
4. Combined Statements of Equity for the years ended December 31, 1998,
1997 and 1996.
5. Combined Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
6. Notes to consolidated financial statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
The audited financial statements as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 of
Tele-Communications Inc., including the report of independent
accountants, filed as Exhibit 99.1 to this 8-K includes the following
information:
1. Management's Discussion and Analysis
2. Report of Independent Accountants.
3. Consolidated Balance Sheets at December 31, 1998.
4. Consolidated Statements of Operations and Comprehensive Earnings for
the years ended December 31, 1998, 1997 and 1996.
5. Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
6. Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
7. Notes to consolidated financial statements.
<PAGE> 3
AT&T Corp.
(b) Pro forma financial information
Pursuant to paragraph (b)(2) of Item 7 of Form 8-K, the Company hereby
files the pro forma financial information included in Exhibit 99.2 as
follows:
1. Unaudited pro forma condensed financial introductory paragraph(s).
2. Unaudited pro forma condensed Balance Sheet at December 31, 1998.
3. Unaudited pro forma condensed Income Statement for the year ended
December 31, 1998. 4. Notes to unaudited pro forma condensed financial
information.
(c) Exhibits
Exhibit 23.1 Consent of KPMG LLP
Exhibit 23.2 Consent of KPMG LLP
Exhibit 99 Liberty Media/Ventures Group financial results and other
information for the year ended December 31, 1998.
Exhibit 99.1 Tele-Communications Inc. financial results and other
information for the year ended December 31, 1998.
Exhibit 99.2 AT&T Corp. unaudited pro forma condensed financial
results for the year ended December 31, 1998.
<PAGE> 4
AT&T Corp.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T CORP.
/s/ N. S. Cyprus
----------------------------------
By: N. S. Cyprus
Vice President and Controller
March 18, 1999
<PAGE> 5
AT&T Corp.
Exhibit Index
Exhibit 23.1 Consent of KPMG LLP
Exhibit 23.2 Consent of KPMG LLP
Exhibit 99 Liberty Media/Ventures Group financial results and other
information for the year ended December 31, 1998.
Exhibit 99.1 Tele-Communications Inc. financial results and other
information for the year ended December 31, 1998.
Exhibit 99.2 AT&T Corp. unaudited pro forma condensed financial
results for the year ended December 31, 1998.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration Statements
(Nos. 333-47257, 33-34265, 33-34264, 33-29256, 33-21937, 33-39708, 333-47251,
33-56643, 33-50819, 33-50817, 33-54797, 333-47255, 33-28665, 33-63195,
333-70279, 333-70279-01, 333-70279-02 and 333-52757) on Form S-8, (ii) the
Registration Statements (Nos. 33-42150, 33-42150-01, 33-42150-02, 33-42150-03,
33-52119, 33-52119-01, 33-52119-02, 33-52119-03, 33-52119-05, 33-45302,
33-45302-01, 333-49419, 333-49419-01, 333-49419-02, 333-49419-03, 333-49419-04
and 333-49419-05) on post-effective amendment on Form S-8 to Form S-4, (iii) the
Registration Statement (No. 33-57745) on Form S-4, and (iv) the Registration
Statements (Nos. 33-49589, 33-59495, 333-71167 and 333-00573) on Form S-3 of
AT&T Corp., of our report, dated March 9, 1999, relating to the consolidated
balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31,
1998, and 1997, and the related consolidated statements of operations and
comprehensive earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the March 19, 1999 Current Report on Form 8-K of AT&T Corp.
KPMG LLP
Denver, Colorado
March 19, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration Statements
(Nos. 333-47257, 33-34265, 33-34264, 33-29256, 33-21937, 33-39708, 333-47251,
33-56643, 33-50819, 33-50817, 33-54797, 333-47255, 33-28665, 33-63195,
333-70279, 333-70279-01, 333-70279-02 and 333-52757) on Form S-8, (ii) the
Registration Statements (Nos. 33-42150, 33-42150-01, 33-42150-02, 33-42150-03.
33-52119, 33-52119-01, 33-52119-02, 33-52119-03, 33-52119-05, 33-45302,
33-45302-01, 333-49419, 333-49419-01, 333-49419-02, 333-49419-03, 333-49419-04
and 333-49419-05) on post-effective amendment on Form S-8 to Form S-4, (iii) the
Registration Statement (No. 33-57745) on Form S-4, and (iv) the Registration
Statements (Nos. 33-49589, 33-59495, 333-71167 and 333-00573) on Form S 3 of
AT&T Corp., of our report, dated March 9, 1999, relating to the combined balance
sheets of Liberty/Ventures Group as of December 31, 1998 and 1997, and the
related combined statements of operations and comprehensive earnings, equity,
and cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in the March 19, 1999 Current Report on Form 8-K of
AT&T Corp.
KPMG LLP
Denver, Colorado
March 19, 1999
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately on the consolidated financial statements
of Tele-Communications, Inc. and subsidiaries as of December 31, 1998 and 1997
and for each of the years in the three-year period ended December 31, 1998.
We have audited the accompanying combined balance sheets of Liberty/Ventures
Group (a combination of certain assets of Tele-Communications, Inc., as defined
in note 1) as of December 31, 1998 and 1997, and the related combined statements
of operations and comprehensive earnings, equity, and cash flows for each of the
years in the three-year period ended December 31, 1998. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of Liberty/Ventures Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Liberty/Ventures Group are intended to
reflect the performance of the businesses of Tele-Communications, Inc., which
produce and distribute programming services, Tele-Communications, Inc.'s
principal international assets and substantially all of Tele-Communications,
Inc.'s domestic non-cable and non-programming assets. The combined financial
statements of Liberty/Ventures Group should be read in conjunction with the
consolidated financial statements of Tele-Communications, Inc. and subsidiaries.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of
Liberty/Ventures Group as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
March 9, 1999
<PAGE> 2
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 531 224
Restricted cash (note 11) 17 5
Trade and other receivables, net 185 127
Prepaid program rights 146 104
Committed program rights 117 117
Investments in affiliates, accounted for under the equity method, and
related receivables (note 5) 3,079 2,654
Investment in Time Warner, Inc. ("Time Warner") (note 6) 7,083 3,538
Investment in AT&T Corp. ("AT&T") (note 7) 3,556 --
Investment in Sprint Corporation ("Sprint") (notes 2 and 5) 2,446 --
Other investments and related receivables (note 8) 1,298 695
Property and equipment, at cost:
Land 8 8
Distribution systems 549 856
Support equipment and buildings 378 153
------- -------
935 1,017
Less accumulated depreciation 350 280
------- -------
585 737
------- -------
Intangible assets:
Excess cost over acquired net assets 1,030 429
Franchise costs 109 108
------- -------
1,139 537
Less accumulated amortization 164 86
------- -------
975 451
------- -------
Other assets, at cost, net of accumulated amortization (note 10) 330 275
------- -------
$20,348 8,927
======= =======
</TABLE>
(continued)
2
<PAGE> 3
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
amounts in millions
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable $ 78 40
Accrued liabilities 204 168
Program rights payable 156 156
Customer prepayments 134 137
Deferred revenue (note 15) 334 --
Deferred option premium (note 6) -- 306
Capital lease obligations (note 15) 190 387
Debt (note 11) 2,706 757
Deferred income taxes (note 12) 4,458 957
Other liabilities 215 90
------- -------
Total liabilities 8,475 2,998
------- -------
Minority interests in equity of attributed
subsidiaries (notes 5, 9 and 13) 545 620
Obligation to redeem common stock (note 13) 17 --
Combined equity (note 13):
Combined equity 6,896 4,011
Accumulated other comprehensive earnings, net of taxes (note 14) 3,718 768
------- -------
10,614 4,779
Due to related parties 697 530
------- -------
Total combined equity 11,311 5,309
------- -------
Commitments and contingencies (note 15)
$20,348 8,927
======= =======
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 4
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations and Comprehensive Earnings
Years ended December 31, 1998 and 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Revenue:
Unaffiliated parties $ 1,301 1,104 1,136
Related parties (note 13) 258 195 117
Net sales from electronic retailing services -- -- 984
------- ------- -------
1,559 1,299 2,237
------- ------- -------
Cost of sales, operating costs and expenses:
Cost of sales -- -- 605
Operating 882 682 750
Selling, general and administrative 427 348 563
Charges from related parties (note 13) 28 75 63
Cost of distribution agreements (note 10) 50 -- --
Stock compensation (note 13) 518 296 10
Depreciation and amortization 243 196 210
------- ------- -------
2,148 1,597 2,201
------- ------- -------
Operating income (loss) (589) (298) 36
Other income (expense):
Interest expense (116) (57) (68)
Interest expense to related parties (note 13) (10) (18) --
Dividend and interest income 100 57 39
Interest income from related parties (note 13) -- 6 14
Share of losses of affiliates, net (note 5) (1,034) (850) (372)
Minority interests in losses of attributed subsidiaries 102 25 26
Gain on dispositions, net (notes 5, 6, 7 and 8) 4,738 420 1,558
Gains on issuance of equity by affiliates and subsidiaries (notes
5, 7, 9 and 10) 357 172 13
Other, net 6 2 9
------- ------- -------
4,143 (243) 1,219
------- ------- -------
Earnings (loss) before income taxes 3,554 (541) 1,255
Income tax benefit (expense) (note 12) (1,397) 130 (457)
------- ------- -------
Net earnings (loss) $ 2,157 (411) 798
======= ======= =======
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments 3 (22) 35
Unrealized holding gains arising during the period, net of
reclassification adjustments 2,947 749 (316)
------- ------- -------
Other comprehensive earnings (loss) 2,950 727 (281)
------- ------- -------
Comprehensive earnings (note 14) $ 5,107 316 517
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 5
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity net of tax parties equity
------ ---------- ------- ------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 3,659 322 7 3,988
Net earnings 798 -- -- 798
Foreign currency translation adjustments (note 14) -- 35 -- 35
Recognition of previously unrealized gains on
available-for-sale securities (note 14) -- (364) -- (364)
Unrealized gains on available-for-sale securities (note 14) -- 48 -- 48
Repurchase of common stock (38) -- -- (38)
Issuance of stock by attributed subsidiary 10 -- -- 10
Other transfers from (to) related parties, net 609 -- (141) 468
------- ------- ------- -------
Balance at December 31, 1996 5,038 41 (134) 4,945
Net loss (411) -- -- (411)
Foreign currency translation adjustments (note 14) -- (22) -- (22)
Unrealized gains on available-for-sale securities (note 14) -- 749 -- 749
Contribution to combined equity for issuance of common stock
to TCI Employee Stock Purchase Plan 2 -- -- 2
Repurchase of common stock (625) -- -- (625)
Excess of consideration paid over carryover basis of net
assets acquired from related party (219) -- -- (219)
Gain in connection with issuance of stock of affiliate (note 5) 66 -- -- 66
Issuance of stock by attributed subsidiary 19 -- -- 19
Issuance of common stock 30 -- -- 30
Excess of cash received over carryover basis of SUMMITrak
Assets 30 -- -- 30
Other transfers from related parties, net 81 -- 664 745
------- ------- ------- -------
Balance at December 31, 1997 4,011 768 530 5,309
Net earnings 2,157 -- -- 2,157
Foreign currency translation adjustments (note 14) -- 3 -- 3
Unrealized gains on available-for-sale securities (note 14) -- 2,947 -- 2,947
Payments for call agreements (140) -- -- (140)
Repurchase of common stock (30) -- -- (30)
Premium received in connection with put obligation 2 -- -- 2
Reclassification of redemption amount of common stock
subject to put obligation (17) -- -- (17)
Gain in connection with issuance of stock of affiliate (note 5) 68 -- -- 68
Gain in connection with issuance of stock by attributed
subsidiary (note 9) 2 -- -- 2
Issuance of common stock (note 9) 777 -- (5) 772
Transfer of net liabilities to related party 50 -- -- 50
Assignment of option contract from related party 16 -- (16) --
Other transfers from related parties, net -- -- 188 188
------- ------- ------- -------
Balance at December 31, 1998 $ 6,896 3,718 697 11,311
======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
5
<PAGE> 6
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
amounts in millions
(see note 4)
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ 2,157 (411) 798
Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities:
Depreciation and amortization 243 196 210
Cost of distribution agreements 50 -- --
Stock compensation 518 296 10
Payments of stock compensation (58) (75) (1)
Share of losses of affiliates, net 1,034 850 372
Deferred income tax expense 1,393 16 471
Intergroup tax allocation (2) (159) (21)
Minority interests in losses of attributed
subsidiaries (102) (25) (26)
Gain on issuance of equity by affiliates and subsidiaries (357) (172) (13)
Gain on disposition of assets, net (4,738) (420) (1,558)
Other noncash charges 5 32 18
Changes in operating assets and liabilities, net of the effect of
acquisitions and dispositions:
Change in receivables (49) 9 (53)
Change in prepaid expenses and committed program rights (39) (3) (12)
Change in payables, accruals, customer prepayments and deferred
revenue 11 38 50
------- ------- -------
Net cash provided by operating activities 66 172 245
------- ------- -------
Cash flows from investing activities:
Cash paid for acquisitions (92) (41) (168)
Capital expended for property and equipment (144) (168) (221)
Cash balances of deconsolidated subsidiaries -- (39) --
Investments in and loans to affiliates and others (1,404) (683) (536)
Return of capital from affiliates 12 5 6
Collections on loans to affiliates and others -- 133 24
Cash paid for cable distribution fees -- -- (32)
Cash proceeds from dispositions 423 302 170
Other, net (29) (6) (13)
------- ------- -------
Net cash used by investing activities (1,234) (497) (770)
------- ------- -------
</TABLE>
(continued)
6
<PAGE> 7
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
amounts in millions
(see note 4)
Cash flows from financing activities:
<S> <C> <C> <C>
Borrowings of debt 2,199 667 470
Repayments of debt and capital lease obligations (622) (348) (628)
Issuance of debentures 229 -- 345
Payments for call agreements (140) -- --
Change in restricted cash (12) (5) --
Cash transfers from related parties (216) 310 293
Repurchase of common stock (30) (625) (38)
Repurchase of common stock by attributed subsidiary (24) (42) --
Net proceeds from issuance of stock by attributed subsidiaries 75 148 10
Contributions by minority shareholders of attributed subsidiaries -- 4 319
Other, net 16 (4) (9)
------- ------- -------
Net cash provided by financing activities 1,475 105 762
------- ------- -------
Effect of exchange rate changes on cash -- -- 4
------- ------- -------
Net increase (decrease) in cash and cash equivalents 307 (220) 241
Cash and cash equivalents at beginning of year 224 444 203
------- ------- -------
Cash and cash equivalents at end of year $ 531 224 444
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
7
<PAGE> 8
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
December 31, 1998, 1997 and 1996
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty/Ventures Group, as defined below. All
significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty/Ventures Group
are presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries and should be read in
conjunction with such consolidated financial statements.
On February 17, 1999, TCI received shareholder approval to combine
"Liberty Media Group," a group of TCI's assets which produce and
distribute programming services, and "TCI Ventures Group," a group of
assets comprised of TCI's principal international assets and businesses
and substantially all of TCI's non-cable and non-programming assets
(collectively, "Liberty/Ventures Group"). On March 9, 1999, the
combination of Liberty Media Group and TCI Ventures Group (the
"Liberty/Ventures Combination"), was effected in connection with TCI's
Merger with AT&T described in note 2. The Liberty/Ventures Combination
did not result in any transfer of assets or liabilities of TCI or any
of its subsidiaries or affect the rights of creditors of TCI or of
holders of TCI's or any of its subsidiaries' debt.
At December 31, 1998, Liberty/Ventures Group consisted principally of
the following assets and their related liabilities: (i) TCI's
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software, including multimedia products, (ii) TCI's businesses engaged
in electronic retailing, direct marketing, advertising sales relating
to programming services, infomercials and transaction processing, (iii)
TCI's businesses engaged in international cable, telephony and
programming businesses (Tele-Communications International, Inc.
"TINTA") (iv) TCI's principal interests in the telephony business
consisting primarily of TCI's investment in the business of providing
wireless communications services, using the radio spectrum for
broadband personal communications services ("PCS"), to residential and
business customers nationwide under the Sprint(R) brand (a registered
trademark of Sprint Communications Company, L.P.) through TCI's
holdings of a new class of trading stock of Sprint (the "Sprint PCS
Group Stock"), TCI's equity interest in AT&T and Western
Tele-Communications, Inc. ("WTCI"), a wholly-owned subsidiary of TCI
that provides long distance transport of video, voice and data traffic
and other telecommunications services to interexchange carriers on a
wholesale basis using primarily a digital broadband microwave network
located throughout a 12 state region, (v) TCI's businesses engaged in
high speed multimedia Internet services, including TCI's interest in At
Home Corporation ("@Home") and (vi) other assets, including National
Digital Television Center, Inc. ("NDTC"), which provides digital
compression and authorization services to programming suppliers and to
video distribution outlets.
(continued)
8
<PAGE> 9
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Targeted Stock
TCI's assets and operations were previously included in three separate
groups, each of which was tracked separately by public equity
securities. These groups were known as Liberty Media Group, TCI
Ventures Group and "TCI Group", a group of TCI's assets not attributed
to Liberty Media Group or TCI Ventures Group, which is comprised
primarily of TCI's domestic cable and communications business. Liberty
Media Group was tracked through the Tele-Communications, Inc. Series A
Liberty Media Group Common Stock ("Liberty Group Series A Stock") and
Series B Liberty Media Group Common Stock ("Liberty Group Series B
Stock" and together with the Liberty Group Series A Stock, the "Liberty
Group Stock"). TCI Ventures Group was tracked separately through the
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock
("TCI Ventures Group Series A Stock") and Series B TCI Ventures Group
Common Stock ("TCI Ventures Group Series B Stock" and together with the
TCI Ventures Group Series A Stock, the "TCI Ventures Group Stock").
The Liberty Group Stock was intended to reflect the separate
performance of Liberty Media Group and the TCI Ventures Group Stock was
intended to reflect the separate performance of TCI Ventures Group. TCI
Group was tracked through the Tele-Communications, Inc. Series A TCI
Group Common Stock (the "TCI Group Series A Stock") and Series B TCI
Group Common Stock (the "TCI Group Series B Stock", and together with
the TCI Group Series A Stock, the "TCI Group Stock"), respectively. The
TCI Group Stock was intended to reflect the separate performance of TCI
Group. Each of the separate series of Tele-Communications, Inc. common
stock was converted to a series of common stock of AT&T upon the March
9, 1999 merger of TCI into AT&T. See note 2.
Collectively, Liberty/Ventures Group and TCI Group are referred to as
the "Groups" and individually are referred to as a "Group". The TCI
Group Series A Stock, Liberty Group Series A Stock and TCI Ventures
Group Series A Stock are sometimes collectively referred to herein as
the "Series A Stock," and the TCI Group Series B Stock, Liberty Group
Series B Stock and TCI Ventures Group Series B Stock are sometimes
collectively referred to herein as the "Series B Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group and Liberty/Ventures Group,
each such Group in the capital structure of TCI did not affect the
ownership or the respective legal title to such assets or
responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries each were responsible for their respective
liabilities. Holders of TCI Group Stock and Liberty/Ventures Group
Stock were common stockholders of TCI and were subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities.
(continued)
9
<PAGE> 10
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective with the Liberty/Ventures Combination, debt securities of TCI
that were convertible into or exchangeable for shares of TCI Ventures
Group Stock were, as a result of the operation of antidilution
provisions, adjusted so that there will be delivered upon their
conversion or exchange the number of shares of Liberty/Ventures Group
Stock that would have been issuable in the Liberty/Ventures Combination
with respect to the TCI Ventures Group Stock issuable upon conversion
or exchange had such conversion or exchange occurred prior to the
record date for the Liberty/Ventures Combination. Options to purchase
TCI Ventures Group Stock outstanding at the time of the
Liberty/Ventures Combination were adjusted such that the holders of
such options have options to purchase that number of shares of
Liberty/Ventures Group Stock which the holder would have been entitled
to receive had the holder exercised such option to purchase TCI
Ventures Group Stock prior to the record date for the Liberty/Ventures
Combination. The aggregate exercise price of the previously outstanding
options to purchase TCI Ventures Group Stock was not effected by the
Liberty/Ventures Combination.
Effective with the Liberty/Ventures Combination, preferred stock and
debt securities of TCI that were convertible into or exchangeable for
shares of Liberty Group Stock did not result in any changes. Such
securities will continue to be convertible or exchangeable into the
same number of shares of Liberty/Ventures Group Stock. Similarly,
options to purchase Liberty Group Stock outstanding at the time of the
Liberty/Ventures Combination did not result in any changes. Such
options remain options to purchase that number of shares of
Liberty/Ventures Group Stock having the same exercise price of the
previously outstanding options to purchase Liberty Group Stock.
The issuance of shares of Liberty/Ventures Group Stock upon such
conversion, exchange or exercise of such convertible securities will
not result in any transfer of funds or other assets from TCI Group to
Liberty/Ventures Group in consideration of such issuance. In the case
of the exercise of such options to purchase Liberty/Ventures Group
Stock, the proceeds received upon the exercise of such options will be
attributed to Liberty/Ventures Group.
(continued)
10
<PAGE> 11
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Merger with AT&T
On March 9, 1999, AT&T acquired TCI in a merger (the "AT&T/TCI Merger")
in which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged
with and into TCI, and TCI thereby became a wholly-owned subsidiary of
AT&T. As a result of the AT&T/TCI Merger, each share of TCI Group
Series A Stock was converted into 0.7757 of a share of common stock,
par value $1.00 per share, of AT&T ("AT&T Common Stock") and each share
of TCI Group Series B Stock was converted into 0.8533 of a share of
AT&T Common Stock. Upon closing of the AT&T/TCI Merger, the
shareholders of Liberty/Ventures Group were issued separate shares of
new targeted stock of AT&T in exchange for the shares of
Liberty/Ventures Group Stock held. Due to the closing of the
Liberty/Ventures Combination occurring simultaneously with the closing
of the AT&T/TCI Merger, each share of Liberty Group Series A Stock was
converted into one share of a newly created class of AT&T common stock
designated as the Class A Liberty Media Group Common Stock, par value
$1.00 per share (the "New Liberty Media Group Class A Tracking Stock"),
each share of Liberty Group Series B Stock was converted into one share
of a newly created class of AT&T common stock designated as the Class B
Liberty Media Group Common Stock, par value $1.00 per share (the "New
Liberty Media Group Class B Tracking Stock" and together with the New
Liberty Media Group Class A Tracking Stock, the "New Liberty Media
Group Tracking Stock"), each share of TCI Ventures Group Series A Stock
was converted into 0.52 of a share of New Liberty Media Group Class A
Tracking Stock and each share of TCI Ventures Group Series B Stock was
converted into 0.52 of a share of New Liberty Media Group Class B
Tracking Stock.
Effective with the AT&T/TCI Merger, each share of TCI's Convertible
Preferred Stock Series C-Liberty Media Group was converted into 56.25
shares of New Liberty Media Group Class A Tracking Stock and each share
of TCI's Redeemable Convertible Liberty Media Group Preferred Stock,
Series H was converted into 0.590625 of a share of New Liberty Media
Group Class A Tracking Stock. In general, the holders of shares of New
Liberty Media Group Class A Tracking Stock and the holders of shares of
New Liberty Media Group Class B Tracking Stock will vote together as a
single class with the holders of shares of AT&T Common Stock on all
matters presented to such stockholders, with the holders being entitled
to one-tenth (1/10th) of a vote for each share of New Liberty Media
Group Class A Tracking Stock held, 1 vote per share of New Liberty
Media Group Class B Tracking Stock held and 1 vote per share of AT&T
Common Stock held.
(continued)
11
<PAGE> 12
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The shares of New Liberty Media Group Tracking Stock issued in the
AT&T/TCI Merger are intended to reflect the separate performance of the
businesses and assets attributed to Liberty/Ventures Group. Pursuant
to, and subject to the terms and conditions set forth in, the Agreement
and Plan of Restructuring and Merger, dated as of June 23, 1998,
immediately prior to the AT&T/TCI Merger, certain assets previously
attributed to Liberty/Ventures Group (including, among others, the
shares of AT&T Common Stock received in the merger of AT&T and Teleport
Communications Group, Inc. ("TCG") (see note 7), the stock of @Home
attributed to Liberty/Ventures Group, the assets and business of NDTC
and Liberty/Ventures Group's equity interest in WTCI) were transferred
to TCI in exchange for approximately $5.5 billion in cash. Also, upon
consummation of the AT&T/TCI Merger, through a new tax sharing
agreement between Liberty/Ventures Group and AT&T, Liberty/Ventures
Group is entitled to the benefit of approximately $2 billion in net
operating loss carryforwards available to the entities included in
TCI's consolidated income tax return as of the date of the AT&T/TCI
Merger. Such net operating loss carryforwards are subject to adjustment
by the Internal Revenue Service and are subject to limitations on usage
which may affect the ultimate amount utilized. Additionally, certain
warrants previously attributed to TCI Group were transferred to
Liberty/Ventures Group in exchange for approximately $176 million in
cash. Certain agreements entered into at the time of the AT&T/TCI
Merger provide, among other things, for preferred vendor status to
Liberty/Ventures Group for digital basic distribution on AT&T's systems
of new programming services created by Liberty/Ventures Group and for a
renewal of existing affiliation agreements. Pursuant to amended
corporate governance documents for the entities included in
Liberty/Ventures Group and certain agreements among AT&T and TCI, the
business of Liberty/Ventures Group will continue to be managed by
certain persons who were members of TCI's management prior to the
AT&T/TCI Merger.
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on
December 31, 1998, Liberty/Ventures Group transferred all of its
beneficially owned securities (the "Sprint Securities") of Sprint to a
trustee (the "Trustee") prior to the AT&T/TCI Merger. The Final
Judgment, if entered by the United States District Court for the
District of Columbia, would require the Trustee, on or before May 23,
2002, to dispose of a portion of the Sprint Securities sufficient to
cause Liberty/Ventures Group to beneficially own no more than 10% of
the outstanding Series 1 PCS Stock of Sprint on a fully diluted basis
on such date. On or before May 23, 2004, the Trustee must divest the
remainder of the Sprint Securities beneficially owned by
Liberty/Ventures Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty/Ventures Group in the same
proportion as other holders of Sprint's PCS Stock so long as such
securities are held by the trust. The Final Judgment would also
prohibit the acquisition of Liberty/Ventures Group of additional Sprint
Securities, with certain exceptions, without the prior written consent
of the DOJ.
(continued)
12
<PAGE> 13
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1998 and 1997 was not material.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
specific number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated cost of the programs when
the film is available for airing less prepayments. These amounts are
amortized on a film-by-film basis over the anticipated number of
exhibitions.
Investments
All marketable equity securities held by Liberty/Ventures Group are
classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried net of taxes as a component of
accumulated other comprehensive earnings in combined equity. Realized
gains and losses are determined on a specific-identification basis.
Other investments in which the ownership interest is less than 20% and
are not considered marketable securities are carried at the lower of
cost or net realizable value. For those investments in affiliates in
which TCI's voting interest is 20% to 50%, the equity method of
accounting is generally used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize Liberty/Ventures
Group's share of net earnings or losses of the affiliates as they occur
rather then as dividends or other distributions are received, limited
to the extent of Liberty/Ventures Group's investment in, advances to
and commitments for the investee. Liberty/Ventures Group's share of net
earnings or losses of affiliates includes the amortization of the
difference between Liberty/Ventures Group's investment and its share of
the net assets of the investee. However, recognition of gains on sales
of properties to affiliates accounted for under the equity method is
deferred in proportion to Liberty/Ventures Group's ownership interest
in such affiliates.
Changes in Liberty/Ventures Group's proportionate share of the
underlying equity of an attributed subsidiary or equity method
investee, which result from the issuance of additional equity
securities by such attributed subsidiary or equity investee, generally
are recognized as gains or losses in Liberty/Ventures Group's combined
statements of operations.
(continued)
13
<PAGE> 14
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Property and Equipment
Property and equipment, including significant improvements, is stated
at cost which includes acquisition costs allocated to tangible assets
acquired. Equipment acquired under capital leases are stated at the
present value of minimum lease payments, not to exceed the fair value
of the leased asset. Construction and initial customer installation
costs, including interest during construction, material, labor and
applicable overhead, are capitalized. Interest capitalized during 1998,
1997 and 1996 was not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 20 years for distribution systems (3 to 5 years
for converters and in-home wiring and 10 to 20 years for the remaining
components of the distribution system) and 3 to 40 years for support
equipment and buildings (3 to 5 years for support equipment and 10 to
40 years for buildings and improvements). Equipment held under capital
leases are depreciated on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.
Repairs and maintenance are charged to operations, and additions are
capitalized. At the time of ordinary retirements, sales or other
dispositions of cable property, the original cost and cost of removal
of such property are charged to accumulated depreciation, and salvage,
if any, is credited thereto. Gains and losses relating to cable
property are only recognized in connection with sales of properties in
their entirety. Gains and losses relating to all other assets are
recognized at the time of disposal.
Excess Cost Over Acquired Net Assets
Excess cost over acquired net assets consists of the difference between
the cost of acquiring non-cable entities and amounts assigned to their
tangible assets. Such amounts are amortized on a straight-line basis
over 5 to 30 years.
Franchise Costs
Franchise costs generally include the difference between the cost of
acquiring cable companies and amounts allocated to their tangible
assets. Such amounts are amortized on a straight-line basis over 40
years.
Impairment of Long-lived Assets
Liberty/Ventures Group periodically reviews the carrying amounts of
property, plant and equipment and its intangible assets to determine
whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, such
loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary
to estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or
fair value less costs to sell.
(continued)
14
<PAGE> 15
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Minority Interests
Recognition of minority interests' share of losses of attributed
subsidiaries is generally limited to the amount of such minority
interests' allocable portion of the common equity of those attributed
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of attributed
subsidiaries have the right to cause Liberty/Ventures Group to
repurchase such holders' common equity.
Preferred stock (and accumulated dividends thereon) of attributed
subsidiaries are included in minority interests in equity of attributed
subsidiaries. Dividend requirements on such preferred stocks are
reflected as minority interests in losses of attributed subsidiaries in
the accompanying combined statements of operations and comprehensive
earnings.
Foreign Currency Translation
The functional currency of Liberty/Ventures Group is the United States
("U.S.") dollar. The functional currency of Liberty/Ventures Group's
foreign operations generally is the applicable local currency for each
foreign subsidiary and foreign equity method investee. In this regard,
the functional currency of certain of Liberty/Ventures Group's foreign
subsidiaries and foreign equity investees is the Argentine peso, the
United Kingdom ("UK") pound sterling ("pound sterling" or "pounds"),
the French franc ("FF") and the Japanese yen ("(Y)"). All amounts
presented herein with respect to operations in Argentina are stated in
U.S. dollars because the Argentine government has maintained an
exchange rate of one U.S. dollar to one Argentine peso since April of
1991. However, no assurance can be given that the Argentine government
will maintain such an exchange rate in future periods. Assets and
liabilities of foreign subsidiaries and foreign equity investees are
translated at the spot rate in effect at the applicable reporting date,
and the combined statements of operations and Liberty/Ventures Group's
share of the results of operations of its foreign equity affiliates are
translated at the average exchange rates in effect during the
applicable period. The resulting unrealized cumulative translation
adjustment, net of applicable income taxes, is recorded as a component
of accumulated other comprehensive earnings in combined equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the accompanying
combined statements of operations and comprehensive earnings as
unrealized (based on the applicable period end exchange rate) or
realized upon settlement of the transactions.
Cash flows from attributed foreign subsidiaries are calculated in their
functional currencies. The effect of exchange rate changes on cash
balances held in foreign currencies is reported as a separate line item
in the accompanying statements of cash flows.
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at December 31, 1998, as published in The Wall Street Journal.
(continued)
15
<PAGE> 16
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Foreign Currency Derivatives
From time to time, Liberty/Ventures Group uses certain derivative
financial instruments to manage its foreign currency risks. Amounts
receivable or payable pursuant to derivative financial instruments that
qualify as hedges of existing assets, liabilities and firm commitments
are deferred and reflected as an adjustment of the carrying amount of
the hedged item. Market value changes in all other derivative financial
instruments are recognized currently in the combined statements of
operations and comprehensive earnings. At December 31, 1998 and 1997,
Liberty/Ventures Group had no significant deferred hedging gains or
losses.
Derivative Instruments and Hedging Activities
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("Statement 133"), which is
effective for all fiscal years beginning after June 15, 1999. Statement
133 establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under Statement 133, changes in the fair values of
derivative instruments are recognized immediately in earnings unless
those instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures of net
investments in foreign operations. Although management of
Liberty/Ventures Group has not completed its assessment of the impact
of Statement 133 on its combined results of operations and financial
position, management estimates that the impact of Statement 133 will
not be material.
Revenue Recognition
Programming revenue is recognized in the period during which
programming is provided, pursuant to affiliation agreements.
Advertising revenue is recognized, net of agency commissions, in the
period during which underlying advertisements are broadcast. Cable
revenue is recognized in the period that services are rendered. Cable
installation revenue is recognized in the period the related services
are provided to the extent of direct selling costs. Any remaining
amount is deferred and recognized over the estimated average period
that customers are expected to remain connected to the cable
distribution system.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
16
<PAGE> 17
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $112 million , $60 million and $52 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
Cash paid for income taxes during the years ended December 31, 1998,
1997 and 1996 was $29 million, $35 million and $14 million,
respectively. In addition, Liberty/Ventures Group received income tax
refunds amounting to $15 million during the year ended December 31,
1996.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
amounts in millions
-------------------
Cash paid for acquisitions:
<S> <C> <C> <C>
Fair value of assets acquired $ 162 452 688
Net liabilities assumed (107) (209) (115)
Debt issued to related parties and others -- (404) (52)
Contribution to combined equity from TCI for
acquisitions -- -- (196)
Deferred tax asset (liability) recorded in
acquisition -- 112 (37)
Increase in minority interests in equity of
attributed subsidiaries due to issuance of shares
by attributed subsidiary -- -- (43)
Minority interest in equity of acquired attributed
subsidiaries 39 (129) (77)
Excess consideration paid over carryover basis of
net assets acquired from related party -- 219 --
Gain in connection with the issuance of shares by
attributed subsidiary (2) -- --
----- ----- -----
Cash paid for acquisitions $ 92 41 168
===== ===== =====
</TABLE>
(continued)
17
<PAGE> 18
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Costs of distribution agreements $ 74 173 --
===== ===== ===
Property and equipment purchased under capital leases $ 13 176 64
===== ===== ===
Noncash acquisition of minority interest in attributed subsidiaries
(notes 9 and 13):
Fair value of assets $(741) (29) --
Deferred tax liability recorded 154 -- --
Minority interests in equity of attributed
subsidiaries (185) (1) --
Liberty Group Stock issued 772 30 --
----- ----- ---
$ -- -- --
===== ===== ===
Common stock received in exchange for option (note 6) $ -- 306 --
===== ===== ===
Preferred stock received in exchange for common stock and note
receivable (note 8) $ -- 371 --
===== ===== ===
Exchange of attributed subsidiaries for note receivable
and equity investments $ -- -- 574
===== ===== ===
</TABLE>
Liberty/Ventures Group ceased to include Flextech p.l.c. ("Flextech")
and Cablevision S.A. ("Cablevision") in its combined financial results
and began to account for Flextech and Cablevision using the equity
method of accounting, effective January 1, 1997 and October 1, 1997,
respectively. The effects of changing the method of accounting for
Liberty/Ventures Group's ownership interests in Flextech and
Cablevision as of December 31, 1997 from the consolidation method to
the equity method are summarized below (amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash
equivalents) reclassified to investments in
affiliates $(596)
Liabilities reclassified to investments in
affiliates 484
Minority interests in equity of attributed
subsidiaries reclassified to investments in
affiliates 151
-----
Decrease in cash and cash equivalents $ 39
=====
</TABLE>
(continued)
18
<PAGE> 19
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investments in Affiliates
Liberty/Ventures Group has various investments accounted for under the
equity method. The following table includes Liberty/Ventures Group's
carrying amount and percentage ownership of the more significant
investments at December 31, 1998 and the carrying amount at December
31, 1997:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Percentage Carrying Carrying
Ownership Amount Amount
--------- ------ ------
amounts in millions
<S> <C> <C> <C>
USA Networks, Inc. ("USAI") and related
investments 21% 1,042 348
Sprint Spectrum Holding Company L.P., MinorCo,
L.P. and PhillieCo Partnership I, L.P.
(the "PCS Ventures") -- -- 607
Telewest Communications plc ("Telewest") 22% 515 324
Flextech 37% 320 261
Cablevision 28% 315 239
Various foreign equity investments (other than
Telewest, Flextech and Cablevision) various 346 209
QVC, Inc. ("QVC") 43% 197 134
TCG -- -- 295
Other various 344 237
----- ----
3,079 2,654
===== =====
</TABLE>
Summarized unaudited combined financial information for affiliates is as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Combined Financial Position amounts in millions
<S> <C> <C>
Investments $ 2,003 4,085
Property and equipment, net 8,147 7,250
Franchise costs and other intangibles, net 14,395 7,870
Other assets, net 7,553 10,763
------- -------
Total assets $32,098 29,968
======= =======
Debt $15,264 16,051
Other liabilities 11,620 7,724
Owners' equity 5,214 6,193
------- -------
Total liabilities and equity $32,098 29,968
======= =======
</TABLE>
(continued)
19
<PAGE> 20
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997 1996
---- ---- ----
amounts in millions
Combined Operations
<S> <C> <C> <C>
Revenue $ 14,062 7,107 4,576
Operating expenses (13,092) (7,635) (4,727)
Depreciation and amortization (2,629) (1,152) (547)
-------- -------- --------
Operating loss (1,659) (1,680) (698)
Interest expense (1,728) (656) (375)
Other, net (166) (443) (267)
-------- -------- --------
Net loss $ (3,553) (2,779) (1,340)
======== ======== ========
</TABLE>
Pursuant to an agreement among Liberty/Ventures Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and
amended in August 1996 (the "BDTV Agreement"), Liberty/Ventures Group
contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
"Silver King Option") to purchase 2 million shares of Class B common
stock of Silver King Communications, Inc. ("Silver King") (which shares
represented voting control of Silver King at such time) and $4 million
in cash, representing the exercise price of the Silver King Option.
BDTV-I is a corporation formed by Liberty/Ventures Group and Mr. Diller
pursuant to the BDTV Agreement, in which Liberty/Ventures Group owns
over 99% of the equity and none of the voting power (except for
protective rights with respect to certain fundamental corporate
actions) and Mr. Diller owns less than 1% of the equity and all of the
voting power. BDTV-I exercised the Silver King Option shortly after its
contribution, thereby becoming the controlling stockholder of Silver
King. Such change in control of Silver King had been approved by the
Federal Communications Commission ("FCC") in June 1996, subject,
however, to the condition that the equity interest of Liberty/Ventures
Group in Silver King not exceed 21.37% without the prior approval of
the FCC (the "FCC Order").
(continued)
20
<PAGE> 21
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc.
("HSN") by merger of HSN with a subsidiary of Silver King in December
1996 (the "HSN Merger") where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. Liberty/Ventures
Group accounted for the HSN Merger as a sale of a portion of its
investment in HSN and accordingly, recorded a pre-tax gain of
approximately $47 million. In order to effect the HSN Merger in
compliance with the FCC Order, Liberty/Ventures Group agreed to defer
receiving certain shares of Silver King that would otherwise have
become issuable to it in the HSN Merger until such time as it was
permitted to own such shares. As a result, the HSN Merger was
structured so that Liberty/Ventures Group received (i) 15.6 million
shares of Class B common stock of Silver King, all of which shares
Liberty/Ventures Group contributed to BDTV II INC. ("BDTV-II"), (ii)
the contractual right (the "Contingent Right") to be issued up to an
additional 5.2 million shares of Class B common stock of Silver King
from time to time upon the occurrence of certain events which would
allow Liberty/Ventures Group to own additional shares in compliance
with the FCC Order (including events resulting in the dilution of
Liberty/Ventures Group's percentage equity interest), and (iii)
approximately 739,000 shares of Class B common stock and 17.6 million
shares of common stock of HSN (representing approximately 19.9% of the
equity of HSN). BDTV-II is a corporation formed by Liberty/Ventures
Group and Barry Diller pursuant to the BDTV Agreement, in which the
relative equity ownership and voting power of Liberty/Ventures Group
and Mr. Diller are substantially the same as their respective equity
ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer included in the
combined financial results of Liberty/Ventures Group. Subsequent to the
HSN Merger, Silver King was renamed HSN, Inc. ("HSNI").
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and Liberty/Ventures Group, HSNI
consummated a transaction (the "Universal Transaction") through which
Universal sold its 50% interest in USAI, to HSNI and Universal
contributed the remaining 50% interest in USAI and its domestic
television production and distribution operations to HSNI. Subsequent
to these transactions, HSNI was renamed USAI.
At the closing of the Universal Transaction, Universal (i) was issued 6
million shares of USAI's Class B common stock, 7 million shares of
USAI's common stock and 109 million common equity shares ("LLC Shares")
of USANi LLC, a limited liability company formed to hold all of the
businesses of USAI and its subsidiaries, except for its broadcasting
business and its equity interest in Ticketmaster Group, Inc. and (ii)
received a cash payment of $1.3 billion. Pursuant to an Exchange
Agreement relating to the LLC Shares (the "LLC Exchange Agreement"),
approximately 74 million of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's Class B common stock and the
remainder of the LLC Shares issued to Universal are each exchangeable
for one share of USAI's common stock.
(continued)
21
<PAGE> 22
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the closing of the Universal Transaction, Liberty/Ventures Group was
issued 1.2 million shares of USAI's Class B common stock. Of such
shares, 800,000 shares of Class B common stock were contributed to BDTV
IV INC. (collectively with BDTV-I, BDTV-II and BDTV III INC., "BDTV"),
a newly-formed entity having substantially the same terms as BDTV-I,
BDTV-II and BDTV III INC. Liberty/Ventures Group accounts for its
investment in BDTV under the equity method.
On June 24, 1998, USAI consummated the previously announced agreement
to acquire the remaining stock of Ticketmaster Group, Inc. which it did
not previously own through a tax-free merger (the "Ticketmaster
Transaction"). In connection with the increases in USAI's equity, net
of the dilution of Liberty/Ventures Group's ownership interest, that
resulted from the issuance of common stock by USAI in the Universal
Transaction and the Ticketmaster Transaction, Liberty/Ventures Group
recorded a $64 million increase to combined equity (after deducting a
deferred tax liability of $42 million) and an increase to investment in
affiliates of $106 million. No gain was recognized in the combined
statements of operations and comprehensive earnings due primarily to
Liberty/Ventures Group's commitment to purchase additional equity
interests in USAI.
In connection with the Universal Transaction, each of Universal and
Liberty/Ventures Group was granted a preemptive right with respect to
future issuances of USAI's common stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in USAI that they had prior to such issuances. In connection
with such right, during 1998, Liberty/Ventures Group purchased
approximately 4.7 million shares of USAI's common stock and
approximately 22.9 million LLC Shares for an aggregate cost of
approximately $560 million. Pursuant to the LLC Exchange Agreement,
each LLC Share issued or to be issued to Liberty/Ventures Group is
exchangeable for one share of USAI's common stock.
At December 31, 1998, Liberty/Ventures Group held 24.4 million shares
of USAI's common stock through BDTV and 5.2 million shares of USAI's
common stock directly. Additionally, Liberty/Ventures Group held 22.9
million LLC Shares at December 31, 1998 as well as shares of HSN's
common stock which are exchangeable for 16.6 million shares of USAI's
common stock. Liberty/Ventures Group's direct ownership of USAI is
restricted under the FCC Order. Assuming the exchange of
Liberty/Ventures Group's shares in HSN and its LLC Shares for USAI
common stock, and the exchange of certain securities owned by Universal
and certain of its affiliates for USAI common stock, Liberty/Ventures
Group would own 69.1 million shares or approximately 21% of USAI,
including shares held through BDTV at December 31, 1998. USAI's common
stock had a closing market value of $33-1/8 per share on December 31,
1998.
During the years ended December 31, 1998, 1997 and 1996,
Liberty/Ventures Group's share of affiliates' earnings (losses) from
its interests in USAI and related investments accounted for $30
million, $3 million and ($1 million), respectively.
(continued)
22
<PAGE> 23
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The PCS Ventures included Sprint Spectrum Holding Company, L. P.
("Sprint Spectrum") and MinorCo, L.P. (collectively, "Sprint PCS") and
PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each of
the Sprint PCS partnerships were subsidiaries of Sprint, Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and
Liberty/Ventures Group. The partners of PhillieCo were subsidiaries of
Sprint, Cox and Liberty/Ventures Group. Liberty/Ventures Group had a
30% partnership interest in each of the Sprint PCS partnerships and a
35% partnership interest in PhillieCo. During the years ended December
31, 1998, 1997 and 1996, the PCS Ventures accounted for $629 million,
$493 million and $133 million, respectively, of Liberty/Ventures
Group's share of affiliates' losses.
On November 23, 1998, Liberty/Ventures Group, Comcast, and Cox
exchanged their respective interests in Sprint PCS and PhillieCo (the
"PCS Exchange") for shares of Sprint PCS Group Stock which tracks the
performance of Sprint's newly created PCS Group (consisting initially
of the PCS Ventures and certain PCS licenses which were separately
owned by Sprint). The Sprint PCS Group Stock collectively represents an
approximate 17% voting interest in Sprint. As a result of the PCS
Exchange, Liberty/Ventures Group holds the Sprint Securities which
consists of shares of Sprint PCS Group Stock, as well as certain
additional securities of Sprint exercisable for or convertible into
such securities, representing approximately 24% of the equity value of
Sprint attributable to its PCS Group and less than 1% of the voting
interest in Sprint. Through November 23, 1998, Liberty/Ventures Group
accounted for its interest in the PCS Ventures using the equity method
of accounting, however, as a result of the PCS Exchange and
Liberty/Ventures Group's less than 1% voting interest in Sprint,
Liberty/Ventures Group no longer exercises significant influence with
respect to its investment in the PCS Ventures. Accordingly,
Liberty/Ventures Group accounts for its investment in the Sprint PCS
Group Stock as an available-for-sale security.
As a result of the PCS Exchange, Liberty/Ventures Group recorded a
non-cash gain of $1.9 billion (before deducting deferred income tax
expense of $647 million) during the fourth quarter of 1998 based on the
difference between the carrying amount of Liberty/Ventures Group's
interest in the PCS Ventures and the fair value of the Sprint
Securities received.
Telewest currently operates and constructs cable television and
telephone systems in the UK. Telewest accounted for $134 million, $145
million and $109 million of Liberty/Ventures Group's share of its
affiliates' losses during the years ended December 31, 1998, 1997 and
1996, respectively.
At December 31, 1998 Liberty/Ventures Group indirectly owned 463
million of the issued and outstanding Telewest ordinary shares. The
reported closing price on the London Stock Exchange of Telewest
ordinary shares was pound sterling1.74 ($2.88) per share at December
31, 1998.
(continued)
23
<PAGE> 24
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which
holders of General Cable received 1.243 new Telewest shares and pound
sterling0.65 ($1.11) in cash for each share of General Cable. In
addition, holders of American Depository shares of General Cable
("General Cable ADS") (each representing five General Cable shares)
received 6.215 new Telewest shares and pound sterling3.25 ($5.53) in
cash for each share of General Cable ADS. Based upon Telewest's closing
share price of pound sterling0.89 ($1.51) on April 14, 1998, the
General Cable Merger was valued at approximately pound sterling649
million ($1.1 billion).
The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of
approximately 261 million new Telewest shares at a price of pound
sterling0.925 ($1.57) per share (the "Telewest Offer").
Liberty/Ventures Group subscribed to 85 million Telewest ordinary
shares at an aggregate cost of pound sterling78 million ($133 million)
in connection with the Telewest Offer.
In connection with the General Cable Merger, Liberty/Ventures Group
converted its entire holdings of Telewest convertible preference shares
(133 million shares) into Telewest ordinary shares. As a result of the
General Cable Merger, Liberty/Ventures Group's ownership interest in
Telewest decreased to 22%. In connection with the increase in
Telewest's equity, net of the dilution of Liberty/Ventures Group's
interest in Telewest, that resulted from the General Cable Merger,
Liberty/Ventures Group recorded a non-cash gain of $60 million (before
deducting deferred income tax expense of $21 million) during 1998.
In April 1997, Flextech and BBC Worldwide Limited ("BBC Worldwide")
formed two separate joint ventures (the "BBC Joint Ventures") and
entered into certain related transactions. The consummation of the BBC
Joint Ventures and related transactions resulted in, among other
things, a reduction of Liberty/Ventures Group's economic ownership
interest in Flextech from 46.2% to 36.8%. Liberty/Ventures Group
continues to maintain a voting interest in Flextech of approximately
50%. As a result of such dilution, Liberty/Ventures Group recorded a
$152 million increase to the carrying amount of Liberty/Ventures
Group's investment in Flextech, a $53 million increase to deferred
income tax liability, a $66 million increase to combined equity and a
$33 million increase to minority interests in equity of attributed
subsidiaries. No gain was recognized in the statement of operations due
primarily to certain contingent obligations of Liberty/Ventures Group
with respect to one of the BBC Joint Ventures (see note 15). Flextech
accounted for $21 million and $16 million of Liberty/Ventures Group's
share of its affiliates' losses during the years ended December 31,
1998 and 1997, respectively.
Based on the pound sterling6.07 ($10.07) per share closing price of the
Flextech ordinary shares on the London Stock Exchange, the 58 million
Flextech ordinary shares owned by Liberty/Ventures Group had an
aggregate market value of pound sterling351 million ($583 million) at
December 31, 1998.
On October 9, 1997, Liberty/Ventures Group sold a portion of its 51%
interest in Cablevision to unaffiliated third parties. In connection
with such sale and certain related transactions, Liberty/Ventures Group
recognized a gain of $49 million. Cablevision accounted for $23 million
and $3 million of Liberty/Ventures Group's share of its affiliates'
losses during the years ended December 31, 1998 and 1997, respectively.
(continued)
24
<PAGE> 25
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On October 13, 1998, one of the Cablevision shareholders exercised a
put right representing a 7.2% interest in Cablevision. Consequently, on
December 22, 1998, Liberty/Ventures Group purchased its pro-rata
portion of such shareholder's ownership interest for $25 million, $8
million of which was paid at closing and the remaining amount
(including accrued interest thereon) will be paid in four equal
semi-annual installments. As a result of the put, Liberty/Ventures
Group's equity interest in Cablevision increased from 26% to 28%.
As of April 29, 1996, Liberty/Ventures Group and The News Corporation
Limited ("News Corp.") formed two sports programming ventures. In the
U.S., Liberty/Ventures Group and News Corp. formed Fox/Liberty Networks
LLC ("Fox Sports") into which Liberty/Ventures Group contributed
interests in its national and regional sports networks and into which
News Corp. contributed its fx cable network and certain other assets.
Liberty/Ventures Group received a 50% interest in Fox Sports and a
distribution of $350 million in cash. No gain or loss was recognized as
the cash distribution approximated the carrying amount of the assets
contributed.
Prior to the first quarter of 1998, Liberty/Ventures Group had no
obligation, nor intention, to fund Fox Sports. During 1998,
Liberty/Ventures Group made the determination to provide funding to Fox
Sports based on specific transactions consummated by Fox Sports.
Consequently, Liberty/Ventures Group's share of losses of Fox Sports of
$83 million for the year ended December 31, 1998 includes previously
unrecognized losses of Fox Sports of approximately $64 million. Losses
for Fox Sports were not recognized in prior periods due to the fact
that Liberty/Ventures Group's investment in Fox Sports was less than
zero.
Internationally, News Corp. and Liberty/Ventures Group formed a venture
("Fox Sports International") to operate sports programming services in
Latin American and Australia and a variety of new sports services
throughout the world except in Asia and in the United Kingdom, Japan
and New Zealand where prior arrangements preclude an immediate
collaboration. Liberty/Ventures Group owns 50% of Fox Sports
International with News Corp. owning the other 50%. Fox Sports
International accounted for $34 million, $30 million and $21 million of
Liberty/Ventures Group's share of its affiliates' losses during the
years ended December 31, 1998, 1997 and 1996, respectively.
In addition to Telewest, Flextech, Fox Sports International and
Cablevision, Liberty/Ventures Group has other less significant
investments in affiliates 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 foreign investments in affiliates accounted for $70 million, $70
million and $54 million of Liberty/Ventures Group's share of its
affiliates' losses during the years ended December 31, 1998, 1997 and
1996, respectively.
(continued)
25
<PAGE> 26
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with certain transactions between one of such foreign
affiliates ("MultiThematiques") and certain of its minority
shareholders, Liberty/Ventures Group's ownership interest in
MultiThematiques decreased from 33% to 30%. In connection with the
increase in MultiThematiques' equity, net of the dilution of
Liberty/Ventures Group's interest in MultiThematiques, that resulted
from such transactions, Liberty/Ventures Group recorded a $4 million
increase to combined equity (after deducting a deferred tax liability
of $2 million) and an increase to investments in affiliates of $6
million. No gain was recognized in the combined statements of
operations and comprehensive earnings due primarily to Liberty/Ventures
Group's continued funding obligation to MultiThematiques.
TCG accounted for $32 million, $66 million and $51 million of
Liberty/Ventures Group's share of its affiliates' losses during the
years ended December 31, 1998, 1997 and 1996, respectively. See note 7.
The $797 million aggregate excess of Liberty/Ventures Group's aggregate
historical cost basis in its affiliates over Liberty/Ventures Group's
proportionate share of its affiliates' net assets is being amortized
over an estimated useful life of 10 to 20 years.
Certain of Liberty/Ventures Group's affiliates are general partnerships
and any subsidiary of TCI which is attributed to Liberty/Ventures Group
that is a general partner in a general partnership is, as such, liable
as a matter of partnership law for all debts (other than non-recourse
debts) of that partnership in the event liabilities of that partnership
were to exceed its assets.
(6) Investment in Time Warner
On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 1.5 Time Warner common shares (as adjusted for a
two-for-one stock split) for each TBS Class A and Class B common share
held, and each holder of TBS Class C preferred stock received 1.6 Time
Warner common shares (as adjusted for a two-for-one stock split) for
each of the 6 shares of TBS Class B common stock into which each share
of Class C preferred stock could have been converted.
Liberty/Ventures Group entered into an agreement with the Federal Trade
Commission ("FTC") (the "FTC Consent Decree"), pursuant to which, among
other things, Liberty/Ventures Group agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger
for shares of a separate series of Time Warner common stock with
limited voting rights (the "TW Exchange Stock"). Holders of the TW
Exchange Stock are entitled to one one-hundredth (l/100th) of a vote
for each share with respect to the election of directors. Holders of
the TW Exchange Stock will not have any other voting rights, except as
required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such
holders. Subject to the federal communications laws, each share of the
TW Exchange Stock will be convertible at any time at the option of the
holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably
with the Time Warner common stock and to share ratably with the holders
of Time Warner common stock in assets remaining for common stockholders
upon dissolution, liquidation or winding up of Time Warner.
(continued)
26
<PAGE> 27
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the TBS/Time Warner Merger, Liberty/Ventures Group
received approximately 101.2 million shares (as adjusted for a
two-for-one stock split) of the TW Exchange Stock in exchange for its
TBS holdings. As a result of the TBS/Time Warner Merger,
Liberty/Ventures Group recognized a pre-tax gain of $1.5 billion in the
fourth quarter of 1996. Liberty/Ventures accounts for its investment in
Time Warner as an available-for-sale security.
On June 24, 1997 Liberty/Ventures Group granted Time Warner an option
to acquire the business of Southern Satellite Systems, Inc.
("Southern") and certain of its subsidiaries (together with Southern,
the "Southern Business") through a purchase of assets (the "Southern
Option"). Liberty/Ventures Group received 12.8 million shares (as
adjusted for a two-for-one stock split) of TW Exchange Stock valued at
$306 million in consideration for the grant. In September 1997, Time
Warner exercised the Southern Option. Pursuant to the Southern Option,
Time Warner acquired the Southern Business, effective January 1, 1998,
for $213 million in cash. Liberty/Ventures Group recognized a $515
million pre-tax gain in connection with such transactions in the first
quarter of 1998.
As security for borrowings under one of its credit facilities,
Liberty/Ventures Group has pledged a portion of its TW Exchange Stock.
At December 31, 1998 such pledged portion had an aggregate fair value
of approximately $2.7 billion.
(7) Investment in AT&T
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, Liberty/Ventures Group
received in exchange for all of its interest in TCG, approximately 47
million shares of AT&T Common Stock. Liberty/Ventures Group recognized
a $2.3 billion gain (excluding related tax expense of $883 million) on
such transaction during the third quarter of 1998 based on the
difference between the carrying amount of Liberty/Ventures Group's
interest in TCG and the fair value of the AT&T Common Stock received.
Liberty/Ventures Group accounts for its equity interest in AT&T as an
available-for-sale security.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 of a share of TCG stock for each share of ACC stock. As
a result of such merger transaction, Liberty/Ventures Group's interest
in TCG was reduced to approximately 26%. In connection with the
increase in TCG's equity, net of the dilution of Liberty/Ventures
Group's interest in TCG, that resulted from such merger,
Liberty/Ventures Group recorded a non-cash gain of $201 million (before
deducting deferred income tax expense of $71 million).
(continued)
27
<PAGE> 28
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the year ended December 31, 1997, TCG issued 6.6 million shares
of its Class A common stock for certain acquisitions. The total
consideration paid by TCG through the issuance of common stock was
approximately $123 million. In addition, effective November 5, 1997,
TCG consummated a public offering of 7.3 million shares of its Class A
common stock. TCG received net proceeds from its sale of shares
pursuant to such offering of $318 million. As a result of the above
transactions, Liberty/Ventures Group's ownership interest in TCG was
reduced to approximately 28%. Accordingly, as a result of the increase
in TCG's equity, net of the dilution of Liberty/Ventures Group's
ownership interest in TCG, Liberty/Ventures Group recognized non-cash
gains aggregating $112 million (before deducting deferred income tax
expense of $43 million).
On July 2, 1996, TCG conducted an initial public offering (the "TCG
IPO") in which it sold 27 million shares of Class A common stock at
$16.00 per share to the public for aggregate net proceeds of
approximately $410 million. As a result of the TCG IPO,
Liberty/Ventures Group's ownership interest in TCG was reduced to
approximately 31%. Accordingly, Liberty/Ventures Group recognized a
gain amounting to $13 million (before deducting deferred income tax
expense of approximately $5 million).
(8) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
amounts in millions
<S> <C> <C>
Available-for-sale securities, at fair value $ 159 248
Investment in preferred stock, at cost, including premium 371 371
Investment in General Instrument Corporation ("GI")
(note 15) 396 --
Other investments, at cost, and related receivables 372 76
------ ------
$1,298 695
====== ======
</TABLE>
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
Liberty/Ventures Group, which held non-voting Class C common stock of
International Family Entertainment, Inc. ("IFE") ("Class C Stock") and
$23 million of IFE 6% convertible secured notes due 2004, convertible
into Class C Stock, ("Convertible Notes"), contributed its Class C
Stock and Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in
exchange for a new series of 30 year non-convertible 9% preferred stock
of FKW with a stated value of $345 million (the "FKW Preferred Stock").
As a result of the exchange, Liberty Media Group recognized a pre-tax
gain of approximately $304 million during the third quarter of 1997.
(continued)
28
<PAGE> 29
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Management of Liberty/Ventures Group estimates the market value,
calculated using a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty/Ventures
Group's other investments aggregated $1,743 million and $766 million at
December 31, 1998 and December 31, 1997, respectively. No independent
appraisals were conducted for those assets.
(9) Acquisitions and Dispositions
On January 12, 1998, Liberty/Ventures Group acquired from a minority
shareholder of United Video Satellite Group, Inc. ("UVSG") 24.8 million
shares of UVSG Class A common stock in exchange for 12.7 million shares
of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty
Group Series A Stock. The aggregate value assigned to the shares issued
by TCI was based upon the market value of such shares at the time the
transaction was announced. As a result of such transaction
Liberty/Ventures Group increased its ownership in the equity of UVSG to
approximately 73% and the voting power increased to 93%. In connection
with the issuance of common stock in such transaction, Liberty/Ventures
Group recorded a $346 million increase to combined equity.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange
for an approximate 20% interest in SNG. As a result of such
transaction, Liberty/Ventures Group's ownership interest in SNG
decreased to approximately 80%. In connection with the increase in
SNG's equity, net of the dilution of Liberty/Ventures Group's ownership
interest in SNG, that resulted from such transaction, Liberty/Ventures
Group recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to SNG
was accounted for as a purchase and the $61 million excess of the
purchase price over the fair value of the net assets acquired was
recorded as excess cost and is being amortized over five years.
During 1998, TCI Music, Inc. ("TCI Music") issued approximately 382,000
shares of its Series A Common Stock in connection with certain
acquisitions. In connection with the issuance of such shares,
Liberty/Ventures Group's ownership interest was diluted to 80.7% and
Liberty/Ventures Group recorded a $2 million increase to combined
equity. No gain was recognized in the combined statements of operations
due primarily to Liberty/Ventures Group's contingent obligation to
purchase certain shares from shareholders of TCI Music (see note 13).
(continued)
29
<PAGE> 30
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On March 1, 1999, UVSG and News Corp. completed a transaction whereby
News Corp.'s TV Guide properties were combined with UVSG to create a
platform for offering television guide services to consumers and
advertising. As part of this combination, a unit of News Corp. received
consideration consisting of $800 million in cash and 60 million shares
of UVSG's stock, including 22.5 million shares of its Class A common
stock and 37.5 million shares of its Class B common stock. In addition,
News Corp. elected to purchase approximately 6.5 million additional
shares of UVSG Class A common stock for $129 million in order to
equalize its ownership with that of Liberty/Ventures Group. As a result
of these transactions, and another transaction completed on the same
date, News Corp., Liberty/Ventures Group and UVSG's public stockholders
own on an economic basis approximately 44%, 44% and 12%, respectively,
of UVSG. Following such transactions, News Corp. and Liberty/Ventures
Group each have approximately 49% of the voting power of UVSG's
outstanding stock. Upon consummation, Liberty/Ventures Group began
accounting for its interest in UVSG under the equity method of
accounting.
On August 24, 1998, Liberty/Ventures Group purchased 100% of the issued
and outstanding common stock of Pramer S.A. ("Pramer"), an Argentine
programming company, for $32 million in cash and the issuance of notes
payable in the amount of $65 million (the "Pramer Notes"). See note 11.
The $101 million excess cost over acquired net assets is being
amortized over ten years.
On November 19, 1998, Liberty/Ventures Group exchanged, in a merger
transaction, 0.58 of a share of Liberty Group Series A Stock for each
share of Tele-Communications International, Inc. Series A Common Stock
not beneficially owned by Liberty/Ventures Group. Such transaction was
accounted for as an acquisition of a minority interest. The aggregate
value assigned to the shares issued by TCI was based upon the market
value of Liberty Group Series A Stock at the time the merger was
announced. In connection with the issuance of common stock in such
merger transaction, Liberty/Ventures Group recorded a $426 million
increase to combined equity.
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI
and TCI Merger Sub, Inc. ("UVSG Merger Sub"), pursuant to which UVSG
Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). Liberty/Ventures Group acquired 24.8 million
shares of UVSG Class B common stock and 4.2 million shares of UVSG
Class A common stock, together representing approximately 39% of the
issued and outstanding common stock of UVSG and approximately 85% of
the total voting power of UVSG common stock immediately after the UVSG
Merger, resulting in UVSG becoming a majority-controlled attributed
entity of Liberty/Ventures Group. The UVSG Merger has been accounted
for by the purchase method. Accordingly, the results of operations of
UVSG have been combined with those of Liberty/Ventures Group since
January 25, 1996 and Liberty/Ventures Group recorded UVSG's assets and
liabilities at fair value.
(continued)
30
<PAGE> 31
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(10) At Home Corporation
During 1998, @Home completed a public offering (the "@Home Offering")
in which 2.9 million shares of @Home common stock were sold for net
cash proceeds of approximately $125 million. In connection with the
@Home Offering, Liberty/Ventures Group paid $37 million to purchase
800,000 shares of @Home common stock. Additionally, @Home issued 1.2
million shares of common stock in certain acquisitions, along with the
assumption of options to purchase @Home's common stock. As a result of
these stock issuances, Liberty/Ventures Group's economic interest in
@Home decreased to 38.8%, which represents an approximate 70.88% voting
interest. As a result of the increase in @Home's equity in connection
with such stock issuances, net of the dilution of Liberty/Ventures
Group's ownership interest in @Home, Liberty/Ventures Group recognized
a gain of $51 million.
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10.4 million shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, Liberty/Ventures Group's economic interest in @Home
decreased from 43% to 39%. In connection with the increase in @Home's
equity, net of the dilution of Liberty/Ventures Group's ownership
interest in @Home, Liberty/Ventures Group recognized a gain of $60
million during the third quarter of 1997.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 21.2 million
shares of @Home's Series A common stock. Of these warrants, warrants to
purchase 11.2 million shares were exercisable as of December 31, 1998.
During the year ended December 31, 1998, @Home recorded non-cash
charges of $50 million to operations based on the fair value of 1
million shares which were underlying warrants which became exercisable
during the period. Such charges are included in "cost of distribution
agreements" in the accompanying combined statements of operations.
@Home may issue additional stock, or warrants in connection with its
efforts to expand its distribution of the @Home service to other cable
operators. The exercise of warrants or stock issued by @Home will
reduce Liberty/Ventures Group's equity interest and voting power in
@Home.
Pursuant to a shareholders' agreement among certain shareholders of
@Home, under certain circumstances, Liberty/Ventures Group could be
required to sell a portion of its common stock of @Home to such
shareholders.
(continued)
31
<PAGE> 32
"LIBERTY/VENTURED GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted
average December 31,
interest ------------------------
rate 1998 1997
---- ---- ----
amounts in millions
<S> <C> <C> <C>
Bank credit facilities (a) 6.1% $2,029 390
Convertible Subordinated Debentures (b) 4.0% 229 --
4-1/2% Convertible Subordinated Debentures 4.5% 345 345
Other 7.4% 103 22
------ -----
$2,706 757
====== ===
</TABLE>
(a) At December 31, 1998, Liberty/Ventures had approximately $1 billion in
unused lines of credit.
(b) On December 28, 1998, @Home issued $437 million of Convertible
Subordinated Debentures in a private offering within the United States
to qualified institutional investors. The issue price of each $1,000
debenture was $524.64 (52.464% of principal amount at maturity), or
approximately $229 million. Issuance costs were approximately $7
million, resulting in net proceeds to @Home of approximately $222
million. The issuance costs were recorded as other assets and are
being amortized by charges to interest expense ratably over the term
of the debentures. Each debenture is convertible at the option of the
holder at any time prior to maturity, unless redeemed or otherwise
purchased, into 6.55 shares of @Home's common stock.
The bank credit facilities of Liberty/Ventures Group generally contain
restrictive covenants which require, among other things, the maintenance of
certain financial ratios, and include limitations on indebtedness, liens and
encumbrances, acquisitions, dispositions, guarantees and dividends.
Additionally, Liberty/Ventures Group pays fees ranging from .15% to .375% per
annum on the average unborrowed portions of the total amounts available for
borrowings under bank credit facilities.
32
<PAGE> 33
"LIBERTY/VENTURES GROUP"
(a Combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As collateral for borrowings under one of Liberty/Ventures Group's
credit facilities, the banks lend against certain assets designated by
Liberty/Ventures Group (the "Designated Assets"). The components of the
Designated Assets may be changed from time to time. The aggregate
market value of the Designated Assets, as determined by certain
criteria in the revolving credit agreement, must at all times exceed an
amount equal to three times the total outstanding borrowings under the
facility. The Designated Assets at December 31, 1998 were
Liberty/Ventures Group's holdings in Discovery Communications, Inc.,
QVC and the FKW Preferred Stock. The carrying amount of the Designated
Assets as of December 31, 1998 was $617 million. Recourse to the banks
for payment of Liberty/Ventures Group's obligations under this facility
is limited solely to the Designated Assets.
Also, as security for borrowings under one of its credit facilities,
Liberty/Ventures Group has pledged a portion of its TW Exchange Stock.
See note 6.
Certain of Liberty/Ventures Group's bank credit facilities have credit
agreements which provide for a three month interest reserve to be held
by an administrative agent. At December 31, 1998 and 1997, $17 million
and $5 million, respectively, were held in the interest reserve and are
included in restricted cash in the accompanying combined balance
sheets.
Liberty/Ventures Group's attributed subsidiary in Puerto Rico (the
"Puerto Rico Subsidiary") has a reducing revolving bank facility which
is unsecured and provides for maximum borrowing commitments of $100
million (the "Puerto Rico Bank Facility"). On September 21, 1998,
Hurricane Georges struck Puerto Rico and caused considerable property
damage to the area in general, including the Puerto Rico Subsidiary's
cable television systems. On September 27, 1998, the Puerto Rico
Subsidiary submitted a property damage claim to its insurance carrier
for approximately $15 million which represents the estimated
replacement costs of its damaged property. In addition to property
damage caused by Hurricane Georges, the Puerto Rico subsidiary suffered
a loss in revenue from its pre-hurricane customers. The loss of revenue
from September 21, 1998 to December 31, 1998 has been estimated at $7
million. The estimated loss of revenue exceeded its business
interruption insurance by $4 million. Such uncovered losses could cause
the Puerto Rico Subsidiary to be in violation of certain financial
covenants of the Puerto Rico Bank Facility in the fourth quarter of
1998 and the first quarter of 1999. Violations of certain financial
covenants will prevent the Puerto Rico Subsidiary from borrowing any
unused borrowing commitments and could result in the acceleration of
amounts due under the Puerto Rico Bank Facility. See note 15.
The U.S. dollar equivalent of the annual maturities of Liberty/Ventures
Group's debt for each of the next five years are as follows: 1999: $578
million; 2000: $491 million; 2001: $70 million; 2002: $78 million and
2003: $710 million.
With the exception of the 4-1/2% Convertible Subordinated Debentures,
which had a fair value of $373 million at December 31, 1998,
Liberty/Ventures Group believes that the carrying value of
Liberty/Ventures Group's debt approximated its fair value at December
31, 1998.
(continued)
33
<PAGE> 34
"LIBERTY/VENTURES GROUP"
(a Combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(12) Income Taxes
TCI files a consolidated federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis. Income tax expense for Liberty/Ventures Group is based
upon those items in the consolidated tax calculations of TCI applicable
to Liberty/Ventures Group. Intergroup tax allocation represents an
apportionment of tax expense or benefit (other than deferred taxes) and
alternative minimum taxes to Liberty/Ventures Group in relation to its
amount of taxable earnings or losses. Such amounts are reflected as
borrowings from or loans to related parties.
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI and
certain subsidiaries of TCI was implemented effective July 1, 1995. The
Old Tax Sharing Agreement formalized certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes
and the settlement procedures with respect to the intercompany
allocation of current tax attributes. Under the Old Tax Sharing
Agreement, Liberty Media Group and TCI Ventures Group were responsible
to TCI for their share of consolidated income tax liabilities (computed
as if TCI were not liable for the alternative minimum tax) determined
in accordance with the Old Tax Sharing Agreement, and TCI was
responsible to Liberty Media Group and TCI Ventures Group to the extent
that the income tax attributes generated by Liberty Media Group and TCI
Ventures Group and their attributed subsidiaries were utilized by TCI
to reduce its consolidated income tax liabilities (computed as if TCI
were not liable for the alternative minimum tax). In the combined
financial statements of Liberty/Ventures Group, the tax liabilities and
benefits of such entities so determined have been charged or credited
to an intercompany account between TCI and Liberty/Ventures Group. Such
intercompany account is required to be settled only upon the date that
an entity ceases to be a member of TCI's consolidated group for federal
income tax purposes. Under the Old Tax Sharing Agreement, TCI retains
the burden of any alternative minimum tax and has the right to receive
the tax benefits from an alternative minimum tax credit attributable to
any tax period beginning on or after July 1, 1995 and ending on or
before October 1, 1997.
(continued)
34
<PAGE> 35
"LIBERTY/VENTURES GROUP"
(a Combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by Group. Effective
for periods on and after the Effective Date, through the AT&T/TCI
Merger, federal income taxes were computed based upon the type of tax
paid by TCI (on a regular tax or alternative minimum tax basis) on a
separate basis for each Group. Based upon these separate calculations,
an allocation of tax liabilities and benefits was made such that each
Group was required to make cash payments to TCI based on its allocable
share of TCI's consolidated federal income tax liabilities (on a
regular tax or alternative minimum tax basis, as applicable)
attributable to such Group and actually used by TCI in reducing its
consolidated federal income tax liability. Tax attributes and tax basis
in assets was inventoried and tracked for ultimate credit to or charge
against each Group. Similarly, in each taxable period that TCI paid
alternative minimum tax, the federal income tax benefits of each Group,
computed as if such Group were subject to regular tax, was inventoried
and tracked for payment to or payment by each Group in years that TCI
utilized the alternative minimum tax credit associated with such
taxable period. The Group generating the utilized tax benefits received
a cash payment only if, and when, the unutilized taxable losses of the
other Group were actually utilized. If the unutilized taxable losses
expired without ever being utilized, the Group generating the
unutilized tax benefits never received payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes
were calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the
Group was a separate unitary or combined group for tax purposes), and
TCI's combined or unitary tax liability was allocated among the Groups
based upon such separate calculation.
(continued)
35
<PAGE> 36
"LIBERTY/VENTURES GROUP"
(a Combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that were
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date were shared
and allocated pursuant to the terms of the Old Tax Sharing Agreement,
as amended.
Income tax benefit (expense) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
---------- --------- --------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1998:
State and local income tax expense, including intergroup
tax allocation $ (2) (200) (202)
Federal income tax expense, including intergroup tax
allocation (1) (1,190) (1,191)
Foreign income tax expense (1) (3) (4)
------- ------- -------
$ (4) (1,393) (1,397)
======= ======= =======
Year ended December 31, 1997:
State and local income tax expense, including intergroup
tax allocation $ (3) (32) (35)
Federal income tax benefit, including intergroup tax
allocation 158 12 170
Foreign income tax benefit (expense) (9) 4 (5)
------- ------- -------
$ 146 (16) 130
======= ======= =======
Year ended December 31, 1996:
State and local income tax expense, including intergroup
tax allocation $ (3) (92) (95)
Federal income tax benefit (expense), including intergroup
tax allocation 29 (371) (342)
Foreign income tax expense (12) (8) (20)
------- ------- -------
$ 14 (471) (457)
======= ======= =======
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the U.S. federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
-------- ------- -----
amounts in millions
<S> <C> <C> <C>
Computed expected tax benefit (expense) $(1,244) 189 (439)
Dividends excluded for income tax purposes 16 8 2
Minority interest of attributed subsidiaries 33 3 --
Amortization not deductible for income tax purposes (21) (10) (10)
State and local income taxes, net of federal income taxes (132) (23) (60)
Recognition of difference in income tax basis of
investments in attributed subsidiaries (1) (10) 67
Effect of foreign tax rate differential on earnings of
attributed foreign subsidiary -- 1 1
Increase in valuation allowance (44) (26) (24)
Gain on sale of attributed subsidiary's stock 18 21 --
Effect of deconsolidations on deferred tax expense -- (11) --
Other, net (22) (12) 6
------- ------- -------
$(1,397) 130 (457)
======= ======= =======
</TABLE>
(continued)
36
<PAGE> 37
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------ --------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating and capital loss carryforwards $ 188 237
Future deductible amount attributable to accrued stock
compensation and deferred compensation 215 58
Recognized gain on sale of assets 147 --
Other future deductible amounts due principally to
non-deductible accruals 16 26
------ ------
Deferred tax assets 566 321
------ ------
Less valuation allowance 139 95
------ ------
Net deferred tax assets 427 226
------ ------
Deferred tax liabilities:
Property and equipment, due principally to differences
in depreciation 41 17
Investments in affiliates, due principally to losses of
affiliates recognized for income tax purposes in
excess of losses recognized for financial statement
purposes 4,825 1,153
Other, net 19 13
------ ------
Deferred tax liabilities 4,885 1,183
------ ------
Net deferred tax liabilities $4,458 957
====== ======
</TABLE>
The valuation allowance relates principally to deferred tax assets
arising from net operating loss carryforwards of @Home and TCI Music.
At December 31, 1998, Liberty/Ventures Group had net operating and
capital loss carryforwards for income tax purposes aggregating
approximately $560 million which, if not utilized to reduce taxable
income in future periods, will begin to expire at various dates
beginning in the year 2003.
Certain subsidiaries of Liberty/Ventures Group had additional net
operating loss carryforwards for income tax purposes aggregating $106
million and these net operating losses are subject to certain rules
limiting their usage.
For purposes of these combined financial statements, Liberty/Ventures
Group has already received benefit for approximately $75 million of the
net operating loss carryforwards disclosed above. Liberty/Ventures
Group is responsible to TCI to the extent this amount of net operating
loss carryforwards is utilized by TCI in future periods.
(continued)
37
<PAGE> 38
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(13) Combined Equity
Stock Repurchase and Issuances
In conjunction with a stock repurchase program or similar transaction,
TCI may elect to sell put options on its own common stock. Proceeds
from any sales of puts with respect to TCI Ventures Group Stock and
Liberty Group Stock are reflected by Liberty/Ventures Group as an
increase to combined equity, and an amount equal to the maximum
redemption amount under unexpired put options with respect to TCI
Ventures Group Stock and Liberty Group Stock is reflected as an
"obligation to redeem common stock" in the accompanying combined
balance sheets.
During the year ended December 31, 1998, pursuant to a stock repurchase
program, 239,450 shares of TCI Ventures Group Stock and 766,783 shares
of Liberty Group Stock were repurchased at an aggregate cost of
approximately $30 million. Such amount is reflected as a decrease to
combined equity in the accompanying combined financial statements.
During the year ended December 31, 1997, pursuant to a stock repurchase
program, Liberty/Ventures Group repurchased 916,500 shares of Liberty
Group Stock and 338,196 shares of TCI Ventures Group Stock in open
market transactions and 219,937 shares of Liberty Group Stock from the
spouse of an officer and director of TCI at an aggregate cost of $22
million.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary attributed to TCI Group. TCI exchanged 47.2
million shares of TCI Group Series A Stock for shares of Kearns-Tribune
Corporation which held 17.9 million shares of TCI Group Stock and 10.1
million shares of Liberty Group Stock. Liberty/Ventures Group purchased
from TCI Group the 10.1 million shares of Liberty Group Stock that were
acquired in such transaction for $168 million.
During the third quarter of 1997, Liberty/Ventures Group commenced a
tender offer (the "Liberty Tender Offer") to purchase up to an
aggregate of 22.5 million shares of Liberty Group Stock at a price of
$20 per share through October 3, 1997. During the fourth quarter of
1997, Liberty/Ventures Group repurchased 21.7 million shares of Liberty
Group Series A Stock and 82,074 shares of Liberty Group Series B Stock
at an aggregate cost of approximately $435 million pursuant to the
Liberty Tender Offer. All of the above described purchases are
reflected as a reduction of combined equity in the accompanying
combined financial statements.
(continued)
38
<PAGE> 39
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the fourth quarter of 1997, TCI entered into a Total Return
Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
Equity Swap Facility, TCI had the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares
("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
Group Series A Stock with an aggregate purchase price of up to $300
million. TCI had the right, but not the obligation, to purchase Equity
Swap Shares through the September 30, 2000 termination date of the
Equity Swap Facility. During such period, TCI was to settle
periodically any increase or decrease in the market value of the Equity
Swap Shares. If the market value of the Equity Swap Shares exceeded the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost were segregated from the
other Equity Swap Shares. If the market value of Equity Swap Shares was
less than the Counterparty's cost, TCI, at its option, settled such
difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, TCI was required to periodically pay
the Counterparty a fee equal to a LIBOR-based rate on the
Counterparty's cost to acquire the Equity Swap Shares. Due to TCI's
ability to issue shares to settle periodic price fluctuation and fees
under the Equity Swap Facility, TCI recorded all amounts received or
paid under this arrangement as increases or decreases, respectively, to
equity. As of December 31, 1998, the Equity Swap Facility had acquired
5 million shares of TCI Group Series A Stock and 1 million shares of
TCI Ventures Group Series A Stock at an aggregate cost that was
approximately $135 million less than the fair value of such Equity Swap
Shares at December 31, 1998. The costs and benefits associated with the
TCI Ventures Group Series A Stock held by the Equity Swap Facility were
attributed to Liberty/Ventures Group. From February 10, 1999 to March
5, 1999, TCI terminated all transactions under the Equity Swap Facility
and the related swap agreement.
(continued)
39
<PAGE> 40
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Options and Stock Appreciation Rights
Liberty/Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights on
certain TCI common stock (collectively, "Awards") granted by TCI to
certain TCI employees and/or directors who are involved with
Liberty/Ventures Group. Estimated compensation relating to stock
appreciation rights ("SARs") has been recorded through December 31,
1998, and is subject to future adjustment based upon vesting and market
value, and ultimately, on the final determination of market value when
such rights are exercised. As allowed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), Liberty/Ventures Group continues to account for
stock based compensation pursuant to Accounting Principles Board
Opinion No. 25, which Liberty/Ventures Group estimates that
compensation expense would not be materially different under Statement
123. The estimated compensation adjustment with respect to TCI SARs
resulted in increases (decreases) to Liberty/Ventures Group's share of
TCI's stock compensation liability of $460 million, $235 million and
$(9 million) for the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, for the years ended December 31, 1998, 1997
and 1996, Liberty/Ventures Group made cash payments relating to its
share of TCI's stock compensation obligations of $58 million, $64
million and less than $1 million, respectively. The payable or
receivable arising from the compensation related to the Awards is
included in the amount due to related parties.
Transactions with Officers and Directors
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
John C. Malone, and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI the right to acquire
any shares of TCI stock which are entitled to cast more than one vote
per share (the "High-Voting Shares") owned by the Malones, which
currently consist of an aggregate of approximately 60 million
High-Voting shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI has the right to acquire the shares
at a maximum price equal to the then relevant market price of shares of
Series A Stock plus a ten percent premium. The Malones also agreed that
if TCI were ever to be sold to another entity, then the maximum premium
that the Malones would receive on their High-Voting Shares would be no
greater than a ten percent premium over the price paid for the relevant
shares of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
(continued)
40
<PAGE> 41
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a stockholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agreed to consult
with each other in connection with matters to be brought to the vote of
TCI's stockholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for the Board of TCI and Dr.
Malone has agreed to vote his High Voting Shares for such nominee and
(iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups. Liberty/Ventures Group's share of the
Call Payments of $140 million was paid during the first quarter of 1998
and is reflected as a reduction of combined equity.
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty/Ventures Group at rates set at the beginning of the year based
on projected utilization for that year. During the years ended December
31, 1998, 1997 and 1996 Liberty/Ventures Group was allocated $17
million, $13 million and $11 million, respectively, in corporate
general and administrative costs by TCI Group.
Certain subsidiaries attributed to Liberty/Ventures Group produce
and/or distribute sports and other programming and other services to
cable distribution operators (including TCI Group) and others. Charges
to TCI Group are based upon customary rates charged to others.
During 1998 and 1997, entities attributed to Liberty/Ventures Group
made marketing support payments to entities attributed to TCI Group.
Charges by TCI Group for such arrangements for the years ended December
31, 1998 and 1997 aggregated $5 million and $19 million, respectively.
HSN pays a commission to TCI Group for merchandise sales to customers
who are customers of TCI Group's cable systems. Aggregate commissions
and charges paid to TCI Group were $7 million for the year ended
December 31, 1996.
(continued)
41
<PAGE> 42
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A subsidiary that was a member of Liberty/Ventures Group, leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to Liberty/Ventures Group in exchange for
Liberty/Ventures Group's assignment of its ownership interest in such
attributed subsidiary to TCI Group. Due to the related party nature of
the transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $176 million) has been reflected
as an increase to combined equity.
The Puerto Rico Subsidiary purchases programming services from TCI
Group. The charges, which approximate TCI Group's cost and are based on
the aggregate number of subscribers served by the Puerto Rico
Subsidiary, aggregated $6 million, $6 million and $4 million during the
years ended December 31, 1998, 1997 and 1996, respectively.
In 1996, a subsidiary attributed to Liberty/Ventures Group (i) issued
preferred stock in connection with a previous acquisition, which is
convertible at the option of the holders into 1,084,056 of TCI Group
Series A Common Stock beginning in April 1999 or sooner in the event of
a change in control of TCI and (ii) acquired an option contract from
TCI Group in exchange for a $14 million increase in the intercompany
amount due to TCI Group. Such option contract provided Liberty/Ventures
Group with the right to acquire 1,084,056 shares of TCI Group Series A
Stock at a price equivalent to the fair value at the time of exercise
less $14.625 per share. During September 1998, TCI Group assigned its
obligation under the option contract to Liberty/Ventures Group. As a
result of such assignment, Liberty/Ventures Group recorded a $16
million reduction to the intercompany amount due to TCI Group and a
corresponding increase to combined equity. In July 1998,
Liberty/Ventures Group entered into an equity swap transaction with a
commercial bank, which provides Liberty/Ventures Group with the right
but not the obligation to acquire 1,084,056 shares of TCI Group Series
A Stock for approximately $45 million on or before April 19, 1999. In
the event Liberty/Ventures Group does not exercise its right to acquire
such shares, any difference between the counterparty's cost and the
market value of the shares on the settlement date will be settled in
cash or shares of Liberty/Ventures Group Series A Stock at
Liberty/Ventures Group's option. Such shares could be used to satisfy
the exchange requirements of the aforementioned preferred stock.
Cablevision purchases programming services from certain affiliates. The
related charges generally are based upon the number of Cablevision's
subscribers that receive the respective services. During the year ended
December 31, 1997, such charges aggregated $12 million. Additionally,
certain of Cablevision's general and administrative functions are
provided by affiliates. The related charges, which generally are based
upon the respective affiliate's cost of providing such functions,
aggregated $2 million during the year ended December 31, 1997. The
above-described programming and general and administrative charges are
included in operating costs in the accompanying combined statements of
operations and comprehensive earnings.
(continued)
42
<PAGE> 43
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Prior to July 1997, Liberty/Ventures Group's other investments included
a 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership
which distributed "STARZ!," a first-run movie premium programming
service launched in 1994. Entities attributed to TCI Group held the
remaining 50.1% partnership interest.
During July 1997, Liberty/Ventures Group, TCI Group, and the 10%
minority holder of Encore Media Corporation ("EMC"), an attributed
subsidiary of Liberty/Ventures Group, entered into a series of
transactions pursuant to which the businesses of "Encore," a movie
premium programming service, and STARZ! were contributed to Encore
Media Group. Upon completion of the transaction, Liberty/Ventures Group
owned 80% of Encore Media Group and TCI Group owned the remaining 20%.
In connection with these transactions, the 10% minority interest in EMC
was exchanged for approximately 2.4 million shares of Liberty Group
Series A Stock, which was accounted for as an acquisition of a minority
interest.
Liberty/Ventures Group received its 80% ownership interest in Encore
Media Group in exchange for (i) the contribution of its 49.9% interest
in QE+, (ii) the contribution of EMC, (iii) the issuance of a $307
million note payable to TCI Group (the "EMG Promissory Note"), (iv) the
cancellation and forgiveness of amounts due for certain services
provided to QE+ equal to 4% of the gross revenue of QE+ ("STARZ Content
Fees") and (v) the termination of an option to increase
Liberty/Ventures Group's ownership interest in QE+.
TCI Group received the remaining 20% interest in Encore Media Group and
the aforementioned consideration from Liberty/Ventures Group in
exchange for the contribution of TCI Group's 50.1% ownership interest
in QE+ and certain capital contributions made by TCI Group to QE+. In
addition, TCI Group entered into a 25 year affiliation agreement with
Encore Media Group (the "EMG Affiliation Agreement") pursuant to which
TCI Group will pay monthly fixed amounts in exchange for unlimited
access to all of the existing Encore and STARZ! services.
Upon formation of Encore Media Group, the operations of STARZ! are
included in the combined financial results of Liberty/Ventures Group.
The EMG Promissory Note is included in amounts due to related parties.
Prior to the formation of Encore Media Group, STARZ Content Fees were
included in revenue from related parties.
Effective December 31, 1997, Liberty/Ventures Group and TCI Group
agreed to amend the above transactions. Pursuant to the amendment, the
above described series of transactions were rescinded, retroactive to
July 1, 1997. Such rescission was given effect as of December 31, 1997
for financial reporting purposes. Simultaneously, Liberty/Ventures
Group and TCI Group entered into a new agreement whereby the EMG
Affiliation Agreement was amended to permanently reduce the monthly
fixed amounts for the life of the contract. TCI Group's 20% ownership
interest in Encore Media Group was eliminated and the EMG Promissory
Note was reduced by $32 million. The amounts to be paid to Encore Media
Group pursuant to the EMG Affiliation Agreement were reduced to amounts
which reflect current market prices.
(continued)
43
<PAGE> 44
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Due to the related party nature of the above-described transactions,
the $133 million excess of the consideration paid over the carryover
basis of the assets transferred (including a deferred tax asset of $98
million) was reflected as a decrease to combined equity. Subsequent to
the amendment, 100% of the operations of Encore Media Group are
included in the combined financial results of Liberty/Ventures Group.
Effective July 11, 1997, pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended (the "DMX Merger Agreement"),
by and among TCI, TCI Music, a wholly-owned subsidiary of TCI, a
wholly-owned subsidiary of TCI Music ("DMX Merger Sub") and DMX, Inc.
("DMX"), Merger Sub was merged with and into DMX, with DMX as the
surviving corporation (the "DMX Merger"). As a result of the DMX
Merger, stockholders of DMX became stockholders of TCI Music.
In connection with the DMX Merger, TCI and TCI Music entered into an
agreement pursuant to which, effective as of the closing of the DMX
Merger: (i) TCI Music issued to TCI (as designee of certain of its
indirect subsidiaries), 62.5 million shares of Series B Common Stock,
$.01 par value per share, of TCI Music ("TCI Music Series B Common
Stock") and a promissory note in the amount of $40 million (the "TCI
Music Note"), (ii) until December 31, 2006, certain subsidiaries of TCI
transferred to TCI Music the right to receive all revenue from sales of
DMX music services to their residential and commercial subscribers, net
of an amount equal to 10% of revenue from such sales to residential
subscribers and net of the revenue otherwise payable to DMX as license
fees for DMX music services under affiliation agreements currently in
effect, (iii) TCI contributed to TCI Music certain commercial digital
DMX tuners that were not in service as of the effective date of the DMX
Merger, and (iv) TCI granted to each stockholder who became a
stockholder of TCI Music pursuant to the DMX Merger, one right (a
"Right") with respect to each whole share of Series A Common Stock,
$.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock" and together with the TCI Music Series B Common Stock, the "TCI
Music Common Stock") acquired by such stockholder in the DMX Merger
pursuant to the terms of a Rights Agreement among TCI, TCI Music and
the rights agent (the "Rights Agreement"). Upon consummation of the DMX
Merger, each outstanding share of DMX Common Stock was converted into
the right to receive (i) one-quarter of a share of TCI Music Series A
Common Stock, (ii) one Right with respect to each whole share of TCI
Music Series A Common Stock and (iii) cash in lieu of the issuance of
fractional shares of TCI Music Series A Common Stock and Rights. Each
Right entitled the holder to require TCI to purchase from such holder
one share of TCI Music Series A Common Stock for $8.00 per share,
subject to reduction by the aggregate amount per share of any dividend
and certain other distributions, if any, made by TCI Music to its
stockholders, and, payable at the election of TCI, in cash, a number of
shares of TCI Group Series A Stock, having an equivalent value or a
combination thereof, if during the one-year period beginning on the
effective date of the DMX Merger, the price of TCI Music Series A
Common Stock did not equal or exceed $8.00 per share for a period of at
least 20 consecutive trading days.
(continued)
44
<PAGE> 45
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement to be effective as of July 11, 1997 which
provides, among other things, for TCI to deliver, or cause certain of
its subsidiaries to deliver to TCI Music fixed monthly payments
(subject to inflation and other adjustments) through 2017.
Effective with the DMX Merger, TCI beneficially owned approximately
45.7% of the outstanding shares of TCI Music Series A Common Stock and
100% of the outstanding shares of TCI Music Series B Common Stock,
which represented 89.6% of the equity and 98.7% of the voting power of
TCI Music. Simultaneously with the DMX Merger, Liberty/Ventures Group
acquired the TCI-owned TCI Music Common Stock by agreeing to reimburse
TCI for any amounts required to be paid by TCI pursuant to TCI's
contingent obligation under the Rights Agreement to purchase up to 15
million shares (7 million of which are owned by Liberty/Ventures Group)
of TCI Music Series A Common Stock and issuing an $80 million
promissory note (the "Music Note") to TCI. Liberty/Ventures Group had
recorded its contingent obligation to purchase such shares under the
Rights Agreement as a component of minority interest in equity of
attributed subsidiaries in the accompanying combined financial
statements. The Music Note may be reduced by the payment of cash or the
issuance by TCI of shares of Liberty/Ventures Group Stock for the
benefit of entities attributed to TCI Group. Additionally,
Liberty/Ventures Group may elect to pay $50 million of the Music Note
by delivery of a Stock Appreciation Rights Agreement that will give TCI
Group the right to receive 20% of the appreciation in value of
Liberty/Ventures Group's investment in TCI Music, to be determined at
July 11, 2002. TCI Music was included in the combined financial results
of Liberty/Ventures Group as of the date of the DMX Merger. Due to the
related party nature of the transaction, the $86 million excess of the
consideration paid over the carryover basis of the TCI Music Common
Stock acquired by Liberty/Ventures Group from TCI was reflected as a
decrease in combined equity. The Music Note is included in amounts due
to related parties.
In December 1997, TCI Music issued convertible preferred stock and
common stock in connection with two acquisitions. After giving effect
to such issuances and assuming the conversion of the TCI Music
convertible preferred stock, Liberty/Ventures Group, at December 31,
1997, owned TCI Music securities representing 78% of TCI Music's common
stock and 97% of the voting power attributable to such TCI Music common
stock. In connection with the issuance of such common shares,
Liberty/Ventures Group recorded a $19 million increase to combined
equity. No gain was recognized in the statements of operations and
comprehensive earnings due primarily to Liberty/Ventures Group's
contingent obligation under the Rights Agreement.
Prior to the July 1998 expiration of the Rights, Liberty/Ventures Group
was notified of the tender of 4.9 million shares and associated Rights.
On August 27, 1998, Liberty/Ventures Group paid $39 million to satisfy
TCI's obligation under the Rights Agreement.
(continued)
45
<PAGE> 46
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the third quarter of 1997, Liberty/Ventures Group sold certain
assets (the "SUMMITrak Assets") to CSG Systems, Inc. ("CSG") for cash
consideration of $106 million, plus five-year warrants to purchase up
to 1.5 million shares of CSG common stock at $24 per share (the "CSG
Warrants") and $12 million in cash, once certain numbers of TCI
affiliated customers are being processed on a CSG billing system. In
connection with the sale of the SUMMITrak Assets, TCI Group committed
to purchase billing services from CSG through 2012. In light of such
commitment, Liberty/Ventures Group has reflected the $30 million excess
(after deducting deferred income taxes of $17 million) of the cash
received over the book value of the SUMMITrak Assets as an increase to
combined equity.
During the fourth quarter of 1997, Liberty/Ventures Group's remaining
assets in TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C. were
transferred to TCI Group in exchange for a $19 million reduction of the
intercompany amount owed by Liberty/Ventures Group to TCI Group. Such
transfer was accounted for at historical cost due to the related party
nature of the transaction.
Due to Related Parties
The components of "Due to related parties" are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
----------------------
amounts in millions
<S> <C> <C>
Note receivable from TCI Group $-- (88)
Notes payable to TCI Group, including accrued interest 141 378
Intercompany account 556 240
---- ----
$697 530
==== ====
</TABLE>
Amounts outstanding under the note receivable from TCI Group were
repaid in their entirety during the third quarter of 1998.
Amounts outstanding at December 31, 1998 under notes payable to TCI
Group bear interest at varying rates. During the second quarter of
1998, TCI issued 153,183 shares of Liberty Group Series B Stock valued
at $5 million to an individual who is an officer and director of TCI
for the benefit of entities attributed to TCI Group, accordingly, the
Music Note was reduced by such amount.
TCI Group has provided a revolving loan facility (the "Ventures
Intergroup Credit Facility") to Liberty/Ventures Group for a five-year
period commencing on September 10, 1997. Borrowings under the Ventures
Intergroup Credit Facility are included in notes payable to TCI Group
in the table above. Such facility permits aggregate outstanding
borrowings at any one time of up to $500 million (subject to reduction
as provided below), which borrowings bear interest at a rate per annum
equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to
3/8% per annum of the average unborrowed availability under the
Ventures Intergroup Credit Facility is payable by Liberty/Ventures
Group to TCI Group on a quarterly basis.
(continued)
46
<PAGE> 47
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The non-interest bearing intercompany account includes certain income
tax and stock compensation allocations that are to be settled at some
future date. All other amounts included in the intercompany account are
to be settled within thirty days following notification.
(14) Other Comprehensive Earnings
Accumulated other comprehensive earnings included in the
Liberty/Ventures Group's combined balance sheets and statements of
combined equity reflect the aggregate of foreign currency translation
adjustments and unrealized holding gains and losses on securities
classified as available-for-sale. The change in the components of
accumulated other comprehensive earnings, net of taxes, is summarized
as follows:
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
currency gains other
translation (losses) on comprehensive
adjustments securities earnings
----------- ---------- --------
amounts in millions
<S> <C> <C> <C>
Balance at January 1, 1996 $ (10) 332 322
Other comprehensive earnings (loss) 35 (316) (281)
------ ------ ------
Balance at December 31, 1996 25 16 41
Other comprehensive earnings (loss) (22) 749 727
------ ------ ------
Balance at December 31, 1997 3 765 768
Other comprehensive earnings 3 2,947 2,950
------ ------ ------
Balance at December 31, 1998 $ 6 3,712 3,718
====== ====== ======
</TABLE>
(continued)
47
<PAGE> 48
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The components of other comprehensive earnings are reflected in the
Liberty/Ventures Group's combined statements of operations, net of
taxes and reclassifications adjustments for gains realized in net
earnings (loss). The following table summarizes the tax effects and
reclassification adjustments related to each component of other
comprehensive earnings.
<TABLE>
<CAPTION>
Tax
Before-tax (expense) Net-of-tax
amount benefit amount
-------- --------- ----------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1998:
Foreign currency translation adjustments $ 4 (1) 3
------- ------- -------
Unrealized gains on securities:
Unrealized holding gains arising during period 4,851 (1,904) 2,947
------- ------- -------
Other comprehensive earnings $ 4,855 (1,905) 2,950
======= ======= =======
Year ended December 31, 1997:
Foreign currency translation adjustments $ (31) 9 (22)
------- ------- -------
Unrealized gains on securities:
Unrealized holding gains arising during period 1,235 (486) 749
------- ------- -------
Other comprehensive earnings $ 1,204 (477) 727
======= ======= =======
Year ended December 31, 1996:
Foreign currency translation adjustments $ 54 (19) 35
------- ------- -------
Unrealized gains on securities:
Unrealized holding gains arising during period 75 (27) 48
Less: reclassification adjustment for gains
realized in net earnings (568) 204 (364)
------- ------- -------
Net unrealized losses (493) 177 (316)
------- ------- -------
Other comprehensive loss $ (439) 158 (281)
======= ======= =======
</TABLE>
(continued)
48
<PAGE> 49
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(15) Commitments and Contingencies
Encore Media Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2017 (the
"Film Licensing Obligations"). Based on customer levels at December 31,
1998, these agreements require minimum payments aggregating
approximately $808 million. The aggregate amount of the Film Licensing
Obligations under these license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, required aggregate payments under the
Film Licensing Obligations could prove to be significant.
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC
Worldwide and is obligated to provide the Principal Joint Venture with
a primary credit facility of pound sterling 88 million ($150 million)
and subject to certain restrictions, a standby credit facility of pound
sterling 30 million ($51 million). As of December 31, 1998, the
Principal Joint Venture had borrowed pound sterling 16 million ($27
million) under the primary credit facility. If Flextech defaults in its
funding obligation to the Principal Joint Venture and fails to cure
within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that
TINTA assume all of Flextech's funding obligations to the Principal
Joint Venture.
Liberty/Ventures Group has guaranteed various loans, notes payable,
letters of credit and other obligations (the "Guaranteed Obligations")
of certain affiliates. At December 31, 1998, the Guaranteed Obligations
aggregated approximately $243 million. Currently, Liberty/Ventures
Group is not certain of the likelihood of being required to perform
under such guarantees.
Liberty/Ventures Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements. Rental expense under such arrangements
amounts to $98 million, $84 million and $102 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
A summary of future minimum lease payments under noncancellable
operating and capital leases as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Years ending December 31: Operating Capital
---------- -------
amounts in millions
<S> <C> <C>
1999 $ 71 48
2000 62 43
2001 52 36
2002 49 31
2003 42 31
Thereafter 141 63
-----
252
Less amounts representing interest 62
----
Capital lease obligations $190
====
</TABLE>
(continued)
49
<PAGE> 50
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
It is expected that in the normal course of business, leases that
expire generally 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 1999.
On July 17, 1998, Liberty/Ventures Group acquired 21.4 million shares
of restricted stock of GI in exchange for (i) certain of the assets of
NDTC's set-top authorization business, (ii) the license of certain
related software to GI, (iii) a $50 million promissory note from
Liberty/Ventures Group to GI and (iv) a nine year revenue guarantee
from Liberty/Ventures Group in favor of GI. In connection therewith,
NDTC also entered into a service agreement pursuant to which it will
provide certain postcontract services to GI's set-top authorization
business. The 21.4 million shares of GI common stock are, in addition
to other transfer restrictions, restricted as to their sale by NDTC for
a three year period, and represent approximately 13% of the outstanding
common stock of GI at December 31, 1998. Liberty/Ventures Group
recorded its investment in such shares at fair value which included a
discount attributable to the above-described liquidity restriction.
Liberty/Ventures Group carries its investment in such shares at the
lower of cost or net realizable value. The $346 million excess of the
fair value of GI common stock received over (i) the book value of
certain assets transferred from NDTC to GI, and (ii) the $42 million
present value of the promissory note due from Liberty/Ventures Group to
GI, has been deferred by Liberty/Ventures Group in the accompanying
December 31, 1998 combined balance sheet. A portion of such excess
equal to the $160 million present value of the annual amounts specified
by the revenue guarantee will be amortized to revenue over nine years
in proportion to such annual guaranteed amounts. The remaining $186
million excess will be amortized to revenue on a straight-line basis
over the nine-year period that NDTC is required to perform postcontract
services.
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the
Puerto Rico Subsidiary's cable television systems. The Puerto Rico
Subsidiary's cable television systems represent $45 million of
Liberty/Ventures Group's revenue for the year ended December 31, 1998.
The Puerto Rico Subsidiary has property and business interruption
insurance aggregating $15 million that is subject to a deductible of $1
million. The Puerto Rico Subsidiary has submitted a property damage
claim to its insurance carrier for approximately $15 million which
represents the estimated replacement cost of its damaged property. As a
result of the damage caused by Hurricane Georges, the Puerto Rico
Subsidiary, at December 31, 1998, recorded an impairment to reduce the
net book value of the damaged property and equipment by $8 million and
recorded a receivable in the amount of $12 million as insurance
coverage for property damages. The $12 million in insurance coverage
for property damages were fully collected prior to December 31, 1998.
As of December 31, 1998, approximately 82% of the Puerto Rico
Subsidiary's pre-hurricane basic customers were receiving cable
television services. Although there can be no assurance, the Puerto
Rico Subsidiary estimates that it will regain 100% of its pre-hurricane
customer base by June 30, 1999. The loss of revenue from September 21,
1998 through December 31, 1998 has been estimated at $7 million. In
addition, the estimated loss of revenue for the first quarter of 1999
is approximately $3 million. The Puerto Rico Subsidiary's business
interruption insurance will cover the first $3 million in lost revenue.
The $3 million in business interruption coverage was fully collected
prior to December 31, 1998.
(continued)
50
<PAGE> 51
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Puerto Rico Subsidiary has also claimed coverage for business
interruption under a secondary insurance carrier. Such policy, which
covers the Puerto Rico Subsidiary's parent company's subsidiaries,
carries a deductible of $2.5 million. This insurance claim is subject
to approval by such insurance carrier and accordingly, no assurance can
be given that amounts claimed will be paid in their entirety. However,
in the event such claims are collected the overall impact in lost
revenues for the Puerto Rico Subsidiary as a result of Hurricane
Georges will not exceed $2.5 million.
Liberty/Ventures Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty/Ventures Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
(16) Year 2000
During 1998, TCI continued its enterprise-wide, comprehensive efforts
to assess and remediate its computer systems and related software and
equipment to ensure such systems, software and equipment recognize,
process and store information in the year 2000 and thereafter. TCI's
year 2000 remediation efforts include an assessment of Liberty/Ventures
Group's most critical systems, equipment, and facilities. TCI also
continued its efforts to verify the year 2000 readiness of
Liberty/Ventures Group's significant suppliers and vendors and
continued to communicate with significant business partners and
affiliates to assess such partners and affiliates' year 2000 status.
TCI has a year 2000 Program Management Office (the "PMO") to organize
and manage its year 2000 remediation efforts. The PMO is responsible
for overseeing, coordinating and reporting on Liberty/Ventures Group's
year 2000 remediation efforts.
During 1998, TCI continued its survey of significant third-party
vendors and suppliers whose systems, services or products are important
to Liberty/Ventures' operations. The year 2000 readiness of such
providers is critical to continued provision of Liberty/Ventures
Group's programming services. Year 2000 expenses and capital
expenditures incurred during the year ended December 31, 1998 were not
material.
In addition to the survey process described above, management of
Liberty/Ventures Group has identified its most critical supplier/vendor
relationships and has instituted a verification process to determine
the vendor's year 2000 readiness. Such verification includes, as deemed
necessary, reviewing vendors' test and other data and engaging in
regular conferences with vendors' year 2000 teams. Liberty/Ventures
Group is also requiring testing to validate the year 2000 compliance of
certain critical products and services.
(continued)
51
<PAGE> 52
"LIBERTY/VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant market value is associated with Liberty/Ventures Group's
investments in certain public and private corporations, partnerships
and other businesses. Accordingly, Liberty/Ventures Group is monitoring
the public disclosure of such publicly-held business entities to
determine their year 2000 readiness. In addition, Liberty/Ventures
Group has surveyed and monitored the year 2000 status of certain
privately-held business entities in which Liberty/Ventures Group has
significant investments.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that Liberty/Ventures Group's systems or the
systems of other companies on which Liberty/Ventures Group relies will
be converted in time or that any such failure to convert by
Liberty/Ventures Group or other companies will not have a material
adverse effect on its financial position, results of operations or cash
flows.
52
<PAGE> 1
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company. Such
discussion should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
Targeted Stock
The Company, through its subsidiaries and affiliates, is principally
engaged in the construction, acquisition, ownership, and operation of cable
television systems and the provision of satellite-delivered video entertainment,
information and home shopping programming services to various video distribution
media, principally cable television systems. The Company also has investments in
cable and telecommunications operations and television programming in certain
international markets as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies.
The Company's assets and operations were previously included in three
separate groups, each of which was tracked separately by public equity
securities. These groups were known as the Liberty Media Group, the TCI Ventures
Group and the TCI Group.
The Liberty Media Group was intended to reflect the separate
performance of TCI's assets which produce and distribute programming services.
For additional information, see note 1 to the accompanying consolidated
financial statements of the Company.
The TCI Ventures Group was intended to reflect the separate performance
of TCI's principal international assets and businesses and substantially all of
TCI's non-cable and non-programming assets. For additional information, see note
1 to the accompanying consolidated financial statements of the Company.
The TCI Group was intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Liberty Media Group or TCI
Ventures Group. Such subsidiaries and assets are comprised primarily of TCI's
domestic cable and communications business. For additional information, see note
1 to the accompanying consolidated financial statements of the Company.
The TCI Group was tracked separately through the TCI Group Series A
Stock and the TCI Group Series B Stock. The Liberty Media Group was tracked
separately through the Liberty Group Series A Stock and Liberty Group Series B
Stock. The TCI Ventures Group was tracked separately through the TCI Ventures
Group Series A Stock and TCI Ventures Group Series B Stock.
The TCI Group Series A Stock, TCI Ventures Group Series A Stock and the
Liberty Group Series A Stock are sometimes collectively referred to herein as
the "Series A Stock," and the TCI Group Series B Stock, TCI Ventures Group
Series B Stock and Liberty Group Series B Stock are sometimes collectively
referred to herein as the "Series B Stock."
1
<PAGE> 2
Merger and Restructuring
On March 9, 1999, AT&T acquired TCI in the AT&T Merger in which Italy
Merger Corp., a wholly-owned subsidiary of AT&T, merged with and into TCI, and
TCI thereby became a wholly-owned subsidiary of AT&T. As a result of the AT&T
Merger, (i) each share of TCI Group Series A Stock was converted into 0.7757 of
a share of AT&T Common Stock, (ii) each share of TCI Group Series B Stock was
converted into 0.8533 of a share of AT&T Common Stock, (iii) each share of
Liberty Group Series A Stock was converted into one share of a newly created
class of AT&T common stock designated as the AT&T Liberty Class A Tracking
Stock, (iv) each share of Liberty Group Series B Stock was converted into one
share of a newly created class of AT&T common stock designated as the AT&T
Liberty Class B Tracking Stock, (v) each share of TCI Ventures Group Series A
Stock was converted into 0.52 of a share of AT&T Liberty Class A Tracking Stock,
(vi) each share of TCI Ventures Group Series B Stock was converted into 0.52 of
a share of AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's
Convertible Preferred Stock, Series C-TCI Group was converted into 103.059502
shares of AT&T Common Stock, (viii) each share of TCI's Convertible Preferred
Stock Series C-Liberty Media Group was converted into 56.25 shares of AT&T
Liberty Class A Tracking Stock, (ix) each share of TCI's Redeemable Convertible
TCI Group Preferred Stock, Series G was converted into 0.923083 shares of AT&T
Common Stock and (x) each share of TCI's Redeemable Convertible Liberty Media
Group Preferred Stock, Series H was converted into 0.590625 of a share of AT&T
Liberty Class A Tracking Stock. Following the AT&T Merger, each share of TCI's
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock ("Class B
Preferred Stock") continues to be outstanding as the Class B 6% Preferred Stock
with the same rights and preferences such stock had prior to the AT&T Merger. In
general, the holders of shares of AT&T Liberty Class A Tracking Stock and the
holders of shares of AT&T Liberty Class B Tracking Stock will vote together as a
single class with the holders of shares of AT&T Common Stock on all matters
presented to such stockholders, with the holders being entitled to one-tenth
(1/10th) of a vote for each share of AT&T Liberty Class A Tracking Stock held, 1
vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote per share
of AT&T Common Stock held.
2
<PAGE> 3
The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are
intended to reflect the separate performance of the businesses and assets
attributed to "Liberty/Ventures Group," which following the AT&T Merger, is
comprised of the businesses and assets attributed to Liberty Media Group and TCI
Ventures Group at the time of the AT&T Merger. Pursuant to, and subject to the
terms and conditions set forth in, the Agreement and Plan of Restructuring and
Merger, dated as of June 23, 1998 (the "Merger Agreement"), immediately prior to
the AT&T Merger, certain assets previously attributed to TCI Ventures Group
(including, among others, the shares of AT&T Common Stock received in the merger
of AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At Home
Corporation ("@Home") attributed to TCI Ventures Group, the assets and business
of the National Digital Television Center, Inc. ("NDTC") and TCI Ventures
Group's equity interest in Western Tele-Communications, Inc.("WTCI")) were
transferred to TCI Group in exchange for approximately $5.5 billion in cash.
Also, upon consummation of the AT&T Merger, through a new tax sharing agreement
between Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled
to the benefit of approximately $2.0 billion of net operating loss carryforwards
attributable to all entities included in TCI's consolidated federal income tax
return as of the date of the AT&T Merger. Such net operating loss carryforwards
are subject to adjustment by the Internal Revenue Service and are subject to
limitations on usage which may affect the ultimate amount utilized. See note 19
to the accompanying consolidated financial statements of the Company.
Additionally, certain warrants previously attributed to TCI Group were
transferred to Liberty/Ventures Group in exchange for approximately $176 million
in cash. Certain agreements entered into at the time of the AT&T Merger provide,
among other things, for preferred vendor status to Liberty/Ventures Group for
digital basic distribution on AT&T's systems of new programming services created
by Liberty/Ventures Group and for a renewal of existing affiliation agreements.
The transfer of certain other immaterial assets was also effected.
Pursuant to amended corporate governance documents for the entities
included in Liberty/Ventures Group and certain agreements among AT&T and TCI,
the business of Liberty/Ventures Group will continue to be managed by certain
persons who were members of TCI's management prior to the AT&T Merger. AT&T will
initially designate one third of the directors of such entities and its rights
as the sole shareholder of the common stock of such entities following the AT&T
Merger will, in accordance with Delaware law, be limited to actions which will
require shareholder approval. Therefore, management has concluded that TCI does
not have a controlling financial interest (as that term is used in Statement of
Financial Accounting Standards No. 94) in the entities comprising the
Liberty/Ventures Group following the AT&T Merger, and will account for its
investment in such entities under the equity method.
3
<PAGE> 4
Accordingly, effective with the AT&T Merger, the results of operations
of the entities attributed to Liberty/Ventures Group (exclusive of @Home, NDTC
and WTCI which were transferred to TCI Group immediately prior to the AT&T
Merger) will no longer be consolidated in the TCI consolidated financial
statements. The following table presents certain combined operating information
of Liberty/Ventures Group (inclusive of the operating information of @Home, NDTC
and WTCI) for the indicated periods:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1998 1997 1996
----------- ------------ -----------
amounts in millions
<S> <C> <C> <C>
Revenue:
Unaffiliated parties $ 1,301 1,104 1,136
TCI Group 258 195 117
Net sales from electronic retailing services -- -- 984
----------- ------------ -----------
1,559 1,299 2,237
----------- ------------ -----------
Cost of sales, operating costs and expenses:
Cost of sales -- -- 605
Operating 882 682 750
Selling, general and administrative 427 348 563
Charges from related parties 28 75 63
Cost of distribution agreements 50 -- --
Stock compensation 518 296 10
Depreciation and amortization 243 196 210
----------- ------------ -----------
2,148 1,597 2,201
----------- ------------ -----------
Operating income (loss) (589) (298) 36
Other income (expense):
Interest expense (116) (57) (68)
Interest expense to related parties (10) (18) --
Dividend and interest income 100 57 39
Interest income from related parties -- 6 14
Share of losses of affiliates, net (1,034) (850) (372)
Minority interests in losses of attributed
subsidiaries 102 25 26
Gains on dispositions, net 4,738 420 1,558
Gains on issuance of equity by affiliates and
subsidiaries 357 172 13
Other, net 6 2 9
----------- ------------ -----------
4,143 (243) 1,219
----------- ------------ -----------
Earnings (loss) before income
taxes 3,554 (541) 1,255
Income tax benefit (expense) (1,397) 130 (457)
----------- ------------ -----------
Net earnings (loss) $ 2,157 (411) 798
=========== ============ ===========
</TABLE>
If the transfer of @Home, NDTC and WTCI from Liberty/Ventures Group to TCI Group
had occurred on January 1, 1998, TCI Group's revenue, operating cash flow (as
defined by the Company) and operating loss would have increased (decreased) by
$182 million, $7 million and ($159 million), respectively.
4
<PAGE> 5
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on December
30, 1998, Liberty/Ventures Group prior to the AT&T Merger transferred all of the
equity securities of Sprint Corporation ("Sprint") beneficially owned by the
Liberty/Ventures Group (the "Sprint Securities") to a trust with an independent
trustee (the "Trustee"), pursuant to a trust agreement approved by the DOJ (the
"Trust Agreement"). The Final Judgment, if entered by the United States District
Court for the District of Columbia, would require the Trustee, on or before May
23, 2002, to dispose of a portion of the Sprint Securities held by the trust and
beneficially owned by Liberty/Ventures Group sufficient to cause
Liberty/Ventures Group to own beneficially no more than 10% of the outstanding
Series 1 PCS Stock of Sprint on a fully diluted basis (assuming the issuance of
all shares of Series 1 PCS Stock of Sprint ultimately issuable in respect of the
applicable securities of Sprint upon the exercise, conversion or other issuance
thereof in accordance with the terms of such securities) on such date. On or
before May 23, 2004, the Trustee must divest the remainder of the Sprint
Securities beneficially owned by Liberty/Ventures Group.
The Trust Agreement grants the Trustee the sole right to sell the
Sprint Securities and provides that all decisions regarding such divestiture
will be made by the Trustee without discussion or consultation with AT&T or the
entities in the Liberty/Ventures Group; however, the Final Judgment would
provide that the Trustee shall consult with the board of directors of the
Liberty/Ventures Group entity that owns Sprint Securities regarding such
divestiture (other than certain directors appointed by AT&T following the AT&T
Merger and any director, officer or shareholder that owns more than 0.10% of the
outstanding AT&T Common Stock). The Trustee has the power and authority to
accomplish such divestiture only in a manner reasonably calculated to maximize
the value of the Sprint Securities beneficially owned by Liberty/Ventures Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty/Ventures Group in the same proportion
as other holders of Sprint's PCS stock so long as such securities are held by
the trust. The Final Judgment also would prohibit the acquisition by
Liberty/Ventures Group of additional Sprint Securities (other than in connection
with the exercise or conversion, as applicable, of certain Sprint Securities)
without the prior written consent of the DOJ.
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries. This restructuring included merging TCI's cable
subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets
and liabilities of TCIC have been assumed by TCI, including TCIC's public debt.
In connection with TCIC's merger with TCI, each share of TCIC's Cumulative
Exchangeable Preferred Stock, Series A was converted into 2.119 shares of TCI
Group Series A Stock, and such shares of TCI Group Series A Stock were
subsequently converted into AT&T Common Stock in connection with the AT&T
Merger. All other public securities issued by subsidiaries of TCIC (other than
TCI Pacific Communications, Inc. ("Pacific")) otherwise remained unaffected.
Furthermore, as part of the restructuring, (i) certain asset transfers were made
between TCI and its subsidiaries, (ii) 123,896 shares of the Company's
Convertible Redeemable Participating Preferred Stock, Series F ("Series F
Preferred Stock"), which were held by subsidiaries of TCI, were converted into
185,428,946 shares of TCI Group Series A Stock (which in turn were converted
into 143,837,233 shares of AT&T Common Stock in the AT&T Merger and continue to
be held by subsidiaries of TCI), (iii) the remaining 154,411 shares of Series F
Preferred Stock which were formerly held by subsidiaries of TCI were distributed
to TCI through a series of liquidations and canceled, and (iv) 125,728,816
shares of TCI Group Series A Stock, 9,154,134 shares of TCI Group Series B
Stock, 6,654,367 shares of Liberty Group Series A Stock, 3,417,187 shares of
Liberty Group Series B Stock, and 67,536 shares of Class B Preferred Stock, each
formerly held by subsidiaries of TCI, were distributed to TCI through a series
of liquidations and canceled.
5
<PAGE> 6
After the AT&T Merger, under the terms of the 5% Class A Senior
Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable Preferred
Stock"), each share of that preferred stock is exchangeable, from and after
August 1, 2001, for approximately 4.225 shares of AT&T Common Stock, subject to
certain anti-dilution adjustments. Additionally, after the AT&T Merger, Pacific
may elect to make any dividend, redemption or liquidation payment on the
Exchangeable Preferred Stock in cash, by delivery of shares of AT&T Common Stock
or by a combination of the foregoing forms of consideration.
Magness Settlement
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI would have the option, but not the obligation, to purchase the
Option Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
would settle quarterly any increase or decrease in the market value of the
Option Shares. If the market value of the Option Shares should exceed the
Investment Bankers' cost, Option Shares with a fair value equal to the
difference between the market value and cost would be segregated from the other
Option Shares in an account at the Investment Bankers. If the market value of
the Option Shares should be less than the Investment Bankers' cost, the Company,
at its option, would settle such difference with shares of TCI Group Series A
Stock or TCI Ventures Group Series A Stock or, subject to certain conditions,
with cash or letters of credit. In addition, the Company would be required to
pay the Investment Bankers a quarterly fee equal to the London Interbank Offered
Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for payments made by the
Company pursuant to any quarterly settlement with the Investment Bankers. Due to
the Company's ability to settle quarterly price fluctuations and fees with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock, the
Company records all amounts received or paid under this arrangement as increases
or decreases, respectively, to equity. During the fourth quarter of 1997, the
Company repurchased 4 million shares of TCI Group Series A Stock from one of the
Investment Bankers for an aggregate cash purchase price of $66 million.
Additionally, as a result of the Exchange Offers and certain open market
transactions that were completed to obtain the desired weighting of TCI Group
Series A Stock and TCI Ventures Group Series A Stock, the Investment Bankers
disposed of 4,210,308 shares of TCI Group Series A Stock and acquired 23,407,118
shares of TCI Ventures Group Series A Stock during the last half of 1997. As a
result of the foregoing transactions and certain transactions related to the
January 5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares of TCI
Group Series A Stock and 11,740,610 shares of TCI Ventures Group Series A Stock
at December 31, 1998. At December 31, 1998, the market value of the Option
Shares exceeded the Investment Bankers' cost by $421 million.
6
<PAGE> 7
Pursuant to a certain letter agreement, dated June 16, 1997, between
Dr. Malone, TCI's Chairman and Chief Executive Officer, and the Magness Estate,
Dr. Malone agreed to waive certain rights of first refusal with respect to
shares of TCI Group Series B Stock beneficially owned by the Magness Estate.
Such rights of first refusal arise from a letter agreement, dated June 17, 1988,
among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant to which
Dr. Malone was granted a right of first refusal to acquire any shares of TCI
Group Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such waiver was
necessary in order for the Magness Estate to consummate the Exchange and the
Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the TCI Group Series B Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of TCI Group Series A Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the TCI Group Series B Stock for the
five trading days preceding the acquisition.
In connection with certain legal proceedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested rescission of such
transaction and damages.
Pursuant to an agreement effective as of January 5, 1998, TCI, Gary
Magness, Kim Magness, Sharon Magness, the Magness Estate, the Estate of Betsy
Magness (the first wife of Bob Magness) and Dr. Malone agreed to settle their
respective claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties admitting any of
the claims or allegations against that party (the "Magness Settlement").
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A Stock
and 11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI
as authorized but unissued shares, (ii) the Magness Estate returned to the
Investment Bankers the portion of the Sale Price attributable to such returned
shares and (iii) the Magness Estate paid $11 million to TCI representing a
reimbursement of the Exchange fees incurred by TCI from June 16, 1997 through
February 9, 1998 with respect to such returned shares. TCI then issued to the
Magness Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298
shares of TCI Ventures Group Series B Stock. In addition, as part of the Magness
Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to the
Estate of Betsy Magness in exchange for an equal number of shares of TCI Group
Series A Stock and issued 1,531,834 shares of TCI Ventures Group Series B Stock
for an equal number of shares of TCI Ventures Group Series A Stock.
7
<PAGE> 8
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which at December 31, 1998 consisted of an aggregate of
approximately 69 million High-Voting Shares upon Dr. Malone's death or upon a
contemplated sale of the High-Voting Shares (other than a minimal amount) to
third persons. In either such event, TCI has the right to acquire the shares at
a maximum price equal to the then relevant market price of shares of
"low-voting" Series A Stock plus a ten percent premium. The Malones also agreed
that if TCI were ever to be sold to another entity, then the maximum premium
that the Malones would receive on their High-Voting Shares would be no greater
than a ten percent premium over the price paid for the relevant shares of Series
A Stock. TCI paid $150 million to the Malones in consideration of their entering
into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's, which at December 31, 1998
consisted of an aggregate of approximately 55 million High-Voting Shares. The
Magness Family was paid $124 million by TCI in consideration of their entering
into the Magness Call Agreement.
8
<PAGE> 9
Additionally, on February 9, 1998, the Magness Family entered into a
Shareholders' Agreement (the "Shareholders' Agreement") with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult with each
other in connection with matters to be brought to the vote of TCI's
stockholders, subject to the proviso that if they cannot mutually agree on how
to vote the shares, Dr. Malone has an irrevocable proxy to vote the High-Voting
Shares owned by the Magness Family, (ii) the Magness Family may designate a
nominee for the Board and Dr. Malone has agreed to vote his High-Voting Shares
for such nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created in favor
of the Malones. In addition, the Malone Right granted by TCI to Dr. Malone to
acquire 30,545,864 shares of TCI Group Series B Stock was reduced to an option
to acquire 14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms
of the Shareholders' Agreement, the Magness Family has the right to participate
in the reduced Malone Right on a proportionate basis with respect to 12,406,238
shares of the 14,511,570 shares subject to the Malone Right. On June 24, 1998,
Dr. Malone delivered notice to TCI exercising his right to purchase (subject to
the Magness Family proportionate right) up to 14,511,570 shares of TCI Group
Series B Stock at a per share price of $35.5875 pursuant to the Malone Right. In
addition, a representative of the Magness Family advised Dr. Malone that the
Magness Family would participate in such purchase up to the Magness Family's
proportionate right. On October 14, 1998, 8,718,770 shares of TCI Group Series B
Stock were issued to Dr. Malone upon payment of cash consideration totaling $310
million. On October 16, 1998, 5,792,800 shares of TCI Group Series B Stock were
issued to the Magness Family upon payment of cash consideration totaling $206
million. In connection with the acquisition of the TCI Group Series B Stock by
Dr. Malone, TCI executed certain waivers to the Malone Call Agreement and TCI
and the Magness Family executed a waiver to the Shareholders' Agreement to,
among other things, permit (subject to certain limitations) the pledge of TCI
Group Series B Stock owned by Dr. Malone as collateral to the lenders who
provided the funds for his purchase of shares of TCI Group Series B Stock. In
connection with the AT&T Merger, Liberty Media Corporation ("Liberty") became
entitled to exercise TCI's rights under each Call Agreement and the
Shareholders' Agreement with respect to the AT&T Liberty Class B Tracking Stock
acquired by the Malones and the Magness Family as a result of the AT&T Merger
and the Malones and the Magness Family agreed that the Shareholders' Agreement
would continue to apply to the AT&T Liberty Class B Tracking Stock.
On February 1, 1999, the Company began to terminate the transactions
under the agreements with the Investment Bankers described above, and as of
March 5, 1999, such transactions were terminated. In connection with the
termination of such transactions the Company received an aggregate cash payment
of $509 million.
Inflation
Inflation has not had a significant impact on TCI's results of
operations during the three-year period ended December 31, 1998.
9
<PAGE> 10
Accounting Standards
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). The Company has reclassified its prior period consolidated
balance sheet and consolidated statements of operations to conform to the
requirements of SFAS 130. SFAS 130 requires that all items which are components
of comprehensive earnings or losses be reported in a financial statement in the
period in which they are recognized. The Company has included cumulative foreign
currency translation adjustments and unrealized holding gains and losses on
available-for-sale securities in other comprehensive earnings that are recorded
directly in stockholders' equity. Pursuant to SFAS 130, these items are
reflected, net of related tax effects, as components of comprehensive earnings
in the Company's consolidated statements of operations and comprehensive
earnings, and are included in accumulated other comprehensive earnings in the
Company's consolidated balance sheets and statements of stockholders' equity.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("SFAS 133"), which is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities by requiring that
all derivative instruments be reported as assets or liabilities and measured at
their fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those instruments
qualify as hedges of the (1) fair values of existing assets, liabilities, or
firm commitments, (2) variability of cash flows of forecasted transactions, or
(3) foreign currency exposures of net investments in foreign operations.
Although management of the Company has not completed its assessment of the
impact of SFAS 133 on its consolidated results of operations and financial
position, management currently estimates that the impact of SFAS 133 will not be
material.
Year 2000
During 1998, the Company continued its enterprise-wide, comprehensive
efforts to assess and remediate its computer systems and related software and
equipment to ensure such systems, software and equipment recognize, process and
store information in the year 2000 and thereafter. The Company's year 2000
remediation efforts include an assessment of its most critical systems, such as
customer service and billing systems, headends and other cable plant systems
that support the Company's programming services, business support operations,
and other equipment and facilities. The Company also continued its efforts to
verify the year 2000 readiness of its significant suppliers and vendors and
continued to communicate with significant business partners and affiliates to
assess such partners and affiliates' year 2000 status.
The Company has a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is responsible
for overseeing, coordinating and reporting on the Company's year 2000
remediation efforts. At December 31, 1998, it was comprised of a 119-member,
full-time staff, accountable to executive management of the Company.
10
<PAGE> 11
The PMO has defined a four-phase approach to determining the year 2000
readiness of the Company's systems, software and equipment. Such approach is
intended to provide a detailed method for tracking the evaluation, repair and
testing of the Company's critical systems, software and equipment. Phase 1,
Assessment, involves the inventory of all critical systems, software and
equipment and the identification of any year 2000 issues. Phase 1 also includes
the preparation of the workplans needed for remediation. Phase 2, Remediation,
involves repairing, upgrading and/or replacing any non-compliant critical
equipment and systems. Phase 3, Testing, involves testing the Company's critical
systems, software, and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to the Company. Phase 4, Implementation,
involves placing compliant systems, software and equipment into production or
service.
At December 31, 1998, TCI's overall progress by phase was as follows:
<TABLE>
<CAPTION>
Percentage of year 2000 Expected Completion
Projects Date - All year 2000
Phase Completed by Phase* Projects
----- ------------------- --------------------
<S> <C> <C>
Phase 1-Assessment 69% April 1999
Phase 2-Remediation 28% June 1999
Phase 3-Testing 16% July 1999
Phase 4-Implementation 11% September 1999
</TABLE>
- -------------
*The percentages set forth above were calculated by dividing the number of year
2000 projects that have completed a given phase by the total number of year 2000
projects.
The completion dates set forth above are based on the Company's current
expectations. However, due to the uncertainties inherent in year 2000
remediation, no assurances can be given as to whether such projects will be
completed on such dates.
The Company is completing an inventory of critical systems with
embedded technologies that impact its operations and is currently determining
the correct remediation approach. The embedded technologies assessments are
expected to be complete by April of 1999.
During 1998, the Company continued its survey of significant
third-party vendors and suppliers whose systems, services or products are
important to the Company's operations (e.g., suppliers of addressable
controllers and set-top devices, and the provider of the Company's billing
services). The year 2000 readiness of such providers is critical to continued
provision of the Company's cable service. The Company has received information
that critical systems, services or products supplied to the Company by third
parties are either year 2000 ready or are expected to be year 2000 ready by
mid-1999.
In addition to the survey process described above, management of the
Company has identified its most critical supplier/vendor relationships and has
instituted a verification process to determine the vendor's year 2000 readiness.
Such verification includes, as deemed necessary, reviewing vendors' test and
other data and engaging in regular conferences with vendors' year 2000 teams.
The Company is also requiring testing to validate the year 2000 compliance of
certain critical products and services.
11
<PAGE> 12
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other businesses.
Accordingly, the Company is monitoring the public disclosure of such
publicly-held business entities to determine their year 2000 readiness,
including Cablevision Systems Corporation ("CSC"), Time Warner, Inc. ("Time
Warner"), and AT&T. In addition, the Company has surveyed and monitored the year
2000 status of certain privately-held business entities in which the Company has
significant investments. For updated information related to such companies' year
2000 programs, please refer to the most recent periodic filings with the
Securities and Exchange Commission of CSC, Time Warner and AT&T.
Year 2000 expenses and capital expenditures incurred during the year
ended December 31, 1998 were $11 million and $2 million, respectively.
Management of the Company currently estimates the remaining costs to be not less
than $113 million, bringing the total estimated cost associated with the
Company's year 2000 remediation efforts to be not less than $126 million
(including $33 million for replacement of noncompliant information technology
("IT") Systems). Also included in this estimate is $14 million in future
payments to be made pursuant to unfulfilled executory contracts or commitments
with vendors for year 2000 remediation services. Although no assurances can be
given, management currently expects that (i) cash flow from operations will fund
the costs associated with year 2000 compliance and (ii) the total projected cost
associated with the Company's year 2000 program will not be material to the
Company's financial position, results of operations or cash flows.
The Company is a widely distributed enterprise in which allocation of
certain resources, including IT support is decentralized. Accordingly, the
Company does not consolidate an IT budget. Therefore, total estimated year 2000
costs as a percentage of an IT budget are not available. There are currently no
planned IT projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce the Company's
risks associated with the changeover to the year 2000 and has implemented
certain contingency plans to minimize the effect of any potential year 2000
related disruptions. The risks and the uncertainties discussed below and the
associated contingency plans relate to systems, software, equipment, and
services that the Company has deemed critical in regard to customer service,
business operations, financial impact or safety.
The failure of addressable controllers contained in the cable system
headends could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, management expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the programmers, premium and adult content channels would not likely be
transmitted until the addressable controller had been repaired.
Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view requests. The
Company plans to have its customer service representatives answer telephone
calls from customers in the event of outages and expects to retrieve needed
customer information manually from the billing service provider.
12
<PAGE> 13
A failure of the services provided by billing systems service providers
could result in a loss of customer records which could disrupt the ability to
bill customers for a protracted period. The Company plans to prepare electronic
backup records of its customer billing information prior to the year 2000 to
allow for data recovery. In addition, the Company continues to monitor the year
2000 readiness of its key customer-billing suppliers.
Advertising revenue could be adversely affected by the failure of
certain equipment which could impede or prevent the insertion of advertising
spots in the Company's programming. The Company anticipates that it can minimize
such effect by manually resetting the dates each day until the equipment is
repaired.
The Company owns investments in numerous cable programming operators
and other businesses. The market value of the Company's investment in these
entities could be adversely impacted by material failures of such entities to
address year 2000 remediation issues (including supplier and vendor issues)
related to their programming services and businesses. Further, due to tax and
strategic considerations, the Company has a limited ability to dispose of these
investments if year 2000 issues develop. Therefore, as a contingency plan, the
Company has undertaken an extensive effort to verify and in certain cases assist
in the year 2000 remediation efforts of companies in which it has significant
investments.
Security and fire protection systems failure could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site and plans to
implement a backup plan for communicating with local fire and police
departments. Also, certain personal computers interface with and control
elevators, escalators, wireless systems, public access systems and certain
telephony systems. In the event such computers cease operating, conducting a
power off/on is expected to resume normal functioning. If a power off/on does
not resume normal functioning, management expects to resolve the problem by
resetting the computer to a pre-designated date which precedes the year 2000.
In the event that the local public utility cannot supply power, the
Company expects to supply power for a limited time to the Company's cable
headends, the NDTC and office sites through backup generators.
The financial impact of any or all of the above worst-case scenarios
has not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.
If critical systems related to the Company's cable TV and programming
services are not successfully remediated, the Company could face claims of
breach of contract from customers of the NDTC, from parties to cable system sale
or exchange agreements, from certain programming providers and from other cable
TV businesses that rely on the Company's programming services. The Company has
not determined the possible losses from any such claims of breach of contract.
13
<PAGE> 14
SUMMARY OF OPERATIONS
Summarized operating data with respect to TCI is presented below for
the indicated periods:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1998 1997 1996
----------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Revenue $ 7,351 7,570 8,022
Operating expenses (2,997) (2,995) (3,677)
Selling, general and administrative expenses (1,642) (1,600) (2,069)
Year 2000 costs (11) -- --
AT&T merger costs (14) -- --
Stock compensation (866) (488) 13
Reserve for loss arising from contingent obligation (90) -- --
Cost of distribution agreements (50) -- --
Impairment of assets (5) (15) --
Restructuring charges -- -- (41)
Depreciation (1,121) (1,077) (1,093)
Amortization (614) (546) (523)
----------- ---------- ----------
Operating income (loss) (59) 849 632
Interest expense (1,061) (1,160) (1,096)
Interest and dividend income 122 88 64
Share of losses of affiliates, net (1,384) (930) (450)
Loss on early extinguishment of debt (60) (39) (71)
Minority interests in earnings of consolidated
subsidiaries, net (88) (154) (56)
Gains on issuance of equity interests by subsidiaries 89 60 --
Gains on issuance of stock by equity investees 268 112 12
Gains on disposition of assets, net 5,760 401 1,593
Other, net (49) (22) (65)
----------- ---------- ----------
Earnings (loss) before income taxes 3,538 (795) 563
Income tax benefit (expense) (1,595) 234 (271)
----------- --------- ----------
Net earnings (loss) $ 1,943 (561) 292
=========== ========= ==========
</TABLE>
The Company's domestic cable and communications businesses and assets
were attributed to TCI Group, and the Company's programming businesses and
assets were attributed to Liberty Media Group. The Company's principal
international businesses and assets and the Company's remaining non-cable and
non-programming domestic businesses and assets were included in TCI Ventures
Group.
14
<PAGE> 15
Acquisitions and Dispositions
The Company has completed a number of acquisitions and dispositions
during the three years ended December 31, 1998 which have affected the
comparability of operating results between periods. The acquisitions and
dispositions which had a significant impact on the Company's operating results
are discussed below.
On March 4, 1998, the Company contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange for
approximately 48.9 million newly issued CSC Class A common shares (the "CSC
Transaction"). For additional information concerning the CSC Transaction, see
note 6 to the accompanying consolidated financial statements. In addition to the
CSC Transaction, the Company also completed, during 1998, eight transactions
whereby TCI contributed cable television systems serving in the aggregate
approximately 1,924,000 customers to eight separate joint ventures
(collectively, the "1998 Joint Ventures") in exchange for non-controlling
ownership interests in each of the 1998 Joint Ventures, and the assumption and
repayment by the 1998 Joint Ventures of debt owed by the Company to external
parties aggregating $323 million and intercompany debt owed to the Company
aggregating $2,374 million. The CSC Transaction and the formation of the 1998
Joint Ventures are collectively referred to herein as the "1998 Contribution
Transactions." During the year ended December 31, 1998, the Company's revenue
and operating cash flow (defined by the Company as operating income before
depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger
costs and stock compensation) included $622 million and $278 million,
respectively, from the cable television systems included in the 1998
Contribution Transactions.
In addition to the 1998 Contribution Transactions, the Company, as of
December 31, 1998, has signed agreements or letters of intent to contribute
within the next twelve months, certain cable television systems (the "Pending
Contribution Cable Systems") serving approximately 1.2 million basic customers
to joint ventures in which the Company will retain non-controlling ownership
interests (the "Pending Contribution Transactions"). Following the completion of
the Pending Contribution Transactions, the Company will no longer consolidate
the Pending Contribution Cable Systems. Accordingly it is anticipated that the
completion of the Pending Contribution Transactions, as currently contemplated,
will result in aggregate estimated reductions (based on 1998 amounts) to the
Company's debt, annual revenue and annual operating cash flow of $1.5 billion,
$500 million and $200 million, respectively. No assurance can be given that any
of the Pending Contribution Transactions will be consummated.
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King Communications Inc. ("Silver King") acquired Home
Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King
in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. As a result of the HSN
Merger, HSN is no longer included in the consolidated financial results of the
Company. Subsequent to the HSN Merger, Silver King was renamed HSN, Inc.
("HSNI"). Revenue and expenses related to HSNI are included under the captions
"Net sales from electronic retailing services" and "cost of sales from
electronic retailing services", respectively, in the accompanying consolidated
Statement of Operations and Comprehensive Earnings for the year ended December
31, 1996. For additional information on the HSN Merger, see note 6 to the
accompanying consolidated financial statements of the Company.
15
<PAGE> 16
On July 31, 1996, the Company acquired an entity from Viacom, Inc. that
owned cable television assets valued at $2.326 billion at the acquisition date.
Upon consummation of such acquisition (the "Viacom Acquisition"), the acquired
entity was renamed TCI Pacific Communications, Inc. For additional information
concerning the Viacom Acquisition, see note 10 to the accompanying consolidated
financial statements of the Company.
Through December 4, 1996, the Company had an investment in Primestar
Partners L.P. ("Primestar"). Primestar provided programming and marketing
support to each of its cable partners, including the Company, who provided
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 subsequent to December 4, 1996 are not consolidated with those of the
Company. For additional information on the Satellite Spin-Off, see note 11 to
the accompanying consolidated financial statements.
The Company has also completed certain other acquisitions and
dispositions during the three years ended December 31, 1998. See note 10 to the
accompanying consolidated financial statements of the Company. The timing and
magnitude of such acquisitions and dispositions may also affect the
comparability of financial results between periods. Consequently, the historical
amounts included in the accompanying consolidated financial statements are not
comparable year to year. The following table presents adjustments to remove the
effects of the aforementioned acquisitions and dispositions from selected
operating items.
<TABLE>
<CAPTION>
Effect of
acquisitions
Historical and dispositions As adjusted
---------- ---------------- -----------
Year ended December 31, 1998: amounts in millions
<S> <C> <C> <C>
Revenue $ 7,351 (1,499) 5,852
Operating expenses $ (2,997) 644 (2,353)
Selling, general and administrative expenses $ (1,642) 336 (1,306)
Year ended December 31, 1997:
Revenue $ 7,570 (1,962) 5,608
Operating expenses $ (2,995) 816 (2,179)
Selling, general and administrative expenses $ (1,600) 402 (1,198)
Year ended December 31, 1996:
Revenue $ 8,022 (2,422) 5,600
Operating expenses $ (3,677) 1,231 (2,446)
Selling, general and administrative expenses $ (2,069) 708 (1,361)
</TABLE>
16
<PAGE> 17
Revenue and Expenses
The Company's revenue decreased $219 million or 3% and $452 million or
6% for the years ended December 31, 1998 and 1997, respectively, as compared to
the prior year. Exclusive of the effects of acquisitions and dispositions,
revenue increased $244 million or 4% and $8 million or less than 1% during 1998
and 1997, respectively.
Exclusive of the effects of acquisitions and dispositions, revenue from
domestic cable operations increased 2% during 1998 as compared to 1997. Revenue
from domestic cable customers accounted for this 2% increase, primarily due to
the net effect of a 5% increase in basic revenue, an increase in revenue from
digital products and a 10% decrease in premium revenue. The Company experienced
a 5% increase in its average basic rate, an increase of less than 1% in the
number of average basic customers, a 5% decrease in its average rate for
traditional premium services and a 5% decrease in the number of average
traditional premium subscriptions. Additionally, the December 31, 1997
termination of an agreement pursuant to which the Company provided fulfillment
services to a third party resulted in a 1% decrease, and advertising sales and
other revenue accounted for a 1% increase, in revenue from domestic cable
operations. A significant portion of the increase in advertising sales is
attributable to arrangements with programming suppliers that may not continue at
current levels in future periods.
Exclusive of the effects of acquisitions and dispositions, revenue from
domestic cable operations increased 6% during 1997 as compared to 1996. Revenue
from domestic cable customers accounted for 3% of the 1997 increase in revenue
from domestic cable operations, primarily as a result of the net effect of a 7%
increase in basic revenue and a 4% decrease in premium revenue. The Company
experienced a 9% increase in its average basic rate, a 1% decrease in the number
of average basic customers, a 7% increase in its average premium rate and an 11%
decrease in the number of average premium subscriptions. Advertising sales and
other revenue accounted for the remaining 3% increase in revenue from domestic
cable operations.
Exclusive of the effects of acquisitions and dispositions, revenue from
programming services increased 15% and 29% for the years ended December 31, 1998
and 1997, respectively, as compared to the prior year. The increases related
primarily to higher revenue from the distribution of "Encore" premium movie
services to cable operators, including TCI Group, and higher revenue from TV
Guide, Inc. (formerly United Video Satellite Group, Inc. ("UVSG")).
Additionally, Netlink International had increased revenue during 1998 compared
to the same period in 1997, primarily due to increased rates as a result of
increased copyright fees.
Operating expenses increased $2 million or less than 1% and decreased
$682 million or 19% for the years ended December 31, 1998 and 1997,
respectively, as compared to the prior year. Exclusive of the effects of
acquisitions and dispositions, operating expenses increased $174 million or 8%
and decreased $267 million or 11% during 1998 and 1997, respectively.
Exclusive of the effects of acquisitions and dispositions, operating
expenses from domestic cable operations increased 5% during each of 1998 and
1997, respectively, as compared to the prior year. Such changes relate primarily
to higher programming and labor costs, which in 1998 were partially offset by
reductions attributable to higher capitalized labor and overhead resulting
primarily from increased installation and construction activities. It is
anticipated that the Company's programming costs will increase in future
periods.
17
<PAGE> 18
Exclusive of the effects of acquisitions and dispositions, operating
expenses from programming operations increased 73% and 85% during 1998 and 1997,
respectively, as compared to the prior year. The increases relate primarily to
higher costs to acquire programming content from suppliers due primarily to an
increase in first run movie content as a percent of Encore's total movie content
in both 1998 and 1997. Such first run movies are generally obtained at higher
costs than movies which are not first run. Other miscellaneous increases include
higher music rights costs and higher copyright fees.
Selling, general and administrative expenses increased $42 million or
3% and decreased $469 million or 23% for the years ended December 31, 1998 and
1997, respectively, as compared to the prior year. Exclusive of the effects of
acquisitions and dispositions, the expenses increased $108 million or 9% and
decreased $163 million or 12% during 1998 and 1997, respectively.
Exclusive of the effects of acquisitions and dispositions, selling,
general and administrative expenses from domestic cable operations increased 12%
and decreased 6% during 1998 and 1997, respectively, as compared to the prior
year. The 1998 increase is due primarily to general increases in expenses
relating to the launch of digital products and other initiatives, which
increases were partially offset by an increase in marketing incentives received
from programming suppliers. The majority of such marketing incentives are
associated with the Company's launch of digital services and accordingly may not
continue at current levels in the future periods. The 1997 decrease is due
primarily to lower marketing costs due primarily to launch and other incentives
from programming suppliers, a reduction in salaries and related payroll expenses
due to work force reductions in the fourth quarter of 1996, and other reductions
in general and administrative expenses in 1997.
Exclusive of the effects of acquisitions and dispositions, selling,
general and administrative expenses from programming operations increased 3% and
less than 1% during 1998 and 1997, respectively, as compared to the prior year.
The increase relates primarily to higher contract labor, marketing and marketing
support costs.
Year 2000 costs include fees and other expenses incurred directly in
connection with TCI's comprehensive efforts to review and correct computer
systems, equipment and related software to ensure readiness for the year 2000.
See detailed discussion above.
AT&T merger costs include investment advisory, legal and accounting
fees, and other incremental pre-closing costs directly related to the AT&T
Merger. See note 2 to the accompanying consolidated financial statements of the
Company.
The Company records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by the Company to
certain employees and directors. The amount of expense associated with stock
compensation is based on the vesting of the related stock options and stock
appreciation rights and the market price of the underlying common stock as of
the date of the accompanying consolidated financial statements. The estimated
compensation liability relating to stock appreciation rights has been recorded
as of December 31, 1998, and is subject to future adjustment based upon vesting
and market values and, ultimately, on the final determination of market values
when such rights are exercised.
During the fourth quarter of 1998, the Company recorded a $90 million
charge to provide for the estimated losses that are expected to result from the
Company's obligation under a certain contribution agreement. See note 20 to the
accompanying consolidated financial statements of the Company.
18
<PAGE> 19
During 1998, @Home issued performance-based warrants to certain cable
operators to purchase up to 10.3 million shares of @Home Series A common stock
at an exercise price of $10.50 per share. Warrants to purchase approximately
920,000 shares of @Home's Series A common stock became exercisable in 1998.
@Home recorded non-cash charges to operations of $50 million for the fair value
of these warrants. Such charges are included in cost of distribution agreements
in the accompanying consolidated statements of operations and comprehensive
earnings of the Company. In the event the performance milestones are met with
respect to the remaining unexercisable performance based warrants, @Home will
record non-cash charges to operations in future periods based on the difference
between the then fair market value of @Home's Series A common stock and the
exercise price of $10.50 per share.
During the fourth quarter of 1996, the Company restructured certain of
its operating and accounting functions. In connection with such restructuring,
the Company recognized a charge of $41 million related primarily to work force
reductions. As of December 31, 1998, all of such charges had been paid.
Depreciation expense increased $44 million or 4% and decreased $16
million or 1% for the years ended December 31, 1998 and 1997, respectively, as
compared to the prior year. The 1998 increase represents the net effect of (i)
increases attributable to acquisitions, capital expenditures and differences in
the composition of TCI's depreciable property and equipment and (ii) decreases
attributable to the 1998 Contribution Transactions and other dispositions. The
1997 decrease represents the net effect of a decrease due to the Satellite
Spin-off and another disposition that more than offset increases attributable to
acquisitions and capital expenditures.
Amortization expense increased $68 million or 12% and $23 million or 4%
for the years ended December 31, 1998 and 1997, respectively, as compared to the
prior year. Such increases are primarily attributable to the net effects of
acquisitions and dispositions and the amortization of certain intangible assets
arising from certain distribution agreements entered into in 1997 and 1998 by
@Home. See note 18 to the accompanying consolidated financial statements of the
Company.
Due to the effects of purchase accounting, the Company anticipates that
its depreciation and amortization expenses will increase significantly following
the AT&T Merger.
Other Income and Expenses
The Company's interest expense decreased $99 million or 9% from 1997 to
1998 and increased $64 million or 6% from 1996 to 1997. The decrease in 1998 is
primarily the result of debt reductions attributable to the 1998 Contribution
Transactions and a lower effective borrowing rate as compared to the prior year.
The increase in 1997 is primarily the result of higher average debt balances, as
a result of the Viacom Acquisition on July 31, 1996. The Company's weighted
average interest rate on borrowings was 7.32%, 7.71% and 7.75% during 1998, 1997
and 1996, respectively.
19
<PAGE> 20
Interest and dividend income increased $34 million or 39% and $24
million or 38% during 1998 and 1997, respectively, as compared to the prior
year. The 1998 increase is attributable to (i) higher dividend income due
primarily to dividends received on AT&T Common Stock that was acquired in July
1998 and dividends received on preferred stock of Fox Kids Worldwide, Inc. ("FKW
Preferred Stock") that was acquired in August 1997, and (ii) increased interest
income due primarily to increases in the Company's cash and restricted cash
balances and other interest-earning assets. Subsequent to the AT&T Merger, any
dividends received on AT&T Common Stock ($31 million during 1998) will not be
recognized as income, but instead will be recorded as increases to the Company's
additional paid-in capital. The 1997 increase is attributable to (i) higher
dividend income due to dividends received on a series of Time Warner, Inc.
common stock with limited voting rights that was acquired in October 1996 and
dividends received on FKW Preferred Stock that was acquired in August 1997, and
(ii) increased interest income due to higher balances of interest-earning assets
in 1997, as compared to 1996. See notes 5, 7, 8 and 10 to the accompanying
consolidated financial statements of the Company.
TCI's investments in affiliates are comprised of limited partnerships
and other entities that are primarily engaged in the domestic cable television
business or other communications services businesses. TCI's share of earnings
(losses) of affiliates were ($1,384 million), ($930 million) and ($450 million)
in 1998, 1997 and 1996, respectively. Of these earnings (losses), ($352
million), ($90 million) and ($79 million), respectively, relate to the Company's
domestic cable operations, ($67 million), ($12 million) and $8 million,
respectively, relate to the Company's programming operations and ($965 million),
($828 million) and ($379 million), respectively, relate to the Company's other
businesses.
The majority of the 1998 increase in the Company's share of losses of
its domestic cable affiliates is attributable to the Company's share of losses
of CSC, which was partially offset by the Company's share of 1998 gains
recognized by two affiliates on the sale of certain assets. The 1997 increase is
primarily due to the Company's share of losses of a 49%-owned cable television
partnership that was acquired by the Company in July 1996.
The 1998 increase in the Company's share of losses of its programming
affiliates is primarily attributable to an $83 million increase in the Company's
share of Fox/Liberty Networks' ("Fox Sports") losses, offset in part by a $33
million increase in the Company's share of the earnings of QVC, Inc. ("QVC").
Prior to the first quarter of 1998, the Company had no obligation, nor
intention, to fund Fox Sports. During 1998, the Company made the determination
to provide funding to Fox Sports based on specific transactions consummated by
Fox Sports. Consequently, the Company's share of losses of Fox Sports for 1998
includes previously unrecognized losses of Fox Sports of approximately $64
million. Losses for Fox Sports were not recognized in prior periods due to the
fact that the Company's investment in Fox Sports was less than zero. The 1997
change in the Company's share of earnings (losses) of its programming affiliates
is attributable to a $30 million decrease in the Company's share of Discovery's
earnings, offset in part by a $7 million increase in the Company's share of
QVC's earnings.
20
<PAGE> 21
The Company's share of losses of its other affiliates is primarily
comprised of the Company's share of the losses of the PCS Ventures and various
foreign affiliates. During the years ended December 31, 1998, 1997 and 1996, the
Company's share of the PCS Ventures' losses was $629 million, $493 million and
$167 million, respectively. During the years ended December 31, 1998, 1997 and
1996, the Company's share of losses from its foreign affiliates was $282
million, $264 million and $184 million, respectively. The increases in the
losses of the PCS Ventures are primarily attributable to increases in (i)
selling, general and administrative costs associated with Sprint Spectrum
Holding Company L.P.'s ("Sprint Spectrum") efforts to increase its customer
base, (ii) depreciation expense resulting from capital expenditures made to
expand its PCS network and (iii) interest expense associated with higher amounts
of outstanding debt. As a result of a November 1998 transaction, the Company no
longer accounts for its investment in the PCS Ventures under the equity method.
See notes 2, 6 and 9 to the accompanying consolidated financial statements of
the Company.
In connection with certain repurchases of notes payable, TCI recognized
losses on early extinguishment of debt of $60 million, $39 million and $62
million during the years ended December 31, 1998, 1997 and 1996, respectively.
Such losses related to prepayment penalties amounting to $52 million, $33
million and $60 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and the retirement of deferred loan costs. Also, during the year
ended December 31, 1996, certain TCI subsidiaries terminated, at such
subsidiaries' option, certain revolving bank credit facilities with aggregate
commitments of approximately $2 billion and refinanced certain other bank credit
facilities. In connection with such termination and refinancings, TCI recognized
a loss on early extinguishment of debt of $9 million related to the retirement
of deferred loan costs.
Minority interests in earnings of consolidated subsidiaries aggregated
$88 million, $154 million and $56 million for the years ended December 31, 1998,
1997 and 1996, respectively. Such amounts include dividends on preferred
securities of the Company's subsidiaries of $191 million, $180 million and $86
million, respectively, offset in part by the minority interests share of the
losses of @Home and certain other majority-owned subsidiaries of the Company.
During the years ended December 31, 1998 and 1997, the minority interests' share
of @Home's net losses was approximately $89 million and $34 million,
respectively. See notes 6, 10 and 18 to the accompanying consolidated financial
statements of the Company.
Gains on issuance of equity interests by subsidiaries were $89 million
and $60 million during the years ended December 31, 1998 and 1997, respectively.
The gains relate to the 1998 and 1997 public offering of securities by the
Company's @Home subsidiary and the February 1998 equity issuance by the
Company's then subsidiary, Superstar/Netlink Group LLC. See note 18 to the
accompanying consolidated financial statements of the Company.
Gains on issuance of stock by equity investees were $268 million, $112
million and $12 million during the years ended December 31, 1998, 1997 and 1996,
respectively. The gains relate to the dilution of the Company's interest in
various equity method investments. See notes 6, 8 and 18 to the accompanying
consolidated financial statements of the Company.
21
<PAGE> 22
Gains on disposition of assets of $5,760 million during 1998 include
(i) a $2.3 billion gain (excluding related deferred income tax expense of $883
million) attributable to the June 23, 1998 consummation of a merger in which TCG
was acquired by AT&T, (ii) a $1.9 billion gain (excluding related deferred
income tax expense of $647 million) attributable to the November 23, 1998
exchange of the Company's interest in the PCS Ventures, and (iii) an aggregate
gain of $898 million gain attributable to the March 4, 1998 contribution of
cable television systems to CSC and certain other of the 1998 Contribution
Transactions. See notes 6, 7, 8, 9 and 10 to the accompanying consolidated
financial statements of the Company.
Net Earnings (Loss)
As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI's net earnings (before preferred stock dividend
requirements) of $1,943 million for the year ended December 31, 1998 changed by
$2,504 million, as compared to TCI's net loss (before preferred stock dividend
requirements) of $561 million for the year ended December 31, 1997, and (ii)
TCI's net loss (before preferred stock dividend requirements) of $561 million
for the year ended December 31, 1997 changed by $853 million, as compared to
TCI's net earnings (before preferred stock dividend requirements) of $292
million for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As described in greater detail in note 2 to the accompanying
consolidated financial statements of the Company, on March 9, 1999, TCI was
acquired by AT&T in a merger and TCI thereby became a wholly-owned subsidiary of
AT&T. The AT&T Merger also resulted in the deconsolidation of the businesses and
assets attributed to the Liberty/Ventures Group (exclusive of @Home, NDTC and
WTCI which were transferred to TCI Group immediately prior to the AT&T Merger)
at the time of the AT&T Merger.
Pursuant to the Merger Agreement, immediately prior to the AT&T Merger,
certain assets previously attributed to TCI Ventures Group (including, among
others, the shares of AT&T Common Stock received in the merger of AT&T and TCG,
the stock of @Home attributed to TCI Ventures Group, the assets and business of
NDTC and TCI Ventures Group's equity interest in WTCI) were transferred to TCI
Group in exchange for approximately $5.5 billion in cash. Also, upon
consummation of the AT&T Merger, through a new tax sharing agreement between
Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled to the
benefit of approximately $2.0 billion of net operating loss carryforwards
attributable to all entities included in TCI's consolidated federal income tax
return as of the date of the AT&T Merger. Such net operating loss carryforwards
are subject to adjustment by the Internal Revenue Service and are subject to
limitations on usage which may affect the ultimate amount utilized. See note 19
to the accompanying consolidated financial statements of the Company.
Additionally, certain warrants previously attributed to TCI Group were
transferred to Liberty/Ventures Group in exchange for approximately $176 million
in cash. TCI funded the $5.5 billion payment to Liberty/Ventures Group through
borrowings from AT&T. Such borrowings are evidenced by a note payable to AT&T in
the amount of $5.5 billion (the "AT&T Note"). The AT&T Note accrues interest at
LIBOR, plus 15 basis points, and is due and payable on demand on or before March
9, 2004.
22
<PAGE> 23
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries. This restructuring included merging TCI's cable
subsidiary, TCIC, into TCI. As a result of TCIC's merger with TCI, all assets
and liabilities of TCIC have been assumed by TCI, including TCIC's public debt.
In connection with TCIC's merger with TCI, each share of TCIC's Cumulative
Exchangeable Preferred Stock, Series A, was converted into 2.119 shares of TCI
Group Series A Stock, and such shares of TCI Group Series A Stock were
subsequently converted into AT&T Common Stock in connection with the AT&T
Merger. All other public securities issued by subsidiaries of TCIC (other than
Pacific) otherwise remained unaffected. Furthermore, as part of the
restructuring, (i) certain asset transfers were made between TCI and its
subsidiaries, (ii) 123,896 shares of Series F Preferred Stock, which were held
by subsidiaries of TCI, were converted into 185,428,946 shares of TCI Group
Series A Stock (which in turn were converted into 143,837,233 shares of AT&T
Common Stock in the AT&T Merger and continue to be held by subsidiaries of TCI),
(iii) the remaining 154,411 shares of Series F Preferred Stock which were
formerly held by subsidiaries of TCI were distributed to TCI through a series of
liquidations and canceled, and (iv) 125,728,816 shares of TCI Group Series A
Stock, 9,154,134 shares of TCI Group Series B Stock, 6,654,367 shares of Liberty
Group Series A Stock, 3,417,187 shares of Liberty Group Series B Stock, and
67,536 shares of Class B Preferred Stock, each formerly held by subsidiaries of
TCI, were distributed to TCI through a series of liquidations and canceled.
After the AT&T Merger, under the terms of the Exchangeable Preferred
Stock of Pacific, each share of that preferred stock is exchangeable, from and
after August 1, 2001, for approximately 4.225 shares of AT&T Common Stock,
subject to certain anti-dilution adjustments. Additionally, after the AT&T
Merger, Pacific may elect to make any dividend, redemption or liquidation
payment on the Exchangeable Preferred Stock in cash, by delivery of shares of
AT&T Common Stock or by a combination of the foregoing forms of consideration.
As a result of the deconsolidation of Liberty/Ventures Group in
connection with the AT&T Merger, Liberty/Ventures Group's liquidity sources
(including the $5.5 billion payment from TCI) will be used towards the liquidity
requirements of Liberty/Ventures Group and will not represent a source of
liquidity to TCI. Conversely, TCI anticipates that Liberty/Ventures Group will
not require funds from TCI to satisfy the Liberty/Ventures Group's liquidity
requirements.
At December 31, 1998, the Company had approximately $3.7 billion of
availability in unused lines of credit (excluding amounts related to lines of
credit which provide availability to support commercial paper). At December 31,
1998, $999 million of such unused lines of credit related to Liberty/Ventures
Group (inclusive of @Home, NDTC and WTCI). Following the AT&T Merger, it is
anticipated that such unused lines of credit of Liberty/Ventures Group will not
represent a source of liquidity to the Company. It is anticipated that TCI's
remaining lines of credit will be terminated in the first half of 1999 and,
accordingly, will no longer provide a source of liquidity for the Company
(exclusive of @Home, NDTC and WTCI). To the extent that funds generated by the
Company's operating activities are not sufficient to meet its liquidity needs,
the Company anticipates that it would obtain additional financing from AT&T or
external sources. No assurance can be given that any such additional financing
could be obtained on terms acceptable to the Company.
At December 31, 1998, the Company held cash and cash equivalents of
$419 million which were held entirely by @Home. The cash balances of @Home are
intended to be applied towards the liquidity needs of @Home, accordingly @Home's
cash balances will not be made available to TCI. TCI's restricted cash is
primarily comprised of proceeds received in connection with certain asset
dispositions. Such proceeds, which aggregated $162 million and $34 million
December 31, 1998 and 1997, respectively, are designated to be reinvested in
certain identified assets for income tax purposes.
23
<PAGE> 24
During the years ended December 31, 1998, 1997 and 1996 the Company had
"operating cash flow" (as defined by the Company as operating income before
depreciation, amortization, other non-cash items, year 2000 costs, AT&T merger
costs and stock compensation) of $2,712 million, $2,975 million and $2,276
million, respectively. 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.
The Company's operating activities provided cash of $1,223 million,
$1,710 million and $1,278 million during the years ended December 31, 1998, 1997
and 1996, respectively. Net cash provided by operating activities generally
reflects net cash from operations of TCI available for TCI's liquidity needs
after taking into consideration the aforementioned additional substantial costs
of doing business not reflected in operating cash flow. Following the
deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger,
Liberty/Ventures Group's cash flows will no longer be included in the Company's
consolidated statements of cash flows. Liberty/Ventures Group's operating
activities provided cash of $66 million, $172 million and $245 million during
the years ended December 31, 1998, 1997 and 1996, respectively (inclusive of the
operating activities of @Home, NDTC and WTCI).
Cash used by the Company's investing activities aggregated $637
million, $1,156 million and $2,508 million during the years ended December 31,
1998, 1997 and 1996, respectively. Cash used by Liberty/Ventures Group's
investing activities aggregated $1,234 million, $497 million and $770 million
during the years ended December 31, 1998, 1997 and 1996, respectively (inclusive
of the investing activities of @Home, NDTC and WTCI). Following the
deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger,
Liberty/Ventures Group's cash flows (exclusive of the cash flows of @Home, NDTC
and WTCI) will no longer be included in the Company's consolidated statements of
cash flows.
The amount of capital expended by TCI for property and equipment was
$1,917 million, $709 million and $2,055 million during 1998, 1997 and 1996,
respectively. Such expenditures primarily relate to TCI's cable distribution
systems. TCI estimates that it will expend approximately $5 billion over the
next two years to expand the capacity of its cable distribution systems to allow
for the provision of two-way service offerings. No assurance can be given that
actual capital costs will not exceed such estimated capital costs. Additionally,
the foregoing estimate does not include customer specific capital costs required
to deliver local telephony services. TCI cannot reasonably estimate such costs
since such costs are dependent upon the extent of customer increases and the
average per-unit-cost to install customer premise equipment. As described below,
TCI is obligated to purchase a significant number of digital set-top devices
over the next three years.
24
<PAGE> 25
On March 4, 1998, the Company contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange for
approximately 48.9 million newly issued CSC Class A common shares. CSC also
assumed and repaid approximately $574 million of debt owed by TCI to external
parties and $95 million of debt owed to the Company. The Company has also
entered into letters of intent with CSC which provide for the Company to acquire
a cable system in Michigan and an additional 4% of CSC's Class A common shares
and for CSC to (i) acquire cable systems serving approximately 250,000 customers
in Connecticut and (ii) assume $110 million of the Company's debt. The ability
of the Company to sell or increase its investment in CSC is subject to certain
restrictions and limitations set forth in a stockholders agreement with CSC. At
December 31, 1998, the Company owned 49,982,572 shares of CSC Class A common
stock, which had a closing market price of $50.13 per share on such date. Such
shares represented an approximate 33.0% equity interest in CSC's total
outstanding shares and an approximate 9% voting interest in CSC in all matters
except for (i) the election of directors, in which case the Company effectively
has the right to designate two of CSC's directors, and (ii) any increase in
authorized shares, in which case the Company has agreed to vote its interest in
proportion with the public holders of CSC Class A common shares. For additional
information concerning the CSC Transaction, see note 6 to the accompanying
consolidated financial statements of the Company.
In addition to the CSC Transaction, the Company also completed, during
1998, eight transactions whereby TCI contributed cable television systems
serving in the aggregate approximately 1,924,000 customers to the 1998 Joint
Ventures in exchange for non-controlling ownership interests in each of the 1998
Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of
debt owed by the Company to external parties aggregating $323 million and
intercompany debt owed to the Company aggregating $2,374 million. The Company
has agreed to take certain steps to support compliance by certain of the 1998
Joint Ventures with their payment obligations under certain debt instruments, up
to an aggregate contingent commitment of $980 million. In light of such
contingent commitments, the Company has deferred any gains on the formation of
such 1998 Joint Ventures. During the year ended December 31, 1998, the Company's
revenue and operating cash flow (defined by the Company as operating income
before depreciation, amortization, other non-cash items, year 2000 costs, AT&T
merger costs and stock compensation) included $622 million and $278 million,
respectively, from the cable television systems included in the 1998
Contribution Transactions.
In addition to the 1998 Contribution Transactions, the Company, as of
December 31, 1998, has signed agreements or letters of intent to contribute
within the next twelve months, the Pending Contribution Cable Systems serving
approximately 1.2 million basic customers to joint ventures in which the Company
will retain non-controlling ownership interests. Following the completion of the
Pending Contribution Transactions, the Company will no longer consolidate the
Pending Contribution Cable Systems. Accordingly it is anticipated that the
completion of the Pending Contribution Transactions, as currently contemplated,
will result in aggregate estimated reductions (based on 1998 amounts) to the
Company's debt, annual revenue and annual operating income of $1.5 billion, $500
million and $200 million, respectively. No assurance can be given that any of
the Pending Contribution Transactions will be consummated
25
<PAGE> 26
During the year ended December 31, 1998, the Company contributed cash
to various equity affiliates of the Liberty/Ventures Group and participated in
other transactions with respect to such Liberty/Ventures Group equity
affiliates. Following the AT&T Merger, transactions between Liberty/Ventures
Group and its equity affiliates will no longer be reflected in the Company's
consolidated financial statements. For additional information concerning the
historical effects on liquidity and capital resources of transactions involving
the Liberty/Ventures Group's equity affiliates, see notes 6, 9 and 10 to the
accompanying consolidated financial statements of the Company.
On November 19, 1998, the Company exchanged, in a merger transaction,
0.58 of a share of Liberty Group Series A Stock for each share of the issued and
outstanding Series A Common Stock of its then majority-owned subsidiary,
Tele-Communications International, Inc. ("TINTA"), not beneficially owned by the
Company. Such transaction was accounted for as an acquisition of a minority
interest. The aggregate value assigned to the 10,086,594 shares of Liberty Group
Series A stock issued by TCI was based upon the market value of Liberty Group
Series A Stock at the time the merger was announced. TINTA is attributed to the
Liberty/Ventures Group.
On January 19, 1999, @Home entered into a merger agreement with Excite,
Inc. ("Excite"), a global internet media company that offers consumers and
advertisers comprehensive internet navigation services with extensive
personalization capabilities. Under the terms of the merger agreement, @Home
will issue approximately 55 million shares of its common stock for all of the
outstanding common stock of Excite based on an exchange ratio of 1.041902 shares
of @Home's common stock for each share of Excite's common stock. @Home may issue
up to approximately 15 million additional shares of common stock in connection
with the assumption of obligations under Excite's stock option and employer
stock purchase plans and outstanding warrants. @Home will account for the
transaction as a purchase. @Home's preliminary estimate of the total purchase
consideration is approximately $7 billion, based on the fair value at the time
of announcement of the merger, of common stock to be issued and stock option,
stock purchase plan and warrant obligations assumed, plus estimated transaction
costs. As a result of the proposed merger, the Company's economic interest in
@Home would decrease from 39% to 27%. The merger is subject to several
conditions, including approval by both companies' stockholders and the
expiration of applicable waiting periods under certain antitrust laws. TCI
Ventures Group's investment in @Home was transferred to TCI Group in connection
with the AT&T Merger.
During the year ended December 31, 1998, pursuant to a stock repurchase
program, 66,041 shares of TCI Group Series A Stock, 145,450 shares of TCI
Ventures Group Series A Stock, 94,000 shares of TCI Ventures Group Series B
Stock and 766,783 shares of Liberty Group Series A Stock were repurchased at an
aggregate cost of $31 million.
As security for borrowings under one of Liberty/Ventures Group's credit
facilities, Liberty/Ventures Group has pledged a portion of its shares of Time
Warner common stock with limited voting rights. At December 31, 1998 such
pledged portion had an aggregate fair value of approximately $2.7 billion. As
collateral for borrowings under another one of Liberty/Ventures Group's credit
facilities the banks lend against certain assets designated by Liberty/Ventures
Group (the "Designated Assets"). The carrying amount of the Designated Assets at
December 31, 1998 was $617 million. Following the deconsolidation of
Liberty/Ventures Group in connection with the AT&T Merger, Liberty/Ventures
Group's assets and liabilities (exclusive of @Home, NDTC, and WTCI) will not be
included in the Company's consolidated financial statements.
26
<PAGE> 27
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, the Company received in exchange
for all of its interest in TCG, approximately 47 million shares of AT&T Common
Stock. Such AT&T Common Stock was transferred from TCI Ventures Group to TCI
Group in connection with the AT&T Merger. Following the AT&T Merger, TCI will
treat its investment in AT&T Common Stock as an investment in its parent.
Accordingly, the fair value of TCI's investment in AT&T Common Stock will be
reflected as a reduction of TCI's equity, and any dividends received on such
AT&T Common Stock will be recorded as an increase to TCI's additional paid-in
capital. During 1998, TCI recognized dividends of $31 million on its investment
in AT&T Common Stock.
In connection with the Magness Settlement TCI paid $274 million during
1998 pursuant to certain call agreements. Additionally, on February 1, 1999, the
Company began to terminate the transactions under the agreements with the
Investment Bankers described above, and as of March 5, 1999, such transactions
were terminated. In connection with the termination of such transactions the
Company received an aggregate cash payment of $509 million. For additional
information see note 17 to the accompanying consolidated financial statements of
the Company.
During the fourth quarter of 1997, TCI entered into a total return
equity swap facility (the "Equity Swap Facility"). Pursuant to the Equity Swap
Facility, TCI would have the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase Equity Swap Shares
of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an
aggregate purchase price of up to $300 million. TCI would have the right, but
not the obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period, TCI would
settle periodically any increase or decrease in the market value of the Equity
Swap Shares. If the market value of the Equity Swap Shares should exceed the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost would be segregated from the other
Equity Swap Shares. If the market value of the Equity Swap Shares should be less
than the Counterparty's cost, TCI, at its option, would settle such difference
with shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition, TCI
would be required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI's ability to issue shares to settle periodic price fluctuations and
fees under the Equity Swap Facility, TCI records all amounts received or paid
under this arrangement as increases or decreases, respectively, to equity. As of
December 31, 1998, the Equity Swap Facility had acquired 4,935,780 shares of TCI
Group Series A Stock and 1,171,800 shares of TCI Ventures Group Series A Stock
at an aggregate cost that was approximately $135 million less than the fair
value of such Equity Swap Shares at December 31, 1998. From February 10, 1999 to
March 5, 1999, the Company terminated all transactions under the Equity Swap
Facility and the related swap agreement. In connection with the termination of
such transactions the Company received an aggregate cash payment of $170
million.
The Company's programming and other business segments have investments
in certain entities which will require significant additional capital in order
to develop their respective businesses and assets, to fund future operating
losses and to fund future growth. In certain cases, the Company has contractual
commitments pursuant to which (subject to certain conditions) it may be required
to make significant additional capital contributions to the entities in which it
has investments. The majority of such investments are included in
Liberty/Ventures Group. Following the deconsolidation of Liberty/Ventures Group
in connection with the AT&T Merger, any capital contributions or fundings to
such entities will be made using Liberty/Ventures Group's liquidity sources.
27
<PAGE> 28
Many of the Company's subsidiaries operate in industries, primarily the
telecommunications industry and the internet services industry, which have
experienced and are expected to continue to experience (i) rapid and significant
changes in technology, (ii) ongoing improvements in the capacity and quality of
such services, (iii) frequent and new product and service introductions, and
(iv) enhancements and changes in end-user requirements and preferences. The
degree to which these changes will affect such entities and the ability of such
entities to compete in their respective businesses cannot be predicted. If
markets fail to develop, develop more slowly than expected, or become highly
competitive, the Company's operating results and financial condition may be
materially adversely affected.
TCI is committed to purchase billing services from an unaffiliated
third party pursuant to three successive five year agreements. Pursuant to such
arrangement, TCI is obligated at December 31, 1998 to make minimum payments
aggregating approximately $1.6 billion through 2012. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
Prior to the AT&T Merger, transactions between TCI Group and
Liberty/Ventures Group were eliminated in TCI's consolidated financial
statements. Following the deconsolidation of Liberty/Ventures Group in
connection with the AT&T Merger, Liberty/Ventures Group's results of operations
(exclusive of the results of operations of @Home, NDTC and WTCI) will no longer
be included in the consolidated operating income of TCI. In this regard, TCI has
agreed to make fixed monthly payments to an entity attributed to
Liberty/Ventures Group pursuant to an affiliation agreement. The fixed annual
commitments increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation through 2022. In addition, pursuant to certain
agreements between TCI and an entity attributed to Liberty/Ventures Group, TCI
is obligated at December 31, 1998 to make minimum revenue payments through 2017
and minimum license fee payments through 2007 aggregating approximately $405
million to such attributed entity. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $415
million at December 31, 1998, of which $391 million relates to amounts
guaranteed by entities attributed to Liberty/Ventures Group. Following the
deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger,
notes payable and other obligations guaranteed by entities attributed to
Liberty/Ventures Group (exclusive of @Home, NDTC and WTCI) will no longer be
included with those of TCI. As described in note 10 to the accompanying
consolidated financial statements, the Company also has provided certain credit
enhancements with respect to the 1998 Joint Ventures. The Company also has
guaranteed the performance of certain affiliates and other parties with respect
to such parties' contractual and other obligations. Although there can be no
assurance, management of the Company believes that it will not be required to
meet its obligations under such guarantees, or if it is required to meet any of
such obligations, that they will not be material to the Company.
Subsequent to December 31, 1998, a subsidiary of the Company agreed to
enter into a contribution agreement (the "Contribution Agreement") with certain
shareholders of Primestar pursuant to which the Company would, to the extent it
is relieved of $166 million of contingent liabilities currently owed to certain
creditors of Primestar and its subsidiaries, contribute up to $166 million to
Primestar to the extent necessary to satisfy liabilities of Primestar. During
the fourth quarter of 1998, the Company recorded a $90 million charge to provide
for the estimated losses that are expected to result from the Contribution
Agreement. The Company's obligation under the Contribution Agreement will expire
in 2001.
28
<PAGE> 29
Liberty/Ventures Group is obligated to pay fees for the rights to
exhibit certain films that are released by various producers through 2017 and
has made certain financial commitments related to the acquisition of
programming. Based on customer levels at December 31, 1998, these agreements
require minimum payments aggregating approximately $808 million. Following the
deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger
such rights fee obligations will no longer be included with TCI's financial
commitments. However, TCI Group's guarantee of $320 million of such rights fee
obligations of Liberty/Ventures Group will continue to be included with TCI's
contingent obligations. The amount of the total obligation under these license
agreements is not currently estimable because such amount is dependent upon the
number of qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the release
of such qualifying films. Nevertheless, it is anticipated that the required
payments under these obligations will be significant. In addition, an entity
attributed to Liberty/Ventures Group has guaranteed the obligation of an
affiliate to pay fees for the license to exhibit certain films through 2000. If
such entity were to fail to fulfill its obligations under the guarantee, the
beneficiaries have the right to demand an aggregate payment from such entity of
approximately $26 million.
TCI is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, TCI is committed to carry such
suppliers' programming on its cable systems. Additionally, certain of such
agreements provide for penalties and charges in the event the programming is not
carried or not delivered to a contractually specific number of customers.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC ("Approved
Purchasers"), entered into an agreement (the "Digital Terminal Purchase
Agreement") with General Instrument Corporation ("GI") to purchase advanced
digital set-top devices. The hardware and software incorporated into these
devices are designed and manufactured to be compatible and interoperable with
the OpenCable(TM) architecture specifications adopted by CableLabs, the cable
television industry's research and development consortium, in November 1997.
NDTC has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999 and 2000
at an average price of $318 per set-top device. Through December 31, 1998,
approximately 1.6 million set-top devices had been purchased pursuant to this
commitment. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis).
Such warrants vest as annual purchase commitments are met. On December 31, 1998,
the Company vested in 4,928,000 warrants pursuant to such arrangements, which
were recorded at their fair value of $64 million on such date. Vested warrants
are accounted for as available-for-sale securities in the Company's consolidated
financial statements. NDTC has the right to terminate the Digital Terminal
Purchase Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with respect to
the development, testing and delivery of advanced digital set-top devices. In
connection with the AT&T Merger, the above described warrants were transferred
to Liberty/Ventures Group in exchange for approximately $176 million in cash. To
the extent that such warrants do not vest because TCI fails to meet its purchase
commitments, TCI is required to repay a proportional amount of such cash to
Liberty/Ventures Group.
29
<PAGE> 30
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements, transponder lease agreements and uses
certain equipment under lease arrangements. For additional information on the
Company's future minimum lease payments under noncancellable operating losses,
see note 20 to the accompanying consolidated financial statements of the
Company.
The Company's various partnerships and other affiliates accounted for
by the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company), through
net cash provided by their own operating activities and in certain circumstances
through required capital contributions from their partners.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into interest rate exchange agreements
("Interest Rate Swaps") pursuant to which it (i) pays fixed interest rates (the
"Fixed Rate Agreements") and receives variable interest rates and (ii) pays
variable interest rates (the "Variable Rate Agreements") and receives fixed
interest rates. During 1998, 1997 and 1996, the Company's net payments pursuant
to the Fixed Rate Agreements were less than $1 million, $7 million and $14
million, respectively; and the Company's net receipts (payments) pursuant to the
Variable Rate Agreements were $10 million, (less than $1 million) and $15
million, respectively. At December 31, 1998, all of the Company's Fixed Rate
Agreements had expired. At December 31, 1998, the Company would be entitled to
receive $63 million upon termination of the Variable Rate Agreements.
In addition to the Variable Rate Agreements, the Company entered into
fixed Interest Rate Swaps pursuant to which it pays a variable rate based on
LIBOR (5.5% at December 31, 1998) and receives a variable rate based on Constant
Maturity Treasury Index ("CMT") (4.9% at December 31, 1998) on a notional amount
of $400 million through September 2000; and pays a variable rate based on LIBOR
(5.4% at December 31, 1998) and receives a variable rate based on CMT (5.0% at
December 31, 1998) on notional amounts of $95 million through February 2000.
During the years ended December 31, 1998 and 1997, the Company's net payments
(receipts) pursuant to such agreements were $2 million and (less than $1
million), respectively. At December 31, 1998, the Company would be required to
pay an estimated $4 million to terminate such Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of nonperformance by the
other parties to the agreements. However, the Company does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, as of December 31, 1998, the
Company does not anticipate material near-term losses in future earnings, fair
values or cash flows resulting from derivative financial instruments. See note
12 to the accompanying consolidated financial statements of the Company for
additional information regarding Interest Rate Swaps.
30
<PAGE> 31
At December 31, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, the Company had $8.0 billion (or 57%) of
fixed rate debt and $6.1 billion (or 43%) of variable-rate debt. At December 31,
1998, Liberty/Ventures Group (inclusive of @Home, NDTC and WTCI) had $2.0
billion of variable rate debt and $700 million of fixed rate debt. Following the
deconsolidation of Liberty/Ventures Group in connection with the AT&T Merger,
Liberty/Ventures Group's debt (exclusive of @Home, NDTC and WTCI) will no longer
be included in TCI's debt. TCI's interest rate exposure was primarily to changes
in LIBOR rates. The aggregate hypothetical decrease in the fair value of TCI's
fixed rate debt and interest rate swaps as of December 31, 1998 that would have
resulted from a hypothetical adverse change of 10% in the related LIBOR rates is
estimated to be $504 million. The aggregate hypothetical loss in earnings and
cash flows on an annual basis on TCI's variable rate debt and interest rate
swaps as of December 31, 1998 that would have resulted from a hypothetical
adverse change of 10% in the related LIBOR rates, sustained for one year, is
estimated to be $26 million.
Approximately twenty-five percent of the cable television franchises
held by TCI, involving approximately 4.6 million basic customers, expire within
five years. 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 Cable Television Consumer Protection and Competition Act of 1992 and the
Telecommunications Act of 1996 and other applicable federal, state and local
law. Such provisions establish 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 established standards.
TCI 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.
During 1998, TCI has continued to experience a competitive impact from
medium power and high power direct broadcast satellite ("DBS") operators that
use high frequencies to transmit signals that can be received by home satellite
dishes ("HSDs") much smaller in size than traditional HSDs. DBS operators have
the right to distribute substantially all of the significant cable television
programming services currently carried by cable television systems. The DBS
industry has grown rapidly over the last several years and now serves
approximately 9 million subscribers nationwide. Recently announced mergers could
strengthen the surviving DBS companies. TCI is unable to predict what effect
such competition will have on TCI's financial position.
Financial Statements and Supplementary Data.
The consolidated financial statements of Tele-Communications, Inc. are
filed under this Item, beginning on Page II-38. The financial statement
schedules required by Regulation S-X are filed under Item 14 of this Annual
Report on Form 10-K.
31
<PAGE> 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
In view of the AT&T Merger, described in detail under Item 1, Business
- - General Development of Business, it has been determined that it will be more
efficient and effective for the Company to have its independent auditing
function performed by AT&T's external auditors, PricewaterhouseCoopers LLP. For
that reason, the Company has notified KPMG LLP that the Company will no longer
retain that firm as its independent auditor, effective upon the completion of
the audits of the Company's financial statements for the fiscal year ended
December 31, 1998 and for the two-month period ended February 28, 1999. The
Company retained PricewaterhouseCoopers, LLP effective as of March 9, 1999 for
the audit of the Company's financial statements for the period ending December
31, 1999. The Company maintains high regard for KPMG LLP and is grateful for the
work it has performed over the years.
During the Company's two most recent fiscal years ended December 31,
1998 and December 31, 1997, the reports of KPMG LLP on the Company's financial
statements contained no adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years ended December 31,
1998 and December 31, 1997, and interim periods thereafter:
(1) No disagreements with KPMG LLP have occurred on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
KPMG LLP, would have caused it to make reference to the subject matter of the
disagreement in connection with its reports on the Company's financial
statements.
(2) No reportable events involving KPMG LLP have occurred that must be
disclosed under Item 304(a)(1)(v) of Regulation S-K.
(3) The Company has not consulted with PricewaterhouseCoopers LLP on
items that concerned the application of accounting principles to a specific
transaction, either completed or proposed, or on the type of audit opinion that
might be rendered on the Company's financial statements.
The Company requested, and KPMG LLP has furnished, a letter addressed
to the Securities and Exchange Commission (the "Commission") stating that KPMG
LLP agrees with the statements set forth in the second paragraph above and in
numbered paragraphs (1) and (2) above. A copy of the letter from KPMG LLP to the
Commission is filed as Exhibit 16.1 to this Form 10-K.
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive earnings,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tele-Communications,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
March 9, 1999
33
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- --------
amounts in millions
<S> <C> <C>
Assets
Cash and cash equivalents $ 419 244
Restricted cash (note 5) 185 40
Trade and other receivables, net 593 529
Prepaid program rights 146 104
Committed program rights 117 115
Investments in affiliates, accounted for under the
equity method, and related receivables (notes 6
and 17) 4,765 3,063
Investment in Time Warner, Inc. ("Time Warner") (note 7) 7,118 3,555
Investment in AT&T Corp. ("AT&T") (note 8) 3,556 --
Investment in Sprint Corporation ("Sprint") (notes 2 and 9) 2,446 --
Property and equipment, at cost:
Land 63 96
Distribution systems 10,107 10,784
Support equipment and buildings 1,769 1,558
--------- ---------
11,939 12,438
Less accumulated depreciation 4,786 4,759
--------- ---------
7,153 7,679
--------- ---------
Franchise costs 14,658 17,910
Less accumulated amortization 2,590 2,763
--------- ---------
12,068 15,147
--------- ---------
Other assets, net of accumulated amortization (note 18) 3,285 2,001
--------- ---------
$ 41,851 32,477
========= =========
</TABLE>
(continued)
34
<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Balance Sheets, continued
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
amounts in millions
<S> <C> <C>
Liabilities and Stockholders' Equity
Accounts payable $ 229 169
Accrued interest 253 258
Accrued programming expense 471 399
Other accrued expenses 1,128 997
Deferred option premium (note 7) -- 306
Debt (note 12) 14,052 15,250
Deferred income taxes (note 19) 9,749 6,104
Other liabilities 1,819 664
-------- --------
Total liabilities 27,701 24,147
-------- --------
Minority interests in equity of consolidated subsidiaries 1,460 1,664
Redeemable securities:
Preferred stock (note 13) 300 655
Common stock (note 3) 22 5
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Preferred
Securities") holding solely subordinated debt securities
of TCI Communications, Inc. ("TCIC") (note 14) 1,500 1,500
Stockholders' equity (note 15):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value -- --
Common stock, $1 par value:
Series A TCI Group. Authorized 1,750,000,000 shares;
issued 610,748,188 shares in 1998 and 605,616,143
shares in 1997 611 606
Series B TCI Group. Authorized 150,000,000 shares;
issued 73,929,229 shares in 1998 and 78,203,044
shares in 1997 74 78
Series A Liberty Media Group. Authorized 750,000,000
shares; issued 367,890,546 shares in 1998 and
344,962,521 shares in 1997 368 345
Series B Liberty Media Group. Authorized 75,000,000
shares; issued 35,198,156 shares in 1998 and
35,180,385 shares in 1997 35 35
Series A TCI Ventures Group. Authorized 750,000,000
shares; issued 377,253,230 shares in 1998 and
377,386,032 shares in 1997 377 377
Series B TCI Ventures Group. Authorized 75,000,000
shares; issued 45,750,534 shares in 1998 and
32,532,800 shares in 1997 46 33
Additional paid-in capital 5,987 5,063
Accumulated other comprehensive earnings, net of taxes (notes
1 and 16) 3,749 772
Retained earnings (accumulated deficit) 1,124 (812)
-------- --------
12,371 6,497
Treasury stock and common stock held by subsidiaries, at cost
(note 15) (1,503) (1,991)
-------- --------
Total stockholders' equity 10,868 4,506
-------- --------
Commitments and contingencies (notes 2, 6, 10, 20 and 21) $ 41,851 32,477
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Earnings
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue:
Communications and programming services $ 7,351 7,570 7,038
Net sales from electronic retailing services -- -- 984
-------- -------- --------
7,351 7,570 8,022
-------- -------- --------
Operating costs and expenses:
Operating 2,997 2,995 3,072
Cost of sales from electronic retailing
services -- -- 605
Selling, general and administrative 1,642 1,600 2,069
Year 2000 costs (note 21) 11 -- --
AT&T merger costs (note 2) 14 -- --
Stock compensation 866 488 (13)
Reserve for loss arising from contingent
obligation (note 20) 90 -- --
Cost of distribution agreements (note 18) 50 -- --
Impairment of assets 5 15 --
Restructuring charges -- -- 41
Depreciation 1,121 1,077 1,093
Amortization 614 546 523
-------- -------- --------
7,410 6,721 7,390
-------- -------- --------
Operating income (loss) (59) 849 632
Other income (expense):
Interest expense (1,061) (1,160) (1,096)
Interest and dividend income 122 88 64
Share of losses of affiliates, net (note 6) (1,384) (930) (450)
Loss on early extinguishment of debt (note 12) (60) (39) (71)
Minority interests in earnings of consolidated
subsidiaries, net (note 14) (88) (154) (56)
Gains on issuance of equity interests by
subsidiaries (notes 10 and 18) 89 60 --
Gains on issuance of stock by equity investees
(notes 6, 8 and 18) 268 112 12
Gains on disposition of assets, net (notes 6, 7
8, 9 and 10) 5,760 401 1,593
Other, net (49) (22) (65)
-------- -------- --------
3,597 (1,644) (69)
-------- -------- --------
Earnings (loss) before income taxes 3,538 (795) 563
Income tax benefit (expense) (note 19) (1,595) 234 (271)
-------- -------- --------
Net earnings (loss) 1,943 (561) 292
Dividend requirements on preferred stocks (24) (42) (35)
-------- -------- --------
Net earnings (loss) attributable to common
stockholders $ 1,919 (603) 257
======== ======== ========
</TABLE>
(continued)
36
<PAGE> 37
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Earnings, continued
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock $ (240) (537) (799)
Liberty Media Group Series A and Series B common stock 156 125 1,056
TCI Ventures Group Series A and Series B common stock
2,003 (191) --
-------- -------- --------
$ 1,919 (603) 257
======== ======== ========
Basic earnings (loss) attributable to common stockholders
per common share (note 4):
TCI Group Series A and Series B common stock $ (.46) (.85) (1.20)
======== ======== ========
Liberty Media Group Series A and Series B common stock $ .43 .34 2.82
======== ======== ========
TCI Ventures Group Series A and Series B common stock $ 4.75 (.47) --
======== ======== ========
Diluted earnings (loss) attributable to common
stockholders per common and potential common share
(note 4): TCI Group Series A and Series B common stock $ (.49) (.85) (1.20)
======== ======== ========
Liberty Media Group Series A and Series B common stock $ .39 .31 2.58
======== ======== ========
TCI Ventures Group Series A and Series B common stock $ 4.44 (.47) --
======== ======== ========
Net earnings (loss) $ 1,943 (561) 292
-------- -------- --------
Other comprehensive earnings, net of taxes (note 16):
Foreign currency translation adjustments 2 (22) 35
Unrealized gains on securities:
Unrealized holding gains arising during period 2,977 753 41
Less: reclassification adjustment for gains
included in net earnings (2) -- (364)
-------- -------- --------
Other comprehensive earnings 2,977 731 (288)
-------- -------- --------
Comprehensive earnings $ 4,920 170 4
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
Class B TCI Group Liberty Media Group
Preferred ------------------- -------------------
Stock Series A Series B Series A Series B
--------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 672 85 337 32
Net earnings -- -- -- -- --
Issuance of common stock for
acquisition -- 11 -- 6 --
Issuance of common stock upon
conversion of notes -- 2 -- 2 --
Issuance of common stock upon
conversion of preferred stock -- 1 -- -- --
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock -- (6) -- (3) --
Contribution of common stock to
subsidiary -- 16 -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. -- -- -- -- --
Accreted dividends on all classes
of preferred stock -- -- -- -- --
Accreted dividends on all classes
of preferred stock not subject to
mandatory redemption requirements -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- --
Foreign currency translation
adjustments, net of taxes (note 16) -- -- -- -- --
Unrealized gains on securities, net
of taxes and reclassification
adjustment (note 16) -- -- -- -- --
--------- -------- -------- -------- --------
Balance at December 31, 1996 $ -- 696 85 342 32
========= ======== ======== ======== ========
<CAPTION>
Treasury
stock and
Accumulated common
other Retained stock
Additional comprehensive earnings held by Total
paid-in earnings, (accumulated subsidiaries, stockholders'
capital net of taxes deficit) at cost equity
---------- ------------- ------------ ------------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
3,863 329 (543) (314) 4,461
Net earnings -- -- 292 -- 292
Issuance of common stock for
acquisition 248 -- -- -- 265
Issuance of common stock upon
conversion of notes (2) -- -- -- 2
Issuance of common stock upon
conversion of preferred stock 15 -- -- -- 16
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock (121) -- -- -- (130)
Contribution of common stock to
subsidiary (16) -- -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. (405) -- -- -- (405)
Accreted dividends on all classes
of preferred stock (35) -- -- -- (35)
Accreted dividends on all classes
of preferred stock not subject to
mandatory redemption requirements 10 -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation
adjustments, net of taxes (note 16) -- 35 -- -- 35
Unrealized gains on securities, net
of taxes and reclassification
adjustment (note 16) -- (323) -- -- (323)
---------- ------------- ------------ ------------- -------------
Balance at December 31, 1996 3,547 41 (251) (314) 4,178
========== ============= ============ ============= =============
</TABLE>
(continued)
38
<PAGE> 39
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity, continued
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred ---------------------- -------------------- -----------------------
Stock Series A Series B Series A Series B Series A Series B
--------- ---------- --------- --------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- 696 85 342 32 -- --
Net loss -- -- -- -- -- -- --
Issuance of TCI Ventures Group
common stock in exchange for
TCI Group common stock (note 1) -- (189) (16) -- -- 377 33
Costs associated with TCI Ventures
Exchange -- -- -- -- -- -- --
Exchange of common stock with an
officer/director (note 17) -- -- 7 -- 3 -- --
Issuance of common stock for
acquisitions and investment -- 63 2 2 -- -- --
Issuance of Series A TCI Group
common stock in exchange for Series
B TCI Group common stock (the
"Exchange") (note 17) -- 31 -- -- -- -- --
Recognition of fees related to the
Exchange (note 17) -- -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- -- --
Cancellation of common stock -- -- -- -- -- -- --
Reclassification to redeemable
securities of redemption amount of
common stock subject to put obligation -- -- -- -- -- -- --
Gain from issuance of equity by
subsidiary and equity investee, net
of taxes -- -- -- -- -- -- --
Issuance of common stock upon exercise
of stock options -- -- -- -- -- -- --
Issuance of restricted stock granted
pursuant to stock incentive plan -- 1 -- -- -- -- --
Issuance of common stock upon conversion
of notes and preferred stock -- 3 -- 1 -- -- --
Issuance of common stock to
Tele-Communications, Inc. Employee
Stock Purchase Plan -- 1 -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Foreign currency translation adjustments,
net of taxes (note 16) -- -- -- -- -- -- --
Unrealized gains on securities, net of
taxes and reclassification adjustment
(note 16) -- -- -- -- -- -- --
----- --------- --------- -------- --------- ---------- ---------
Balance at December 31, 1997 $ -- 606 78 345 35 377 33
===== ========= ========= ======== ========= ========== =========
<CAPTION>
Treasury
stock and
Accumulated common
other Retained stock held
Additional comprehensive earnings by Total
paid-in earnings, (accumulated subsidiaries, stockholders'
capital net of taxes deficit) at cost equity
---------- ------------- ------------ ------------- --------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,547 41 (251) (314) 4,178
Net loss
Issuance of TCI Ventures Group -- -- (561) -- (561)
common stock in exchange for
TCI Group common stock (note 1)
Costs associated with TCI Ventures (205) -- -- -- --
Exchange
Exchange of common stock with an (7) -- -- -- (7)
officer/director (note 17)
Issuance of common stock for 160 -- -- (170) --
acquisitions and investment
Issuance of Series A TCI Group 1,058 -- -- (484) 641
common stock in exchange for Series
B TCI Group common stock (the
"Exchange") (note 17) 481 -- -- (512) --
Recognition of fees related to the
Exchange (note 17) (11) -- -- -- (11)
Repurchase of common stock -- -- -- -- (529)
Cancellation of common stock (18) -- -- (529) --
Reclassification to redeemable
securities of redemption amount of
common stock subject to put obligation (4) -- -- 18 (4)
Gain from issuance of equity by
subsidiary and equity investee, net
of taxes 86 -- -- -- 86
Issuance of common stock upon exercise
of stock options 4 -- -- -- 4
Issuance of restricted stock granted
pursuant to stock incentive plan 3 -- -- -- 4
Issuance of common stock upon conversion
of notes and preferred stock 3 -- -- -- 7
Issuance of common stock to
Tele-Communications, Inc. Employee
Stock Purchase Plan 8 -- -- -- 9
Accreted dividends on all classes of
preferred stock (42) -- -- -- (42)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 10 -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation adjustments,
net of taxes (note 16) -- (22) -- -- (22)
Unrealized gains on securities, net of
taxes and reclassification adjustment
(note 16) -- 753 -- -- 753
---------- ----------- ------------ --------- ----------
Balance at December 31, 1997 5,063 772 (812) (1,991) 4,506
========== =========== ============ ========= ==========
</TABLE>
39
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity, continued
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred --------------------- -------------------- ---------------------
Stock Series A Series B Series A Series B Series A Series B
--------- -------- -------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ -- 606 78 345 35 377 33
Net earnings -- -- -- -- -- -- --
Exchange of common stock in connection with
the Magness Settlement (note 17) -- -- 11 -- -- -- 13
Issuance of common stock in connection with
settlement of litigation -- 1 1 -- -- -- --
Reclassification to redeemable securities
of redemption amount of common stock
subject to put obligation -- -- -- -- -- -- --
Premium received in connection with put
obligation -- -- -- -- -- -- --
Issuance of common stock for acquisitions
(note 10) -- 1 -- 7 -- 13 --
Repurchase of common stock to be held in
treasury (note 15) -- -- -- -- -- -- --
Repurchase and retirement of common stock
(note 15) -- -- -- -- -- -- --
Retirement of common stock held in treasury -- (12) (16) -- -- (13) --
Gain from issuance of equity by subsidiary
and equity investee, net of taxes (note 6) -- -- -- -- -- -- --
Issuance of common stock upon conversion of
notes and preferred stock (notes 12 and
13) -- 15 -- 6 -- -- --
Payments for call agreements (note 17) -- -- -- -- -- -- --
Issuance of common stock upon exercise of
Malone Right (note 17) -- -- -- -- -- -- --
Issuance of common stock to acquire
minority interest of subsidiary -- -- -- 10 -- -- --
Issuance of common stock upon exercise of
stock options -- -- -- -- -- -- --
Recognition of fees related to the Equity
Swap Facility and the Exchange (notes 15
and 17) -- -- -- -- -- -- --
Reimbursement of fees related to Exchange
(note 17) -- -- -- -- -- -- --
Recognition of stock compensation related
to restricted stock awards -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Foreign currency translation adjustments,
net of taxes (note 16) -- -- -- -- -- -- --
Unrealized gains on securities, net of
taxes and reclassification adjustment
(note 16) -- -- -- -- -- -- --
------- ------- ------- ------ ------ -------- ---------
Balance at December 31, 1998 $ -- 611 74 368 35 377 46
======= ======= ======= ====== ====== ======== =========
<CAPTION>
Treasury
stock and
Accumulated common
other Retained stock held
Additional comprehensive earnings by Total
paid-in earnings, (accumulated subsidiaries, stockholders'
capital net of taxes deficit) at cost equity
---------- ------------ ------------ ------------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 5,063 772 (812) (1,991) 4,506
Net earnings -- -- 1,943 -- 1,943
Exchange of common stock in connection with
the Magness Settlement (note 17) 509 -- -- (533) --
Issuance of common stock in connection with
settlement of litigation 48 -- -- (3) 47
Reclassification to redeemable securities
of redemption amount of common stock
subject to put obligation (17) -- -- -- (17)
Premium received in connection with put
obligation 3 -- -- -- 3
Issuance of common stock for acquisitions
(note 10) 353 -- -- -- 374
Repurchase of common stock to be held in
treasury (note 15) -- -- -- (20) (20)
Repurchase and retirement of common stock
(note 15) (11) -- -- -- (11)
Retirement of common stock held in treasury (760) -- -- 801 --
Gain from issuance of equity by subsidiary
and equity investee, net of taxes (note 6) 70 -- -- -- 70
Issuance of common stock upon conversion of
notes and preferred stock (notes 12 and
13) 331 -- -- -- 352
Payments for call agreements (note 17) (274) -- -- -- (274)
Issuance of common stock upon exercise of
Malone Right (note 17) 273 -- -- 243 516
Issuance of common stock to acquire
minority interest of subsidiary 416 -- -- -- 426
Issuance of common stock upon exercise of
stock options 10 -- -- -- 10
Recognition of fees related to the Equity
Swap Facility and the Exchange (notes 15
and 17) (31) -- -- -- (31)
Reimbursement of fees related to Exchange
(note 17) 11 -- -- -- 11
Recognition of stock compensation related
to restricted stock awards 11 -- -- -- 11
Accreted dividends on all classes of
preferred stock (13) -- (12) -- (25)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 5 -- 5 -- 10
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation adjustments,
net of taxes (note 16) -- 2 -- -- 2
Unrealized gains on securities, net of
taxes and reclassification adjustment
(note 16) -- 2,975 -- -- 2,975
---------- ---------- ------------ --------- -----------
Balance at December 31, 1998 5,987 3,749 1,124 (1,503) 10,868
========== ========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
amounts in millions
(see note 5)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,943 (561) 292
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,735 1,623 1,616
Stock compensation 866 488 (13)
Payments of obligation relating to stock
compensation (187) (132) (3)
Share of losses of affiliates, net 1,384 930 450
Loss on early extinguishment of debt 60 39 71
Minority interests in earnings of consolidated
subsidiaries, net 88 154 56
Restructuring charges -- -- 41
Payments of restructuring charges (9) (24) (8)
Reserve for loss arising from contingent obligation 90 -- --
Gains on issuance of equity interests by subsidiaries (89) (60) --
Gains on issuance of stock by equity investees (268) (112) (12)
Gains on disposition of assets, net (5,760) (401) (1,593)
Deferred income tax expense (benefit) 1,461 (275) 233
Cost of distribution agreements 50 -- --
Other noncash charges 10 25 11
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables (183) (53) (115)
Change in inventories -- -- (8)
Change in prepaids (44) (77) (23)
Change in other accruals and payables 76 146 283
-------- -------- --------
Net cash provided by operating activities 1,223 1,710 1,278
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisitions (459) (323) (664)
Capital expended for property and equipment (1,917) (709) (2,055)
Investments in and loans to affiliates (1,503) (636) (778)
Collections of loans to affiliates 2,497 133 647
Proceeds from disposition of assets 889 541 341
Change in restricted cash (145) (1) (39)
Cash received in exchanges 45 18 66
Other investing activities (44) (179) (26)
-------- -------- --------
Net cash used in investing activities (637) (1,156) (2,508)
-------- -------- --------
Cash flows from financing activities:
Borrowings of debt 5,553 2,513 8,163
Repayments of debt (5,978) (3,036) (7,969)
Prepayment penalties (52) (33) (60)
Repurchase of common stock to be held in treasury (20) (529) --
Repurchase and retirement of common stock (11) -- --
Repurchase of subsidiary common stock (24) (42) --
Payment of preferred stock dividends (27) (42) (35)
Payment of dividends on subsidiary preferred stock
and Trust Preferred Securities (189) (179) (95)
Payments for call agreements (274) -- --
Proceeds from issuance of common stock 516 5 --
Proceeds from issuance of subsidiary common stock
and preferred stock 94 148 223
Proceeds from issuance of Trust Preferred Securities -- 490 971
Contributions by minority stockholders of subsidiaries -- 6 319
Other financing activities 1 (16) --
-------- -------- --------
Net cash provided (used) by financing activities (411) (715) 1,517
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 175 (161) 287
Cash and cash equivalents at beginning of year 244 405 118
-------- -------- --------
Cash and cash equivalents at end of year $ 419 244 405
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Basis of Presentation
Nature of Business
Tele-Communications, Inc. ("TCI" or the "Company"), through its
subsidiaries and affiliates, is principally engaged in the
construction, acquisition, ownership, and operation of domestic cable
television systems and the provision of satellite-delivered video
entertainment, information and home shopping programming services to
various video distribution media, principally cable television systems.
The Company also has investments in cable and telecommunications
operations and television programming in certain international markets
as well as investments in companies and joint ventures involved in
developing and providing programming for new television and
telecommunications technologies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of TCI and those of all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Preferred stock of TCI which is owned by subsidiaries of
TCI eliminates in consolidation. Common stock of the Company held by
subsidiaries is treated similar to treasury stock in consolidation.
Targeted Stock
The Company's assets and operations were previously included in three
separate groups, each of which was tracked separately by public equity
securities. These groups were known as the "Liberty Media Group", the
"TCI Ventures Group" and the "TCI Group".
The Liberty Media Group was intended to reflect the separate
performance of TCI's assets which produce and distribute programming
services.
The TCI Ventures Group was intended to reflect the separate performance
of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming assets.
The TCI Group was intended to reflect the separate performance of TCI
and its subsidiaries and assets not attributed to Liberty Media Group
or TCI Ventures Group. Such subsidiaries and assets are comprised
primarily of TCI's domestic cable and communications business.
(continued)
42
<PAGE> 43
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The TCI Group was tracked separately through the Tele-Communications,
Inc. Series A TCI Group Common Stock (the "TCI Group Series A Stock")
and Series B TCI Group Common Stock (the "TCI Group Series B Stock,"
and together with the TCI Group Series A Stock, the "TCI Group Stock").
The Liberty Media Group was tracked through the Tele-Communications,
Inc. Series A Liberty Media Group Common Stock ("Liberty Group Series A
Stock") and Series B Liberty Media Group Common Stock ("Liberty Group
Series B Stock" and together with the Liberty Group Series A Stock, the
"Liberty Group Stock"). The TCI Ventures Group was tracked separately
through the Tele-Communications, Inc. Series A TCI Ventures Group
Common Stock ("TCI Ventures Group Series A Stock") and Series B TCI
Ventures Group Common Stock ("TCI Ventures Group Series B Stock" and
together with the TCI Ventures Group Series A Stock, the "TCI Ventures
Group Stock").
On August 5, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the Liberty Group Stock.
Additionally, the shareholders of TCI approved the redesignation of the
previously authorized Class A and Class B common stock into TCI Group
Series A Stock and TCI Group Series B Stock, respectively. On August
10, 1995, TCI distributed, in the form of a dividend, 2.25 shares of
Liberty Group Stock for each four shares of TCI Group Stock owned (the
"Liberty Distribution").
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series A
Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the Exchange Offers was two shares
of the applicable series of TCI Ventures Group Stock for each share of
the corresponding series of TCI Group Stock properly tendered up to the
indicated maximum numbers. Upon the September 10, 1997 consummation of
the Exchange Offers, 188,661,300 shares of TCI Group Series A Stock and
16,266,400 shares of TCI Group Series B Stock were exchanged for
377,322,600 shares of TCI Ventures Group Series A Stock and 32,532,800
shares of TCI Ventures Group Series B Stock (the "TCI Ventures
Exchange").
Each of the separate series of Tele-Communications, Inc. common stock
was converted to a series of common stock of AT&T Corporation ("AT&T")
upon the March 9, 1999 merger of the Company into AT&T. See note 2.
Collectively, the TCI Group, the Liberty Media Group and the TCI
Ventures Group are referred to as the "Groups" and individually, may be
referred to herein as a "Group." The TCI Group Series A Stock, TCI
Ventures Group Series A Stock and the Liberty Group Series A Stock are
sometimes collectively referred to herein as the "Series A Stock," and
the TCI Group Series B Stock, TCI Ventures Group Series B Stock and
Liberty Group Series B Stock are sometimes collectively referred to
herein as the "Series B Stock."
(continued)
43
<PAGE> 44
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group, each such Group in the capital structure of TCI,
which encompassed the TCI Group Stock, Liberty Group Stock and TCI
Ventures Group Stock, did not affect the ownership or the respective
legal title to such assets or responsibility for liabilities of TCI or
any of its subsidiaries. TCI and its subsidiaries each were responsible
for their respective liabilities. Holders of TCI Group Stock, Liberty
Group Stock and TCI Ventures Group Stock were common stockholders of
TCI and were subject to risks associated with an investment in TCI and
all of its businesses, assets and liabilities.
Accounting Standards
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statements of
operations and comprehensive earnings to conform to the requirements of
SFAS 130. SFAS 130 requires that all items which are components of
comprehensive earnings or losses be reported in a financial statement
in the period in which they are recognized. The Company has included
cumulative foreign currency translation adjustments and unrealized
holding gains and losses on available-for-sale securities in other
comprehensive earnings that are recorded directly in stockholders'
equity. Pursuant to SFAS 130, these items are reflected, net of related
tax effects, as components of comprehensive earnings in the Company's
consolidated statements of operations and comprehensive earnings, and
are included in accumulated other comprehensive earnings in the
Company's consolidated balance sheets and statements of stockholders'
equity.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"), which is effective
for all fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures of net
investments in foreign operations. Although management of the Company
has not completed its assessment of the impact of SFAS 133 on its
consolidated results of operations and financial position, management
currently estimates that the impact of SFAS 133 will not be material.
(continued)
44
<PAGE> 45
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Merger with AT&T
On March 9, 1999, AT&T acquired TCI in a merger (the "AT&T Merger") in
which Italy Merger Corp., a wholly-owned subsidiary of AT&T, merged
with and into TCI, and TCI thereby became a wholly-owned subsidiary of
AT&T. As a result of the AT&T Merger, (i) each share of TCI Group
Series A Stock was converted into 0.7757 of a share of common stock,
par value $1.00 per share, of AT&T ("AT&T Common Stock"), (ii) each
share of TCI Group Series B Stock was converted into 0.8533 of a share
of AT&T Common Stock, (iii) each share of Liberty Group Series A Stock
was converted into one share of a newly created class of AT&T common
stock designated as the Class A Liberty Media Group Common Stock, par
value $1.00 per share (the "AT&T Liberty Class A Tracking Stock"), (iv)
each share of Liberty Group Series B Stock was converted into one share
of a newly created class of AT&T common stock designated as the Class B
Liberty Media Group Common Stock, par value $1.00 per share (the "AT&T
Liberty Class B Tracking Stock" and together with the AT&T Liberty
Class A Tracking Stock, the "AT&T Liberty Tracking Stock"), (v) each
share of TCI Ventures Group Series A Stock was converted into 0.52 of a
share of AT&T Liberty Class A Tracking Stock, (vi) each share of TCI
Ventures Group Series B Stock was converted into 0.52 of a share of
AT&T Liberty Class B Tracking Stock, (vii) each share of TCI's
Convertible Preferred Stock, Series C-TCI Group (the "Series C-TCI
Group Preferred Stock") was converted into 103.059502 shares of AT&T
Common Stock, (viii) each share of TCI's Convertible Preferred Stock
Series C-Liberty Media Group (the "Series C-Liberty Media Group
Preferred Stock") was converted into 56.25 shares of AT&T Liberty Class
A Tracking Stock, (ix) each share of TCI's Redeemable Convertible TCI
Group Preferred Stock, Series G ("Series G Preferred Stock") was
converted into 0.923083 shares of AT&T Common Stock and (x) each share
of TCI's Redeemable Convertible Liberty Media Group Preferred Stock,
Series H ("Series H Preferred Stock") was converted into 0.590625 of a
share of AT&T Liberty Class A Tracking Stock. Following the AT&T
Merger, each share of TCI's Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock ("Class B Preferred Stock")
continues to be outstanding as the Class B Preferred Stock of TCI with
the same rights and preferences such stock had prior to the AT&T
Merger. In general, the holders of shares of AT&T Liberty Class A
Tracking Stock and the holders of shares of AT&T Liberty Class B
Tracking Stock will vote together as a single class with the holders of
shares of AT&T Common Stock on all matters presented to such
stockholders, with the holders being entitled to one-tenth (1/10th) of
a vote for each share of AT&T Liberty Class A Tracking Stock held, 1
vote per share of AT&T Liberty Class B Tracking Stock held and 1 vote
per share of AT&T Common Stock held.
(continued)
45
<PAGE> 46
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The shares of AT&T Liberty Tracking Stock issued in the AT&T Merger are
intended to reflect the separate performance of the businesses and
assets attributed to "Liberty/Ventures Group," which following the AT&T
Merger, is comprised of the businesses and assets attributed to Liberty
Media Group and TCI Ventures Group at the time of the AT&T Merger.
Pursuant to, and subject to the terms and conditions set forth in, the
Agreement and Plan of Restructuring and Merger, dated as of June 23,
1998 (the "Merger Agreement"), immediately prior to the AT&T Merger,
certain assets previously attributed to TCI Ventures Group (including,
among others, the shares of AT&T Common Stock received in the merger of
AT&T and Teleport Communications Group, Inc. ("TCG"), the stock of At
Home Corporation ("@Home") attributed to TCI Ventures Group, the assets
and business of the National Digital Television Center, Inc. ("NDTC")
and TCI Ventures Group's equity interest in Western
Tele-Communications, Inc.) were transferred to TCI Group in exchange
for approximately $5.5 billion in cash. Also, upon consummation of the
AT&T Merger, through a new tax sharing agreement between
Liberty/Ventures Group and AT&T, Liberty/Ventures Group became entitled
to the benefit of approximately $2.0 billion of net operating loss
carryforwards attributable to all entities included in TCI's
consolidated federal income tax return as of the date of the AT&T
Merger. Such net operating loss carryforwards are subject to adjustment
by the Internal Revenue Service and are subject to limitations on usage
which may affect the ultimate amount utilized. See note 19 to the
accompanying consolidated financial statements of the Company.
Additionally, certain warrants previously attributed to TCI Group were
transferred to Liberty/Ventures Group in exchange for approximately
$176 million in cash. Certain agreements entered into at the time of
the AT&T Merger provide, among other things, for preferred vendor
status to Liberty/Ventures Group for digital basic distribution on
AT&T's systems of new programming services created by Liberty/Ventures
Group and for a renewal of existing affiliation agreements. The
transfer of other immaterial assets was also effected.
Pursuant to amended corporate governance documents for the entities
included in Liberty/Ventures Group and certain agreements among AT&T
and TCI, the business of Liberty/Ventures Group will continue to be
managed by certain persons who were members of TCI's management prior
to the AT&T Merger. AT&T will initially designate one third of the
directors of such entities and its rights as the sole shareholder of
the common stock of such entities following the AT&T Merger will, in
accordance with Delaware law, be limited to actions which will require
shareholder approval. Therefore, management has concluded that TCI does
not have a controlling financial interest (as that term is used in
Statement of Financial Accounting Standards No. 94) in the entities
comprising the Liberty/Ventures Group following the AT&T Merger, and
will account for its investment in such entities under the equity
method.
(continued)
46
<PAGE> 47
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on
December 30, 1998, Liberty/Ventures Group prior to the AT&T Merger
transferred all of the equity securities of Sprint Corporation
("Sprint") beneficially owned by the Liberty/Ventures Group (the
"Sprint Securities") to a trust with an independent trustee (the
"Trustee"), pursuant to a trust agreement approved by the DOJ (the
"Trust Agreement"). The Final Judgment, if entered by the United States
District Court for the District of Columbia, would require the Trustee,
on or before May 23, 2002, to dispose of a portion of the Sprint
Securities held by the trust and beneficially owned by Liberty/Ventures
Group sufficient to cause Liberty/Ventures Group to own beneficially no
more than 10% of the outstanding Series 1 PCS Stock of Sprint on a
fully diluted basis (assuming the issuance of all shares of Series 1
PCS Stock of Sprint ultimately issuable in respect of the applicable
securities of Sprint upon the exercise, conversion or other issuance
thereof in accordance with the terms of such securities) on such date.
On or before May 23, 2004, the Trustee must divest the remainder of the
Sprint Securities beneficially owned by Liberty/Ventures Group.
The Trust Agreement grants the Trustee the sole right to sell the
Sprint Securities and provides that all decisions regarding such
divestiture will be made by the Trustee without discussion or
consultation with AT&T or the entities in the Liberty/Ventures Group;
however, the Final Judgment would provide that the Trustee shall
consult with the board of directors of the Liberty/Ventures Group
entity that owns the Sprint Securities regarding such divestiture
(other than certain directors appointed by AT&T following the AT&T
Merger and any director, officer or shareholder that owns more than
0.10% of the outstanding AT&T Common Stock). The Trustee has the power
and authority to accomplish such divestiture only in a manner
reasonably calculated to maximize the value of the Sprint Securities
beneficially owned by Liberty/Ventures Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty/Ventures Group in the same
proportion as other holders of Sprint's PCS Stock so long as such
securities are held by the trust. The Final Judgment also would
prohibit the acquisition by Liberty/Ventures Group of additional Sprint
Securities (other than in connection with the exercise or conversion,
as applicable, of certain Sprint Securities) without the prior written
consent of the DOJ.
(continued)
47
<PAGE> 48
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately prior to the AT&T Merger, TCI restructured its ownership of
certain of its subsidiaries. This restructuring included merging TCI's
cable subsidiary, TCIC, into TCI. As a result of TCIC's merger with
TCI, all assets and liabilities of TCIC have been assumed by TCI,
including TCIC's public debt. In connection with TCIC's merger with
TCI, each share of TCIC's Cumulative Exchangeable Preferred Stock,
Series A was converted into 2.119 shares of TCI Group Series A Stock,
and such shares of TCI Group Series A Stock were subsequently converted
into AT&T Common Stock in connection with the AT&T Merger. All other
public securities issued by subsidiaries of TCIC (other than TCI
Pacific Communications, Inc. ("Pacific")) otherwise remained
unaffected. Furthermore, as part of the restructuring, (i) certain
asset transfers were made between TCI and its subsidiaries, (ii)
123,896 shares of the Company's Convertible Redeemable Participating
Preferred Stock, Series F ("Series F Preferred Stock") which were held
by subsidiaries of TCI, were converted into 185,428,946 shares of TCI
Group Series A Stock (which in turn were converted into 143,837,233
shares of AT&T Common Stock in the AT&T Merger and continue to be held
by subsidiaries of TCI), (iii) the remaining 154,411 shares of Series F
Preferred Stock which were formerly held by subsidiaries of TCI were
distributed to TCI through a series of liquidations and canceled, and
(iv) 125,728,816 shares of TCI Group Series A Stock, 9,154,134 shares
of TCI Group Series B Stock, 6,654,367 shares of Liberty Group Series A
Stock, 3,417,187 shares of Liberty Group Series B Stock, and 67,536
shares of Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock ("Class B Preferred Stock"), each formerly held by
subsidiaries of TCI, were distributed to TCI through a series of
liquidations and canceled.
After the AT&T Merger, under the terms of the 5% Class A Senior
Cumulative Exchangeable Preferred Stock of Pacific (the "Exchangeable
Preferred Stock"), each share of that preferred stock is exchangeable,
from and after August 1, 2001, for approximately 4.225 shares of AT&T
Common Stock, subject to certain anti-dilution adjustments.
Additionally, after the AT&T Merger, Pacific may elect to make any
dividend, redemption or liquidation payment on the Exchangeable
Preferred Stock in cash, by delivery of shares of AT&T Common Stock or
by a combination of the foregoing forms of consideration.
(3) Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1998 and 1997 was not significant.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
specific number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated costs of the programs when
the film is available for airing less prepayments. Such amounts are
amortized on a film-by-film basis over the anticipated number of
exhibitions.
(continued)
48
<PAGE> 49
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investments
Marketable equity securities held by the Company are classified as
available-for-sale and are reported at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are
carried net of taxes as a component of accumulated other comprehensive
earnings in stockholders' equity. Realized gains and losses are
determined on a specific-identification basis.
Other investments in which the ownership interest is less than 20% and
are not considered marketable securities are generally carried at the
lower of cost or net realizable value. For those investments in
affiliates in which the Company's voting interest is 20% to 50%, the
equity method of accounting is generally used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the
Company's share of the net earnings or losses of the affiliates as they
occur rather than as dividends or other distributions are received. The
Company's share of losses are generally limited to the extent of the
Company's investment in, advances to and commitments for the investee.
The Company's share of net earnings or losses of affiliates includes
the amortization of the difference between the Company's investment and
its share of the net assets of the investee. Recognition of gains on
sales of properties to affiliates accounted for under the equity method
is deferred in proportion to the Company's ownership interest in such
affiliates.
Changes in the Company's proportionate share of the underlying equity
of a subsidiary or equity method investee, which result from the
issuance of additional equity securities by such subsidiary or equity
investee, generally are recognized as gains or losses in the Company's
consolidated statements of operations and comprehensive earnings.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and
applicable overhead related to installations and interest during
construction are capitalized. During 1998, 1997 and 1996, interest
capitalized was not significant.
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.
(continued)
49
<PAGE> 50
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Franchise Costs
Franchise costs include the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible
assets. Such amounts are generally amortized on a straight-line basis
over 40 years. Costs incurred by the Company in negotiating and
renewing franchise agreements are amortized on a straight-line basis
over the life of the franchise, generally 10 to 20 years.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amounts of property,
plant and equipment and its identifiable intangible assets to determine
whether current events or circumstances warrant adjustments to such
carrying amounts. If an impairment adjustment is deemed necessary, such
loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary
to estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or
fair value less costs to sell.
Derivative Financial Instruments
The Company has entered into variable and fixed interest rate exchange
agreements ("Interest Rate Swaps") which it uses to manage interest
rate risk arising from the Company's financial liabilities. Such
Interest Rate Swaps are accounted for as hedges; and accordingly,
amounts receivable or payable under Interest Rate Swaps are recognized
as adjustments to interest expense. Gains and losses on early
terminations of Interest Rate Swaps are included in the carrying amount
of the related debt and amortized as yield adjustments over the
remaining term of the derivative financial instruments or the remaining
term of the related debt, whichever is shorter. The Company does not
use such instruments for trading purposes.
Derivative financial instruments that can be settled, at the Company's
option, in shares of the Company's common stock are accounted for as
equity instruments. Periodic settlements of amounts payable/receivable
pursuant to such financial instruments are included in additional
paid-in capital.
In conjunction with a stock repurchase program or similar transaction,
the Company may elect to sell put options on its own common stock.
Proceeds from any such sales are reflected as an increase to additional
paid-in capital and an amount equal to the maximum redemption amount
under unexpired put options is reflected as redeemable common stock.
(continued)
50
<PAGE> 51
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
From time to time, the Company uses certain derivative financial
instruments to manage its foreign currency risks. Because the Company
generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries.
However, the Company may enter into forward contracts to reduce its
exposure to short-term (generally no more than one year) movements in
the exchange rates applicable to firm funding commitments that are
denominated in currencies other than the U.S. dollar. When high
correlation of changes in the market value of the forward contract and
changes in the fair value of the firm commitment is probable, the
forward contract is accounted for as a hedge. Changes in the market
value of a forward contract that qualifies as a hedge and any gains or
losses on early termination of such a forward contract are deferred and
included in the measurement of the item (generally an investment in, or
an advance to, a foreign affiliate) that results from the funding of
such commitment. Market value changes in derivative financial
instruments that do not qualify as hedges are recognized currently in
the consolidated statements of operations and comprehensive earnings.
To date, the Company's use of forward contracts, as described above,
has not had a material impact on the Company's financial position or
results of operations.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of consolidated
subsidiaries have the right to cause the Company to repurchase such
holders' common equity.
Included in minority interests in equity of consolidated subsidiaries
is $925 million and $927 million in 1998 and 1997, respectively, of
preferred stocks (and accumulated dividends thereon) of certain
subsidiaries. Dividend requirements on such subsidiary preferred stocks
are reflected as minority interests in the accompanying consolidated
statements of operations and comprehensive earnings.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement
of operations items are translated at average currency exchange rates.
The resulting translation adjustment is recorded as a separate
component of accumulated other comprehensive earnings in stockholders'
equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the combined
statements of operations as unrealized (based on the applicable period
end translation) or realized upon settlement of the transactions. Such
realized and unrealized gains and losses were not material to the
accompanying consolidated financial statements.
(continued)
51
<PAGE> 52
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized
in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the
extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are
expected to remain connected to the cable distribution system.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 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 SFAS
123, the Company continues to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion
No. 25"). The Company has included the disclosures required by SFAS 123
in note 15.
Operating Segments
The Company has significant operations principally in two operating
segments: domestic cable and communications services and programming
services. Substantially all of the Company's domestic cable and
communications businesses and assets ("cable") were attributed to TCI
Group, and substantially all of the Company's programming businesses
and assets ("programming") have been attributed to Liberty Media Group.
The Company's principal international businesses and assets and the
Company's remaining non-cable and non-programming domestic businesses
and assets have been attributed to TCI Ventures Group. No individual
business or asset within TCI Ventures Group constituted a reportable
segment of the Company. See note 22 for additional segment information.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
52
<PAGE> 53
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Earnings (Loss) Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options, etc.)
as if they had been converted at the beginning of the periods
presented. Potential common shares that have an anti-dilutive effect
(i.e., those that increase income per share or decrease loss per share)
are excluded from diluted EPS.
(a) TCI Group Stock
The basic loss attributable to TCI Group common stockholders
per common share for the years ended December 31, 1998, 1997
and 1996 and the diluted loss attributable to TCI Group common
stockholders per common share for the years ended December 31,
1997 and 1996 was computed by dividing net loss attributable
to TCI Group common stockholders ($240 million, $537 million
and $799 million, respectively) by the weighted average number
of common shares outstanding of TCI Group Stock during the
period (525 million, 632 million and 665 million,
respectively). Potential common shares were not included in
the diluted calculation of weighted average shares outstanding
because their inclusion would be anti-dilutive. At December
31, 1998, 1997 and 1996, there were 100 million, 113 million,
and 126 million potential common shares, respectively,
consisting of stock options and other performance awards and
convertible securities that could potentially dilute future
EPS calculations in periods of net earnings. Such potential
common share amounts do not take into account the assumed
number of shares that would be repurchased by the Company upon
the exercise of stock options and other performance awards.
The diluted loss attributable to TCI Group common stockholders
per common share for the year ended December 31, 1998 was
computed by dividing net loss attributable to TCI Group common
stockholders, which is increased by aggregate payments of $15
million made during 1998 under certain contracts which may be
settled in shares or cash, but for the purpose of computing
diluted EPS, are assumed to be settled in shares (see notes 15
and 17), by the weighted average number of common shares
outstanding of TCI Group Stock during the period. Potential
common shares were not included in the diluted calculation of
weighted average shares outstanding because their inclusion
would be anti-dilutive.
In conjunction with the March 9, 1999 AT&T Merger, TCI Group
Stock was converted into AT&T Common Stock. See note 2.
(b) Liberty Group Stock
The basic earnings attributable to Liberty Media Group common
stockholders per common share for the years ended December 31,
1998, 1997 and 1996 was computed by dividing net earnings
attributable to Liberty Media Group common stockholders by the
weighted average number of common shares outstanding of
Liberty Group Stock during the period.
(continued)
53
<PAGE> 54
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings attributable to Liberty Media Group common
stockholders per common and potential common share for the years ended
December 31, 1998, 1997 and 1996 was computed by dividing earnings
attributable to Liberty Media Group common stockholders, adjusted for
Liberty Media Group's share of interest expense of an affiliate
accrued during the year-ended 1998, assuming the conversion of the
affiliate's convertible securities into Liberty Group Stock as of the
beginning of the period, by the weighted average number of common and
dilutive potential common shares outstanding of Liberty Group Stock
during the period. Shares issuable upon conversion of the Series
C-Liberty Media Group Preferred Stock, the Convertible Preferred
Stock, Series D, the Series H Preferred Stock, convertible notes
payable, convertible debentures of affiliate and stock options and
other performance awards have been included in the diluted calculation
of weighted average shares to the extent that the assumed issuance of
such shares would have been dilutive, as illustrated below. All of the
outstanding shares of Convertible Preferred Stock, Series D, were
redeemed effective April 1, 1998 (see note 13). Numerator adjustments
for dividends and interest associated with the convertible preferred
shares and convertible notes payable, respectively, were not made to
the computation of diluted earnings per share as such dividends and
interest was paid by TCI Group. See notes 12 and 13 for descriptions
of the convertible notes payable and convertible preferred shares,
respectively. See note 15 for descriptions of stock options.
In conjunction with the March 9, 1999 AT&T Merger, Liberty Group Stock
was converted into AT&T Liberty Tracking Stock. See note 2.
(continued)
54
<PAGE> 55
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted
EPS with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Basic EPS:
Earnings attributable to common
stockholders $ 156 125 1,056
======== ======== ========
Weighted average common shares 359 366 374
======== ======== ========
Basic earnings per share attributable to
common stockholders $ .43 .34 2.82
======== ======== ========
Diluted EPS:
Earnings attributable to common
stockholders $ 156 125 1,056
Add interest expense 1 -- --
-------- -------- --------
Adjusted earnings attributable to common
stockholders assuming conversion of
convertible notes payable of
affiliate $ 157 125 1,056
======== ======== ========
Weighted average common shares 359 366 374
Add dilutive potential common shares:
Employee and director options and
other performance awards 8 4 3
Convertible notes payable 19 19 21
Convertible debentures of affiliate 7 -- --
Series C- Liberty Media Group
Preferred Stock 4 4 4
Convertible Preferred Stock, Series D -- 6 5
Series H Preferred Stock 4 4 2
-------- -------- --------
Dilutive potential common shares 42 37 35
-------- -------- --------
Diluted weighted average common shares 401 403 409
======== ======== ========
Diluted earnings per share attributable
to common stockholders $ .39 .31 2.58
======== ======== ========
</TABLE>
(c) TCI Ventures Group Stock
The basic earnings (loss) attributable to TCI Ventures Group
stockholders per common share for the year ended December 31,
1998 and the period from September 10, 1997 (the date of the
TCI Ventures Exchange) through December 31, 1997 was computed
by dividing earnings (loss) attributable to TCI Ventures
Group stockholders by the weighted average number of common
shares outstanding of TCI Ventures Group Stock during the
period.
(continued)
55
<PAGE> 56
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The diluted earnings (loss) attributable to TCI Ventures Group
stockholders per common and potential common share for the year ended
December 31, 1998 and the period from September 10, 1997 through
December 31, 1997 was computed by dividing earnings (loss)
attributable to TCI Ventures Group stockholders by the weighted
average number of common and dilutive potential common shares
outstanding of TCI Ventures Group stock during the period. Shares
issuable upon conversion of convertible notes payable and stock
options and other performance awards have been included in the diluted
calculation of weighted average shares to the extent that the assumed
issuance of such shares would have been dilutive, as illustrated
below. Numerator adjustments for interest associated with convertible
notes payable were not made to the computation of diluted earnings per
share as such interest was paid by TCI Group. In conjunction with the
March 9, 1999 AT&T Merger, TCI Ventures Group Stock was converted into
AT&T Liberty Tracking Stock. See note 2.
Information concerning the reconciliation of basic EPS to dilutive EPS
with respect to TCI Ventures Group Stock is presented below:
<TABLE>
<CAPTION>
September 10,
Year ended 1997 through
December 31, December 31,
1998 1997
------------ ------------
amounts in millions,
except per share amounts
<S> <C> <C>
Basic EPS:
Earnings (loss) attributable to common
stockholders $ 2,003 (191)
============ ============
Weighted average common shares 422 410
============ ============
Basic (loss) earnings per share
attributable to common stockholders $ 4.75 (.47)
============ ============
Diluted EPS:
Earnings (loss) attributable to common
stockholders $ 2,003 (191)
============ ============
Weighted average common shares 422 410
------------ ------------
Add dilutive potential common shares:
Employee and director options and
other performance awards 8 --
Convertible notes payable 21 --
------------ ------------
Dilutive potential common shares 29 --
------------ ------------
Diluted weighted average common shares 451 410
============ ============
Diluted earnings (loss) per share
attributable to common stockholders $ 4.44 (.47)
============ ============
</TABLE>
(continued)
56
<PAGE> 57
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $1,066 million, $1,183 million and $1,056
million for the years ended December 31, 1998, 1997 and 1996,
respectively. Cash paid for income taxes was $57 million, $141 million,
and $41 million in 1998, 1997 and 1996, respectively. In addition, the
Company received income tax refunds amounting to $76 million and $36
million during the years ended December 31, 1998 and 1997,
respectively.
Significant noncash investing and financing activities are reflected
in the following table:
<TABLE>
<CAPTION>
Years ended
December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Recorded value of assets acquired $ (1,098) (1,857) (5,064)
Net liabilities assumed 11 720 1,811
Deferred tax liability recorded in acquisitions 71 145 1,379
Change in minority interests in equity of consolidated
subsidiaries (169) 93 113
Elimination of notes receivable from affiliates 350 -- --
Common stock and preferred stock issued in acquisitions 376 1,060 457
TCI common stock and preferred stock held by acquired
company -- (484) --
Preferred stock of subsidiaries issued in acquisitions -- -- 640
-------- -------- --------
Cash paid for acquisitions $ (459) (323) (664)
======== ======== ========
Cash received in exchanges:
Recorded value of assets acquired $ (136) (392) (709)
Historical cost of assets exchanged 151 399 754
Gain recorded on exchange of assets 30 11 21
-------- -------- --------
Cash received in exchanges $ 45 18 66
======== ======== ========
Capitalized costs of distribution agreements (note 18) $ 74 173 --
======== ======== ========
Exchange of consolidated subsidiaries for note receivable
and equity investments $ -- -- 894
======== ======== ========
</TABLE>
For a description of certain non-cash transactions, see notes 6 and
10.
@Home's cash and cash equivalent balances of $419 million and $120
million are included in the Company's cash and cash equivalent
balances at December 31, 1998 and 1997, respectively. Such @Home
balances are available to be applied towards the liquidity
requirements of @Home. Accordingly, it is not anticipated that any
portion of such @Home balances will be distributed or otherwise made
available to the Company.
The Company's restricted cash is primarily comprised of proceeds
received in connection with certain asset dispositions. Such proceeds,
which aggregated $162 million and $34 million at December 31, 1998 and
1997, respectively, are designated to be reinvested in certain
identified assets for income tax purposes. The Company's restricted
cash also includes amounts held as collateral for interest payment
obligations pursuant to certain bank credit facilities. Such amounts
aggregated $17 million and $5 million at December 31, 1998 and 1997,
respectively.
(continued)
57
<PAGE> 58
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company ceased to consolidate Flextech p.l.c. ("Flextech") and
Cablevision S.A. ("Cablevision") and began to account for Flextech and
Cablevision using the equity method of accounting, effective January
1, 1997 and October 1, 1997, respectively. The effects of changing the
method of accounting for the Company's ownership interest in Flextech
and Cablevision from the consolidation method to the equity method are
summarized below (amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash equivalents) reclassified to
equity investments $ 596
Liabilities reclassified to equity investments (484)
Minority interests in equity of subsidiaries reclassified to
equity investments (151)
-------
Decrease in cash and cash equivalents $ (39)
=======
</TABLE>
(6) Investments in Affiliates
The Company has various investments accounted for under the equity
method. The following table includes the Company's carrying value and
percentage ownership of the Company's more significant investments as
of the indicated dates:
<TABLE>
<CAPTION>
Percentage Carrying value at
Percentage December 31,
ownership at ----------------------
December 31, 1998 1998 1997
----------------- -------- --------
amounts in millions
<S> <C> <C> <C>
USA Networks, Inc. ("USAI") and related
investments (a) (a) $ 1,042 348
Cablevision Systems Corporation ("CSC") (b) 33% 945 15
Telewest Communications plc ("Telewest") (c) 22% 515 324
Flextech (d) 37% 320 261
Cablevision (e) 28% 315 239
Various foreign equity investments (other
than Telewest, Flextech and
Cablevision) (f) various 346 209
InterMedia Capital Partners IV, L.P.
("InterMedia IV") and InterMedia
Capital Management IV, L.P. ("ICM IV")
(collectively, "IP IV") (g) 50% 207 262
Falcon Communications, L.P. 46% 189 --
QVC, Inc. ("QVC") 43% 197 134
Parnassos, L.P. 33% 120 --
Sprint Spectrum Holding Company L.P.,
MinorCo, L.P. and PhillieCo Partnership
I L.P. (the "PCS Ventures") (h) -- -- 607
TCG (i) -- -- 295
Other (j) 569 369
-------- --------
$ 4,765 3,063
======== ========
</TABLE>
(continued)
58
<PAGE> 59
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- -----------
(a) USAI
Pursuant to an agreement among the Company, Barry Diller and certain
of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), the Company contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Silver King Option")
to purchase 2 million shares of Class B common stock of Silver King
Communications, Inc. ("Silver King") (which shares represented voting
control of Silver King at such time) and $4 million in cash,
representing the exercise price of the Silver King Option. BDTV-I is a
corporation formed by the Company and Mr. Diller pursuant to the BDTV
Agreement, in which the Company owns over 99% of the equity and none
of the voting power (except for protective rights with respect to
certain fundamental corporate actions) and Mr. Diller owns less than
1% of the equity and all of the voting power. BDTV-I exercised the
Silver King Option shortly after its contribution, thereby becoming
the controlling stockholder of Silver King. Such change in control of
Silver King had been approved by the Federal Communications Commission
("FCC") in June 1996, subject, however, to the condition that the
equity interest of the Company in Silver King not exceed 21.37%
without the prior approval of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into
in August 1996, Silver King acquired Home Shopping Network, Inc.
("HSN") by merger of HSN with a subsidiary of Silver King in December
1996 (the "HSN Merger") where HSN is the surviving corporation and a
subsidiary of Silver King following the HSN Merger. The Company
accounted for the HSN Merger as a sale of a portion of its investment
in HSN and accordingly, recorded a pre-tax gain of approximately $47
million. In order to effect the HSN Merger in compliance with the FCC
Order, the Company agreed to defer receiving certain shares of Silver
King that would otherwise have become issuable to it in the HSN Merger
until such time as it was permitted to own such shares. As a result,
the HSN Merger was structured so that the Company received (i) 15.6
million shares of Class B common stock of Silver King, all of which
shares the Company contributed to BDTV II INC. ("BDTV-II"), (ii) the
contractual right to be issued up to an additional 5.2 million shares
of Class B common stock of Silver King from time to time upon the
occurrence of certain events which would allow the Company to own
additional shares in compliance with the FCC Order (including events
resulting in the dilution of the Company's percentage equity
interest), and (iii) approximately 739,000 shares of Class B common
stock and 17.6 million shares of common stock of HSN (representing
approximately 19.9% of the equity of HSN). BDTV-II is a corporation
formed by the Company and Barry Diller pursuant to the BDTV Agreement,
in which the relative equity ownership and voting power of the Company
and Mr. Diller are substantially the same as their respective equity
ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer included in the
consolidated financial results of the Company. Subsequent to the HSN
Merger, Silver King was renamed HSN, Inc. ("HSNI").
(continued)
59
<PAGE> 60
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1998, pursuant to an Investment Agreement among Universal
Studios, Inc. ("Universal"), HSNI, HSN and the Company, dated as of
October 1997 and amended and restated as of December 1997, HSNI
consummated a transaction (the "Universal Transaction") through which
USA Networks Partners, Inc., a subsidiary of Universal, sold its 50%
interest in USAI, a New York general partnership, to HSNI and
Universal contributed the remaining 50% interest in USAI and its
domestic television production and distribution operations to HSNI.
Subsequent to these transactions, HSNI was renamed USAI. In connection
with the Universal Transaction, Universal, USAI, HSN and the Company
became parties to a number of other agreements relating to, among
other things, (i) the management of USAI, (ii) the purchase and sale
or other transfer of voting securities of USAI, including securities
convertible or exchangeable for voting securities of USAI, and (iii)
the voting of such securities.
At the closing of the Universal Transaction, Universal (i) was issued
6 million shares of USAI's Class B common stock, 7 million shares of
USAI's common stock and 109 million common equity shares ("LLC
Shares") of USANi LLC, a limited liability company formed to hold all
of the businesses of USAI and its subsidiaries, except for its
broadcasting business and its equity interest in Ticketmaster Group,
Inc. and (ii) received a cash payment of $1.3 billion. Pursuant to an
Exchange Agreement relating to the LLC Shares (the "LLC Exchange
Agreement"), approximately 74 million of the LLC Shares issued to
Universal are each exchangeable for one share of USAI's Class B common
stock and the remainder of the LLC Shares issued to Universal are each
exchangeable for one share of USAI's common stock.
At the closing of the Universal Transaction, the Company was issued
1.2 million shares of USAI's Class B common stock. Of such shares,
800,000 shares of Class B common stock were contributed to BDTV IV
INC. (collectively with BDTV-I, BDTV-II and BDTV III INC., "BDTV"), a
newly-formed entity having substantially the same terms as BDTV-I,
BDTV-II and BDTV III INC. (with the exception of certain transfer
restrictions) in which the Company owns over 99% of the equity and
none of the voting power (except for protective rights with respect to
certain fundamental corporate actions) and Barry Diller owns less than
1% of the equity and all of the voting power. The Company accounts for
its investment in BDTV under the equity method. In addition, the
Company purchased 10 LLC Shares at the closing of the Universal
Transaction for an aggregate purchase price of $200.
On June 24, 1998, USAI consummated the previously announced agreement
to acquire the remaining stock of Ticketmaster Group, Inc. which it
did not previously own through a tax-free merger (the "Ticketmaster
Transaction"). In connection with the increases in USAI's equity, net
of the dilution of the Company's ownership interest, that resulted
from the issuance of common stock by USAI in the Universal Transaction
and the Ticketmaster Transaction, the Company recorded a $64 million
increase to equity (after deducting a deferred income tax liability of
$42 million) and an increase to the carrying value of the Company's
investment in USAI of $106 million. No gain was recognized in the
consolidated statements of operations and comprehensive earnings due
primarily to the Company's commitment to purchase additional equity
interests in USAI.
(continued)
60
<PAGE> 61
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Universal Transaction, each of Universal and
the Company was granted a preemptive right with respect to future
issuances of USAI's common stock, subject to certain limitations, to
maintain their respective percentage ownership interests in USAI that
they had prior to such issuances. In connection with such right,
during 1998, the Company purchased approximately 4.7 million shares of
USAI's common stock and approximately 22.9 million LLC Shares for an
aggregate cost of approximately $560 million. Pursuant to the LLC
Exchange Agreement, each LLC Share issued or to be issued to the
Company is exchangeable for one share of USAI's common stock.
At December 31, 1998, the Company held 24.4 million shares of USAI's
common stock through BDTV and 5.2 million shares of USAI's common
stock directly. Additionally, the Company held 22.9 million LLC Shares
at December 31, 1998 as well as shares of HSN's common stock which are
exchangeable for 16.6 million shares of USAI's common stock. The
Company's direct ownership of USAI is restricted under the FCC.
Assuming the exchange of the Company's shares in HSN and its LLC
Shares for USAI common stock, and the exchange of certain securities
owned by Universal and certain of its affiliates for USAI common
stock, the Company would own 69.1 million shares or approximately 21%
of USAI, including shares held through BDTV at December 31, 1998.
USAI's common stock had a closing market value of $33-1/8 per share on
December 31, 1998.
During the years ended December 31, 1998, 1997 and 1996, the Company's
share of affiliates' earnings (losses) from its interests in USAI and
related investments accounted for $30 million, $3 million and ($1
million), respectively.
(b) CSC
On March 4, 1998, the Company contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange
for approximately 48.9 million newly issued CSC Class A common shares
(the "CSC Transaction"). CSC also assumed and repaid approximately
$574 million of debt owed by the Company to external parties and $95
million of debt owed to the Company. As a result of the CSC
Transaction, the Company recognized a $506 million gain in the
accompanying consolidated statement of operations and comprehensive
earnings for the year ended December 31, 1998. Such gain represents
the excess of the $1,161 million fair value of the CSC Class A common
shares received over the historical cost of the net assets transferred
by the Company to CSC. The $1.9 billion difference between the
carrying value of the Company's investment in CSC and CSC's net
deficiency is being amortized over an estimated useful life of 20
years. Including the amortization of such difference, CSC accounted
for $240 million of the Company's share of its affiliates' losses
during the year ended December 31, 1998.
The Company has also entered into letters of intent with CSC which
provide for the Company to acquire a cable system in Michigan and an
additional 4% of CSC's Class A common shares and for CSC to (i)
acquire cable systems serving approximately 250,000 customers in
Connecticut and (ii) assume $110 million of the Company's debt.
(continued)
61
<PAGE> 62
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1998, the Company owned 49,982,572 shares of CSC Class
A common stock, which had a closing market price of $50.13 per share
on such date. Such shares represented an approximate 33.0% equity
interest in CSC's total outstanding shares and an approximate 9%
voting interest in CSC in all matters except for (i) the election of
directors, in which case the Company effectively has the right to
designate two of CSC's directors, and (ii) any increase in authorized
shares, in which case the Company has agreed to vote its interest in
proportion with the public holders of CSC Class A common shares. The
ability of the Company to sell or increase its investment in CSC is
subject to certain restrictions and limitations set forth in a
stockholders agreement with CSC.
(c) Telewest
Telewest currently operates and constructs cable television and
telephone systems in the United Kingdom ("UK"). Telewest accounted for
$134 million, $145 million and $109 million of the Company's share of
its affiliates' losses during the years ended December 31, 1998, 1997
and 1996, respectively.
At December 31, 1998, the Company indirectly owned 463 million or
21.6% of the issued and outstanding Telewest ordinary shares. The
reported closing price on the London Stock Exchange of Telewest
ordinary shares was (pound)1.74 ($2.88) per share at December 31,
1998.
Effective September 1, 1998, Telewest and General Cable PLC ("General
Cable") consummated a merger (the "General Cable Merger") in which
holders of General Cable received 1.243 new Telewest shares and
(pound)0.65 ($1.11) in cash for each share of General Cable. In
addition, holders of American Depository shares of General Cable
("General Cable ADS") (each representing five General Cable shares)
received 6.215 new Telewest shares and (pound)3.25 ($5.53) in cash for
each share of General Cable ADS. Based upon Telewest's closing share
price of (pound)0.89 ($1.51) on April 14, 1998, the General Cable
Merger was valued at approximately (pound)649 million ($1.1 billion).
The cash portion of the General Cable Merger was financed through an
offer to qualifying Telewest shareholders for the purchase of
approximately 261 million new Telewest shares at a price of
(pound)0.925 ($1.57) per share (the "Telewest Offer"). The Company
subscribed to 85 million Telewest ordinary shares at an aggregate cost
of (pound)78 million ($133 million) in connection with the Telewest
Offer. Immediately following the Telewest Offer, the Company held 28%
of the issued and outstanding Telewest ordinary shares.
In connection with the General Cable Merger, the Company converted its
entire holdings of Telewest convertible preference shares (133 million
shares) into Telewest ordinary shares. As a result of the General
Cable Merger, the Company's ownership interest in Telewest decreased
to 21.6%. In connection with the increase in Telewest's equity, net of
the dilution of the Company's interest in Telewest, that resulted from
the General Cable Merger, the Company recorded a non-cash gain of $60
million (before deducting deferred income tax expense of $21 million)
during 1998.
(continued)
62
<PAGE> 63
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Flextech
In January 1997, the Company's voting interest in Flextech was reduced
to 50% and the Company ceased to include Flextech in its consolidated
financial results and began to account for Flextech using the equity
method of accounting. In April 1997, Flextech and BBC Worldwide
Limited formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions. The consummation of the
BBC Joint Ventures and related transactions resulted in, among other
things, a reduction of the Company's economic ownership interest in
Flextech from 46.2% to 36.8%. The Company continues to maintain a
voting interest in Flextech of approximately 50%. As a result of such
dilution, the Company recorded a $152 million increase to the carrying
amount of the Company's investment in Flextech, a $53 million increase
to deferred income tax liability, a $66 million increase to equity and
a $33 million increase to minority interests in equity of consolidated
subsidiaries. No gain was recognized in the statement of operations
and comprehensive earnings due primarily to certain contingent
obligations of the Company with respect to one of the BBC Joint
Ventures. Flextech accounted for $21 million and $16 million of the
Company's share of its affiliates' losses during the years ended
December 31, 1998 and 1997, respectively.
Based on the (pound)6.07 ($10.07) per share closing price of the
Flextech ordinary shares on the London Stock Exchange, the 58 million
Flextech ordinary shares owned by the Company had an aggregate market
value of (pound)351 million ($583 million) at December 31, 1998.
(e) Cablevision
On October 9, 1997, the Company sold a portion of its 51% interest in
Cablevision to unaffiliated third parties. In connection with such
sale and certain related transactions, the Company recognized a gain
of $49 million. Additionally, effective October 1, 1997, the Company
ceased to consolidate Cablevision and began to account for Cablevision
using the equity method of accounting. Cablevision accounted for $23
million and $3 million of the Company's share of its affiliates'
losses during the years ended December 31, 1998 and 1997,
respectively. See note 20.
(continued)
63
<PAGE> 64
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Various Foreign Investments
Internationally, The News Corporation Limited ("News Corp.") and the
Company formed a venture ("Fox Sports International") to operate sports
programming services in Latin American and Australia and a variety of
new sports services throughout the world except in Asia and in the
United Kingdom, Japan and New Zealand where prior arrangements preclude
an immediate collaboration. The Company owns 50% of Fox Sports
International with News Corp. owning the other 50%. Fox Sports
International accounted for $34 million, $30 million and $21 million of
the Company's share of its affiliates' losses during the years ended
December 31, 1998, 1997 and 1996, respectively.
In addition to Telewest, Flextech and Fox Sports International and
Cablevision, the Company has other less significant equity method
investments in video distribution and programming businesses located
in the UK, other parts of Europe, Asia, Latin America and certain
other foreign countries. In the aggregate, such other foreign
investments in affiliates accounted for $70 million, $70 million and
$54 million of the Company's share of its affiliates losses during the
years ended December 31, 1998, 1997 and 1996, respectively.
(g) IP IV
In July 1996, the Company completed a series of transactions that
resulted in the transfer of all or part of the Company's ownership
interests in certain cable television systems to InterMedia IV in
exchange for a 49% limited partnership interest in InterMedia IV and
assumed debt of $120 million. Simultaneously, the Company received a
cable television system and cash from InterMedia IV in exchange for a
cable television system that had been recently acquired by the
Company. The Company recognized no gain or loss in connection with the
above-described transactions. The $225 million excess of the Company's
investment in InterMedia IV over the Company's share of the partners'
capital of InterMedia IV is being amortized over an estimated useful
life of 20 years. Including such amortization, the Company's share of
InterMedia IV's losses was $53 million, $46 million and $16 million
during the years ended December 31, 1998, 1997 and 1996, respectively.
ICM IV owns a 1.12% limited partnership interest in InterMedia IV. The
Company acquired its limited partnership interest in ICM IV in August
1997 pursuant to the transactions described in note 17.
(h) PCS Ventures
PCS Ventures accounted for $629 million, $493 million and $167 million
of the Company's share of its affiliates' losses during the years
ended December 31, 1998, 1997 and 1996, respectively. The 1996 amount
includes $34 million related to prior periods. See notes 2 and 9.
(i) TCG
TCG accounted for $32 million, $66 million and $51 million of the
Company's share of affiliates' losses during the years ended December
31, 1998, 1997 and 1996, respectively. See Note 8.
(j) Other
As of April 29, 1996, the Company and News Corp. formed two sports
programming ventures. In the U.S., the Company and News Corp. formed
Fox/Liberty Networks LLC ("Fox Sports") into which the Company
contributed interests in its national and regional sports networks and
into which News Corp. contributed its fx cable network and certain
other assets. The Company received a 50% interest in Fox Sports and a
distribution of $350 million in cash. No gain or loss was recognized as
the cash distribution approximated the carrying amount of the assets
contributed.
Prior to the first quarter of 1998, the Company had no obligation, nor
intention, to fund Fox Sports. During 1998, the Company made the
determination to provide funding to Fox Sports based on specific
transactions consummated by Fox Sports. Consequently, the Company's
share of losses of Fox Sports of $83 million for the year ended
December 31, 1998 includes previously unrecognized losses of Fox Sports
of approximately $64 million. Losses for Fox Sports were not recognized
in prior periods due to the fact that the Company's investment in Fox
Sports was less than zero.
Certain of the Company's affiliates are general partnerships and any subsidiary
of the Company that is a general partner in a general partnership is, as such,
liable as a matter of partnership law for all debts (other than non-recourse
debts) of that partnership in the event liabilities of that partnership were to
exceed its assets.
(continued)
64
<PAGE> 65
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summarized unaudited combined financial information for the Company's
affiliates for the periods in which the Company used the equity method to
account for such affiliates is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- --------
amounts in millions
<S> <C> <C>
Combined Financial Position
Property and equipment, net $ 11,018 8,319
Franchise costs, net 7,994 3,582
Other assets, net 21,109 20,849
-------- --------
Total assets $ 40,121 32,750
======== ========
Debt $ 23,159 18,973
Other liabilities 11,361 6,836
Redeemable securities 1,727 1,137
Owners' equity 3,874 5,804
-------- --------
Total liabilities and equity $ 40,121 32,750
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Combined Operations
Revenue $ 15,528 7,811 6,088
Operating expenses (13,889) (7,815) (5,576)
Depreciation and
amortization (3,152) (1,506) (1,070)
-------- -------- --------
Operating loss (1,513) (1,510) (558)
Interest expense (2,056) (921) (615)
Other, net (141) (360) (354)
-------- -------- --------
Net loss $ (3,710) (2,791) (1,527)
======== ======== ========
</TABLE>
(7) Investment in Time Warner
On October 10, 1996, Time Warner and Turner Broadcasting System, Inc.
("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby
TBS shareholders received 1.5 Time Warner common shares (as adjusted
for a two-for-one stock split) for each TBS Class A and Class B common
share held, and each holder of TBS Class C preferred stock received
1.6 Time Warner common shares (as adjusted for a two-for-one stock
split) for each of the 6 shares of TBS Class B common stock into which
each share of Class C preferred stock could have been converted.
(continued)
65
<PAGE> 66
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Time Warner, TBS and TCI entered into an Agreement Containing Consent
Order with the Federal Trade Commission ("FTC") dated August 14, 1996,
as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant
to the FTC Consent Decree, among other things, the Company agreed to
exchange the shares of Time Warner common stock to be received in the
TBS/Time Warner Merger for shares of a separate series of Time Warner
common stock with limited voting rights (the "TW Exchange Stock").
Holders of the TW Exchange Stock are entitled to one one-hundredth
(l/100th) of a vote for each share with respect to the election of
directors. Holders of the TW Exchange Stock will not have any other
voting rights, except as required by law or with respect to limited
matters, including amendments of the terms of the TW Exchange Stock
adverse to such holders. Subject to the federal communications laws,
each share of the TW Exchange Stock will be convertible at any time at
the option of the holder on a one-for-one basis for a share of Time
Warner common stock. Holders of TW Exchange Stock are entitled to
receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets
remaining for common stockholders upon dissolution, liquidation or
winding up of Time Warner.
In connection with the TBS/Time Warner Merger, the Company received
approximately 101.2 million shares (as adjusted for a two-for-one
stock split) of the TW Exchange Stock in exchange for its TBS
holdings. As a result of the TBS/Time Warner Merger, the Company
recognized a pre-tax gain of $1.5 billion in the fourth quarter of
1996. The Company accounts for its investment in Time Warner as an
available-for-sale security. See note 12.
On June 24, 1997 the Company granted Time Warner an option to acquire
the business of Southern Satellite Systems, Inc. ("Southern") and
certain of its subsidiaries (together with Southern, the "Southern
Business") through a purchase of assets (the "Southern Option"). The
Company received 12.8 million shares (as adjusted for a two-for-one
stock split) of TW Exchange Stock valued at $306 million in
consideration for the grant. In September 1997, Time Warner exercised
the Southern Option. Pursuant to the Southern Option, Time Warner
acquired the Southern Business, effective January 1, 1998, for $213
million in cash. The Company recognized a $515 million pre-tax gain in
connection with such transactions in the first quarter of 1998.
(8) Investment in AT&T
On July 23, 1998, a merger in which TCG agreed to be acquired by AT&T,
was consummated. As a result of such merger, TCI received in exchange
for all of its interest in TCG, approximately 47 million shares of
AT&T Common Stock. TCI recognized a $2.3 billion gain (before
deducting deferred income tax expense of $883 million) on such
transaction during the third quarter of 1998 based on the difference
between the carrying amount of TCI's interest in TCG and the fair
value of the AT&T Common Stock received. TCI had accounted for its
ownership interest in AT&T Common Stock as an available-for-sale
security. Such AT&T Common Stock was transferred from TCI Ventures
Group to TCI Group in connection with the AT&T Merger. Following the
AT&T Merger, TCI will treat its investment in AT&T Common Stock as an
investment in its parent. Accordingly, the fair value of TCI's
investment in AT&T Common Stock will be reflected as a reduction of
TCI's equity, and any dividends received on such AT&T Common Stock
will be recorded as an increase to TCI's additional paid-in capital.
During 1998, TCI recognized dividends of $31 million on its investment
in AT&T Common Stock.
(continued)
66
<PAGE> 67
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 of a share of TCG stock for each share of ACC stock.
As a result of such merger transaction, TCI's interest in TCG was
reduced to approximately 26%. In connection with the increase in TCG's
equity, net of the dilution of TCI's interest in TCG, that resulted
from such merger, TCI recorded a non-cash gain of $201 million (before
deducting deferred income tax expense of $71 million).
During the year ended December 31, 1997, TCG issued 6.6 million shares
of its Class A common stock for certain acquisitions. The total
consideration paid by TCG through the issuance of common stock was
approximately $123 million. In addition, effective November 5, 1997,
TCG consummated a public offering of 7.3 million shares of its Class A
common stock. TCG received net proceeds from its sale of shares
pursuant to such offering of $318 million. As a result of the above
transactions, TCI's ownership interest in TCG was reduced to
approximately 28%. Accordingly, as a result of the increase in TCG's
equity, net of the dilution of TCI's ownership interest in TCG, TCI
recognized non-cash gains aggregating $112 million (before deducting
deferred income tax expense of $43 million).
On July 2, 1996, TCG conducted an initial public offering (the "TCG
IPO") in which it sold 27 million shares of Class A common stock at
$16.00 per share to the public for aggregate net proceeds of
approximately $410 million. As a result of the TCG IPO, TCI's
ownership interest in TCG was reduced from approximately 35% to
approximately 31%. Accordingly, TCI recognized a gain amounting to $12
million (before deducting deferred income tax expense of approximately
$5 million).
(9) Investment in Sprint
Prior to November 23, 1998, the PCS Ventures included Sprint Spectrum
Holding Company, L. P. and MinorCo, L.P. (collectively, "Sprint PCS")
and PhillieCo Partnership I, L.P. ("PhillieCo"). The partners of each
of the Sprint PCS partnerships were subsidiaries of Sprint, Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo were subsidiaries of Sprint, Cox
and the Company. The Company had a 30% partnership interest in each of
the Sprint PCS partnerships and a 35% partnership interest in
PhillieCo.
On November 23, 1998, the Company, Comcast, and Cox exchanged their
respective interests in Sprint PCS and PhillieCo (the "PCS Exchange")
for shares of "Sprint PCS Group Stock" which tracks the performance of
Sprint's newly created "PCS Group" (consisting initially of the PCS
Ventures and certain PCS licenses which were separately owned by
Sprint). The Sprint PCS Group Stock collectively represents an
approximate 17% voting interest in Sprint. As a result of the PCS
Exchange, the Company holds shares of Sprint PCS Group Stock, as well
as certain additional securities of Sprint exercisable for or
convertible into such Sprint Securities, representing approximately
24% of the equity value of Sprint attributable to its PCS Group and
less than 1% of the voting interest in Sprint. Through November 23,
1998, the Company accounted for its interest in the PCS Ventures using
the equity method of accounting; however, as a result of the PCS
Exchange and the Company's less than 1% voting interest in Sprint, the
Company no longer exercises significant influence with respect to its
investment in the PCS Ventures. Accordingly, the Company accounts for
its investment in the Sprint PCS Group Stock as an available-for-sale
security.
(continued)
67
<PAGE> 68
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the PCS Exchange, the Company recorded a non-cash gain
of $1.9 billion (before deducting deferred income tax expense of $647
million) during the fourth quarter of 1998 based on the difference
between the carrying amount of the Company's interest in PCS Ventures
and the fair value of the Sprint Securities received. In connection
with the March 9, 1999 AT&T Merger, the Company consented to divest
its interest in the Sprint Securities. See note 2.
(10) Acquisitions and Dispositions
In addition to the CSC Transaction described in note 6, the Company
completed, during 1998, eight transactions whereby the Company
contributed cable television systems serving in the aggregate
approximately 1,924,000 customers to eight separate joint ventures
(collectively, the "1998 Joint Ventures") in exchange for
non-controlling ownership interests in each of the 1998 Joint
Ventures, and the assumption and repayment by the 1998 Joint Ventures
of debt owed by the Company to external parties aggregating $323
million and intercompany debt owed to the Company aggregating $2,374
million. The Company has agreed to take certain steps to support
compliance by certain of the 1998 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate
contingent commitment of $980 million. In light of such contingent
commitments, the Company has deferred any gains on the formation of
such 1998 Joint Ventures. Accordingly, the Company has recorded
deferred gains aggregating $163 million and recognized net gains
aggregating $392 million in connection with the formation of the 1998
Joint Ventures. The deferred gains will not be recognized until such
time as the Company's contingent commitments are eliminated. The
Company uses the equity method of accounting to account for its
investments in the 1998 Joint Ventures. The CSC Transaction (see note
6) and the formation of the 1998 Joint Ventures are collectively
referred to herein as the "1998 Contribution Transactions." During the
year ended December 31, 1998, the Company's revenue and operating cash
flow (defined by the Company as operating income before depreciation,
amortization, other non-cash items, year 2000 costs, AT&T merger costs
and stock compensation) included $622 million and $278 million,
respectively, from the cable television systems included in the 1998
Contribution Transactions.
In addition to the 1998 Contribution Transactions, the Company, as of
December 31, 1998, has signed agreements or letters of intent to
contribute within the next twelve months, certain cable television
systems (the "Pending Contribution Cable Systems") serving
approximately 1.2 million basic customers to joint ventures in which
the Company will retain non-controlling ownership interests (the
"Pending Contribution Transactions"). Following the completion of the
Pending Contribution Transactions, the Company will no longer
consolidate the Pending Contribution Cable Systems. Accordingly it is
anticipated that the completion of the Pending Contribution
Transactions, as currently contemplated, will result in aggregate
estimated reductions (based on 1998 amounts) to the Company's debt,
annual revenue and annual operating cash flow of $1.5 billion, $500
million and $200 million, respectively. No assurance can be given that
any of the Pending Contribution Transactions will be consummated.
(continued)
68
<PAGE> 69
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 1, 1999, TV Guide, Inc. (Formerly United Video Satellite
Group, Inc. ("UVSG")) and The News Corporation Limited ("News Corp.")
completed a transaction whereby News Corp.'s TV Guide properties were
combined with UVSG to create a platform for offering television guide
services and advertising to consumers. As part of this combination, a
unit of News Corp. received consideration consisting of $800 million
in cash and 60 million shares of UVSG's stock, including 22.5 million
shares of its Class A common stock and 37.5 million shares of its
Class B common stock. In addition, News Corp. elected to purchase
approximately 6.5 million additional shares of UVSG Class A common
stock for $129 million in order to equalize its ownership with that of
the Company. Prior to such transactions, UVSG was a subsidiary of the
Company. As a result of these transactions, and another transaction
completed on the same date, News Corp., TCI and UVSG's public
stockholders own, on an economic basis, approximately 44%, 44% and
12%, respectively, of UVSG. Following such transactions, News Corp.
and TCI each have approximately 49% of the voting power of UVSG's
outstanding stock. Upon consummation, TCI began accounting for its
interest in UVSG under the equity method of accounting.
On November 19, 1998, TCI exchanged, in a merger transaction, 0.58 of
a share of Liberty Group Series A Stock for each share of the issued
and outstanding Series A common stock of its then majority-owned
subsidiary, Tele-Communications International, Inc. ("TINTA"), not
beneficially owned by TCI (the "TINTA Merger"). Such transaction was
accounted for as an acquisition of a minority interest. The aggregate
value assigned to the 10,086,594 shares of Liberty Group Series A
Stock issued by TCI was based upon the market value of Liberty Group
Series A Stock at the time the TINTA Merger was announced. Assuming
the TINTA Merger had occurred on January 1, 1997, the Company's
results of operations and comprehensive earnings would not have been
materially different from the Company's historical results of
operations and comprehensive earnings for the years ended December 31,
1998 and 1997.
On August 1, 1997, Liberty IFE, Inc., a wholly-owned subsidiary of
TCI, which held non-voting class C common stock of International
Family Entertainment, Inc. ("IFE") ("Class C Stock") and $23 million
of IFE 6% convertible secured notes due 2004, convertible into Class C
Stock, ("Convertible Notes"), contributed its Class C Stock and
Convertible Notes to Fox Kids Worldwide, Inc. ("FKW") in exchange for
a new series of 30 year non-convertible 9% preferred stock of FKW with
a stated value of $345 million (the "FKW Preferred Stock"). As a
result of the exchange, TCI recognized a gain of approximately $304
million.
Effective July 31, 1997, a wholly-owned subsidiary of TCI merged with
and into Kearns-Tribune Corporation ("Kearns-Tribune"). The merger was
valued at $808 million. TCI exchanged 47.2 million shares of TCI Group
Series A Stock for shares of Kearns-Tribune which held 17.9 million
shares of TCI Group Stock and 10.1 million shares of Liberty Group
Stock. The merger of Kearns-Tribune has been accounted for by the
purchase method. Accordingly, the results of operations of
Kearns-Tribune have been combined with those of the Company since the
date of acquisition, and the Company recorded Kearns-Tribune's assets
and liabilities at fair value.
(continued)
69
<PAGE> 70
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 1997, the Company acquired the 50% ownership interest in
TKR Cable Company ("TKR Cable") that the Company did not previously
own and certain additional assets for aggregate consideration of
approximately $970 million. The Company issued approximately 16
million shares of TCI Group Series A Stock, assumed $584 million of
TKR Cable's debt and paid cash of $88 million and shares of Time
Warner common stock valued at $41 million upon consummation of such
acquisition. Prior to the acquisition date, the Company accounted for
its 50% interest in TKR Cable under the equity method. This
acquisition has been treated as a step acquisition for accounting
purposes. Accordingly, the results of operations of TKR Cable have
been combined with those of TCI Group since the date of acquisition
and TCI Group's aggregate cost basis in TKR Cable has been allocated
to TKR Cable's assets and liabilities based on their fair values.
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)
70
<PAGE> 71
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class
B Common Stock (collectively, "Viacom Common Stock") the opportunity
to exchange (the "Viacom 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 Viacom 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 Viacom Exchange Offer automatically converted into 5%
Class A Senior Cumulative Exchangeable Preferred Stock (the
"Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The Exchangeable Preferred Stock
was exchangeable, at the option of the holder commencing after the
fifth anniversary of the date of issuance, for shares of TCI Group
Series A Stock at an exchange rate of 5.447 shares of TCI Group Series
A 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 could have been made in
cash or, at the election of Cable Sub, in shares of TCI Group Series A
Stock, or in any combination of the foregoing. Upon completion of the
Viacom Acquisition, Cable Sub was renamed TCI Pacific Communications,
Inc. ("TCI Pacific"). See note 2.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of TCI Pacific have been
consolidated with those of the Company since the date of acquisition,
and the Company recorded TCI Pacific's assets and liabilities at fair
value.
(11) 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
L.P."), which the Company accounted for by the equity method.
Primestar L.P. had provided programming and marketing support to each
of its cable partners who provided satellite television service to
their customers. On December 4, 1996, the Company distributed (the
"Satellite Spin-off") to the holders of shares of TCI Group Stock all
of the issued and outstanding common stock of TCI Satellite
Entertainment, Inc. ("Satellite"). At the time of the Satellite
Spin-off, Satellite's assets and operations included the Company's
interest in Primestar L.P., the Company's business of distributing
Primestar L.P. programming and two communications satellites. As a
result of the Satellite Spin-off, Satellite's operations are no longer
consolidated with the Company's.
(continued)
71
<PAGE> 72
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Summarized financial information of Satellite as of December 4, 1996
and from January 1, 1996 through December 4, 1996 is as follows
(amounts in millions):
<TABLE>
<S> <C>
Financial Position
Cash, receivables and other assets $ 104
Investment in Primestar L. P 32
Property and equipment, net 1,111
-------
$ 1,247
=======
Accounts payable and accrued liabilities $ 60
Due to Primestar 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)
=======
</TABLE>
(12) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ----------------------
December 31, 1998 1998 1997
----------------- -------- --------
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Notes payable (a) 7.7% $ 9,412 9,017
Bank credit facilities (b) 6.1% 3,773 5,233
Commercial paper 5.6% 109 533
Convertible notes (c) 9.5% 40 40
Other debt, at varying rates 718 427
-------- --------
$ 14,052 15,250
======== ========
</TABLE>
(a) During the year ended December 31, 1998, the Company purchased certain
notes payable which had an aggregate principal balance of $416 million
and fixed interest rates ranging from 8.67% to 10.25% (the "1998
Purchases"). In connection with the 1998 Purchases, the Company
recognized a loss on early extinguishment of debt of $60 million. Such
loss related to prepayment penalties amounting to $52 million and the
retirement of deferred loan costs.
(continued)
72
<PAGE> 73
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the year ended December 31, 1997, the Company purchased certain
notes payable which had an aggregate principal balance of $409 million
and fixed interest rates ranging from 8.75% to 10.13% (the "1997
Purchases"). In connection with the 1997 Purchases, the Company
recognized a loss on early extinguishment of debt of $39 million. Such
loss related to prepayment penalties amounting to $33 million and the
retirement of deferred loan costs.
During the year ended December 31, 1996, the Company purchased certain
notes payable which had an aggregate principal balance of $904 million
and fixed interest rates ranging from 7.88% to 10.44% (the "1996
Purchases"). In connection with the 1996 Purchases, the Company
recognized a loss on early extinguishment of debt of $62 million. Such
loss related to prepayment penalties amounting to $60 million and the
retirement of deferred loan costs.
(b) At December 31, 1998, subsidiaries of the Company had approximately
$3.7 billion in unused lines of credit, excluding amounts related to
lines of credit which provide availability to support commercial
paper.
As security for borrowings under one of the Company's credit
facilities, the Company has pledged a portion of its TW Exchange Stock
with an estimated market value at December 31, 1998 of $2.7 billion
based upon the market value of the marketable common stock into which
it is convertible. Additionally, as security for borrowings under
another of its credit facilities, the Company has pledged its holdings
in Discovery Communications, Inc., QVC and the FKW Preferred Stock. At
December 31, 1998, the carrying value of such holdings aggregated $617
million.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, certain of TCI's subsidiaries pay fees ranging
to 1/2% per annum on the average unborrowed portion of the total
amount available for borrowings under bank credit facilities.
During the year ended December 31, 1996, certain subsidiaries of the
Company terminated, at such subsidiaries' option, certain revolving
bank credit facilities with aggregate commitments of approximately $2
billion and refinanced certain other bank credit facilities. In
connection with such termination and refinancings, the Company
recognized a loss on early extinguishment of debt of $9 million
related to the retirement of deferred loan costs.
(continued)
73
<PAGE> 74
(c) The convertible notes, which are stated net of unamortized discount of
$166 million at December 31, 1998 and 1997, mature on December 11,
2021. Such notes are held by a director of the Company, as well as
several members of his family. In connection with the AT&T Merger,
such director resigned. The notes require, so long as conversion of
the notes has not occurred, an annual interest payment through 2003
equal to 1.85% of the face amount of the notes. During the year ended
December 31, 1997, certain of these notes were converted, pursuant to
their existing terms, into 2,533,116 shares of TCI Group Series A
Stock, 1,448,341 shares of Liberty Group Series A Stock and 256,484
shares of Series A Common Stock, $1.00 par value per share, of
Satellite ("Satellite Series A Common Stock") and 63,432 shares of TCI
Ventures Group Series A Stock. No such conversions occurred during
1998. At December 31, 1998, the notes were convertible, at the option
of the holders, into an aggregate of 24,163,259 shares of TCI Group
Series A Stock, 19,416,889 shares of Liberty Group Series A Stock,
20,711,364 shares of TCI Ventures Group Series A Stock and 3,451,897
shares of Satellite Series A Common Stock. Pursuant to the terms of
the Merger Agreement and a certain stock purchase agreement, dated as
of July 9, 1986, among the Company and the holders of such convertible
notes, the conversion features of the convertible notes were adjusted
such that as of the March 9, 1999 consummation date of the AT&T
Merger, such notes were convertible into 19,088,081 shares of AT&T
Common Stock, 30,186,816 shares of AT&T Liberty Class A Tracking Stock
and 3,451,897 shares of Satellite Series A Common Stock.
The bank credit facilities and various other debt instruments of the Company's
subsidiaries generally contain restrictive covenants which require, among other
things, the maintenance of certain earnings, specified cash flow and financial
ratios (primarily the ratios of cash flow to total debt and cash flow to debt
service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or dividend
payments.
The fair value of the debt of the Company's subsidiaries is estimated based on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. At December
31, 1998, the fair value of the Company's debt was $17,816 million (including
$2,724 million attributable to the value of the common stock underlying the
convertible notes) as compared to a carrying value of $14,052 million on such
date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company may enter into Interest Rate Swaps pursuant to which
it (i) pays fixed interest rates (the "Fixed Rate Agreements") and receives
variable interest rates and (ii) pays variable interest rates (the "Variable
Rate Agreements") and receives fixed interest rates. During the years ended
December 31, 1998, 1997 and 1996, the Company's net payments pursuant to the
Fixed Rate Agreements were less than $1 million, $7 million and $14 million,
respectively; and the Company's net receipts (payments) pursuant to the
Variable Rate Agreements were $10 million, (less than $1 million) and $15
million, respectively. At December 31, 1998, all of the Company's Fixed Rate
Agreements had expired.
(continued)
74
<PAGE> 75
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
such termination settlement over the remainder of the original terms of the
terminated Variable Rate Agreements.
Information concerning the Company's Variable Rate Agreements at December 31,
1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be
Expiration Interest rate Notional received upon
date to be received amount termination (a)
-------------- -------------- ----------- ---------------
<S> <C> <C> <C>
April 1999 7.4% $ 50 $ 1
September 1999 6.4% 350 3
February 2000 5.8%-6.6% 300 4
March 2000 5.8%-6.0% 675 7
September 2000 5.1% 75 --
March 2027 9.7% 300 36
December 2036 9.7% 200 12
----------- -----------
$ 1,950 $ 63
=========== ===========
</TABLE>
- ----------
(a) The estimated amount that the Company would receive to terminate the
agreements at December 31, 1998, taking into consideration current
interest rates and the current creditworthiness of the counterparties,
represents the fair value of the Interest Rate Swaps.
In addition to the Variable Rate Agreements, the Company entered into Interest
Rate Swaps pursuant to which it pays a variable rate based on the London
Interbank Offered Rate ("LIBOR") (5.5% at December 31, 1998) and receives a
variable rate based on the Constant Maturity Treasury Index ("CMT") (4.9% at
December 31, 1998) on a notional amount of $400 million through September 2000;
and pays a variable rate based on LIBOR (5.4% at December 31, 1998) and
receives a variable rate based on CMT (5.0% at December 31, 1998) on notional
amounts of $95 million through February 2000. During the years ended December
31, 1998 and 1997, the Company's net payments (receipts) pursuant to such
agreements were $2 million and (less than $1 million), respectively. At
December 31, 1998, the Company would be required to pay an estimated $4 million
to terminate such Interest Rate Swaps.
The Company is exposed to credit losses for the periodic settlements of amounts
due under the Interest Rate Swaps in the event of nonperformance by the other
parties to the agreements. However, the Company does not anticipate that it
will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. Further, the Company does not anticipate
material near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of December 31, 1998.
(continued)
75
<PAGE> 76
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1999 $ 1,539*
2000 1,574
2001 1,029
2002 661
2003 2,298
</TABLE>
* Includes $109 million of commercial paper.
(13) Redeemable Preferred Stocks
Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series C," par value $.01 per share, as partial consideration
for an acquisition by TCI ("Series C Preferred Stock"). All of the
issued and outstanding shares of Series C Preferred Stock were retired
on December 31, 1997, with the effect that such retired shares have
been restored to the status of authorized and unissued shares of
Series Preferred Stock, and may be reissued as shares of another
series of Series Preferred Stock but may not be reissued as Series C
Preferred Stock. Dividends paid on such shares aggregated $12 million
and $9 million during 1997 and 1996, respectively.
Series C-TCI Group Preferred Stock. On December 31, 1997, TCI issued
70,575 shares designated as Series C-TCI Group Preferred Stock as
partial consideration for retired Series C Preferred Stock. See also
Series C-Liberty Media Group Preferred Stock below. There were 43,575
shares of Series C-TCI Group Preferred Stock outstanding at December
31, 1998. No dividends on such shares were paid in 1998. In connection
with the AT&T Merger, shares of Series C-TCI Group Preferred Stock
were converted into shares of AT&T Common Stock. See note 2.
Series C-Liberty Media Group Preferred Stock. On December 31, 1997,
TCI issued 70,575 shares designated as Series C-Liberty Media Group
Preferred Stock as remaining consideration for retired Series C
Preferred Stock. There were 70,575 shares of Series C-Liberty Media
Group Preferred Stock authorized and outstanding at December 31, 1998.
No dividends on such shares were paid in 1998. In connection with the
AT&T Merger, shares of Series C-Liberty Media Group Preferred Stock
were converted into shares of AT&T Liberty Class A Tracking Stock. See
note 2.
Convertible Preferred Stock, Series D. The Company had designated and
issued 1,000,000 shares of a series of TCI Series Preferred Stock
designated "Convertible Preferred Stock, Series D", par value $.01 per
share. Outstanding shares during the years ended December 31, 1998,
1997 and 1996 accrued dividends at a rate of 5-1/2% per annum of the
liquidation value ($300 per share). Dividends paid on such shares
aggregated $10 million, $16 million and $17 million during 1998, 1997
and 1996, respectively.
(continued)
76
<PAGE> 77
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On February 20, 1998, the Company issued a Notice of Redemption which
called for the redemption of all of its outstanding Convertible
Preferred Stock, Series D for $304.0233 per share. Effective April 1,
1998, all of the outstanding shares of Convertible Preferred Stock,
Series D were redeemed to the extent not previously converted into
shares of TCI Group Series A Stock and Liberty Group Series A Stock.
The shares of Convertible Preferred Stock, Series D, that were
redeemed, as well as previously unissued shares of Convertible
Preferred Stock, Series D, were retired, undesignated and restored to
the status of authorized and unissued shares of Series Preferred
Stock.
Series F Preferred Stock. The Company is authorized to issue 500,000
shares of Series F Preferred Stock, par value $.01 per share. Prior to
the March 9, 1999 consummation of the AT&T Merger and related
transactions, subsidiaries of TCI held all the issued and outstanding
shares (278,307 shares). See note 2.
Series G Preferred Stock and Series H Preferred Stock. In January,
1996, TCI designated and issued 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible TCI Group
Preferred Stock, Series G" and 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible Liberty
Media Group Preferred Stock, Series H" as consideration for an
acquisition. At December 31, 1998, there were 6,444,244 shares of
Series G Preferred Stock and 6,564,794 shares of Series H Preferred
Stock outstanding. The initial liquidation value for the Series G
Preferred Stock and Series H Preferred Stock was $21.60 per share and
$5.40 per share, respectively, subject in both cases, to increase in
an amount equal to aggregate accrued but unpaid dividends, if any.
Dividends began to accrue on the Series G and Series H Preferred Stock
on the first anniversary of issuance of the Series G and Series H
Preferred Stock, and were thereafter payable semi-annually commencing
January 25, 1997, at a rate of 4% per annum on the liquidation value.
Dividends paid on shares of Series G Preferred Stock aggregated $6
million and $3 million during 1998 and 1997, respectively. Dividends
paid on shares of Series H Preferred Stock aggregated $1 million in
each of 1998 and 1997. In connection with the AT&T Merger, shares of
Series G and Series H Preferred Stock were converted into shares of
AT&T Common Stock and AT&T Liberty Class A Tracking Stock,
respectively. See note 2.
(14) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
The Company, through certain subsidiary trusts, (the "Trusts"), had
preferred securities outstanding at December 31, 1998 as follows:
<TABLE>
<CAPTION>
Subsidiary Trust Interest Rate Face Amount
---------------- ------------- -----------
in millions
<S> <C> <C>
TCI Communications Financing I 8.72% $ 500
TCI Communications Financing II 10.00% 500
TCI Communications Financing III 9.65% 300
TCI Communications Financing IV 9.72% 200
----------
$ 1,500
==========
</TABLE>
(continued)
77
<PAGE> 78
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Trusts exist for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into
Subordinated Deferrable Interest Notes (the "Subordinated Debt
Securities") of TCIC. The Subordinated Debt Securities have interest
rates equal to the interest rate of the corresponding Trust Preferred
Securities and have maturity dates ranging from 30 to 49 years from
the date of issuance. The Subordinated Debt Securities are unsecured
obligations of TCIC and are subordinate and junior in right of payment
to certain other indebtedness of the Company. Upon redemption of the
Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. TCIC effectively provides a full and
unconditional guarantee of the Trusts' obligations under the Trust
Preferred Securities.
The Trust Preferred Securities are presented together in a separate
line item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued and paid on the Trust
Preferred Securities aggregated $142 million, $132 million and $71
million for the years ended December 31, 1998, 1997 and 1996,
respectively, and are included in minority interests in earnings of
consolidated subsidiaries in the accompanying consolidated financial
statements.
(15) Stockholders' Equity
Common Stock
The Series A Stock each had one vote per share, and the Series B Stock
each had ten votes per share. Each share of Series B Stock was
convertible, at the option of the holder, into one share of Series A
Stock of the applicable Group. See notes 1 and 2.
The rights of holders of the TCI Group Stock, Liberty Media Group
Stock and TCI Ventures Group Stock upon liquidation of TCI were based
upon the ratio of the aggregate market capitalization, as defined, of
each of the TCI Group Stock, Liberty Group Stock and TCI Ventures
Group Stock to the aggregate market capitalization, as defined, of the
TCI Group Stock, Liberty Group Stock, and TCI Ventures Group Stock.
Stock Repurchases
During the year ended December 31, 1998, pursuant to a stock
repurchase program, 66,041 shares of TCI Group Series A Stock, 145,450
shares of TCI Ventures Group Series A Stock, 94,000 shares of TCI
Ventures Group Series B Stock and 766,783 shares of Liberty Group
Series A Stock were repurchased at an aggregate cost of approximately
$31 million.
During the year ended December 31, 1997, pursuant to a stock
repurchase program approved by the Board, Liberty Media Group
repurchased 916,500 shares of Liberty Group Series A Stock in open
market transactions and 219,937 shares of Liberty Group Series A Stock
from the spouse of an officer and director of TCI at an aggregate cost
of approximately $18 million. Such shares were canceled and returned
to an authorized but unissued status.
(continued)
78
<PAGE> 79
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, pursuant to the stock repurchase program, 4,000,000
shares of TCI Group Series A Stock, 330,902 shares of TCI Group Series
B Stock and 338,196 shares of TCI Ventures Group Series B Stock were
repurchased at an aggregate cost of $77 million during the year ended
December 31, 1997. Such shares are reflected as treasury stock in the
accompanying consolidated financial statements.
Effective July 31, 1997, TCI merged Kearns-Tribune into a wholly-owned
TCI subsidiary attributed to TCI Group. TCI exchanged 47.2 million
shares of TCI Group Series A Stock for shares of Kearns-Tribune which
held 17.9 million shares of TCI Group Stock and 10.1 million shares of
Liberty Group Stock. Such shares are reflected as common stock held by
subsidiaries in the accompanying consolidated financial statements.
See note 2.
During the third quarter of 1997, TCI commenced a tender offer (the
"Liberty Tender Offer") to purchase up to an aggregate of 22.5 million
shares of Liberty Group Stock at a price of $20 per share through
October 3, 1997. During the fourth quarter of 1997, TCI repurchased
21.7 million shares of Liberty Group Series A Stock and 82,074 shares
of Liberty Group Series B Stock at an aggregate cost of approximately
$435 million pursuant to the Liberty Tender Offer. Such purchases are
reflected as treasury stock in the accompanying consolidated financial
statements. See note 2.
Employee Benefit Plans
The Company had several employee stock purchase plans to provide
employees an opportunity to create a retirement fund including
ownership interests in TCI. The primary employee stock purchase plan
provided for employees to contribute up to 10% of their compensation
to a trust for investment in several diversified investment choices,
including investment in Company common stock. The Company, by annual
resolution of the Board, generally contributed up to 100% of the
amount contributed by employees. Such TCI contribution was invested in
TCI Group Stock, Liberty Group Stock and TCI Ventures Group Stock.
Certain of the Company's subsidiaries had their own employee benefit
plans. Contributions to all plans aggregated $43 million, $38 million
and $35 million for 1998, 1997 and 1996, respectively. Subsequent to
the AT&T Merger, the significant terms of the employee stock purchase
plans will remain substantially unchanged and contributions on behalf
of employees will continue to be made in stock.
Preferred Stock
Series Preferred Stock. The TCI Series Preferred Stock is issuable,
from time to time, in one or more series, with such designations,
preferences and relative participating, option or other special
rights, qualifications, limitations or restrictions thereof, as shall
be stated and expressed in a resolution or resolutions providing for
the issue of such series adopted by the Board. The Company is
authorized to issue 50,000,000 shares of Series Preferred Stock.
All shares of any one series of the TCI Series Preferred Stock are
required to be alike for every particular and all shares are required
to rank equally and be identical in all respects, except insofar as
they may vary with respect to matters which the Board is expressly
authorized by the TCI Charter to determine in the resolution or
resolutions proving for the issue of any series of the TCI Series
Preferred Stock.
(continued)
79
<PAGE> 80
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Class A Preferred Stock. The Company is authorized to issue 700,000
shares of Class A Preferred Stock, par value $.01 per share. No such
shares were issued and outstanding as of December 31, 1998.
Class B Preferred Stock. The Company is authorized to issue 1,675,096
shares of Class B Preferred Stock and 1,552,490 of such shares are
issued and outstanding, net of shares held by a TCI subsidiary as of
December 31, 1998. Following the AT&T Merger, the rights of holders of
Class B Preferred Stock will remain unchanged, except that rights
applicable to TCI Group Series A Stock will continue to apply to AT&T
Common Stock. See note 2.
Dividends accrue cumulatively (but without compounding) at an annual
rate of 6% of the stated liquidation value of $100 per share (the
"Stated Liquidation Value"), whether or not such dividends are
declared or funds are legally available for payment of dividends.
Accrued dividends will be payable annually on March 1 of each year (or
the next succeeding business day if March 1 does not fall on a
business day), and, in the sole discretion of the Board, may be
declared and paid in cash, in shares of TCI Group Series A Stock or in
any combination of the foregoing. Accrued dividends not paid as
provided above on any dividend payment date will accumulate and such
accumulated unpaid dividends may be declared and paid in cash, shares
of TCI Group Series A Stock or any combination thereof at any time
(subject to the rights of any senior stock and, if applicable, to the
concurrent satisfaction of any dividend arrearages on any class or
series of TCI preferred stock ranking on a parity with the Class B
Preferred Stock with respect to dividend rights) with reference to any
regular dividend payment date, to holders of record of Class B
Preferred Stock as of a special record date fixed by the Board (which
date may not be more than 45 days nor less than 10 days prior to the
date fixed for the payment of such accumulated unpaid dividends).
Dividends paid on shares of Class B Preferred Stock aggregated $10
million in each of 1998, 1997 and 1996. The Class B Preferred Stock
ranks junior to the Series F Preferred Stock with respect to the
declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of TCI Group Series A Stock, the
number of such shares to be issued and delivered will be determined by
dividing the amount of the dividend to be paid in shares of TCI Group
Series A Stock by the Average Market Price of the TCI Group Series A
Stock. For this purpose, "Average Market Price" means the average of
the daily last reported sale prices (or, if no sale price is reported
on any day, the average of the high and low bid prices on such day) of
a share of TCI Group Series A Stock for the period of 20 consecutive
trading days ending on the tenth trading day prior to the regular
record date or special record date, as the case may be, for the
applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to
the Class B Preferred Stock with respect to liquidating distributions,
to receive from the assets of TCI available for distribution to
stockholders an amount in cash or property or a combination thereof,
per share, equal to the Stated Liquidation Value thereof, plus all
accumulated and accrued but unpaid dividends thereon to and including
the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option
of the holders or otherwise.
(continued)
80
<PAGE> 81
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subject to the prior preferences and other rights of any class or
series of TCI preferred stock, the Class B Preferred Stock will be
exchangeable at the option of TCI in whole but not in part at any time
for junior subordinated debt securities of TCI ("Junior Exchange
Notes"). The Junior Exchange Notes will be issued pursuant to an
indenture (the "Indenture"), to be executed by TCI and a qualified
trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of
outstanding shares of Class B Preferred Stock will be entitled to
receive in exchange therefor newly issued Junior Exchange Notes of a
series authorized and established for the purpose of such exchange,
the aggregate principal amount of which will be equal to the aggregate
Stated Liquidation Value of the shares of Class B Preferred Stock so
exchanged by such holder, plus all accumulated and accrued but unpaid
dividends thereon to and including the exchange date. The Junior
Exchange Notes will be issuable only in principal amounts of $100 or
any integral multiple thereof and a cash adjustment will be paid to
the holder for any excess principal that would otherwise be issuable.
The Junior Exchange Notes will mature on the fifteenth anniversary of
the date of issuance and will be subject to earlier redemption at the
option of TCI, in whole or in part, for a redemption price equal to
the principal amount thereof plus accrued but unpaid interest.
Interest will accrue, and be payable annually, on the principal amount
of the Junior Exchange Notes at a rate per annum to be determined
prior to issuance by adding a spread of 215 basis points to the
"Fifteen Year Treasury Rate" (as defined in the Indenture). Interest
will accrue on overdue principal at the same rate, but will not accrue
on overdue interest.
The Junior Exchange Notes will represent unsecured general obligations
of TCI and will be subordinated in right of payment to all "Senior
Debt" (as defined in the Indenture). Accordingly, holders of Class B
Preferred Stock who receive Junior Exchange Notes in exchange therefor
may have difficulty selling such Junior Exchange Notes.
(continued)
81
<PAGE> 82
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For so long as any dividends are in arrears on the Class B Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Class B Preferred Stock which is entitled to payment of
cumulative dividends prior to the redemption, exchange, purchase or
other acquisition of the Class B Preferred Stock, and until all
dividends accrued up to the immediately preceding dividend payment
date on the Class B Preferred Stock and such parity stock shall have
been paid or declared and set apart so as to be available for payment
in full thereof and for no other purpose, neither TCI nor any
subsidiary thereof may redeem, exchange, purchase or otherwise acquire
any shares of Class B Preferred Stock, any such parity stock or any
class or series of its capital stock ranking junior to the Class B
Preferred Stock (including the TCI common stock), or set aside any
money or assets for such purpose, unless all of the outstanding shares
of Class B Preferred Stock and such parity stock are redeemed. If TCI
fails to redeem or exchange shares of Class B Preferred Stock on a
date fixed for redemption or exchange, and until such shares are
redeemed or exchanged in full, TCI may not redeem or exchange any
parity stock or junior stock, declare or pay any dividend on or make
any distribution with respect to any junior stock or set aside money
or assets for such purpose and neither TCI nor any subsidiary thereof
may purchase or otherwise acquire any Class B Preferred Stock, parity
stock or junior stock or set aside money or assets for any such
purpose. The failure of TCI to pay any dividends on any class or
series of parity stock or to redeem or exchange on any date fixed for
redemption or exchange any shares of Class B Preferred Stock shall not
prevent TCI from (i) paying any dividends on junior stock solely in
shares of junior stock or the redemption purchase or other acquisition
of junior stock solely in exchange for (together with cash adjustment
for fractional shares, if any) or (but only in the case of a failure
to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; or (ii) the payment
of dividends on any parity stock solely in shares of parity stock
and/or junior stock or the redemption, exchange, purchase or other
acquisition of Class B Preferred Stock or parity stock solely in
exchange for (together with a cash adjustment for fractional shares,
if any), or (but only in the case of failure to pay dividends on any
parity stock) through the application of the proceeds from the sale
of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of
directors, will have one vote per share for such purpose and will vote
as a single class with the TCI common stock and any class or series of
TCI preferred stock entitled to vote in any general election of
directors. The Class B Preferred Stock will have no other voting
rights except as required by the Delaware General Corporation Law.
Redeemable Convertible Preferred Stock, Series E. The Company is
authorized to issue 400,000 shares of Redeemable Convertible Preferred
Stock, Series E, par value $.01 per share. No such shares were issued
and outstanding as of December 31, 1998.
(continued)
82
<PAGE> 83
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock-Based Compensation
As of December 31, 1998, the Company and its subsidiaries had several
stock-based compensation plans for certain employees, officers,
directors and other persons. Such plans are described below.
Tele-Communications, Inc. Stock Incentive Plans. In 1994, the Company
adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
"1994 Plan"). The Plan provided for awards to be made in respect of a
maximum of 16 million shares of TCI Class A common stock. Awards may
be made as grants of stock options, stock appreciation rights,
restricted shares, stock units or any combination thereof.
In 1995, the Company adopted the Tele-Communications, Inc. 1995
Employee Stock Incentive Plan (the "1995 Plan"). In addition, the
Company has established the Tele-Communications, Inc. 1996 Stock
Incentive Plan (the "1996 Plan" and the Tele-Communications, Inc. 1998
Incentive Plan (the "1998 Plan") and together with the 1994 Plan and
the 1995 Plan, the "Incentive Plans"). The 1996 Plan provides (i) for
stock-based awards to be made in respect of a maximum of 16 million
shares of TCI Group Series A Stock and a maximum of 6 million shares
of Liberty Group Series A Stock (subject to certain adjustments
described below) and (ii) for cash awards in amounts determined by the
TCI compensation committee. The 1998 Plan provides (i) for stock-based
awards to be made in respect of a maximum of 10 million shares of any
combination of TCI Group Series A Stock or TCI Group Series B Stock, a
maximum of 7.5 million shares of any combination of Liberty Group
Series A Stock or Liberty Group Series B Stock, and a maximum of 7.5
million shares of any combination of TCI Ventures Group Series A Stock
or TCI Ventures Group Series B Stock; and (ii) for cash awards in
amounts determined by the TCI compensation committee.
Awards may be made as grants of stock options ("Options"), stock
appreciation rights ("SARs"), restricted shares ("Restricted Shares"),
stock units ("Stock Units"), performance awards, or any combination
thereof (collectively, "Awards"). Shares in respect of which Awards
are made may be either authorized but unissued shares of Series A
Stock or issued shares reacquired by the Company, including shares
purchased in the open market. Shares of Series A Stock that are
subject to Awards that expire, terminate or are annulled for any
reason without having been exercised (or, with respect to tandem SARs
deemed exercised, by virtue of the exercise of a related Option), or
are Restricted Shares or Stock Units that are forfeited prior to
becoming vested, or are subject to Awards of SAR's that are exercised
for cash, will return to the pool of such shares available for grant
under the 1996 Plan or 1998 Plan.
(continued)
83
<PAGE> 84
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Liberty Distribution, each holder of an
outstanding option or SAR received an additional option or stock
appreciation right, as applicable, covering a number of shares of
Liberty Group Series A Stock equal to 56% (as adjusted) of the number
of shares of Class A common stock theretofore subject to the
outstanding option or stock appreciation right, and the outstanding
option or stock appreciation right would continue in effect as an
option or stock appreciation right covering the same number of shares
of TCI Group Series A Stock (as redesignated) that were theretofore
subject to the option or stock appreciation right. The aggregate
pre-adjustment strike price of the outstanding options or stock
appreciation rights was allocated between the outstanding options or
stock appreciation rights and the newly issued options or stock
appreciation rights in a ratio determined by the Compensation
Committee of TCI. The following descriptions of stock options and/or
stock appreciation rights have been adjusted to reflect such change.
As a result of the TCI Ventures Exchange, the Compensation Committee
of TCI elected to adjust the options in tandem with SARs to purchase
TCI Group Series A Stock to reflect the expected shift of attributable
value from TCI Group to the newly created TCI Ventures Group. The
options in tandem with SARs to purchase TCI Group Series A Stock
outstanding immediately prior to the TCI Ventures Exchange were
canceled and reissued as two separately exercisable options in tandem
with SARS: (i) with 70% of the options in tandem with SARs allocated
to an option in tandem with SARs to purchase TCI Group Series A Stock,
and (ii) with 30% of the options in tandem with SARs allocated to an
option in tandem with SARs to purchase TCI Ventures Group Series A
Stock. The terms of these adjusted options in tandem with SARs,
including the exercise price and the date of grant, are in all
material respects the same as the terms of the original options in
tandem with SARs. The following descriptions of stock options and/or
stock appreciation rights have been adjusted to reflect such change.
Awards granted subsequent to the Liberty Distribution may include
Awards relating to TCI Group Series A Stock or Liberty Group Series A
Stock and Awards granted subsequent to the TCI Ventures Exchange may
include Awards relating to TCI Group Series A Stock, Liberty Group
Series A Stock or TCI Ventures Group Series A Stock in such amounts
and types as the Compensation Committee of TCI determines in
accordance with the terms of the Incentive Plans.
(continued)
84
<PAGE> 85
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Awards of TCI Group Series A Stock made under the Incentive Plans
prior to the Satellite Spin-off were adjusted in connection with the
Satellite Spin-off such that immediately prior to the Satellite
Spin-off, each option was divided into two separately exercisable
options: (i) an option to purchase Satellite Series A Common Stock (an
"Add-on Satellite Option"), exercisable for the number of shares of
Satellite Series A Common Stock that would have been issued in the
Satellite Spin-off in respect of the shares of TCI Group Series A
Stock subject to the applicable TCI Option, if such TCI option had
been exercised in full immediately prior to the record date of the
Satellite Spin-off, and containing substantially equivalent terms as
the existing TCI Option, and (ii) an option to purchase TCI Group
Series A Stock (an "Adjusted TCI Option"), exercisable for the same
number of shares of TCI Group Series A Stock as the corresponding TCI
Option had been. The aggregate exercise price of each TCI Option was
allocated between the Add-on Satellite Option and the Adjusted TCI
Option into which it is divided, and all other terms of the Add-on
Satellite Option and Adjusted TCI Option will in all material respects
be the same as such TCI Option. Similar adjustments were made to the
outstanding TCI SARs, resulting in the holders thereof holding
Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs,
effective immediately prior to the Satellite Spin-off.
As a result of the foregoing, certain persons who remain TCI employees
or non-employee directors after the Satellite Spin-off and certain
persons who were TCI employees prior to the Satellite Spin-off but
became Satellite employees after the Satellite Spin-off hold both
Adjusted TCI Options and separate Add-on Satellite Options and/or hold
both Adjusted TCI SARs and separate Add-on Satellite SARs. The
obligations with respect to the Adjusted TCI Options, Add-on Satellite
Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI
employees and non-employee directors following the Satellite Spin-off
are obligations solely of TCI. The obligations with respect to the
Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and
Add-on Satellite SARs held by persons who are Satellite employees at
the time of the Satellite Spin-off and following the Satellite
Spin-off are no longer TCI employees are obligations solely of
Satellite. Prior to the Satellite Spin-off, TCI and Satellite entered
into an agreement to sell to each other from time to time at the then
current market price shares of TCI Group Series A Stock and Satellite
Series A common stock, respectively, as necessary to satisfy their
respective obligations under such securities.
(continued)
85
<PAGE> 86
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to 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
Group Series A Stock, Liberty Group Series A Stock and TCI Ventures
Group Series A Stock pursuant to the Incentive Plans.
<TABLE>
<CAPTION>
TCI
Liberty Ventures
TCI Group Group Group
Series A Series A Series A
Stock WAEP Stock WAEP Stock WAEP
--------- -------- --------- ------- -------- --------
amounts in thousands, except for WAEP
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996 17,702 $ 15.08 11,568 $ 9.39 --
Exercised (196) 12.70 (132) 7.93 --
Canceled (132) 15.35 (42) 8.45 --
------- ------- ------
Outstanding at December 31, 1996 17,374 12.97 11,394 9.41 --
Adjustment for TCI
Ventures Exchange (7,946) 14.22 -- 15,899 $ 7.11
Granted 12,395 15.27 3,514 15.89 300 7.84
Exercised (5,618) 11.95 (2,502) 8.42 (1,035) 6.76
Canceled (54) 14.27 (42) 10.25 (2) 7.10
------- ------- -------
Outstanding at December 31, 1997 16,151 14.47 12,364 11.45 15,162 7.15
Granted 1,175 33.51 8,245 43.23 20 16.50
Exercised (3,091) 13.50 (1,807) 8.13 (2,940) 6.69
Canceled (512) 15.47 (11) 9.78 (521) 6.92
------- ------- -------
Outstanding at December 31, 1998 13,723 16.28 18,791 25.71 11,721 7.29
======= ======= =======
Exercisable at December 31, 1998 5,093 13.99 5,522 10.64 5,025 6.91
======= ======= =======
Vesting Period 5 years 5 years 5 years
======= ======= =======
</TABLE>
(continued)
86
<PAGE> 87
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
330,000 restricted shares of TCI Group Series A Stock and 67,500
restricted shares of Liberty Group Series A Stock to certain officers
and other key employees of the Company. Based on the terms at the date
of grant, such restricted shares vest as to 50% in December 1999 and
as to the remaining 50% in December 2000. Such restricted shares had a
fair value of $20.625 and $11.67, respectively, on the date of grant.
At December 31, 1998, 123,886 restricted shares of TCI Group Series A
Stock (after adjustment for TCI Ventures Exchange), 102,228 restricted
shares of TCI Ventures Group Series A Stock (after adjustment for TCI
Ventures Exchange and a stock dividend) and 45,000 restricted shares
of Liberty Group Series A Stock (after adjustment for stock dividends)
were unvested.
On July 23, 1997, pursuant to the 1996 Plan, the Company awarded
400,000 restricted shares of TCI Group Series A Stock to an officer
and a director of the Company. Such restricted shares vest as to 50%
in July 2001 and as to the remaining 50% in July 2002. Such restricted
shares had a fair value of $15.81 on the date of grant. At December
31, 1998, 338,154 restricted shares of TCI Group Series A Stock (after
adjustment for TCI Ventures Exchange) and 123,692 restricted shares of
TCI Ventures Group Series A Stock (after adjustment for TCI Ventures
Exchange and a stock dividend) were unvested.
On December 16, 1997, the Company granted options in tandem with stock
appreciation rights to acquire 2,800,000 shares of TCI Ventures Group
Series B Stock to an officer and director of the Company. The options
in tandem with stock appreciation rights have an exercise price of
$10.37 and vest ratably over five years with such vesting period
beginning December 16, 1997, first became exercisable on December 16,
1998 and expire on December 16, 2007.
On June 23, 1998, pursuant to the 1998 Plan, the Company awarded
1,350,000 restricted shares of TCI Group Series A Stock to certain
officers of the Company. Such restricted shares vest as to 50% in June
2002 and as to the remaining 50% in June 2003. Such restricted shares
had a fair value of $38.69 on the date of grant.
On September 3, 1998, pursuant to the 1998 Plan, the Company awarded
1,509,880 restricted shares of TCI Group Series A Stock to certain
officers and other key employees of the Company. Such restricted
shares vest as to 50% in September 2002 and as to the remaining 50% in
September 2003. Such restricted shares had a fair value of $33.75 on
the date of grant.
On December 10, 1998, pursuant to the 1998 Plan, the Company awarded
287,500 restricted shares of TCI Group Series A Stock to an officer
and a director of the Company. Such restricted shares vest as to 50%
in December 2002 and as to the remaining 50% in December 2003. Such
restricted shares had a fair value of $48.375 on the date of grant.
SARs with respect to 150,000 shares of TCI Group Series A Stock,
569,553 shares of Liberty Group Series A Stock and 577,526 shares of
TCI Ventures Group Series A Stock were outstanding at December 31,
1998. These rights have an adjusted strike price of $.52, $.36 and
$.26 per share, respectively. All such SARs are 100% vested at
December 31, 1998 and expire on March 28, 2001. The Company has the
option of paying the holder in stock or cash. During the year ended
December 31, 1998, SARs with respect to 358,350 shares of TCI Group
Series A Stock were exercised.
(continued)
87
<PAGE> 88
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Tele-Communications, Inc. Director Stock Option Plan. On August 3,
1995, stockholders of the Company approved the Director Stock Option
Plan (the "DSOP") including the grant, effective as of November 16,
1994, to each person that as of that date was a member of the Board and
was not an employee of the Company or any of its subsidiaries, of
options to purchase 50,000 shares of TCI Class A common stock. Pursuant
to the DSOP, options to purchase 300,000 shares of TCI Class A common
stock were granted at an exercise price of $22.00 per share. Such
options had a weighted average fair value of $16.49 on the date of
grant. Options issued pursuant to the DSOP vest and become exercisable
over a five-year period from the date of grant and expire 10 years from
the date of grant. During the year ended December 31, 1995, options to
purchase 50,000 shares of TCI Group Series A Stock and options to
purchase 28,125 shares of Liberty Group Series A Stock were canceled.
During the year ended December 31, 1996, options to purchase 150,000
shares of TCI Group Series A Stock and options to purchase 84,375
shares of Liberty Group Series A Stock with a WAEP of $14.75 and
$11.52, respectively, were issued pursuant to the DSOP. Such options
had a weighted average fair value of $9.83 and $7.67, respectively, on
the date of grant.
At December 31, 1998, 330,000 options with respect to TCI Group Stock
granted pursuant to the DSOP were outstanding, 204,000 of which were
exercisable. Such options had a range of exercise prices of $12.25 to
$16.99, with a WAEP of $14.08, and a weighted average remaining
contractual life of 6.76 years.
At December 31, 1998, 225,000 options with respect to Liberty Group
Stock granted pursuant to the DSOP were outstanding, 146,250 of which
were exercisable. Such options had a range of exercise prices of $9.78
to $11.67, with a WAEP of $10.18, and a weighted average remaining
contractual life of 6.63 years.
Tele-Communications International, Inc. Stock Incentive Plan. In 1995,
TINTA adopted the Tele-Communications International, Inc. 1995 Stock
Incentive Plan (the "TINTA 1995 Plan"). The TINTA 1995 Plan provides
for Awards to be made in respect of a maximum of 3,000,000 shares of
TINTA Series A common stock ("TINTA Series A Stock") (subject to
certain anti-dilution adjustments). Shares of TINTA Series A Stock that
are subject to Awards that expire, terminate or are annulled for any
reason without having been exercised (or deemed exercised, by virtue of
the exercise of a related stock appreciation right), or are forfeited
prior to becoming vested will return to the pool of such shares
available for grant under the TINTA 1995 Plan.
On December 13, 1995, stock options in tandem with SARs to purchase
1,352,000 shares of TINTA Series A Stock were granted pursuant to the
TINTA 1995 Plan. Such options vest evenly over five years, first became
exercisable August 4, 1996 and expire on August 4, 2005. During 1997,
TINTA granted stock options in tandem with SARs to purchase 1,130,000
shares of TINTA Series A Stock. Such options vest evenly over five
years, first become exercisable one year after date of grant, and
expire ten years after date of grant.
(continued)
88
<PAGE> 89
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As a result of the TINTA Merger on November 19, 1998, each stock
option and SAR to purchase TINTA Series A Stock was converted into a
stock option or SAR to purchase Liberty Group Series A Stock
determined by multiplying the number of TINTA stock options or SARs by
0.58 at an exercise price per share of such stock option or SAR
divided by 0.58. The following descriptions of stock options and/or
SARs have been adjusted to reflect such change.
The following table presents the number and WAEP of certain options in
tandem with SARs to purchase TINTA Series A Stock and Liberty Group
Series A Stock pursuant to the TINTA 1995 Plan (amounts in thousands,
except for WAEP).
<TABLE>
<CAPTION>
Liberty
TINTA Group
Series A Series A
Stock WAEP Stock WAEP
-------- --------- -------- ------
amounts in thousands, except for WAEP
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996 and 1997 1,352 $ 16.00 -- --
Granted 1,130 14.69 -- --
------ --------
Outstanding at December 31, 1997 2,482 15.40 -- --
Adjustment for TINTA Merger (1,982) 15.31 1,150 $26.40
Exercised (500) 15.75 (1) 25.21
------ --------
Outstanding at December 31, 1998 -- -- 1,149 26.40
====== ========
Exercisable at December 31, 1998 -- -- 448 26.97
====== ========
Vesting Period -- 5 years
====== ========
</TABLE>
On December 13, 1995, pursuant to the TINTA 1995 Plan, 40,000
restricted shares of TINTA Series A Stock were awarded to certain
officers and directors of TINTA. Such restricted shares vest as to 50%
in December 1999 and as to the remaining 50% in December 2000. Such
restricted shares had a fair value of $25.375 on the date of grant. At
December 31, 1998, 23,200 restricted shares of Liberty Group Series A
Stock (after adjustment for TINTA Merger) were unvested.
On July 23, 1997, pursuant to the TINTA 1995 Plan, 150,000 restricted
shares of TINTA Series A Stock were awarded to a director of TINTA.
Such restricted shares vest as to 50% in July 2001 and as to the
remaining 50% in July 2002. Such restricted shares had a fair value of
$14.625 on the date of grant. At December 31, 1998, 87,000 restricted
shares of Liberty Group Series A Stock (after adjustment for TINTA
Merger) were unvested.
(continued)
89
<PAGE> 90
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Tele-Communications International, Inc. Nonemployee Director Stock
Option Plan. On April 11, 1996, TINTA adopted the Tele-Communications
International, Inc. 1996 Nonemployee Director Stock Option Plan (the
"TINTA Director Plan"). The TINTA Director Plan provides for grants to
be made to nonemployee directors of TINTA of options to purchase a
maximum of 1,000,000 shares of TINTA Series A Stock (subject to
certain anti-dilution adjustments). Shares that are subject to such
options that expire or terminate for any reason without having been
exercised will return to the pool of shares underlying options
available to grant under the TINTA Director Plan. Pursuant to the
TINTA Director Plan, options to purchase 200,000 shares of TINTA
Series A Stock were granted in April 1996 at an exercise price of
$16.00 per share. Such options had a weighted average fair value of
$14.01 on the date of grant. Options issued pursuant to the TINTA
Director Plan vest and become exercisable over a five-year period from
the date of grant and expire 10 years from the date of grant.
At December 31, 1998, 116,000 options with respect to Liberty Group
Series A Stock (after adjustment for TINTA Merger) granted pursuant to
the TINTA Director Plan were outstanding, 46,400 of which were
exercisable. Such options had an exercise price of $27.58 and a
weighted average remaining contractual life of 8 years.
Founders Options. Effective December 1, 1996, certain officers and key
employees of the Company were each granted options (the "Telephony
Option") representing 1.0% of the Company's common equity in TCI
Telephony Services, Inc., a consolidated subsidiary of the Company,
("Telephony Services"). The aggregate exercise price for each such
option was equal to 1.0% of (i) the Company's cumulative investment in
Telephony Services as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the
date of such exercise, less (ii) the sum of (x) $500 million and (y)
the amount of the tax benefits generated by Telephony Services (up to
$500 million) as and when used by TCI. Such options had a fair value
of $1,347,700 per option on the date of grant. Each such option was
replaced during 1997 with a separate SAR with respect to each of
Telephony Services' two direct wholly-owned subsidiaries, TCI Teleport
Holdings, Inc. ("TCI Teleport") and TCI Wireless Holdings, Inc. ("TCI
Wireless"). Each of the SAR with respect to TCI Teleport (the "CLEC
SAR") and the SAR with respect to TCI Wireless (the "Wireless SAR")
entitles the holder to the excess of the value of the shares subject
to the SAR (based on the percentage that such shares represent of the
total value of the common equity of TCI Teleport or TCI Wireless, as
applicable, as of the exercise date) over the "strike price" (i.e., 1%
of TCI's cumulative investment in TCI Teleport or TCI Wireless, as
applicable, and their respective subsidiaries at December 1, 1996,
plus a 6% per annum interest factor from the date when each such
investment was made to the date of exercise). The material terms of
the CLEC SAR and the Wireless SAR are the same as those of the
Telephony Option, except that the strike price for each such SAR is an
allocated portion of the exercise price under the Telephony Option
based on TCI's cumulative investment in TCI Teleport and TCI Wireless.
All such SARs will vest and become exercisable in five equal annual
installments, with the first annual installment vesting on February 1,
1997, and will expire on February 1, 2006. Any exercise by one of such
executive officers of all or part of the CLEC SAR would need to be
accompanied by the exercise by such executive officer of a pro rata
portion of Wireline Option described below.
(continued)
90
<PAGE> 91
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Each such officer and key employee was also granted a similar option
(the "Wireline Option") representing 1.0% of the Company's common
equity in TCI Wireline, Inc., another consolidated subsidiary of the
Company, ("Wireline"). The aggregate exercise price for each such
Wireline Option is equal to 1.0% of the Company's cumulative
investment in Wireline as of December 1, 1996, adjusted for a 6% per
annum interest factor from the date each such investment was made to
the date of such exercise. All of such options vest 20% per annum
beginning February 1, 1997 and expire on February 1, 2006. Such
options had a fair value of $4,400 per option on the date of grant.
Such options must be exercised on a pro rata basis with the CLEC SARs
discussed above. On February 19, 1999 the Company repurchased from the
holders of the Wireline Options all shares of the common stock of
Wireline acquired by such holders pursuant to the Wireline Options. At
such time the Company canceled the Wireline Options and deleted the
requirement in the CLEC SARs that holders thereof exercise their
Wireline Option in order to exercise their CLEC SAR.
(continued)
91
<PAGE> 92
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective December 1, 1996, certain officers and key employees of the
Company were each granted options (the "Internet Option") representing
1% of the Company's common equity in TCI Internet Services, Inc. ("TCI
Internet"), a consolidated subsidiary of the Company. The aggregate
exercise price for each Internet Option was equal to 1.0% of the
Company's cumulative investment in TCI Internet 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 price. Such
options vest 20% per annum beginning February 1, 1997 and expire on
February 1, 2006. Such options had a fair value of $346,800 on the
date of grant. In anticipation of the transfer to TCI.NET, Inc.
("TCI.NET") of the Internet services distribution business conducted
through subsidiaries of TCI Internet, each such option was replaced
during 1997 with an option to acquire a number of shares equal to 1.0%
of TCI's common equity in TCI.NET at December 1, 1996 and a SAR with
respect to a number of shares equal to 1.0% of TCI's common equity in
TCI Internet at December 1, 1996. The material terms of the option to
acquire shares of TCI.NET are the same as those of the Internet
Option, except that the exercise price, which will be payable to TCI.
NET, is an allocated portion of the exercise price under the Internet
Option based on TCI's cumulative investment in the Internet services
distribution business relative to the balance of its cumulative
investment in TCI Internet at December 1, 1996. The SAR entitles the
holder to the excess of the value of the shares subject to the SAR
(based on the percentage that such shares represent of the total value
of the common equity of TCI Internet as of the exercise date) over 1%
of TCI's cumulative investment in TCI Internet at December 1, 1996,
plus a 6% per annum interest factor from the date when each such
investment was made to the date of exercise. Any exercise by the
holder of all or part of the TCI.NET option must be accompanied by the
exercise by such holder of a pro rata portion of the TCI Internet SAR,
and vice versa. On February 19, 1999 the Company repurchased from the
holders of the TCI.NET options all shares of the common stock of
TCI.NET acquired by such holders pursuant to the TCI.NET option. At
such time the Company canceled the TCI.NET options and deleted the
requirement in the TCI Internet SARs that holders thereof exercise
their TCI.NET option in order to exercise their TCI Internet SAR. In
connection with the AT&T Merger, the TCI Ventures Group's equity
interest in @Home, which constituted substantially all of the value of
the assets of TCI Internet, was transferred to the TCI Group. As a
result, on March 8, 1999 each Internet SAR was amended to provide,
among other things, that following the AT&T Merger the amounts payable
upon exercise of the Internet SARs would not be determined by
reference to the fair market value of TCI Internet, but would instead
be based upon the fair market value (determined as of the date of
exercise of an Internet SAR) of the investment securities held by TCI
Internet prior to the AT&T Merger, subject to certain adjustments.
Such amendment also provided that the cash settlement value of the
Internet SAR would be paid, at the grantor's election, in cash, AT&T
stock or other stock owned by the grantor. In connection with such
amendment, TCI or Liberty Media Corporation ("Liberty") (depending
upon which entity employed the holder of the Internet SAR) was
substituted for TCI Internet as the obligor under the Internet SARs.
(continued)
92
<PAGE> 93
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1998, 20 Wireless SARs were outstanding, all of which
were exercisable. Such SARs had an exercise price of $1,040,968 and an
average remaining contractual life of 8 years.
At December 31, 1998, 12 TCI Internet SARs were outstanding, none of
which were exercisable. Such SARs and options had an exercise price of
$37,023 and an average remaining contractual life of 8 years.
At December 31, 1998, all of the CLEC SARs had been exercised.
United Video Satellite Group, Inc. Equity Incentive Plan and United
Video Satellite Group, Inc. Stock Option Plan for Non-Employee
Directors. UVSG sponsors the United Video Satellite Group, Inc. Equity
Incentive Plan under which 8.0 million shares of UVSG's Class A Common
Stock are authorized to be issued in connection with the exercise of
awards of stock options, stock appreciation rights and restricted stock
granted under the plan. UVSG's Equity Incentive Plan provides that the
price at which each share of stock covered by an option may be acquired
shall in no event be less than 100% of the fair market value of the
stock on the date the option is granted, except in certain limited
circumstances. Additionally, UVSG sponsors the United Video Satellite
Group, Inc. Stock Option Plan for Non-Employee Directors under which
500,000 shares of UVSG's Class A Common Stock are authorized to be
issued in connection with the exercise of stock options granted
thereunder.
At December 31, 1998, 6.3 million shares of UVSG's Class A Common Stock
were reserved for issuance under the stock option plans. The options
granted under the stock option plans expire ten years from the date of
grant. Options outstanding are as follows (amounts in thousands, except
for WAEP):
<TABLE>
<CAPTION>
UVSG
Class A Common
Stock (1) WAEP (1)
-------------- --------
<S> <C> <C>
At January 1, 1996 $ 4,121 4.25
Granted 1,276 11.11
Exercised (815) 4.04
Canceled (805) 9.21
-------
At December 31, 1996 3,777 5.56
Granted 916 8.54
Exercised (2,089) 4.04
Canceled (252) 5.88
-------
At December 31, 1997 2,352 8.03
Granted 709 16.61
Exercised (254) 6.84
Canceled (36) 9.41
-------
Exercisable at December 31, 1998 2,771 10.32
=======
</TABLE>
- ----------
(1) Adjusted for two-for-one stock split.
Exercise prices for options outstanding as of December 31, 1998 ranged
from $4 to $17. The weighted-average remaining contractual life of such
options is 7.8 years.
(continued)
93
<PAGE> 94
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 1, 1999, the Company's voting interest in UVSG was reduced to
49% and the Company ceased to include UVSG in its consolidated
financial results and began to account for UVSG using the equity method
of accounting. See note 10.
At Home Corporation Stock Option Plans. @Home adopted certain stock
option plans (the "@Home Plans") during 1996, 1997 and 1998. The @Home
Plans provide for the grant of incentive stock options, nonqualified
stock options, restricted stock awards and stock bonuses to employees,
directors and consultants of @Home. Options under the @Home Plans
generally vest at the rate of 25% after one year and ratably on a
monthly basis for three years thereafter.
Options outstanding are as follows (amounts in thousands, except for
WAEP):
<TABLE>
<CAPTION>
@Home
Series A Common
Stock WAEP
--------------- ------
<S> <C> <C>
At January 1, 1996 -- $ --
Granted 5,296 .06
Exercised (4,875) .06
Canceled (198) .05
-------
At December 31, 1996 223 .06
Granted 5,158 6.30
Exercised (2,170) .25
Canceled (153) 3.78
-------
At December 31, 1997 3,058 10.26
Granted 7,648 40.73
Exercised (425) 7.01
Canceled (268) 18.83
-------
At December 31, 1998 10,013 33.44
=======
Exercisable at December 31, 1998 1,616 6.69
=======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged
from $.05 to $71.50. The weighted-average remaining contractual life of
such options is 8.31 to 9.97 years.
TCI Music, Inc. Stock Incentive Plan. During 1997 and 1998, TCI Music,
Inc., a subsidiary of the Company, ("TCI Music") granted stock options
with tandem SARs to employees under the TCI Music, Inc. 1997 Stock
Incentive Plan (the "TCI Music Stock Plan") which is authorized to
issue up to 4,000,000 shares. Options granted under the TCI Music Stock
Plan expire ten years from the date of grant. In addition TCI Music
granted stock options with tandem SARs to the board of directors and
employees in connection with certain mergers. Options issued under the
TCI Music Stock Plan and in connection with certain mergers generally
vest annually in 20% cumulative increments.
On December 21, 1998, TCI Music re-priced the stock options with tandem
SARs pursuant to the TCI Music Stock Plan at $4.00 for all grants to
executive officers and employees of TCI Music and its subsidiaries.
(continued)
94
<PAGE> 95
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the number and WAEP of options in tandem
with SARs to purchase TCI Music Series A Common Stock, after giving
effect to the re-pricing at $4.00 for certain options and tandem SARs
(amounts in thousands, except for WAEP):
<TABLE>
<CAPTION>
TCI Music
Series A
Common Stock WAEP
------------ ----
<S> <C> <C>
At January 1, 1997 -- --
Granted 3,609 5.75
------
At December 31, 1997 3,609 5.75
Granted 1,771 4.00
Exercised (21) 4.00
Canceled (311) 4.00
------
At December 31, 1998 5,048 5.25
======
Exercisable at December 31, 1998 1,373 5.84
======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged
from $4.00 to $6.25. The weighted average remaining contractual life of
such options is 8.7 years. The weighted average fair value of options
granted during 1998, after giving effect to the re-pricing at $4.00 for
certain options and tandem SARs, and 1997 was $3.51 and $3.31,
respectively.
The estimated fair values of the Options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a
present value basis. The key assumptions used in the model for purposes
of these calculations generally include the following: (a) a discount
rate equal to the 10-year Treasury rate on the date of grant; (b) a 35%
volatility factor, (c) the 10-year option term; (d) the closing price
of the respective common stock on the date of grant; and (e) an
expected dividend rate of zero.
(continued)
95
<PAGE> 96
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimated compensation relating to restricted stock awards, options
with tandem SARs and SARs has been recorded through December 31, 1998
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. Compensation recognized for options
with tandem SARs and SARs for the years ended December 31, 1998, 1997
and 1996 was $858 million, $485 million and $(14 million),
respectively. Compensation recognized for restricted stock awards for
the years ended December 31, 1998, 1997 and 1996 was $8 million, $3
million and $1 million, respectively. Had the Company accounted for its
stock based compensation pursuant to the fair value based accounting
method in SFAS 123, the Company's net earnings (loss) and net earnings
(loss) per share would have changed to the pro forma amounts indicated
below (amounts in millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net earnings (loss) attributable to common
stockholders $ 1,902 (608) 256
Pro forma basic net earnings (loss) attributable to
common stockholders per common share
TCI Group Series A and Series B $ (.46) (.86) (1.20)
Liberty Media Group Series A and Series B $ .43 .34 2.82
TCI Ventures Group Series A and Series B $ 4.71 (.47) --
Pro forma diluted net earnings (loss) attributable to common
stockholders per common and potential common share
TCI Group Series A and Series B $ (.49) (.86) (1.20)
Liberty Media Group Series A and Series B $ .39 .31 2.58
TCI Ventures Group Series A and Series B $ 4.41 (.47) --
</TABLE>
(continued)
96
<PAGE> 97
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- -------------------------
Number of Number of
shares Cost basis shares Cost basis
------------ ------------ ---------- ------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Treasury stock is summarized as follows:
TCI Group Series A Stock 11,362,365 $ 182 11,296,324 $ 180
TCI Group Series B Stock 330,902 7 30,876,766 518
Liberty Group Series A Stock 25,561,455 505 25,082,172 489
Liberty Group Series B Stock 82,074 2 82,074 2
TCI Ventures Group Series A Stock 61,450 1 -- --
TCI Ventures Group Series B Stock 432,196 5 338,196 4
Common stock held by subsidiaries is
summarized as follows:
TCI Group Series A Stock 125,728,816 466 125,645,656 464
TCI Group Series B Stock 9,154,134 161 9,112,500 160
Liberty Group Series A Stock 6,654,367 113 6,654,367 113
Liberty Group Series B Stock 3,417,187 61 3,417,187 61
------------ ------------
$ 1,503 $ 1,991
============ ============
</TABLE>
In conjunction with the AT&T Merger, such shares held in treasury and
such shares held by subsidiaries were canceled. See note 2.
(continued)
97
<PAGE> 98
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
General
During the fourth quarter of 1997, the Company entered into a total
return equity swap facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, the Company would have the right to direct
the counterparty (the "Counterparty") to use the Equity Swap Facility
to purchase shares ("Equity Swap Shares") of TCI Group Series A Stock
and TCI Ventures Group Series A Stock with an aggregate purchase price
of up to $300 million. The Company would have the right, but not the
obligation, to purchase Equity Swap Shares through the September 30,
2000 termination date of the Equity Swap Facility. During such period,
the Company would settle periodically any increase or decrease in the
market value of the Equity Swap Shares. If the market value of the
Equity Swap Shares should exceed the Counterparty's cost, Equity Swap
Shares with a fair value equal to the difference between the market
value and cost would be segregated from the other Equity Swap Shares.
If the market value of Equity Swap Shares should be less than the
Counterparty's cost, the Company, at its option, would settle such
difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, the Company would be required to
periodically pay the Counterparty a fee equal to a LIBOR-based rate on
the Counterparty's cost to acquire the Equity Swap Shares. Due to the
Company's ability to issue shares to settle periodic price fluctuations
and fees under the Equity Swap Facility, the Company records all
amounts received or paid under this arrangement as increases or
decreases, respectively, to equity. As of December 31, 1998, the Equity
Swap Facility had acquired 4,935,780 shares of TCI Group Series A Stock
and 1,171,800 shares of TCI Ventures Group Series A Stock at an
aggregate cost that was approximately $135 million less than the fair
value of such Equity Swap Shares at December 31, 1998. From February
10, 1999 to March 5, 1999, the Company terminated all transactions
under the Equity Swap Facility and the related swap agreement. In
connection with the termination of such transactions the Company
received an aggregate cash payment of $170 million.
At December 31, 1998, there were 99,890,031 shares of TCI Group Series
A Stock, 55,828,238 shares of Liberty Group Series A Stock, 33,009,606
shares of TCI Ventures Group Series A Stock and 2,800,000 shares of TCI
Ventures Group Series B Stock reserved for issuance under exercise
privileges related to options, convertible debt securities and
convertible preferred stock. Also, one share of Series A Stock is
reserved for each share of Series B Stock. Additionally, at December
31, 1998, subsidiaries of TCI owned an aggregate of 278,307 shares of
Series F Preferred Stock. In connection with a restructuring, 123,896
shares of Series F Preferred Stock were converted into 185,428,946
shares of TCI Group Series A Stock and the remaining 154,411 shares of
Series F Preferred Stock were canceled. See note 2.
(continued)
98
<PAGE> 99
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Other Comprehensive Earnings
Accumulated other comprehensive earnings included in the Company's
consolidated balance sheets and consolidated statements of
stockholders' equity reflect the aggregate of foreign currency
translation adjustments and unrealized holding gains and losses on
securities classified as available-for-sale. The change in the
components of accumulated other comprehensive earnings, net of taxes,
is summarized as follows:
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
currency gains other
translation (losses) on comprehensive
adjustments securities earnings
--------------- -------------- -----------------
amounts in millions
<S> <C> <C> <C>
Balance at January 1, 1996 $ (9) 338 329
Other comprehensive earnings (loss) 35 (323) (288)
------------- -------------- -----------------
Balance at December 31, 1996 26 15 41
Other comprehensive earnings (loss) (22) 753 731
------------- -------------- -----------------
Balance at December 31, 1997 4 768 772
Other comprehensive earnings 2 2,975 2,977
------------- -------------- -----------------
Balance at December 31, 1998 $ 6 3,743 3,749
============= ============== =================
</TABLE>
(continued)
99
<PAGE> 100
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of other comprehensive earnings are reflected in the
Company's consolidated statements of operations and comprehensive
earnings, net of taxes and reclassifications adjustments for gains
realized in net earnings (loss). The following table summarizes the tax
effects and reclassification adjustments related to each component of
other comprehensive earnings.
<TABLE>
<CAPTION>
Tax
Before-tax (expense) Net-of-tax
amount benefit amount
------------- -------------- ---------------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1998:
Foreign currency translation adjustments $ 3 (1) 2
------------- -------------- ---------------
Unrealized gains on securities:
Unrealized holding gains arising during period 4,889 (1,912) 2,977
Less: reclassification adjustment for gains
realized in net earnings (4) 2 (2)
------------- -------------- ---------------
Net unrealized gains 4,885 (1,910) 2,975
------------- -------------- ---------------
Other comprehensive earnings $ 4,888 (1,911) 2,977
============= ============== ===============
Year ended December 31, 1997:
Foreign currency translation adjustments $ (34) 12 (22)
------------- -------------- ---------------
Unrealized gains on securities:
Unrealized holding gains arising during period 1,236 (483) 753
Less: reclassification adjustment for gains
realized in net earnings -- -- --
------------- -------------- ---------------
Net unrealized gains 1,236 (483) 753
------------- -------------- ---------------
Other comprehensive earnings $ 1,202 (471) 731
============= ============== ===============
Year ended December 31, 1996:
Foreign currency translation adjustments $ 54 (19) 35
------------- -------------- ---------------
Unrealized gains on securities:
Unrealized holding gains arising during period 67 (26) 41
Less: reclassification adjustment for gains
realized in net earnings (598) 234 (364)
------------- -------------- ---------------
Net unrealized gains (531) 208 (323)
------------- -------------- ---------------
Other comprehensive earnings $ (477) 189 (288)
============= ============== ===============
</TABLE>
(continued)
100
<PAGE> 101
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Transactions with Officers and Directors
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for an
equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI would have the option, but not the obligation, to
purchase the Option Shares at any time on or before June 16, 1999 (the
"Option Period"). The preceding transactions are referred to
collectively as the "June 16 Stock Transaction". During the Option
Period, the Company and the Investment Bankers would settle quarterly
any increase or decrease in the market value of the Option Shares. If
the market value of the Option Shares should exceed the Investment
Bankers' cost, Option Shares with a fair value equal to the difference
between the market value and cost would be segregated from the other
Option Shares in an account at the Investment Bankers. If the market
value of the Option Shares should be less than the Investment Bankers'
cost, the Company, at its option, would settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock
or, subject to certain conditions, with cash or letters of credit. In
addition, the Company would be required to pay the Investment Bankers a
quarterly fee equal to LIBOR plus 1% on the Sale Price, as adjusted for
payments made by the Company pursuant to any quarterly settlement with
the Investment Bankers. Due to the Company's ability to settle
quarterly price fluctuations and fees with shares of TCI Group Series A
Stock or TCI Ventures Group Series A Stock, the Company records all
amounts received or paid under this arrangement as increases or
decreases, respectively, to equity. During the fourth quarter of 1997,
the Company repurchased 4 million shares of TCI Group Series A Stock
from one of the Investment Bankers for an aggregate cash purchase price
of $66 million. Additionally, as a result of the Exchange Offers and
certain open market transactions that were completed to obtain the
desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of
TCI Group Series A Stock and acquired 23,407,118 shares of TCI Ventures
Group Series A Stock during the last half of 1997. As a result of the
foregoing transactions and certain transactions related to the January
5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares
of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group
Series A Stock at December 31, 1998. At December 31, 1998, the market
value of the Option Shares exceeded the Investment Bankers' cost by
$421 million.
Pursuant to a certain letter agreement, dated June 16, 1997, between
Dr. Malone, TCI's Chairman and Chief Executive Officer, and the Magness
Estate, Dr. Malone agreed to waive certain rights of first refusal with
respect to shares of TCI Group Series B Stock beneficially owned by the
Magness Estate. Such rights of first refusal arise from a letter
agreement, dated June 17, 1988, among Bob Magness, Kearns-Tribune
Corporation and Dr. Malone, pursuant to which Dr. Malone was granted a
right of first refusal to acquire any shares of TCI Group Series B
Stock which the other parties proposed to sell. As a result of Dr.
Malone's rights under such June 17, 1988 letter agreement, such waiver
was necessary in order for the Magness Estate to consummate the
Exchange and the Sale.
(continued)
101
<PAGE> 102
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from
TCI up to 30,545,864 shares of the TCI Group Series B Stock acquired by
TCI from the Magness Estate pursuant to the Exchange. Such acquisition
may be made in exchange for either, or any combination of, shares of
TCI Group Series A Stock owned by Dr. Malone (exchanged on a one for
one basis), or cash in an amount equal to the average closing sale
price of the TCI Group Series B Stock for the five trading days
preceding the acquisition.
In connection with certain legal proceedings relative to the probate of
the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voiding
Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the Voiding
Action challenged the June 16 Stock Transaction on various fiduciary
bases and requested rescission of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998, TCI, Gary
Magness, Kim Magness, Sharon Magness, the Magness Estate, the Estate of
Betsy Magness (the first wife of Bob Magness) and Dr. Malone agreed to
settle their respective claims against each other relating to the
Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against
that party (the "Magness Settlement").
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were
returned to TCI as authorized but unissued shares, (ii) the Magness
Estate returned to the Investment Bankers the portion of the Sale Price
attributable to such returned shares and (iii) the Magness Estate paid
$11 million to TCI representing a reimbursement of the Exchange fees
incurred by TCI from June 16, 1997 through February 9, 1998 with
respect to such returned shares. TCI then issued to the Magness Estate
10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of
TCI Ventures Group Series B Stock. In addition, as part of the Magness
Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to
the Estate of Betsy Magness in exchange for an equal number of shares
of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures
Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.
(continued)
102
<PAGE> 103
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"),
under which the Malones granted to TCI the right to acquire any shares
of TCI stock which are entitled to cast more than one vote per share
(the "High-Voting Shares") owned by the Malones, which at December 31,
1998 consisted of an aggregate of approximately 69 million High-Voting
Shares upon Dr. Malone's death or upon a contemplated sale of the
High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum
price equal to the then relevant market price of shares of "low-voting"
Series A Stock plus a ten percent premium. The Malones also agreed that
if TCI were ever to be sold to another entity, then the maximum premium
that the Malones would receive on their High-Voting Shares would be no
greater than a ten percent premium over the price paid for the relevant
shares of Series A Stock. TCI paid $150 million to the Malones in
consideration of their entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's, which at December 31, 1998 consisted of an aggregate of
approximately 55 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of their entering into the
Magness Call Agreement.
(continued)
103
<PAGE> 104
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Additionally, on February 9, 1998, the Magness Family entered into a
Shareholders' Agreement (the "Shareholders' Agreement") with the
Malones and TCI under which (i) the Magness Family and the Malones
agree to consult with each other in connection with matters to be
brought to the vote of TCI's stockholders, subject to the proviso that
if they cannot mutually agree on how to vote the shares, Dr. Malone has
an irrevocable proxy to vote the High-Voting Shares owned by the
Magness Family, (ii) the Magness Family may designate a nominee for the
Board and Dr. Malone has agreed to vote his High-Voting Shares for such
nominee and (iii) certain "tag along rights" have been created in favor
of the Magness Family and certain "drag along rights" have been created
in favor of the Malones. In addition, the Malone Right granted by TCI
to Dr. Malone to acquire 30,545,864 shares of TCI Group Series B Stock
was reduced to an option to acquire 14,511,570 shares of TCI Group
Series B Stock. Pursuant to the terms of the Shareholders' Agreement,
the Magness Family has the right to participate in the reduced Malone
Right on a proportionate basis with respect to 12,406,238 shares of the
14,511,570 shares subject to the Malone Right. On June 24, 1998, Dr.
Malone delivered notice to TCI exercising his right to purchase
(subject to the Magness Family proportionate right) up to 14,511,570
shares of TCI Group Series B Stock at a per share price of $35.5875
pursuant to the Malone Right. In addition, a representative of the
Magness Family advised Dr. Malone that the Magness Family would
participate in such purchase up to the Magness Family's proportionate
right. On October 14, 1998, 8,718,770 shares of TCI Group Series B
Stock were issued to Dr. Malone upon payment of cash consideration
totaling $310 million. On October 16, 1998, 5,792,800 shares of TCI
Group Series B Stock were issued to the Magness Family upon payment of
cash consideration totaling $206 million. In connection with the
acquisition of the TCI Group Series B Stock by Dr. Malone, TCI executed
certain waivers to the Malone Call Agreement and TCI and the Magness
Family executed a waiver to the Shareholders' Agreement to, among other
things, permit (subject to certain limitations) the pledge of TCI Group
Series B Stock owned by Dr. Malone as collateral to the lenders who
provided the funds for his purchase of shares of TCI Group Series B
Stock. In connection with the AT&T Merger, Liberty became entitled to
exercise TCI's rights under each Call Agreement and the Shareholders'
Agreement with respect to the AT&T Liberty Class B Tracking Stock
acquired by the Malones and the Magness Family as a result of the AT&T
Merger and the Malones and the Magness Family agreed that the
Shareholders' Agreement would continue to apply to the AT&T Liberty
Class B Tracking Stock.
On February 1, 1999, the Company began to terminate the transactions
under the agreements with the Investment Bankers described above, and
as of March 5, 1999, such transactions were terminated. In connection
with the termination of such transactions the Company received an
aggregate cash payment of $509 million.
After the Company's stockholders voted to approve the terms of the AT&T
Merger, on February 17, 1999, the Board approved the payment by
Liberty/Ventures Group of $1 million to each of two directors of the
Company for their services on the Special Committee of the Company's
Board in evaluating the AT&T Merger and the consideration to be
received by the stockholders of the Company.
(continued)
104
<PAGE> 105
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the AT&T Merger, a limited liability company owned by Dr.
Malone acquired, from certain subsidiaries of the Company, for $17
million working cattle ranches located in Wyoming. No gain or loss was
recognized on such acquisition. The purchase price was paid by such
limited liability company was in the form of a 12-month note in the
amount of $17 million having an interest rate of 7%. Such note is
payable at any time without penalty and is personally guaranteed by Dr.
Malone.
On April 30, 1998, TCI ICM VI, Inc., a subsidiary of the Company,
acquired a 99.999% limited partnership interest in InterMedia Capital
Management VI, L.P. ("ICM VI") from an individual who is an executive
officer and a director of the Company, in exchange for (i) 153,183
shares of Liberty Group Series B Stock (the "Liberty Shares") valued at
$5 million and (ii) a .495% limited partnership interest in InterMedia
Capital Partners VI, L.P. ("ICP VI") having a capital account of $1
million (the "InterMedia VI Transaction"). Such individual acquired his
partnership interest in ICM VI in July 1996 for $10,000. On the
InterMedia VI Transaction closing date, the .001% general partnership
interest in ICM VI was held by InterMedia Management, Inc. ("IMI"), a
corporation all of the stock of which is owned by a former officer of
the Company. The other partnership interests in ICP VI are held by TCI
IP-VI, LLC, a wholly owned subsidiary of the Company (49.005% limited
partnership interest), Blackstone Cable Acquisition Company, LLC or its
affiliates (49.500% limited partnership interest), ICM VI (.999%
limited partnership interest), and InterMedia Capital Management VI,
LLC, an entity of which IMI is the sole member (.001% general
partnership interest).
On August 5, 1998, a then director of the Company paid $1.8 million to
purchase, at fair value, the Company's interest in General
Communication, Inc.
On December 10, 1998, the Board approved the grant to a director of the
Company of 250,000 restricted shares of TCI Group Series A Stock
contingent upon the consummation of the AT&T Merger. In addition,
Liberty paid such director $10 million immediately prior to the AT&T
Merger for his services in negotiating the merger agreement with AT&T
and completing the AT&T Merger.
On September 25, 1997, certain subsidiaries of the Company entered into
an Asset Contribution Agreement with, among others, Fisher
Communications Associates, L.L.C. ("Fisher Communications"), a Colorado
limited liability company, controlled by a then director of the
Company. On January 15, 1998, pursuant to the agreement, the cable
television assets of the applicable cable systems of the Company were
contributed to Peak Cablevision in exchange for a 66.7% partnership
interest in Peak Cablevision. Additionally, cable television assets of
Fisher Communications were contributed in 1998 in exchange of a 33.3%
interest in Peak Cablevision. In connection with the formation of Peak
Cablevision, the Company contributed approximately 87,000 customers
passing 136,500 homes and Fisher Communications contributed
approximately 27,000 customers passing 42,100 homes. The Company
contributed debt amounting to $93 million and Fisher Communications
contributed debt amounting to $19 million.
On July 23, 1997, Dr. Malone acquired from the Company an aggregate of
7,296,324 shares of TCI Group Series B Stock and 3,417,187 shares of
Liberty Group Series B Stock, in exchange for a like number of shares
of TCI Group Series A Stock and Liberty Group Series A Stock,
respectively, held by such executive officer and director.
(continued)
105
<PAGE> 106
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 24, 1997, the Company repurchased 219,937 shares of Liberty
Group Series A Stock from the spouse of Dr. Malone at an aggregate cost
of approximately $4 million.
On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued
139,513 shares of TCI Group Series B Stock (the "IP I Shares") to the
IP Series B Trust I ("Trust"). An executive officer who is also a
director of the Company is the trustee of the Trust. The IP I Shares
were issued in connection with a partial closing under two Partnership
Interest Purchase Agreements both dated as of June 10, 1997 (the "IP-I
and IP-III Purchase Agreements"), pursuant to which the Company
acquired on the IP Phase I Closing Date (a) a 99.998% limited
partnership interest in InterMedia Capital Management III, L.P., (b) a
75% limited partnership interest in InterMedia CM - LP, and (c) a
99.998% limited partnership interest in InterMedia Capital Management,
L.P. in exchange for total consideration of the IP I Shares and cash
and assumption of current liabilities in an aggregate amount of $6
million. As a result of such transactions the Company increased its
direct and indirect ownership of the limited partnership interests of
InterMedia Partners, a California limited partnership, from
approximately 53.6% to 54.7% and obtained the right to receive an
administrative fee from InterMedia Partners and the right to receive a
20% overriding interest on any distributions in excess of the partners'
capital contributions. In light of such increased ownership interests
and rights and the January 1, 1998 consummation of a transaction in
which InterMedia Partners acquired substantially all of the equity
interests held by partners other than TCI, the Company retroactively
adopted the equity method of accounting for its investment in
InterMedia Partners for all periods ended prior to January 1, 1998. On
January 1, 1998, the Company began consolidating its investment in
InterMedia Partners. InterMedia Partners, InterMedia IV and ICM IV are
all managed by the same management group. See note 6.
On August 5, 1997 (the "IP Phase II Closing Date"), the Company issued
2,405,942 shares of TCI Group Series B Stock (the "IP II Shares") to
the IP Series B Trust II ("Trust II"). An executive officer who is also
a director of the Company is the trustee of the Trust II. The IP II
Shares were issued in connection with the closing under the Partnership
Interest Purchase Agreement dated as of August 5, 1997, and a partial
and final closing under the IP-I and IP-III Purchase Agreements,
pursuant to which the Company acquired on the IP Phase II Closing Date
a 99.997% limited partnership interest in ICM IV and an additional
.001% limited partnership interest in InterMedia Capital Management,
L.P. in exchange for total consideration of the IP II Shares and $4.8
million in cash and TCI's assumption of liabilities in an aggregate
amount of $18 million. See note 6.
In connection with the three Partnership Interest Purchase Agreements,
a director of the Company received a consulting fee in the amount of
$400,000 in cash and 31,030 shares of TCI Group Series B Stock and the
son of a director of the Company received an advisory fee in the amount
of 36,364 shares of TCI Group Series B Stock.
(continued)
106
<PAGE> 107
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On January 27, 1999, the Company announced the planned acquisition by
Charter Communications ("Charter") and TCI of certain cable television
systems owned by InterMedia IV and InterMedia Partners. Charter will
pay consideration consisting of cash and cable television systems for
the systems its acquires from InterMedia IV. TCI will acquire certain
other cable systems in a non-cash transaction. Upon the consummation of
the transactions described above, TCI will own all of the partnership
interests in InterMedia IV and InterMedia Partners. The transactions
are subject to the negotiation and signing of definitive documents and
various closing conditions.
An individual who is a director and executive officer of TCI, currently
has a .001% special limited partnership interest in ICM IV, which in
turn has a 1.19% limited partnership interest in InterMedia IV. Such
individual's special limited partnership interest in ICM IV was created
in August 1997 in connection with TCI's acquisition of all of the
partnership interests (other than a .002% general partnership interest
and a .001% special limited partnership interest) in ICM IV. Such
individual also indirectly owns a minimal interest in InterMedia
Partners. In connection with the proposed transaction described above,
it is anticipated that such individual, by virtue of his .001% special
limited partnership interest in ICM IV, will participate in a profit
sharing mechanism of InterMedia IV and receive cash consideration based
on the valuation of InterMedia IV in the transaction described above.
Although the amount of such consideration is uncertain at this time,
its is expected that such consideration will be approximately $10
million. In the transaction described above, it is expected that such
individual will receive less than $50,000 for his indirect interest in
InterMedia Partners.
In connection with the July 1997 Kearns-Tribune merger (see note 10),
the former Chairman of the Board of Kearns-Tribune who was also a
director of TCI (the "Former Kearns-Tribune Chairman") received (i) a
cash payment of $1.6 million and (ii) an assignment of all of
Kearns-Tribune right, title and interest in and to all patented mining
claims owned by Kearns-Tribune, including but not limited to royalties,
buildings, fixtures, surface rights, licenses and contracts related
thereto, which patented mining claims are valued at $438,000. With
respect to the assignment of the mining claims, the Former
Kearns-Tribune Chairman agreed to assume all liabilities with respect
thereto and agreed to indemnify Kearns-Tribune for any and all
liabilities of Kearns-Tribune, if any, relating to the mining claims,
including those arising from past operations. As of December 31, 1997,
Kearns-Tribune had made the cash payment to the Former Kearns-Tribune
Chairman. As of November 11, 1998, Kearns-Tribune completed the
transfers of the mining claims to a corporation designated by the
Former Kearns-Tribune Chairman.
Also in connection with the Kearns-Tribune Merger, Silver King Group
L.L.C. ("SKG"), which is owned and controlled by a director of TCI,
entered into an agreement with Kearns-Tribune to purchase assets
consisting primarily of land, oil and gas royalties and patents for
$10.87 million. On November 30, 1997 such purchase was consummated and
SKG paid Kearns-Tribune $9.5 million of the $10.87 million purchase
price in cash and the remainder of such purchase price in the form of a
non-interest bearing promissory note. As of March 10, 1999, $1,318,000
of such note remains outstanding.
(continued)
107
<PAGE> 108
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 4, 1997, Dr. Malone received an advance from a wholly-owned
subsidiary of the Company in the amount of $6 million. On March 5,
1997, Dr. Malone received a second advance from a wholly-owned
subsidiary of the Company in the amount of $6 million. The terms of the
advances were memorialized by a promissory note. The interest rate on
such loans is 1% over the one-month LIBOR rate compounded annually. Dr.
Malone used the proceeds of the advance to purchase shares of Satellite
Series A Common Stock. On February 9, 1998, Dr. Malone repaid the $12
million promissory note balance and accrued interest in the amount of
$723,000.
On the date of the Satellite Spin-off, the Company granted options to
two of its then executive officers and a key employee of TCIC to
acquire an aggregate of 1,660,190 shares of Satellite Series A Common
Stock. The exercise price for each such option is equal to $8.86 per
share. Such options vest 20% per annum beginning February 1, 1997 and
expire on February 1, 2006.
Effective January 31, 1996, a then 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) 12% 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 were exercised during the first quarter of 1998. The aggregate
exercise price of $3 million was satisfied with five non-interest
bearing promissory notes that are due and payable to the Company in
2006.
On July 1, 1996, pursuant to a Restricted Stock Award Agreement, a then
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
former officer in the event of certain circumstances from the date of
grant through December 13, 2005.
(18) At Home Corporation
On January 19, 1999, @Home entered into a merger agreement with Excite,
Inc. ("Excite"), a global internet media company that offers consumers
and advertisers comprehensive internet navigation services with
extensive personalization capabilities. Under the terms of the merger
agreement, @Home will issue approximately 55 million shares of its
common stock for all of the outstanding common stock of Excite based on
an exchange ratio of 1.041902 shares of @Home's common stock for each
share of Excite's common stock. @Home may issue up to approximately 15
million additional shares of common stock in connection with the
assumption of obligations under Excite's stock option and employer
stock purchase plans and outstanding warrants. @Home will account for
the transaction as a purchase. @Home's preliminary estimate of the
total purchase consideration is approximately $7 billion, based on the
fair value at the time of announcement of the merger, of common stock
to be issued and stock option, stock purchase plan and warrant
obligations assumed, plus estimated transaction costs. As a result of
the proposed merger, TCI's economic interest in @Home would decrease
from 38.8% to 26.5%, which economic interest would represent an
approximate 58% voting interest. The merger is subject to several
conditions, including approval by both companies' stockholders and the
expiration of applicable waiting periods under certain antitrust laws.
(continued)
108
<PAGE> 109
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1998, @Home completed a public offering (the "@Home Offering")
in which 2.9 million shares of @Home common stock were sold for net
cash proceeds of approximately $125 million. In connection with the
@Home Offering, TCI paid $37 million to purchase 800,000 shares of
@Home common stock. Additionally, @Home issued 1.2 million shares of
common stock in certain acquisitions, along with the assumption of
options to purchase @Home's common stock. As a result of these stock
issuances, TCI's economic interest in @Home decreased to 38.8%, which
then represented an approximate 70.88% voting interest. As a result of
the increase in @Home's equity in connection with such stock issuances,
net of the dilution of TCI's ownership interest in @Home, TCI
recognized a gain of $51 million.
In April 1997, @Home issued 240,000 shares of convertible preferred
stock, resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997, @Home completed its initial public offering (the
"@Home IPO"), in which 10.4 million shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, TCI's economic interest in @Home decreased from 43%
to 39%, which economic interest then represented an approximate 72%
voting interest. In connection with the increase in @Home's equity, net
of the dilution of TCI's ownership interest in @Home, TCI recognized a
gain of $60 million during the third quarter of 1997.
In 1997, @Home entered into an exclusive distribution agreement with
CSC. In connection with such agreement, CSC was issued a warrant to
purchase up to 7.9 million shares of @Home's Series A common stock at
an exercise price of $0.50 per share (the "Warrant"), which was
immediately exercisable. In 1997, @Home recorded the $173 million fair
value of the Warrant as an intangible asset which is being amortized
ratably over 56 months. The agreement with CSC also provided for the
issuance of an additional warrant to CSC to purchase up to 3.1 million
shares of @Home's Series A common stock at an exercise price of $0.50
per share under certain circumstances (the "Contingent Warrant").
During 1998, the Contingent Warrant became exercisable for 2.4 million
shares of @Home's Series A common stock and @Home recorded the $74
million fair value of the exercisable portion of the Contingent Warrant
as an intangible asset which is being amortized ratably over 51 months.
During 1998, @Home issued performance-based warrants to certain cable
operators to purchase up to 10.3 million shares of @Home Series A
common stock at an exercise price of $10.50 per share. Warrants to
purchase approximately 920,000 shares of @Home's Series A common stock
became exercisable in 1998. @Home recorded non-cash charges to
operations of $50 million for the fair value of these warrants. Such
charges are included in cost of distribution agreements in the
accompanying consolidated statements of operations and comprehensive
earnings. In the event the performance milestones are met with respect
to the remaining unexercisable performance-based warrants, @Home will
record non-cash charges to operations in future periods based on the
difference between the then fair market value of @Home's Series A
common stock and the exercise price of $10.50 per share.
(continued)
109
<PAGE> 110
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Income Taxes
TCI files a consolidated federal income tax return with all of its
80%-or-more owned subsidiaries. Consolidated subsidiaries in which the
Company owns less than 80% each file a separate income tax return. TCI
and such subsidiaries calculate their respective tax liabilities on a
separate return basis which are combined in the accompanying
consolidated financial statements.
Income tax benefit (expense) for the years ended December 31, 1998,
1997 and 1996 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1998:
Federal $ (115) (1,244) (1,359)
State and local (19) (217) (236)
---------- ---------- ----------
$ (134) (1,461) (1,595)
========== ========== ==========
Year ended December 31, 1997:
Federal $ (10) 264 254
State and local (31) 11 (20)
---------- ---------- ----------
$ (41) 275 234
========== ========== ==========
Year ended December 31, 1996:
Federal $ (25) (184) (209)
State and local (13) (49) (62)
---------- ---------- ----------
$ (38) (233) (271)
========== ========== ==========
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax benefit (expense) $ (1,238) 278 (197)
Amortization not deductible for tax purposes (37) (27) (22)
Minority interest in losses (earnings)of
consolidated subsidiaries 32 27 (3)
Gain on sale of subsidiary stock 31 21 --
State and local income taxes, net of federal
income tax benefit (153) (5) (50)
Increase in valuation allowance (43) (26) (24)
Settlement of tax contingencies (99) -- --
Effect of deconsolidations on deferred taxes (34) -- --
Other (54) (34) 25
---------- ---------- ----------
$ (1,595) 234 (271)
========== ========== ==========
</TABLE>
(continued)
110
<PAGE> 111
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- ----------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 853 920
Less - valuation allowance (227) (183)
Investment tax credit carryforwards 74 117
Less - valuation allowance (40) (41)
Alternative minimum tax credit carryforwards 153 95
Gains deferred for financial statement purposes 210 --
Future deductible amount attributable to accrued
stock appreciation rights and deferred compensation 387 132
Future deductible amounts principally due to
non-deductible accruals 133 150
Other 20 5
---------- ----------
Net deferred tax assets 1,563 1,195
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,099 1,295
Franchise costs, principally due to differences in
amortization 3,429 4,354
Investment in affiliates, due principally to
undistributed earnings of affiliates 6,455 1,277
Deferred intercompany gains 151 181
Other 178 192
---------- ----------
Total gross deferred tax liabilities 11,312 7,299
---------- ----------
Net deferred tax liability $ 9,749 6,104
========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of December 31,
1998 and 1997 was $267 million and $224 million, respectively.
At December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes aggregating approximately $1,555 million of
which, if not utilized to reduce taxable income in future periods, $3
million expires in 2001, $69 million in 2002, $82 million in 2003, $66
million in 2004, $332 million in 2005, $221 million in 2006, $267
million in 2010, $226 million in 2011, $210 million in 2012 and $79
million in 2013. Certain subsidiaries of the Company had additional net
operating loss carryforwards for income tax purposes aggregating
approximately $488 million and these net operating losses are subject
to certain rules limiting their usage. In addition, certain
subsidiaries of the Company file their own separate federal and state
tax returns. These subsidiaries had additional net operating loss
carryforwards aggregating approximately $94 million. These net
operating losses are subject to certain rules limiting their usage.
(continued)
111
<PAGE> 112
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Upon consummation of the AT&T Merger, Liberty/Ventures Group became
entitled to the benefit of net operating loss carryforwards available
to the entities included in TCI's consolidated income tax return as of
the date of the AT&T Merger. See note 2.
At December 31, 1998, the Company had remaining available investment
tax credits of approximately $63 million which, if not utilized to
offset future federal income taxes payable, expire at various dates
through 2005. Certain subsidiaries of the Company had additional
investment tax credit carryforwards aggregating approximately $63
million and these investment tax credit carryforwards are subject to
certain rules limiting their usage.
During 1998, TCI settled examinations by the IRS of certain federal
income tax returns for the years 1983 through 1992. 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 (the "IRS") for the years 1993 through 1995
(the "IRS Examinations"). In the opinion of management, any additional
tax liability, not previously provided for, resulting from the IRS
Examinations ultimately determined to be payable, should not have a
material adverse effect on the consolidated financial position of the
Company.
(20) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, the Company's basic and tier
service rates and its equipment and installation charges (the
"Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. Basic and tier service rates are
evaluated against competitive benchmark rates as published by the FCC,
and equipment and installation charges are based on actual costs. Any
rates for Regulated Services that exceeded the benchmarks were reduced
as required by the 1993 and 1994 rate regulations. The rate regulations
do not apply to the relatively few systems which are subject to
"effective competition" or to services offered on an individual service
basis, such as premium movie and pay-per-view services.
The Company believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed by a
customer, or the appropriate franchise authority, if such authority has
been certified by the FCC to regulate rates. 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)
112
<PAGE> 113
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film
Licensing Obligations"). Based on customer levels at December 31, 1998,
these agreements require minimum payments aggregating approximately
$808 million. The aggregate amount of the Film Licensing Obligations
under these license agreements is not currently estimable because such
amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying
films. Nevertheless, required aggregate payments under the Film
Licensing Obligations could prove to be significant.
The Company is a party to affiliation agreements with programming
suppliers. Pursuant to certain of such agreements, the Company is
committed to carry such suppliers' programming on its cable systems.
Additionally, certain of such agreements provide for penalties and
charges in the event the programming is not carried or not delivered to
a contractually specified number of customers.
The Company is committed to purchase billing services from an
unaffiliated third party pursuant to three successive five year
agreements. Pursuant to such arrangement, the Company is obligated at
December 31, 1998 to make minimum payments aggregating approximately
$1.6 billion through 2012. Such minimum payments are subject to
inflation and other adjustments pursuant to the terms of the underlying
agreements.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $415 million at December 31, 1998. As described in note
10, the Company also has provided certain credit enhancements with
respect to obligations of the 1998 Joint Ventures. The Company also has
guaranteed the performance of certain affiliates and other parties with
respect to such parties' contractual and other obligations. Although
there can be no assurance, management of the Company believes that it
will not be required to meet its obligations under such guarantees, or
if it is required to meet any of such obligations, that they will not
be material to the Company.
Subsequent to December 31, 1998, a subsidiary of the Company agreed to
enter into a contribution agreement ("Contribution Agreement") with
certain shareholders of Primestar, Inc. ("Primestar") pursuant to which
the Company would, to the extent it is relieved of $166.3 million of
contingent liabilities currently owed to certain creditors of Primestar
and its subsidiaries, contribute $166.3 million to Primestar to the
extent necessary to satisfy liabilities of Primestar. During the fourth
quarter of 1998, the Company recorded a $90 million charge to provide
for the estimated losses that are expected to result from the
Contribution Agreement. The Company's obligation under the Contribution
Agreement will expire in 2001.
TINTA has guaranteed the obligation of an affiliate ("The Premium Movie
Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount of The Premium Movie
Partnership's license fee obligations is not currently estimable, TINTA
believes that the aggregate payments pursuant to such obligations could
be significant. If TINTA were to fail to fulfill its obligations under
the guarantee, the beneficiaries have the right to demand an aggregate
payment from TINTA of approximately $26 million. Although TINTA has not
had to perform under such guarantee to date, TINTA cannot be certain
that it will not be required to perform under such guarantee in the
future.
(continued)
113
<PAGE> 114
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements, transponder lease agreements and
uses certain equipment under lease arrangements. Rental expense under
such arrangements amounted to $230 million, $212 million and $187
million in 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<CAPTION>
Years ending
December 31,
----------------------
<S> <C>
1999 $ 153
2000 130
2001 111
2002 97
2003 83
Thereafter 309
</TABLE>
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties.
Effective as of December 16, 1997, NDTC, a subsidiary of TCI, on behalf
of TCIC and other cable operators that may be designated from time to
time by NDTC ("Approved Purchasers"), entered into an agreement (the
"Digital Terminal Purchase Agreement") with General Instrument
Corporation ("GI") to purchase advanced digital set-top devices. The
hardware and software incorporated into these devices are designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999
and 2000 at an average price of $318 per set-top device. Through
December 31, 1998, approximately 1.6 million set-top devices had been
purchased pursuant to this commitment. GI agreed to provide NDTC and
its Approved Purchasers the most favorable prices, terms and conditions
made available by GI to any customer purchasing advanced digital
set-top devices. In connection with NDTC's purchase commitment, GI
agreed to grant warrants to purchase its common stock proportional to
the number of devices ordered by each organization, which as of the
effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted
basis). Such warrants vest as annual purchase commitments are met. On
December 31, 1998, the Company vested in 4,928,000 warrants pursuant to
such arrangements. Such warrants were recorded at their fair value of
$64 million on such date resulting in a reduction in the basis of the
set-top devices. Vested warrants are accounted for as
available-for-sale securities in the Company's consolidated financial
statements. NDTC has the right to terminate the Digital Terminal
Purchase Agreement if, among other reasons, GI fails to meet a material
milestone designated in the Digital Terminal Purchase Agreement with
respect to the development, testing and delivery of advanced digital
set-top devices.
(continued)
114
<PAGE> 115
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 17, 1998, the Company acquired 21.4 million shares of common
stock of GI in exchange for (i) certain of the assets of NDTC's set-top
authorization business, (ii) the license of certain related software to
GI, (iii) a $50 million promissory note from the Company to GI, and
(iv) a nine-year revenue guarantee from the Company in favor of GI. In
connection therewith, NDTC also entered into a services agreement
pursuant to which it will provide certain postcontract services to GI's
set-top authorization business. The 21.4 million shares of GI common
stock are, in addition to other transfer restrictions, restricted as to
their sale by NDTC for a three year period, and represent approximately
13% of the outstanding common stock of GI at December 31, 1998. The
Company recorded its investment in such shares at fair value which
included a discount attributable to the above-described liquidity
restriction. The Company carries its investment in such shares at the
lower of cost or net realizable value. The $346 million excess of the
fair value of GI common stock received over (i) the book value of
certain assets transferred from NDTC to GI, and (ii) the $42 million
present value of the promissory note due from the Company to GI, has
been deferred by the Company in the accompanying consolidated financial
statements. A portion of such excess equal to the $160 million present
value of the annual amounts specified by the revenue guarantee will be
amortized to revenue over nine years in proportion to such annual
guaranteed amounts. The remaining $186 million excess will be amortized
to revenue on a straight-line basis over the nine-year period that NDTC
is required to perform postcontract services.
Certain key employees of the Company and members of the Board hold
restricted stock awards, options and options with tandem SARs to
acquire shares of certain subsidiaries' common stock. Estimates of the
compensation related to 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.
Estimates of compensation relating to phantom stock appreciation rights
granted to employees of a subsidiary of TCI have been recorded in the
accompanying consolidated financial statements, but are subject to
future adjustment based upon a valuation model derived from such
subsidiary's cash flow, working capital and debt.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible the Company may incur losses upon conclusion of
such matters, an estimate of any loss or range of loss cannot be made.
In the opinion of management, it is expected that amounts, if any,
which may be required to satisfy such contingencies will not be
material in relation to the accompanying consolidated financial
statements.
(continued)
115
<PAGE> 116
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Year 2000
During 1998, the Company continued its enterprise-wide, comprehensive
efforts to assess and remediate its computer systems and related
software and equipment to ensure such systems, software and equipment
recognize, process and store information in the year 2000 and
thereafter. The Company's year 2000 remediation efforts include an
assessment of its most critical systems, such as customer service and
billing systems, headends and other cable plant systems that support
the Company's programming services, business support operations, and
other equipment and facilities. The Company also continued its efforts
to verify the year 2000 readiness of its significant suppliers and
vendors and continued to communicate with significant business partners
and affiliates to assess such partners and affiliates' year 2000
status.
The Company has a year 2000 Program Management Office (the "PMO") to
organize and manage its year 2000 remediation efforts. The PMO is
responsible for overseeing, coordinating and reporting on the Company's
year 2000 remediation efforts.
During 1998, the Company continued its survey of significant
third-party vendors and suppliers whose systems, services or products
are important to the Company's operations (e.g., suppliers of
addressable controllers and set-top devices, and the provider of the
Company's billing services). The year 2000 readiness of such providers
is critical to continued provision of the Company's cable service.
In addition to the survey process described above, management of the
Company has identified its most critical supplier/vendor relationships
and has instituted a verification process to determine the vendor's
year 2000 readiness. Such verification includes, as deemed necessary,
reviewing vendors' test and other data and engaging in regular
conferences with vendors' year 2000 teams. The Company is also
requiring testing to validate the year 2000 compliance of certain
critical products and services.
Significant market value is associated with the Company's investments
in certain public and private corporations, partnerships and other
businesses. Accordingly, the Company is monitoring the public
disclosure of such publicly-held business entities to determine their
year 2000 readiness. In addition, the Company has surveyed and
monitored the year 2000 status of certain privately-held business
entities in which the Company has significant investments.
Year 2000 expenses and capital expenditures incurred during the year
ended December 31, 1998 were $11 million and $2 million, respectively.
Management of the Company currently estimates the remaining costs to be
not less than $113 million, bringing the total estimated cost
associated with the Company's year 2000 remediation efforts to be not
less than $126 million (including $33 million for replacement of
noncompliant information technology systems). Also included in this
estimate is $14 million in future payments to be made pursuant to
unfulfilled executory contracts or commitments with vendors for year
2000 remediation services.
(continued)
116
<PAGE> 117
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There
can be no assurance that the Company's systems or the systems of other
companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
(22) Information about the Company's Operating Segments
The Company has two reportable operating segments: domestic cable and
communications services and domestic programming services. Domestic
cable and communications services receives video, audio and data
signals from various sources, and amplify and distribute the signals by
coaxial cable and optical fiber to the premises of customers who pay a
fee for the service. Domestic programming services are produced,
acquired, and distributed, through all available formats and media,
branded entertainment and informational programming and software,
including multimedia products, delivered in both analog and digital
form. The Company's domestic cable and communications services business
and assets were included in TCI Group, and the Company's domestic
programming business and assets were included in Liberty Media Group.
The Company's principal international businesses and assets and the
Company's remaining non-cable and non-programming domestic businesses
and assets were included in TCI Ventures Group.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of operating cash flow
(operating income before depreciation, amortization, other non-cash
items, year 2000 costs, AT&T merger costs and stock compensation).
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 flow provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. The Company
generally accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each segment requires different technology and marketing
strategies.
(continued)
117
<PAGE> 118
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company utilizes the following financial information for purposes
of making decisions about allocating resources to a segment and
assessing a segment's performance:
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
------------------ ------------- ------- -----
amounts in millions
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues from external customers
including intersegment revenue $ 6,022 680 947 7,649
Intersegment revenue -- 232 66 298
Segment operating cash flow 2,469 100 143 2,712
Year ended December 31, 1997:
Revenues from external customers
including intersegment revenue $ 6,429 374 969 7,772
Intersegment revenue -- 173 29 202
Segment operating cash flow 2,766 55 154 2,975
Year ended December 31, 1996:
Revenues from external customers
including intersegment revenue $ 5,881 1,339 926 8,146
Intersegment revenue -- 107 17 124
Segment operating cash flow 2,016 164 96 2,276
As of December 31, 1998
Segment assets $ 21,476 10,181 10,630 42,287
Investment in equity method
investees 1,686 1,979 1,708 5,373
Expenditures for segment assets 1,773 19 125 1,917
As of December 31, 1997
Segment assets $ 23,578 5,039 3,934 32,551
Investment in equity method
investees 414 524 2,113 3,051
Expenditures for segment assets 538 4 167 709
</TABLE>
(continued)
118
<PAGE> 119
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment amounts to the Company's
consolidated balances is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
amounts in millions
<S> <C> <C> <C>
Revenue
Total revenue for reportable segments $ 6,702 6,803 7,220
Other revenue 947 969 926
Elimination of intersegment revenue (298) (202) (124)
----------- ----------- -----------
Total consolidated revenue $ 7,351 7,570 8,022
=========== =========== ===========
Reconciliation of Operating Cash Flow to Earnings
(Loss) Before Income Tax
Total operating cash flow for reportable segments $ 2,569 2,821 2,180
Other operating cash flow 143 154 96
Other items excluded from operating cash flow:
Year 2000 costs (11) -- --
AT&T merger costs (14) -- --
Stock compensation (866) (488) 13
Reserve for loss arising from contingent
obligation (90) -- --
Cost of distribution agreements (50) -- --
Impairment of assets (5) (15) --
Restructuring charges -- -- (41)
Depreciation (1,121) (1,077) (1,093)
Amortization (614) (546) (523)
Interest expense (1,061) (1,160) (1,096)
Interest and dividend income 122 88 64
Share of losses of affiliates, net (1,384) (930) (450)
Loss on early extinguishment of debt (60) (39) (71)
Minority interest in earnings of
consolidated subsidiaries, net (88) (154) (56)
Gains on issuance of equity interests by
subsidiaries 89 60 --
Gains on issuance of stock by equity
investees 268 112 12
Gains on disposition of assets, net 5,760 401 1,593
Other, net (49) (22) (65)
----------- ----------- -----------
Earnings (loss) before income taxes $ 3,538 (795) 563
=========== =========== ===========
</TABLE>
(continued)
119
<PAGE> 120
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Assets
Total assets for reportable segments $ 31,657 28,617
Other segment assets 10,630 3,934
Consolidating and eliminating adjustments (436) (74)
----------- -----------
Consolidated total $ 41,851 32,477
=========== ===========
Other Significant Items
Equity method investments for reportable segments $ 3,665 938
Other equity method investments 1,708 2,113
Consolidating and eliminating adjustments (608) 12
----------- -----------
Consolidated equity method investments $ 4,765 3,063
=========== ===========
Expenditures for reportable segment assets $ 1,792 542
Other asset expenditures 125 167
----------- -----------
Consolidated total asset expenditures $ 1,917 709
=========== ===========
</TABLE>
Substantially all revenue and assets of TCI's reportable segments are
attributed to or located in the United States.
The Company does not have a single external customer which represents
10 percent or more of its consolidated revenues.
(continued)
120
<PAGE> 121
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(23) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
amounts in millions,
except per share data
<S> <C> <C> <C> <C>
1998:
Revenue $ 1,872 1,813 1,825 1,841
========= ========= ========= =========
Operating income (loss) $ 43 39 241 (382)
========= ========= ========= =========
Net earnings (loss) $ 346 (299) 1,340 556
========= ========= ========= =========
Basic earnings (loss) attributable to common
stockholders per common share:
TCI Group Stock $ .44 (.28) .09 (.69)
========= ========= ========= =========
Liberty Group Stock $ .85 (.18) (.03) (.20)
========= ========= ========= =========
TCI Ventures Group Stock $ (.46) (.22) 3.07 2.35
========= ========= ========= =========
Diluted earnings (loss) attributable to common
stockholders per common and potential common share:
TCI Group Stock $ .38 (.28) .08 (.70)
========= ========= ========= =========
Liberty Group Stock $ .78 (.18) (.03) (.20)
========= ========= ========= =========
TCI Ventures Group Stock $ (.46) (.22) 2.88 2.19
========= ========= ========= =========
1997:
Revenue $ 1,821 1,882 1,934 1,933
========= ========= ========= =========
Operating income $ 349 253 222 25
========= ========= ========= =========
Net loss $ (58) (154) (22) (327)
========= ========= ========= =========
Basic earnings (loss) attributable to common
stockholders per common share:
TCI Group Stock $ (.12) (.25) (.34) (.11)
========= ========= ========= =========
Liberty Group Stock $ .04 .02 .44 (.17)
========= ========= ========= =========
TCI Ventures Group Stock $ -- -- .07 (.54)
========= ========= ========= =========
Diluted earnings (loss) attributable to common
stockholders per common and potential common share:
TCI Group Stock $ (.12) (.25) (.34) (.11)
========= ========= ========= =========
Liberty Group Stock $ .04 .02 .40 (.17)
========= ========= ========= =========
TCI Ventures Group Stock $ -- -- .07 (.54)
========= ========= ========= =========
</TABLE>
121
<PAGE> 1
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The unaudited pro forma information set forth below for AT&T gives
effect to the merger with TCI (the Merger) and certain merger-related asset
transfers from New Liberty Media Group as if they had been completed on January
1, 1998 for income statement purposes and December 31, 1998 for balance sheet
purposes, subject to the assumptions and adjustments in the accompanying notes
to the pro forma financial information. AT&T has accounted for the New Liberty
Media Group in the AT&T pro forma financial statements under the equity method
of accounting.
Following the Merger, New Liberty Media Group (Liberty) tracking stock
will continue to represent an interest in the same assets and businesses as TCI
Liberty Media Group and TCI Ventures Group (Liberty/Ventures Group) tracking
stocks did prior to the Merger (after giving effect to the asset transfers).
Pursuant to certain agreements, the New Liberty Media Group will be managed
separately from the AT&T Common Stock Group. Under Delaware corporate law, the
Liberty Board will have virtually all of the New Liberty Media Group's corporate
governance powers and the Class B and C directors on the Liberty Board (who were
designees of TCI prior to the merger) will constitute a majority of the Liberty
Board. AT&T will initially designate one third of the directors and its rights
as the sole shareholder of the common stock of the New Liberty Media Group
following the Merger will be limited to actions which will require shareholder
approval. Those actions are limited to (a) approval of the merger or sale of all
or substantially all of the assets of Liberty Media Corporation (b) the
liquidation of the Liberty Media Corporation (c) amendment of Liberty Media
Corporation's certificate of incorporation, and (d) election of directors.
Furthermore, AT&T will not have the ability to remove the then Class B and C
directors (or their designees) or have an opportunity to elect a majority of the
Liberty Board until 2006, at which time election by AT&T to the Liberty Board of
persons other than those designated by the then Class B and C directors will
constitute a "Triggering Event" which will result in all of the assets and
businesses of the New Liberty Media Group being transferred into an entity
controlled by persons other than AT&T unless the "Triggering Event" is waived by
Liberty Management LLC. Therefore, management has concluded that AT&T will not
have a controlling financial interest (as that term is used in Statement of
Financial Accounting Standards No. 94) in the New Liberty Media Group following
the Merger, and will account for its equity investment in the New Liberty Media
Group under the equity method. In addition, as a tracking stock all of its
earnings or losses are excluded from the earnings available to the holders of
AT&T common stock. The AT&T common stock represents historical AT&T together
with TCI Group, which consists primarily of TCI's domestic cable and
telecommunications operations as well as TCI's interest in At Home Corporation
(@Home).
This pro forma financial information should be read in conjunction with
the historical financial statements of AT&T and TCI. Historical AT&T financial
statements can be found in the Company's annual report on Form 10-K filed March
19, 1999.
<PAGE> 2
TCI historical financial statements can be found on Exhibit 99.1 of this
document.
The pro forma adjustments do not reflect any operating efficiencies and
cost savings that may be achievable with respect to the combined companies. The
pro forma adjustments do not include any adjustments to historical sales for any
future price changes nor any adjustments to selling and marketing expenses for
any future operating changes.
The following information is not necessarily indicative of the
financial position or operating results that would have occurred had the Merger
and the asset transfers been consummated on the dates, or at the beginning of
the periods, for which such transactions are being given effect. The pro forma
adjustments reflecting the consummation of the Merger are based upon the
purchase method of accounting and upon the assumptions set forth in the notes
hereto, including the exchange of all the outstanding shares of TCI Group
Tracking Stock for an aggregate of approximately 439 million shares of AT&T
Common Stock.
For purposes of preparing the AT&T consolidated financial statements,
AT&T will establish a new basis for TCI's assets and liabilities based upon the
fair values thereof and the AT&T purchase price, including the costs of the
Merger. A final determination of required purchase accounting adjustments,
including the allocation of the purchase price to the assets acquired and
liabilities assumed based on their respective fair values, has not yet been
made. Accordingly, the purchase accounting adjustments made in connection with
the development of the pro forma combined financial information are preliminary
and have been made solely for purposes of developing such pro forma combined
financial information. AT&T has undertaken a study to determine the fair value
of certain of TCI's assets and liabilities (as so adjusted) and will make
appropriate purchase accounting adjustments upon completion of that study. The
actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a variety
of factors, including access to additional information and changes in value not
currently identified.
<PAGE> 3
AT&T
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
December 31, 1998
(In Millions)
<TABLE>
<CAPTION>
Pro Forma
Liberty/ Other Pro Forma
Historical Historical Ventures Pro Forma AT&T
AT&T(1) TCI(1) Adjustment(2) Adjustments with TCI
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,160 $ 419 $ -- $ (2,500) (3b) $ 3,505
(7,000) (7)
(250) (3c)
176 (4)
9,500 (6)
Receivables-net 8,652 593 (154) -- 9,091
Other current assets 2,306 448 (279) -- 2,475
------- ------- -------- -------- --------
Total current assets 14,118 1,460 (433) (74) 15,071
Property, plant and
equipment-net 26,903 7,153 (157) -- 33,899
Licensing cost-net 7,948 -- -- -- 7,948
Investments 4,434 17,885 (3,714) 1,559 (3J) 30,998
(64) (4)
14,454 (12)
(3,556)(15)
Franchise costs, goodwill
and other long-term
assets-net 6,147 15,353 (2,284) 700 (3i) 50,182
30,266 (3q,4)
Total assets $59,550 $41,851 $(6,588) $ 43,285 $138,098
------- ------- -------- -------- --------
LIABILITIES:
Accounts payable $ 6,226 $229 $ $ -- $ 6,455
Debt maturing within one year 1,171 1,551 (612) 1,900 (6) 4,010
Other current liabilities 8,045 1,852 (415) -- 9,482
------- ------- -------- --------
Total current liabilities 15,442 3,632 (1,027) 1,900 19,947
Long-term debt 5,556 12,501 (1,881) 7,600 (6) 24,870
1,094 (3l)
Deferred income taxes 5,453 9,749 (3,306) 596 (3p) 11,231
(1,261)(15)
Other long-term
liabilities and deferred credits 7,577 1,819 (227) 561 (3h) 9,745
15 (3o)
------ ------ ------- ------ --------
Total liabilities 34,028 27,701 (6,441) 10,505 65,793
Minority interest -- 1,460 (130) 1,468 (3m) 2,798
Mandatorily redeemable preferred equity -- 1,500 -- 137 (3n) 1,637
Redeemable securities -- 322 (17) (300) (3f) 5
Common shares 1,754 1,511 -- (3,265)(16) --
Additional Paid in Capital 15,195 5,987 -- (21,182)(16) --
Retained earnings 8,676 1,124 -- (9,800)(16) --
Other (103) 2,246 -- (2,143)(16) --
------- ------- -------- -------- --------
Total shareowners'equity (deficit) (36,390)
36,390 (16)
14,454 (12)
26,556 (3a)
446 (3d)
(122) (3e)
(564) (3g)
(7,000) (7)
(44,514)(13)
(23,351)(13)
(2,295)(15)
AT&T Equity (pro forma) 44,514 (13) 44,514
New Liberty Media Group
equity (Tracking stock) 23,351 (13) 23,351
-------- --------
Total liabilities
and shareowners'
equity $59,550 $41,851 $(6,588) $ 43,285 $138,098
======= ======= ======== ======== ========
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements.
<PAGE> 4
AT&T
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1998
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Liberty/ Other Pro Forma
Historical Historical Ventures Pro Forma AT&T
AT&T(1) TCI(1) Adjustment(2) Adjustments with TCI
<S> <C> <C> <C> <C> <C>
REVENUES $ 53,223 $ 7,351 $ (1,148) $ -- $ 59,426
Operating expenses:
Access and other
interconnection 15,328 -- -- -- 15,328
Network and other
communications services 10,250 3,087 (495) -- 12,842
Depreciation and
amortization 4,629 1,735 (135) 757 (8) 6,986
Selling, general and
administrative 13,015 2,583 (943) -- 14,655
Restructuring and other
charges 2,514 5 (5) -- 2,514
-------- -------- -------- -------- --------
Total operating
expenses 45,736 7,410 (1,578) 757 52,325
-------- -------- -------- -------- --------
Operating income (loss) 7,487 (59) 430 (757) 7,101
Other income (expense)-
net 1,247 4,658 (1,005) (78) (8) 1,881
(401)(12)
(2,540)(15)
Interest expense 427 1,061 (103) 616 (9) 2,001
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before taxes 8,307 3,538 (472) (4,392) 6,981
Provision (benefit) for
income taxes 3,072 1,595 (472) (948)(15) 2,982
(265)(10)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations 5,235 1,943 -- (3,179) 3,999
Dividend requirements on
preferred stocks -- (24) -- 14 (11) (10)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
attributable to common
shareowners $ 5,235 $ 1,919 $ -- $ (3,165) $ 3,989
-------- -------- -------- -------- --------
AT&T EPS Calculation:
Income from continuing
operations attributable
to AT&T common shareowners $ 5,235 $ 3,764
Weighted average shares
Outstanding (basic) 1,784 2,093
Basic EPS $ 2.93 $ 1.80
Income from continuing
operations attributable
to AT&T common shareowners $ 5,235 $ 3,778
Weighted average shares
outstanding (diluted) 1,800 2,174
Diluted EPS $ 2.91 $ 1.74
New Liberty Media Group
Basic EPS $ 0.38
Diluted EPS $ 0.38
</TABLE>
See Notes to Unaudited AT&T Condensed Pro Forma Financial Statements.
<PAGE> 5
Notes to Unaudited AT&T Pro Forma Financial Statements (In millions, except per
share amounts)
1. These columns represent historical results of operations and financial
position.
2. These columns represent deconsolidation to the equity method of
accounting of the historical results of operations and financial
position for the interests represented by the shares of New Liberty
Media Group Tracking Stock to be issued in the Merger. AT&T has
accounted for the New Liberty Media Group under the equity method
because it does not possess a "controlling financial interest" in the
New Liberty Media Group. Such deconsolidated interests exclude those
interests to be included in the asset transfers. These columns also
reflect adjustments to intergroup eliminations as a result of the asset
transfer. In addition, the Liberty/Ventures Group and the TCI Group
will exchange certain other assets. These other asset exchanges are
immaterial and are not reflected in these unaudited pro forma financial
statements. New Liberty Media Group Tracking Stock reflects the
separate performance of the businesses and assets to be attributed to
the New Liberty Media Group subsequent to the Merger.
3. This adjustment reflects the acquisition of the TCI Group and the asset
transfers by AT&T and the excess consideration over net assets acquired
(goodwill).
<TABLE>
<S> <C>
Shares of TCI Group Series A Tracking Stock
to be exchanged 495
AT&T exchange ratio per share 0.7757
--------
Equivalent AT&T shares 384
AT&T share price based on the average closing price
three days before and after the Merger was
agreed to and announced $ 60.51
Subtotal $ 23,229
Shares of TCI Group Series B Tracking Stock
to be exchanged 64
AT&T exchange ratio per share 0.8533
--------
Equivalent AT&T shares 55
AT&T share price based on the average closing price
three days before and after the Merger was
agreed to and announced $ 60.51
Subtotal $ 3,327
a. Total consideration for the TCI Group equity $ 26,556
b. Cash consideration for @Home, NDTC and WTCI 2,500
c. Merger costs (estimated) 250
--------
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Total Consideration $ 29,306
d. Historical net book value of the TCI Group 446
e. Historical net book value of @Home, NDTC, WTCI (122)
Fair Value adjustments relating to:
f. Redeemable securities of TCI Group converted (300)
g. In-process research and development (564)
h. Tax benefit payable to New Liberty Media Group
(see Note 5) 561
i. Advances to New Liberty Media Group (see Note 14) (700)
j. Investment in Cablevision Systems Corporation (1,559)
k. Warrants (see Note 4) (112)
l. Convertible notes 1,094
m. Preferred stock issued by subsidiaries 1,468
n. Trust preferred stock 137
o. Employee Stock Options 15
p. Deferred tax impacts 596
--------
q. Preliminary goodwill $ 30,266
--------
</TABLE>
The total consideration will be allocated to the specific identifiable tangible
and intangible assets and liabilities of the TCI Group and the asset transfers
upon the completion of third-party appraisals. Preliminarily, consideration has
been allocated to the TCI Group investment in Cablevision Systems Corporation
and certain debt and publicly traded preferred securities of the TCI Group that
may ultimately be converted into shares of AT&T although such conversion is not
forced by the terms of the Merger. The fair values of the investment in
Cablevision and the publicly traded preferred securities were based on quoted
market prices. Debt and other preferred securities were valued assuming the
instruments converted into shares of AT&T at December 31, 1998. The purchase
accounting allocation may also include certain in-process research and
development projects and other intangible assets, such as franchise agreements
that would be amortized over 40 years (see Note 8). Assuming an estimated useful
life of 10 years, each $1 billion of consideration allocated to property, plant
and equipment or other tangible or intangible assets would have the effect of
decreasing pro forma net income by $46 annually ($0.02 per diluted share for the
year ended December 31, 1998).
In-process research and development, (which had not reached technological
feasibility by the close of the Merger) and which will have no alternative
future use, includes: certain research and development projects that are or will
be underway, as of the close of the Merger, at TCI Group. Projects that may be
characterized as in-process research and development have been identified at TCI
Communications, Inc., NDTC and @Home. TCI Communications is involved in efforts
to increase the depth of optical fiber in its network, integrate the use of open
standards modems, and implement voice over Internet protocol. NDTC is involved
in software development for advanced set-top devices, as well as for the
transmission of data signals. @Home has research and development efforts
underway including efforts to introduce premium services, support the
development and deployment of self-installable modems, enhance cashing and
replication techniques to improve network performance and efficiency, enhance
@Home's advanced network management capabilities, and build a next generation
network-based service provisioning and customer care platform. If, due to the
uncertainties surrounding the successful completion of the acquired in-
<PAGE> 7
process research and development, AT&T is unable to establish technological
feasibility and produce a commercially viable product/service, then anticipated
incremental future cash flows attributable to expected profits from such new
products/services may not be realized. Although there are significant
technological issues to overcome in order to successfully complete the acquired
in-process research and development, including integrating more advanced network
software, integrating advanced set-top device software and introducing new and
advanced services over the existing networks, AT&T expects to successfully
complete the in-process research and development acquired from TCI. A
preliminary estimate of in-process research and development of approximately
$564 was used in these pro forma financial statements.
4. Reflects warrants currently attributed to the TCI Group to be transferred
to the Liberty/Ventures Group in exchange for up to $176 in cash.
TCI's carrying value for the warrants is approximately $64.
5. Gives effect to the transfer from the TCI Group to the New Liberty Media
Group of the benefit of all of the net operating loss carryforwards
available to the entities included in TCI's consolidated income tax return
as of the date of the Merger. Under the terms of a Tax Sharing Agreement,
the associated federal tax benefits of all premerger TCI Group net
operating loss carryforwards are allocated exclusively to the New Liberty
Media Group. Accordingly, the TCI Group has recorded an intercompany
payable to the New Liberty Media Group that results in an increase in
goodwill.
6. Reflects additional borrowing of $9.5 billion to fund TCI Group's
payment to the New Liberty Media Group in connection with the asset
transfers (see Notes 3 and 7) and $4 billion of AT&T Common Stock to be
repurchased by AT&T under a Board approved share repurchase program. (The
share repurchase program was completed in March 1999.) A borrowing mix of
20% short term and 80% long term is assumed.
7. This entry represents consideration paid for the purchase of $3 billion of
AT&T Common Stock currently owned by the TCI Ventures Group as a result of
the Teleport Merger which was completed in July 1998 and the $4 billion of
shares repurchased (see Note 6).
8. This entry represents the amortization of goodwill resulting from the
preliminary allocation of the excess of consideration over the net assets
of the TCI Group and the assets acquired by AT&T in the asset transfers
(see Note 3). We have assumed the amount of the excess consideration
allocated to goodwill and franchise agreements pending completion of
third-party appraisals to be amortized over 40 years. The amortization
period of intangible assets, including goodwill, of 40 years is based upon
the expected useful life of the franchise agreements and value related to
the access to homes passed. The factors considered in determining the
appropriate amortization period included legal and regulatory issues,
experience with renewing franchises and territories, future changes in
technology, anticipated market demand and competition. An allocation to
customer lists and other intangibles with shorter amortization periods will
be made,
<PAGE> 8
although the amounts allocated are not expected to be material. AT&T will
evaluate the periods of amortization continually to determine whether later
events and circumstances warrant revised estimates of useful lives. As
discussed in Note 3, amounts allocated to property, plant and equipment,
investments and identifiable intangible assets may be amortized over
shorter periods resulting in a lower net income. An assessment of the
useful lives attributable to those assets is not complete. Any amount
allocated to goodwill will also be impacted by an in-process research
and development charge also discussed in Note 3. Consideration allocated to
the TCI Group investment in Cablevision has been amortized over a period of
20 years.
9. These entries represent the recognition of incremental interest expense on
the additional borrowings (see Note 6). Interest expense was calculated
using an interest rate of 6.48% based on a credit rating agency profile
indicative of the industry in which the TCI Group operates. An increase of
25 basis points in the assumed interest rates would result in additional
interest expense of approximately $24 annually.
10. These adjustments represent the statutory tax effect of the pro forma
adjustments.
11. Gives effect to the elimination of dividend requirements on certain TCI
Group Preferred Stock to be converted at the time of the Merger.
12. Represents purchase accounting adjustments for New Liberty Media Group.
13. Represents the issuance of New Liberty Media Group Tracking Stock and AT&T
Common Stock.
14. Represents the intercompany receivable from the New Liberty Media Group.
15. Represents the elimination of the Liberty/Ventures Group's investments in
AT&T and certain nonrecurring gains with respect to the Liberty/Ventures
Group's investments in @Home and Teleport.
16. To close out the components of equity to total equity for allocation of pro
forma equity between AT&T and the New Liberty Media Group.
17. On January 8, 1999, AT&T announced that it intended to effect a
three-for-two stock split of its common shares. On March 17, 1999, the
Board of Directors approved the stock split and AT&T announced that the
record date for eligible shareowners would be March 31, 1999 and the
payment date will be April 15, 1999.
The outstanding common shares and earnings per share amounts in the pro
forma income statement are on a pre-split basis. Pro forma basic and
diluted earnings from continuing operations per AT&T common share, adjusted
to reflect the stock split would be $1.20 and $1.16 for the year ended
December 31, 1998.
