<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment No. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-20421
TELE-COMMUNICATIONS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1260157
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
The number of shares outstanding of Tele-Communications, Inc.'s common
stock (net of treasury shares and shares held by subsidiaries) as of October 31,
1997, was:
Tele-Communications, Inc. Series A TCI Group common stock - 468,643,708 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 38,544,680 shares,
Tele-Communications, Inc. Series A Liberty Media Group common stock -
208,812,811 shares,
Tele-Communications, Inc. Series B Liberty Media Group common stock -
21,120,749 shares,
Tele-Communications, Inc. Series A TCI Ventures Group common stock -
188,661,300 shares,
and
Tele-Communications, Inc. Series B TCI Ventures Group common stock -
16,266,400 shares.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS, INC.
Date: November 14, 1997 By: /s/ Stephen M. Brett
----------------------------
Stephen M. Brett
Senior Vice President
and Secretary
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash and cash equivalents $ 555 444
Trade and other receivables, net 473 448
Prepaid expenses 64 81
Prepaid program rights 109 61
Committed film inventory 121 136
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 3,042 3,012
Investment in Time Warner, Inc. ("Time Warner") (note 6) 2,346 2,027
Property and equipment, at cost:
Land 85 77
Distribution systems 10,976 10,039
Support equipment and buildings 1,518 1,541
------------ ------------
12,579 11,657
Less accumulated depreciation 4,678 4,129
------------ ------------
7,901 7,528
------------ ------------
Franchise costs 18,566 17,875
Less accumulated amortization 2,731 2,439
------------ ------------
15,835 15,436
------------ ------------
Other assets, net of amortization 1,645 1,121
------------ ------------
$32,091 30,294
============ ============
(continued)
</TABLE>
I-1
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 128 266
Accrued interest 169 274
Other accrued expenses 1,420 1,159
Deferred option premium (note 6) 306 --
Debt (note 8) 15,153 14,926
Deferred income taxes 6,102 6,012
Other liabilities 531 253
------------------ ---------------
Total liabilities 23,809 22,890
------------------ ---------------
Minority interests in equity of consolidated subsidiaries 1,467 1,493
Redeemable preferred stocks 655 658
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts ("Trust Preferred Securities") holding solely subordinated debt
securities of TCI Communications, Inc.
("TCIC")(note 9) 1,500 1,000
Stockholders' equity (note 10):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
Stock, $.01 par value -- --
Tele-Communications, Inc. Series A TCI Group common stock, $1
par value. Authorized 1,750,000,000 shares; issued
605,422,364 shares in 1997 and 696,325,478 shares in 1996 605 696
Tele-Communications, Inc. Series B TCI Group common stock, $1
par value. Authorized 150,000,000 shares; issued 78,203,044
shares in 1997 and 84,647,065 shares in 1996 78 85
Tele-Communications, Inc. Series A Liberty Media Group common
stock, $1 par value. Authorized 750,000,000 shares; issued
230,675,781 shares in 1997 and 227,844,437 shares in 1996 231 228
Tele-Communications, Inc. Series B Liberty Media Group common
stock, $1 par value. Authorized 75,000,000 shares; issued
23,453,590 shares in 1997 and 21,189,369 shares in 1996 23 21
Tele-Communications, Inc. Series A TCI Ventures Group common
stock, $1 par value. Authorized 750,000,000 shares; issued
188,661,300 shares in 1997 189 --
Tele-Communications, Inc. Series B TCI Ventures Group common
stock, $1 par value. Authorized 75,000,000 shares; issued
16,266,400 shares in 1997 16 --
Additional paid-in capital 5,360 3,672
Cumulative foreign currency translation adjustment, net of taxes -- 26
Unrealized holding gains for available-for-sale securities, net
of taxes 27 15
Accumulated deficit (410) (176)
------------------ ---------------
6,119 4,567
Treasury stock and common stock held by subsidiaries, at cost
(note 10) (1,459) (314)
------------------ ---------------
Total stockholders' equity 4,660 4,253
------------------ ---------------
Commitments and contingencies (note 12)
$ 32,091 30,294
================== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
I-2
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
amounts in millions,
except per share amounts
Revenue:
<S> <C> <C> <C> <C>
Communications and programming services $ 1,934 1,824 5,648 5,133
Net sales from electronic retailing services -- 234 -- 734
------------ ------------ ------------ -------------
1,934 2,058 5,648 5,867
------------ ------------ ------------ -------------
Operating costs and expenses:
Operating 722 746 2,154 2,115
Cost of sales from electronic retailing services -- 137 -- 454
Selling, general and administrative 434 572 1,262 1,603
Stock compensation 160 (11) 231 (16)
Depreciation and amortization 396 394 1,177 1,150
------------ ------------ ------------ -------------
1,712 1,838 4,824 5,306
------------ ------------ ------------ -------------
Operating income 222 220 824 561
Other income (expense):
Interest expense (300) (277) (883) (803)
Interest and dividend income 25 18 64 42
Share of losses of affiliates, net (note 5) (253) (97) (591) (308)
Loss on early extinguishment of debt (note 8) -- (7) (11) (73)
Minority interests in earnings of
consolidated subsidiaries, net (note 9) (35) (28) (129) (32)
Gain on sale of stock by subsidiary and equity investee
(notes 5 and 7) 60 12 81 12
Gain (loss) on disposition of assets (notes 5 and 7) 338 (15) 400 (5)
Other, net (1) 2 (7) (3)
------------ ------------ ------------ -------------
(166) (392) (1,076) (1,170)
------------ ------------ ------------ -------------
Earnings (loss) before income taxes 56 (172) (252) (609)
Income tax benefit (expense) (78) 34 18 163
------------ ------------ ------------ -------------
Net loss (22) (138) (234) (446)
Dividend requirements on preferred stocks (10) (9) (31) (27)
------------ ------------ ------------ -------------
Net loss attributable to common stockholders $ (32) (147) (265) (473)
============ ============ ============ =============
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock $ (217) (164) (472) (509)
Liberty Media Group Series A and Series B common
stock 162 17 184 36
TCI Ventures Group Series A and Series B common
stock 23 -- 23 --
------------ ------------ ------------ -------------
$ (32) (147) (265) (473)
============ ============ ============ =============
Net earnings (loss) attributable to common stockholders per
common share (note 2):
TCI Group Series A and Series B common stock $ (.33) (.25) (.70) (.77)
============ ============ ============ =============
Liberty Media Group Series A and Series B common stock $ .66 .10 .74 .22
============ ============ ============ =============
TCI Ventures Group Series A and Series B common stock $ .11 -- .11 --
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
</TABLE>
I-3
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Class B Common Stock
--------------------------------------------------------
Preferred TCI Group Liberty Media Group TCI Ventures Group
---------------- ------------------- ------------------
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 January 1, 1997 $ -- 696 85 228 21 -- --
Net loss -- -- -- -- -- -- --
Issuance of TCI Ventures Group common stock
in exchange for TCI Group common stock
(note 1) -- (189) (16) -- -- 189 16
Costs associated with TCI Ventures Exchange
(note 1) -- -- -- -- -- -- --
Exchange of common stock with an
officer/director (note 11) -- -- 7 -- 2 -- --
Issuance of common stock for acquisitions
and investment (notes 7 and 11) -- 63 2 2 -- -- --
Issuance of Series A TCI Group common stock
in exchange for Series B TCI Group common
stock (note 10) -- 31 -- -- -- -- --
Repurchase of common stock -- -- -- -- -- -- --
Issuance of common stock by equity investee
(note 5) -- -- -- -- -- -- --
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 -- -- -- -- -- -- --
Recognition of fees related to Exchange
(note 10) -- -- -- -- -- -- --
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 adjustment -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Balance at September 30, 1997 $ -- 605 78 231 23 189 16
====== ====== ====== ====== ====== ====== ======
<CAPTION>
Unrealized Treasury
Cumulative holding stock and
foreign gains for common
currency available- stock
Additional translation for-sale held by Total
paid-in adjustment, securities, Accumulated subsidiaries, stockholders'
capital net of taxes net of taxes deficit at cost equity
---------- ------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,672 26 15 (176) (314) 4,253
Net loss -- -- -- (234) -- (234)
Issuance of TCI Ventures Group common stock
in exchange for TCI Group common stock
(note 1) -- -- -- -- -- --
Costs associated with TCI Ventures Exchange
(note 1) (5) -- -- -- -- (5)
Exchange of common stock with an
officer/director (note 11) 161 -- -- -- (170) --
Issuance of common stock for acquisitions
and investment (notes 7 and 11) 982 -- -- -- (445) 604
Issuance of Series A TCI Group common stock
in exchange for Series B TCI Group common
stock (note 10) 481 -- -- -- (512) --
Repurchase of common stock -- -- -- -- (18) (18)
Issuance of common stock by equity investee
(note 5) 99 -- -- -- -- 99
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 -- -- -- -- -- 4
Issuance of common stock to
Tele-Communications, Inc. Employee
Stock Purchase Plan 8 -- -- -- -- 8
Recognition of fees related to Exchange
(note 10) (11) -- -- -- -- (11)
Accreted dividends on all classes of
preferred stock (31) -- -- -- -- (31)
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements 7 -- -- -- -- 7
Payment of preferred stock dividends (10) -- -- -- -- (10)
Foreign currency translation adjustment -- (26) -- -- -- (26)
Change in unrealized holding gains for
available-for-sale securities -- -- 12 -- -- 12
-------- -------- -------- -------- -------- --------
Balance at September 30, 1997 5,360 -- 27 (410) (1,459) 4,660
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
I-4
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1997 1996
-------- -------
amounts in millions
(see note 4)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (234) (446)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,177 1,150
Stock compensation 231 (16)
Payments of obligation relating to stock appreciation rights (26) (3)
Share of losses of affiliates, net 591 308
Loss on early extinguishment of debt 11 73
Minority interests in earnings of consolidated subsidiaries, net 129 32
Gain on sale of stock by subsidiary and equity investee (81) (12)
Loss (gain) on disposition of assets (400) 5
Deferred income tax benefit (125) (178)
Payments of restructuring charges (21) --
Other noncash charges (credits) 13 (2)
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (10) (20)
Change in inventories -- 11
Change in prepaids (79) (32)
Change in accrued interest (112) (64)
Change in other accruals and payables 150 35
----------- -----------
Net cash provided by operating activities 1,214 841
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions (331) (131)
Capital expended for property and equipment (419) (1,526)
Additional investments in and loans to affiliates (392) (677)
Repayments of loans to affiliates 87 300
Proceeds from disposition of assets 352 255
Cash received in exchanges 20 69
Other investing activities (13) (116)
----------- -----------
Net cash used in investing activities (696) (1,826)
----------- -----------
Cash flows from financing activities:
Borrowings of debt 3,311 7,449
Repayments of debt (4,125) (7,476)
Prepayment penalties (7) (60)
Costs associated with TCI Ventures Exchange (5) --
Proceeds from issuance of common stock 4 --
Proceeds from issuance of Trust Preferred Securities 490 971
Proceeds from issuance of subsidiary common stock and preferred stock 148 223
Contributions by minority shareholders of subsidiaries 4 315
Repurchase of Liberty Media Group common stock (18) --
Repurchase of subsidiary common stock (42) --
Payment of preferred stock dividends (37) (34)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (130) (56)
----------- -----------
Net cash provided (used) by financing activities (407) 1,332
----------- -----------
Net increase in cash and cash equivalents 111 347
Cash and cash equivalents at beginning of period 444 118
----------- -----------
Cash and cash equivalents at end of period $ 555 465
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
(1) General
The accompanying consolidated financial statements include the accounts
of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
In August 1995, TCI issued Tele-Communications, Inc. Series A and
Series B Liberty Media Group common stock ("Liberty Group Stock")
which reflects the separate performance of TCI's assets which produces
and distributes programming services ("Liberty Media Group").
Effective January 13, 1997, the Company issued a stock dividend to
holders of the Liberty Group Stock consisting of one share of Series A
Liberty Group Stock for every two shares of Series A Liberty Group
Stock owned and one share of Series A Liberty Group Stock for every two
shares of Series B Liberty Group Stock owned (the "Liberty Group Stock
Dividend"). The Liberty Group Stock Dividend has been treated as a
stock split, and accordingly, all share and per share amounts have been
retroactively restated to reflect the Liberty Group Stock Dividend.
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A Ventures Group common
stock (the "Series A TCI Ventures Group Stock") and
Tele-Communications, Inc. Series B TCI Ventures Group common stock (the
"Series B TCI Ventures Group Stock," and together with Series A TCI
Ventures Group Stock, the "TCI Ventures Group Stock"). The TCI Ventures
Group Stock reflects the separate performance of TCI Ventures Group. On
August 28, 1997, TCI Ventures Group consisted principally of the
following assets and their related liabilities, which prior to the
issuance of the TCI Ventures Group Stock were attributed to TCI Group:
(i) TCI's 85% equity interest (representing a 92% voting interest) in
Tele-Communications International, Inc. ("TINTA"), which is TCI's
primary vehicle for the conduct of its international cable, telephony
and programming businesses (other than those international programming
businesses attributed to Liberty Media Group), (ii) TCI's principal
interests in the telephony business consisting primarily of TCI's
investment in a series of partnerships formed to engage in the business
of providing wireless communications services; TCI's 30% equity
interest (representing a 37% voting interest) in Teleport
Communications Group Inc. ("TCG"); and Western Tele-Communications,
Inc. ("WTCI"), a wholly-owned subsidiary of TCI, (iii) TCI's 40% equity
interest (representing a 85% voting interest) in United Video Satellite
Group, Inc. ("UVSG"), (iv) TCI's 39% equity interest (representing a
72% voting interest) in At Home Corporation ("@Home"), and (v) other
assets, including TCI's National Digital Television Center, Inc.
("NDTC"), ETC w/tci, Inc., an 80% owned subsidiary of TCI and TCI
SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C., wholly-owned
subsidiaries of TCI. Such subsidiaries and assets are referred to as
"TCI Ventures Group". The stocks of TINTA, TCG, UVSG and @Home are
traded on the National Market tier of The Nasdaq Stock Market.
(continued)
I-6
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to stockholder approval to issue the TCI Ventures Group Stock,
TCI commenced offers (the "Exchange Offers") to exchange shares of
Series A TCI Ventures Group Stock and Series B TCI Ventures Group Stock
for shares of Tele-Communications, Inc. Series A and Series B TCI Group
common stock ("TCI Group Stock"), respectively, (representing
approximately 30% of the outstanding shares of each such series on June
30, 1997, excluding shares held by majority-owned subsidiaries of the
Company) in the ratio of one share of the applicable series of TCI
Ventures Group Stock in exchange for each share of the corresponding
series of TCI Group Stock properly tendered. Upon the September 10,
1997 consummation of the Exchange Offers, 188,661,300 shares of Series
A TCI Group Stock and 16,266,400 shares of Series B TCI Group Stock
were exchanged for an equivalent number of shares of Series A TCI
Ventures Group Stock and Series B TCI Ventures Group Stock,
respectively, (the "TCI Ventures Exchange").
As of September 30, 1997, the TCI Group Stock reflects the separate
performance of TCI's subsidiaries and assets not attributed to Liberty
Media Group or TCI Ventures Group. Such subsidiaries and assets are
referred to as "TCI Group" and are comprised primarily of TCI's
domestic cable and communications business.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group, Liberty Media Group or TCI
Ventures Group for purposes of preparing their combined financial
statements, the change in the capital structure of TCI did not affect
the ownership or the respective legal title to assets or responsibility
for liabilities of TCI or any of its subsidiaries. TCI and its
subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock, Liberty Group Stock or TCI
Ventures Group Stock are holders of common stock of TCI and continue to
be subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities. The issuance of Liberty Group Stock
and TCI Ventures Group Stock did not affect the rights of creditors of
TCI.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in TCI's Annual Report on Form 10-K for the year
ended December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts have been reclassified for comparability with the 1997
presentation.
(continued)
I-7
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Earnings (Loss) Per Common and Common Equivalent Share
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement No. 128"). Statement No. 128 requires the presentation of
basic earnings per share ("EPS") and, for companies with potentially
dilutive securities, such as convertible debt, options and warrants,
diluted EPS. Statement No. 128 is effective for annual and interim
periods ending after December 31, 1997. The Company does not expect
that Statement No. 128 will have a material impact on the Company's
earnings (loss) per share as described below.
TCI Group Series A and Series B Common Stock
The loss attributable to TCI Group Stock stockholders per common share
was computed by dividing net loss attributable to TCI Group Stock
stockholders by the weighted average number of common shares
outstanding of TCI Group Stock during the period (655.6 million and
669.1 million for the three months ended September 30, 1997 and 1996,
respectively; and 670.0 million and 665.0 million for the nine months
ended September 30, 1997 and 1996, respectively). Common stock
equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
Liberty Media Group Series A and Series B Common Stock
Earnings attributable to Liberty Group Stock stockholders per common
share was computed by dividing net earnings attributable to Liberty
Group Stock stockholders by the weighted average number of common
shares outstanding of Liberty Group Stock during the period (245.6
million and 250.9 million for the three months ended September 30, 1997
and 1996, respectively; and 248.0 million and 249.3 million for the
nine months ended September 30, 1997 and 1996, respectively). Common
stock equivalents were not included in the computation because their
inclusion would be anti-dilutive to TCI.
TCI Ventures Group Series A and Series B Common Stock
The earnings attributable to TCI Ventures Group Stock stockholders per
common share for the period from the TCI Ventures Exchange to September
30, 1997 was computed by dividing net earnings attributable to TCI
Ventures Group Stock stockholders by the weighted average number of
common shares outstanding of TCI Ventures Group Stock during the period
(204.9 million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive to TCI.
(3) 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. The Company
does not use such instruments for trading purposes.
(continued)
I-8
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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. 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.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $995 million and $867 million for the nine
months ended September 30, 1997 and 1996, respectively. Cash paid for
income taxes was $49 million for the nine months ended September 30,
1997 and was not material for the nine months ended September 30, 1996.
Summary of cash paid for acquisitions and cash received in exchanges is
as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1997 1996
------ ------
amounts in millions
Cash paid for acquisitions:
<S> <C> <C>
Fair value of assets acquired $ (1,841) (4,730)
Liabilities assumed, net of current assets 720 2,095
Deferred tax liability recorded in acquisitions 187 1,310
Minority interests in equity of acquired entities 64 733
Common stock and preferred stock issued in acquisitions 984 461
TCI common stock and preferred stock held by acquired
company (445) --
----------- -----------
Cash paid for acquisitions $ (331) (131)
========== ===========
Cash received in exchanges:
Aggregate cost basis of assets acquired $ (390) (569)
Historical cost of assets exchanged 399 617
Gain recorded on exchange of assets 11 21
----------- -----------
Cash received in exchanges $ 20 69
========== ===========
</TABLE>
(continued)
I-9
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) 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 more significant investments at September
30, 1997.
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------
Percentage Carrying
Ownership Value
----------- ----------
amounts in millions
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P. 30% - 35% $ 674
Teleport Communications Group, Inc. ("TCG") 30% 256
Home Shopping Network, Inc. ("HSN") 19.9% 118
BDTV INC., BDTV II INC. and BDTV III INC. 99% 228
Flextech p.l.c. ("Flextech") 36.8% 276
Telewest Communications plc ("Telewest") 27% 352
Various foreign equity investments (other than Telewest
and Flextech) various 296
Discovery Communications, Inc. 49% 100
QVC, Inc. 43% 122
</TABLE>
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- --------------------
1997 1996
------ ------
amounts in millions
<S> <C> <C>
Revenue $ 5,400 4,047
Operating expenses (5,237) (3,608)
Depreciation and amortization (1,018) (502)
----------- ---------
Operating loss (855) (63)
Interest expense (596) (337)
Other, net (327) (220)
------------ ---------
Net loss $ (1,778) (620)
=========== =========
(continued)
</TABLE>
I-10
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is a partner in a series of partnerships formed to engage
in the business of providing wireless communications services, using
the radio spectrum for broadband personal communications services
("PCS"), to residential and business customers nationwide, using the
"Sprint"(R) brand (a registered trademark of Sprint Communications
Company, L.P.) (the "PCS Ventures"). The PCS Ventures include Sprint
Spectrum Holding Company, L. P. ("Sprint Spectrum") and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox
Communications, Inc. ("Cox") and the Company. The partners of PhillieCo
are subsidiaries of Sprint, Cox and the Company. The Company has a 30%
partnership interest in each of the Sprint PCS Partnerships and a 35%
interest as a partner in PhillieCo. During the nine months ended
September 30, 1997 and 1996, the PCS Ventures contributed $304 million
and $112 million, respectively, to the Company's share of affiliate
losses. Such 1996 amount includes $34 million related to prior periods.
From inception through September 1997, the four partners have
contributed approximately $3.7 billion to the Sprint PCS Partnerships
(of which the Company contributed an aggregate of approximately $1.1
billion). The remaining capital that the Sprint PCS Partnerships will
require to fund the construction of the PCS systems and to fund
operating losses and the commitments made to American PCS, L.P. ("APC")
and Cox California PCS, L.P. will be substantial. The partners had
agreed in forming the Sprint PCS Partnerships to contribute up to an
aggregate of approximately $4.2 billion of equity thereto, from
inception through fiscal 1999, subject to certain requirements. The
Company expects that the remaining approximately $0.5 billion of such
amount (of which the Company's share is approximately $0.2 billion)
will be contributed by the end of the second quarter of 1998 (although
there can be no assurance that any additional capital will be
contributed). The Company expects that the Sprint PCS Partnerships will
require additional equity thereafter.
Pursuant to an agreement entered into in connection with certain
financings by Sprint Spectrum, under certain circumstances the partners
in Sprint Spectrum may be required to make additional contributions to
Sprint Spectrum to fund projected cash shortfalls to the extent that
the amount of the partners' aggregate contributions to Sprint Spectrum
(exclusive of certain amounts, including amounts invested in certain
affiliates of Sprint Spectrum), following December 31, 1995 are less
than $1.0 billion; however, based on the currently expected timing and
use of the partners' contributions to Sprint Spectrum, the Company
currently believes that such agreement will not result in the Company's
being required to make any incremental capital contributions in
addition to its pro rata portion of the aforementioned $4.2 billion
amount.
(continued)
I-11
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the nine months ended September 30, 1997, TCG, a competitive
local exchange carrier, issued 4,857,083 shares of Class A common stock
at an average price per share of $19.25 for certain acquisitions. The
total consideration paid by TCG through the issuance of common stock
was approximately $93,000,000. As a result of TCG issuing additional
shares, the Company's ownership interest in TCG was reduced from
approximately 31% to approximately 30%. Accordingly, the Company
recognized a gain amounting to $21 million (before deducting deferred
income tax expense of approximately $8 million) representing the
difference between the carrying amount of the Company's investment in
TCG and the Company's proportionate share of TCG's net assets. During
the nine months ended September 30, 1997 and 1996, TCG contributed $43
million and $32 million, respectively, to the Company's share of
affiliate losses.
In January 1997, the Company's voting interest in Flextech, a company
engaged in the distribution and production of programming for
multichannel video distribution systems in the United Kingdom ("UK"),
was reduced to approximately 50% and the Company ceased to consolidate
Flextech 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 value of the
Company's investment in Flextech, a $53 million increase to deferred
income tax liability and a $99 million increase to equity. No gain was
recognized in the statement of operations due primarily to certain
contingent obligations of the Company with respect to one of the BBC
Joint Ventures.
Telewest is a company that is currently operating and constructing
cable television and telephone systems in the UK. Telewest contributed
$111 million and $99 million of the Company's share of its affiliates'
losses during the nine months ended September 30, 1997 and 1996,
respectively. In addition to the Company's investments in Telewest and
Flextech, 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, Flextech and such other equity
method investments accounted for $75 million and $55 million of the
Company's share of its affiliates' losses in 1997 and 1996,
respectively.
During the nine months ended September 30, 1997, TSX Corporation
("TSX"), an equity affiliate of the Company, and Antec Corporation
("Antec") entered into a business combination with Antec being the
surviving entity. In connection with such transaction, the Company
recognized a $29 million gain (before deducting deferred income tax
expense of approximately $12 million) representing the difference
between the fair value of the Antec shares received ($52 million) and
the carrying value of the Company's investment in TSX at the date of
the transaction ($23 million). Upon completion of this transaction, the
Company's ownership interest decreased from an approximate 45% interest
in TSX to an approximate 16% ownership interest in Antec. The Company
accounts for its investment in Antec using the cost method.
(continued)
I-12
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 applicable partnership
law for all debts of that partnership in the event liabilities of that
partnership were to exceed its assets.
(6) Investment in Time Warner
Through October 9, 1996, TCI owned shares of Turner Broadcasting
System, Inc. ("TBS") common stock and shares of TBS preferred stock
that were convertible into TBS common stock. On October 10, 1996, Time
Warner and TBS consummated a merger (the "TBS/Time Warner Merger")
whereby TBS shareholders received 0.75 of a Time Warner common share
for each TBS Class A and Class B common share held, and each holder of
TBS Class C preferred stock received 0.80 of a Time Warner common share
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.
Time Warner, TBS, TCI and Liberty 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, Liberty 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 50.6 million shares of the
TW Exchange Stock in exchange for its TBS holdings.
(continued)
I-13
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the
grant to Time Warner of an option (the "Contract Option") to enter into
a contract with Southern Satellite Systems, Inc. ("Southern"), a wholly
owned subsidiary of Liberty which distributes the TBS SuperStation
("WTBS") signal in the United States and Canada, pursuant to which
Southern would provide Time Warner with certain uplinking and
distribution services relating to WTBS and would assist Time Warner in
converting WTBS from a superstation into a copyright paid cable
programming service. Subsequent to the TBS/Time Warner Merger, Liberty
Media Group and Time Warner revised the structure of the Contract
Option. On June 24, 1997, under the new agreement, Liberty granted Time
Warner a five year option to acquire the business of Southern through a
purchase of assets. Liberty received 6.4 million shares of TW Exchange
Stock valued at $306 million in consideration for the grant. In
September 1997, Time Warner announced its intention to exercise the
option. Pursuant to the option, the consideration for the purchase of
the business of Southern will be approximately $213 million, payable in
a form which is mutually acceptable of cash or Time Warner common stock
together with the assumption of certain liabilities. The transaction is
expected to close on December 31, 1997. At September 30, 1997, the
Company's investment in Time Warner, carried at cost, had an aggregate
fair value of approximately $3 billion based upon the market value of
the marketable common stock into which it is convertible.
(7) Acquisitions and Dispositions
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 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.
On July 11, 1997, @Home completed its initial public offering (the
"IPO"), in which 10,350,000 shares of @Home common stock were sold to
the public for aggregate cash consideration of approximately $109
million before commissions and fees. As a result of the IPO, the TCI
Ventures Group's economic interest in @Home decreased from 43% to 39%
which economic interest represents an approximate 72% voting interest.
In connection with the associated dilution of the TCI Ventures Group's
ownership interest of @Home, the TCI Ventures Group recognized a gain
of $60 million.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary. The merger was valued at $731 million. TCI
exchanged 47.2 million shares of Series A TCI Group Stock for shares of
Kearns-Tribune Corporation which held 17.9 million shares of TCI Group
Stock and 6.7 million shares of Liberty Group Stock. Liberty Media
Group purchased from TCI Group the 6.7 million shares of Liberty Group
Stock that were acquired in such transaction for $168 million in cash.
(continued)
I-14
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On August 1, 1997, Liberty IFE, Inc., a wholly owned subsidiary of
Liberty Media 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 $345 million in a new series of 30 year non-convertible 9%
preferred stock of FKW (the "FKW Preferred Stock"). As a result of the
exchange, Liberty Media Group recognized a pre-tax gain of
approximately $304 million.
In June 1997, the Company entered into an agreement with Cablevision
Systems Corporation ("Cablevision") pursuant to which the Company
agreed to contribute certain of its cable television systems serving
approximately 820,000 basic customers to Cablevision in exchange for
approximately 12.2 million newly issued Cablevision Class A shares.
Such shares represent approximately 33% of Cablevision's total
outstanding shares. Cablevision will also assume approximately $669
million of TCI's debt. The transaction is subject to, among other
matters, Cablevision shareholder and regulatory approvals. There is no
assurance that the transaction will be consummated.
Including the Cablevision transaction described above, the Company
has signed agreements or letters of intent to contribute, within the
next twelve months, certain cable systems serving approximately 3
million basic customers to various joint ventures. Such anticipated
transactions, if consummated as currently intended, would result in
estimated reductions in debt and annual revenue of approximately $4
billion and $1 billion, respectively. Such transactions are subject to,
among other matters, regulatory approval. Accordingly, there is no
assurance that any of such transactions will be consummated.
On July 31, 1996, pursuant to certain agreements entered into among
TCIC, a subsidiary of TCI, TCI, Viacom International, Inc. and Viacom,
Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary
of Viacom ("Cable Sub") which owned Viacom's cable systems and related
assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub
the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the
"Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the Loan
Proceeds. Neither Viacom nor New Viacom Sub has any obligation with
respect to repayment of the Loan Proceeds.
(continued)
I-15
<PAGE> 18
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 of Cable Sub
with a stated value of $100 per share. Upon completion of the Viacom
Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc.
(8) Debt
<TABLE>
<CAPTION>
Debt is summarized as follows:
September 30, December 31,
1997 1996
---------------- --------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,407 9,308
Bank credit facilities (b) 4,554 4,813
Commercial paper 713 638
Convertible notes (c) 40 43
Capital lease obligations and other debt 439 124
----------- -------------
$ 15,153 14,926
=========== =============
</TABLE>
(a) During the nine months ended September 30, 1997, the Company
purchased in the open market certain notes payable which had
an aggregate principal balance of $190 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
$11 million. Such loss related to prepayment penalties
amounting to $7 million and the retirement of deferred loan
costs.
During the nine months ended September 30, 1996, the Company
purchased in the open market certain notes payable which had
an aggregate principle balance of $809 million and fixed
interest rates ranging from 8.67% 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) During the nine months ended September 30, 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 $11 million related
to the retirement of deferred loan costs.
(continued)
I-16
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 1997, subsidiaries of the Company had
approximately $3 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
(c) The convertible notes, which are stated net of unamortized
discount of $166 million at September 30, 1997 and $178
million at December 31, 1996, mature on December 18, 2021. The
notes require, so long as conversion of the notes has not
occurred, an annual interest payment through 2003 equal to
1.85% of the face amount of the notes. During the nine months
ended September 30, 1997, certain of these notes were
converted into 2,519,116 shares of Series A TCI Group Stock
and 958,061 shares of Series A Liberty Group Stock. At
September 30, 1997, the notes were convertible, at the option
of the holders, into an aggregate of 24,177,475 shares of
Series A TCI Group Stock, 12,952,093 shares of Series A
Liberty Group Stock and 10,387,182 shares of Series A TCI
Ventures Group 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.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 116,853,195 shares of Series A TCI
Group Stock held by a subsidiary of the Company. Also, as security for
borrowings under another of the Company's credit facilities, the
Company has pledged a portion of its Time Warner common stock with an
estimated market value of $1.2 billion.
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 September 30, 1997, the fair value of the Company's debt
was $15,503 million, as compared to a carrying value of $15,153 million
on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various Interest Rate Swaps
pursuant to which it (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.1% to 9.3% and receives variable interest
rates on notional amounts of $410 million at September 30, 1997 and
(ii) pays variable interest rates (the "Variable Rate Agreements") and
receives fixed interest rates ranging from 4.8% to 9.7% on notional
amounts of $2,400 million at September 30, 1997. During the nine months
ended September 30, 1997 and 1996, the Company's net payments pursuant
to the Fixed Rate Agreements were less than $1 million and $3 million,
respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were $1 million and $11 million, respectively.
(continued)
I-17
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's Fixed Rate Agreements and Variable Rate Agreements expire
as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest rate Notional Expiration Interest rate Notional
date to be paid amount date to be received amount
---------- ------------- --------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
October 1997 7.1%-9.3% $ 180 September 1998 4.8%-5.4% $ 450
December 1997 8.7% 230 April 1999 7.4% 50
-------
September 1999 6.4% 350
$ 410 February 2000 5.8%-6.6% 300
=======
March 2000 5.8%-6.0% 675
September 2000 5.1% 75
March 2027 9.7% 300
December 2036 9.7% 200
---------
$ 2,400
=========
</TABLE>
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.
The fair value of the Interest Rate Swaps is the estimated amount that
the Company would pay or receive to terminate the agreements at
September 30, 1997, taking into consideration current interest rates
and the current creditworthiness of the counterparties. At September
30, 1997, the Company would be required to pay an estimated $2 million
to terminate the Fixed Rate Agreements and an estimated $8 million to
terminate the Variable Rate Agreements.
In addition, on September 11, 1997 the Company entered into an Interest
Rate Swap pursuant to which it pays a variable rate based on the LIBOR
rate (6.1% at September 30, 1997) and receives a variable rate based on
the Constant Maturity Treasury Index (6.4% at September 30, 1997) on a
notional amount of $400 million. As of September 30, 1997, no payments
or receipts had been made pursuant to such agreement. At September 30,
1997, the Company would be required to pay an estimated $2 million to
terminate such agreement.
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
from 1/4% to 1/2% per annum on the average unborrowed portion of the
total amount available for borrowings under bank credit facilities.
(continued)
I-18
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
In 1996 and 1997, the Company, through certain subsidiary trusts, (the
"Trusts"), issued preferred securities 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>
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 on the Trust Preferred
Securities aggregated $96 million and $47 million during the nine
months ended September 30, 1997 and 1996, respectively, and are
included in minority interests in earnings of consolidated subsidiaries
in the accompanying consolidated financial statements.
(continued)
I-19
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Stockholders' Equity
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------------------- ------------------------------
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:
Series A TCI Group Stock 7,296,324 $ 114 -- $ --
Series B TCI Group Stock 30,545,864 512 -- --
Series A Liberty Group Stock 3,035,750 74 -- --
Common stock held by subsidiaries is summarized as follows:
Series A TCI Group Stock 125,645,656 450 116,853,196 314
Series B TCI Group Stock 9,112,500 141 -- --
Series A Liberty Group Stock 4,436,245 111 -- --
Series B Liberty Group Stock 2,278,125 57 -- --
-------------- --------------
$ 1,459 $ 314
============== ==============
</TABLE>
In June 1997, the Company exchanged (the "Exchange") 30,545,864 shares
of Series A TCI Group Stock ("TCOMA") for the same number of shares of
Series B TCI Group Stock owned by the estate (the "Estate") of the
former Chairman of the Board of Directors of the Company. Subsequent to
the Exchange, the Estate sold (the "Sale") the shares of TCOMA received
in the Exchange, together with approximately 1.5 million shares of
TCOMA that the Estate previously owned (the "Option Shares"), to two
investment banking firms (the "Investment Bankers") for approximately
$530 million (the "Sale Price"). Subsequent to the Sale, TCI entered
into an agreement with the Investment Bankers whereby TCI has the
option, but not the obligation, to purchase the Option Shares at any
time within two years (the "Option Period") from the date of the Sale.
During the Option Period, the Company is to settle quarterly any
increase or decrease in the market value of the Option Shares. If the
market value of the Option Shares exceeds the Investment Bankers' cost,
Option Shares with a fair value equal to the difference between the
market value and cost will be segregated from the other Option Shares.
If the market value of the Option Shares is less than the Investment
Bankers' cost, the Company, at its option, will settle such difference
with shares of TCOMA or, subject to certain conditions, with cash or
letters of credit. In addition, the Company is required to pay the
Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on
the Sale Price. Due to the Company's ability to settle quarterly price
fluctuations with shares of TCOMA, the Company records all amounts
received (paid) under this arrangement as increases (decreases) to
equity. In connection with the Exchange Offers, the Investment Bankers
exchanged 7,461,019 shares of TCOMA for the same number of shares of
Series A TCI Ventures Group Stock. At September 30, 1997, the market
value of the Options Shares exceeded the Investment Bankers' cost by
$113 million.
(continued)
I-20
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Options
Estimated compensation relating to restricted stock awards, stock
appreciation rights ("SARs") and options with tandem SARs awarded by
the Company has been recorded through September 30, 1997, but is
subject to future adjustment based upon market value, and ultimately,
on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
Other
At September 30, 1997, there were 114,611,215 shares of Series A TCI
Group Stock, 31,584,184 shares of Series A Liberty Group Stock and
18,547,213 shares of Series A TCI Ventures Group Stock reserved for
issuance under exercise privileges related to options, convertible debt
securities and convertible preferred stock. Also, one share of Series A
TCI Group Stock is reserved for each share of Series B TCI Group Stock,
one share of Series A Liberty Group Stock is reserved for each share of
Series B Liberty Group Stock and one share of Series A TCI Ventures
Group Stock is reserved for each share of Series B TCI Ventures Group
Stock. Additionally, subsidiaries of TCI own an aggregate of 278,307
shares of TCI Convertible Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock"). Each share of Series F Preferred
Stock is convertible into 416,528,172 shares of Series A TCI Group
Stock.
(11) Transactions with Officers and Directors
On March 4, 1997, an executive officer who is also a director of the
Company received an advance from a wholly-owned subsidiary of the
Company in the amount of $5,787,505. On March 5, 1997, such individual
received a second advance from a wholly-owned subsidiary of the Company
in the amount of $5,813,755. 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. Principal
outstanding on the note is due March 31, 1999 and interest is payable
annually on March 1 of each year. The loan is unsecured.
On July 24, 1997, an executive officer who is also a director of the
Company acquired from the Company an aggregate of 7,296,324 shares of
Series B TCI Group Stock and 2,278,125 shares of Series B Liberty Group
Stock, in exchange for a like number of shares of Series A TCI Group
Stock and Series A Liberty Group Stock, respectively, held by such
executive officer and director.
On July 24, 1997, the Company repurchased 146,625 shares of Series A
Liberty Group Stock from the spouse of an executive officer who is
also a director of the Company at an aggregate cost of approximately
$4 million.
(continued)
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<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On June 10, 1997 (the "IP Phase I Closing Date"), the Company issued
139,513 shares of the Company's Series B TCI Group 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, pursuant to which the Company acquired on the IP Phase I Closing
Date (a) a 1.103% limited partnership interest in InterMedia Partners,
a California limited partnership, (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 $5,848,024.
On August 5, 1997 (the "IP Phase II Closing Date"), the Company issued
2,405,942 shares of the Company's Series B TCI Group 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,
pursuant to which the Company acquired on the IP Phase II Closing Date
a 99.997% limited partnership interest in InterMedia Capital Management
IV, L.P. in exchange for total consideration of the IP II Shares and
cash and assumption of liabilities in an aggregate amount of
$15,450,976.
In connection with the two 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 Series B TCI Group Stock and the
son of a director of the Company received an advisory fee in the amount
of 36,364 shares of Series B TCI Group Stock.
(12) Commitments and Contingencies
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 September 30,
1997, these agreements require minimum payments aggregating
approximately $776 million. The aggregate amount of the Film Licensing
Obligations under other license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under
the Film Licensing Obligations could prove to be significant.
During the third quarter of 1997, the Company committed to purchase
billing services from an unaffiliated third party pursuant to three
successive five year agreements. Pursuant to this arrangement the
Company is obligated 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.
(continued)
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<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $499 million at September 30, 1997. With respect to the
Company's guarantees of $166 million of such obligations, TCI has been
indemnified for any loss, claim or liability that TCI may incur, by
reason of such guarantees. 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.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
Following such merger (the "DMX Merger"), the Company owned 89.6% of
the common equity and 98.7% of the voting power of TCI Music. In
connection with such merger, the Company assumed a contingent
obligation to purchase 14,896,648 shares (6,812,393 of which are
owned by subsidiaries of the Company) of TCI Music common stock at a
price of $8.00 per share. Such obligation may be settled, at the
Company's option, with shares of Series A TCI Group Stock or with cash.
Certain key employees of the Company hold restricted stock awards,
options and options with tandem SARs to acquire shares of certain
subsidiaries' common stock. Estimates of the compensation related to
the restricted stock awards and options and/or SARs have been recorded
in the accompanying consolidated financial statements, but are subject
to future adjustment based upon the market value of the respective
common stock and, ultimately, on the final market value when the rights
are exercised or the restricted stock awards are vested.
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been
recorded in the accompanying combined financial statements, but are
subject to future adjustment based upon a valuation model derived from
such subsidiary's cash flow, working capital and debt. Effective
January 1, 1994, these employees have a put right that requires such
subsidiary to purchase their respective PSARs. The subsidiary may call
the PSARs on or after January 1, 1996.
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.
I-23
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996. The following discussion focuses on
material changes in the trends, risks and uncertainties affecting the Company's
results of operations and financial condition. Reference should also be made to
the Company's consolidated financial statements included herein.
(1) Material changes in financial condition:
Upon the September 10, 1997 consummation of the TCI Ventures Exchange,
188,661,300 shares of Series A TCI Group Stock and 16,266,400 shares of Series B
TCI Group Stock were exchanged for an equivalent number of shares of Series A
TCI Ventures Group Stock and Series B TCI Ventures Group Stock, respectively.
The aggregate number of shares of TCI Ventures Group Stock issued in the TCI
Ventures Exchange was intended to represent 100% of the common stockholders'
equity value of the Company attributable to the TCI Ventures Group. For
additional information concerning the TCI Ventures Exchange and the TCI Ventures
Group Stock, see note 1 to the accompanying consolidated financial statements.
During March 1997, the Company, through special purpose entities
formed as Delaware business trusts, issued $300 million in face value of 9.65%
Capital Securities and $200 million in face value of 9.72% Trust Preferred
Securities. The Company used the net proceeds from such issuances to retire
commercial paper and repay certain other indebtedness.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary. The merger was valued at $731 million. TCI
exchanged 47.2 million shares of Series A TCI Group Stock for shares of
Kearns-Tribune Corporation which held 17.9 million shares of TCI Group Stock and
6.7 million shares of Liberty Group Stock. Liberty Media Group purchased from
TCI Group the 6.7 million shares of Liberty Group Stock that were acquired in
such transaction for $168 million in cash.
The TBS/Time Warner Merger was consummated on October 10, 1996
whereupon Liberty Media Group received approximately 50.6 million shares of TW
Exchange Stock in exchange for its TBS holdings. On June 24, 1997 Liberty Media
Group granted Time Warner a five year option to acquire the business of Southern
(the "Southern Option") through a purchase of assets. Liberty Media Group
received 6.4 million shares of TW Exchange Stock valued at $306 million in
consideration for the grant. In September 1997, Time Warner announced its
intention to exercise the Southern Option. Pursuant to the Southern Option, the
consideration for the purchase of the business of Southern will be $213 million,
payable in a form which is mutually acceptable of cash of Time Warner common
stock, together with the assumption of certain liabilities. See note 6 to the
accompanying consolidated financial statements.
(continued)
I-24
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In June 1997, the Company entered into an agreement with Cablevision
pursuant to which the Company agreed to contribute certain of its cable
television systems serving approximately 820,000 basic customers to Cablevision
in exchange for approximately 12.2 million newly issued Cablevision Class A
shares. Such shares represent approximately 33% of Cablevision's total
outstanding shares. Cablevision will also assume approximately $669 million of
TCI's debt. The transaction is subject to, among other matters, Cablevision
shareholder and regulatory approvals. There is no assurance that the transaction
will be consummated.
Including the Cablevision transaction described above, the Company
has signed agreements or letters of intent to contribute, within the next twelve
months, certain cable systems serving approximately 3 million basic customers to
various joint ventures. Such anticipated transactions, if consummated as
currently intended, would result in estimated reductions in debt and annual
revenue of approximately $4 billion and $1 billion, respectively.
Such transactions are subject to, among other matters, regulatory approval.
Accordingly, there is no assurance that any of such transactions will be
consummated.
In January 1997, the Company acquired the 50% ownership interest in 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 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.
On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC
acquired all of the common stock of Cable Sub which owned Viacom's cable systems
and related assets. The transaction was structured as a tax-free reorganization
in which Cable Sub initially transferred all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub. Cable
Sub also transferred to New Viacom Sub the proceeds of the Loan Facility.
Following these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has
any obligation with respect to repayment of the Loan Proceeds. For additional
discussion of the Viacom Acquisition, see note 7 to the accompanying
consolidated financial statements.
During the nine months ended September 30, 1997 and 1996, in order to
reduce future interest costs, the Company purchased in the open market certain
notes payable which had an aggregate principle balance of $190 million and $809
million, respectively. In connection with such purchases, the Company recognized
losses on early extinguishment of debt of $11 million and $62 million,
respectively. Such losses related to prepayment penalties and the retirement of
deferred loan costs.
Also, during the nine months ended September 30, 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 $11 million related to the retirement of deferred loan
costs.
(continued)
I-25
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
At September 30, 1997, subsidiaries of the Company had approximately $3
billion of availability in unused lines of credit, excluding amounts related to
lines of credit which provide availability to support commercial paper. Although
such subsidiaries of the Company were in compliance with the restrictive
covenants contained in their credit facilities at said date, additional
borrowings under the credit facilities are subject to the subsidiaries'
continuing compliance with the restrictive covenants after giving effect to such
additional borrowings. Such restrictive covenants 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. See note 8
to the accompanying consolidated financial statements for additional information
regarding the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and stock compensation)
($2,232 million and $1,695 million for the nine months ended September 30, 1997
and 1996, respectively) to interest expense ($883 million and $803 million for
the nine months ended September 30, 1997 and 1996, respectively), is determined
by reference to the consolidated statements of operations. The Company's
interest coverage ratio was 253% and 211% for the nine months ended September
30, 1997 and 1996, respectively. Management of the Company believes that the
foregoing interest coverage ratio is adequate in light of the relative
predictability of its cable television operations and interest expense, 50% of
which results from fixed rate indebtedness. However, the Company's current
intent is to reduce its outstanding indebtedness such that its interest coverage
ratio could be increased. There is no assurance that the Company will be able to
achieve such objective. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be a
substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net cash
provided by operating activities ($1,214 million and $841 million for the nine
months ended September 30, 1997 and 1996, respectively) generally reflects net
cash from the operations of the Company available for the Company's liquidity
needs after taking into consideration the aforementioned additional substantial
costs of doing business not reflected in Operating Cash Flow. Prior to 1997,
amounts expended by the Company for its investing activities exceeded net cash
provided by operating activities. The Company has reevaluated its capital
expenditure strategy and currently anticipates that it will expend significantly
less for property and equipment in 1997 than it did in 1996. In this regard, the
amount of capital expended by the Company for property and equipment was $419
million during the nine months ended September 30, 1997, as compared to $1,526
million during the corresponding period in 1996. The Company currently estimates
that it will spend between $550 million and $600 million for capital
expenditures during 1997. To the extent that net cash provided by operating
activities exceeds net cash used in investing activities in 1997, the Company
currently anticipates that such excess cash will initially be used to reduce
outstanding debt.
(continued)
I-26
<PAGE> 29
(1) Material changes in financial condition (continued):
In the event the Company is unable to achieve such objectives,
management believes that net cash provided by operating activities, the ability
of the Company and its subsidiaries to obtain additional financing (including
the subsidiaries available lines of credit and access to public debt markets),
issuances and sales of the Company's equity or equity of its subsidiaries, and
proceeds from disposition of assets will provide adequate sources of short-term
and long-term liquidity in the future. See the Company's consolidated statements
of cash flows included in the accompanying consolidated financial statements.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017. Based on customer
levels at September 30, 1997, these agreements require minimum payments
aggregating approximately $776 million. The aggregate amount of the Film
Licensing Obligations under other license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Nevertheless, the Company's aggregate payments under the Film Licensing
Obligations could prove to be significant.
During the third quarter of 1997, the Company committed to purchase
billing services from an unaffiliated third party pursuant to three successive
five year agreements. Pursuant to this arrangement the Company is obligated 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 $499
million at September 30, 1997. With respect to the Company's guarantees of $166
million of such obligations, TCI has been indemnified for any loss, claim or
liability that TCI may incur, by reason of such guarantees. 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.
In connection with the DMX Merger, the Company assumed a contingent
obligation to repurchase 14,896,648 (6,812,393 of which are owned by
subsidiaries of the Company) shares of TCI Music common stock at a price of
$8.00 per share. Such obligation may be settled, at the Company's option, with
shares of Series A TCI Group Stock or with cash.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company),
through net cash provided by their own operating activities and in certain
circumstances through required capital contributions from their partners.
(continued)
I-27
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various Interest Rate Swaps.
Pursuant to the Interest Rate Swaps, the Company (i) pays fixed interest rates
ranging from 7.1% to 9.3% and receives variable interest rates on notional
amounts of $410 million at September 30, 1997 and (ii) pays variable interest
rates and receives fixed interest rates ranging from 4.8% to 9.7% on notional
amounts of $2,400 million at September 30, 1997. During the nine months ended
September 30, 1997 and 1996, the Company's net payments pursuant to the Fixed
Rate Agreements were less than $1 million and $3 million, respectively; and the
Company's net receipts pursuant to the Variable Rate Agreements were $1 million
and $11 million, respectively. 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. See note 8 to the
accompanying consolidated financial statements for additional information
regarding Interest Rate Swaps.
In addition, on September 11, 1997 the Company entered into an Interest
Rate Swap pursuant to which it pays a variable rate based on the LIBOR rate
(6.1% at September 30, 1997) and receives a variable rate based on the Constant
Maturity Treasury Index (6.4% at September 30, 1997) on a notional amount of
$400 million. As of September 30, 1997, no payments or receipts had been made
pursuant to such agreement. At September 30, 1997, the Company would be required
to pay an estimated $2 million to terminate such agreement.
At September 30, 1997, after considering the net effect of the
aforementioned Interest Rate Swaps, the Company had $7,536 million (or 50%) of
fixed-rate debt and $7,617 million (or 50%) of variable-rate debt. Accordingly,
in an environment of rising interest rates, the Company could experience an
increase in its interest expense.
In June 1997, the Company exchanged 30,545,864 shares of TCOMA for the
same number of shares of Series B TCI Group Stock owned by the Estate of the
former Chairman of the Board of Directors of the Company. Subsequent to the
Exchange, the Estate sold the shares of TCOMA received in the Exchange, together
with approximately 1.5 million shares of TCOMA that the Estate previously owned,
to two investment banking firms for approximately $530 million. Subsequent to
the Sale, TCI entered into an agreement with the Investment Bankers whereby TCI
has the option, but not the obligation, to purchase the Option Shares at any
time within two years from the date of the Sale. During the Option Period, the
Company is to settle quarterly any increase or decrease in the market value of
the Option Shares. If the market value of the Option Shares exceeds the
Investment Bankers' cost, Option Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Option Shares. If the market value of the Option Shares is less than the
Investment Bankers' cost, the Company, at its option, will settle such
difference with shares of TCOMA or, subject to certain conditions, with cash or
letters of credit. In addition, the Company is required to pay the Investment
Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due
to the Company's ability to settle quarterly price fluctuations with shares of
TCOMA, the Company records all amounts received (paid) under this arrangement as
increases (decreases) to equity. In connection with the Exchange Officers, the
Investment Bankers exchanged 7,461,019 shares of TCOMA for the same number of
shares of Series A TCI Ventures Group Stock.
(continued)
I-28
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
Subsequent to September 30, 1997, pursuant to the above agreement, the
Company purchased 4,000,000 shares of TCOMA from one of the Investment Bankers
at an aggregate cost of $66 million in cash.
During the nine months ended September 30, 1997, Liberty Media Group
repurchased 611,000 shares of Series A Liberty Group Stock in open market
transactions and 146,625 shares of Series A Liberty Group Stock from the spouse
of an officer and director of the Company, at an aggregate cost of $18 million.
Such shares are reflected as treasury stock in the accompanying consolidated
financial statements.
In September 1997, the Board authorized a stock repurchase program,
under which TCI may repurchase from time to time up to five percent of its TCI
Group Stock and TCI Ventures Group Stock.
During the third quarter of 1997, TCI commenced a tender offer (the
"Offer") to purchase up to an aggregate of 15 million shares of its Liberty
Group Stock at a price of $30 per share through October 3, 1997. Subsequent to
September 30, 1997, the Company repurchased 14,443,323 shares of Series A
Liberty Group Stock and 54,716 shares of Series B Liberty Group Stock at an
aggregate cost of approximately $435 million pursuant to the Offer.
(2) Material changes in results of operations:
Communications and Programming Services Revenue
The operation of the Company's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996
(collectively, the "Cable Acts") established rules under which the Company's
basic and tier service rates and its equipment and installation charges (the
"Regulated Services") are regulated if a complaint is filed or if the
appropriate franchise authority is certified. Approximately 78% of the Company's
basic customers were served by cable television systems that were subject to
such rate regulation.
During the nine months ended September 30, 1997, 65% of the Company's
revenue from Communications and Programming Services was derived from Regulated
Services. As noted above, any increases in rates charged for Regulated Services
are regulated by the Cable Acts. Moreover, competitive factors may limit the
Company's ability to increase its service rates.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, 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, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with those of the
Company.
(continued)
I-29
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Revenue from communications and programming services increased 6% for
the three months ended September 30, 1997, as compared to the corresponding
period of 1996. Exclusive of the effects of acquisitions, revenue from the
Company's domestic cable customers accounted for 1% of such increase primarily
as a result of a 4% increase in basic revenue and a 7% decrease in premium
revenue. The Company experienced a 6% increase in its average basic rate, a 2%
decrease in the number of average basic customers, a 10% increase in its average
premium rate and a 16% decrease in the number of average premium customers. In
addition, the Company's revenue from communications and programming services
increased 8% due to acquisitions, decreased 5% due to the Satellite Spin-off and
increased 2% due to the Company's domestic programming revenue (from Encore
Media Corporation and QE+Ltd.), international cable revenue and other revenue.
Revenue from communications and programming services increased 10% for
the nine months ended September 30, 1997, as compared to the corresponding
period of 1996. Exclusive of the effects of acquisitions, revenue from the
Company's domestic cable customers accounted for 3% of such increase primarily
as a result of a 8% increase in basic revenue and a 4% decrease in premium
revenue. The Company experienced a 10% increase in its average basic rate, a 1%
decrease in the number of average basic customers, a 6% increase in its average
premium rate and a 10% decrease in the number of average premium customers. In
addition, the Company's revenue from communications and programming services
increased 12% due to acquisitions, decreased 5% due to the Satellite Spin-off
and decreased 2% due to the deconsolidation of the Company's sports programming
businesses. Increases in the Company's domestic programming revenue (from Encore
Media Corporation and QE+Ltd.), international cable revenue and other revenue
accounted for the remaining 2% increase.
Net Sales From Electronic Retailing Services
As a result of the HSN Merger in December 1996, HSN is no longer a
consolidated subsidiary of the Company. Accordingly, the Company no longer
reports revenue or cost of sales related to electronic retailing services. See
note 5 to the accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses decreased 3% for the three months ended September
30, 1997, as compared to the corresponding period of 1996. Exclusive of the
effects of dispositions, net of acquisitions, such expenses were relatively
comparable to the prior period.
Operating expenses increased 2% for the nine months ended September 30,
1997, as compared to the corresponding period of 1996. Exclusive of the effects
of dispositions, net of acquisitions, such expenses increased 7% from the prior
period. Programming expenses accounted for the majority of such increase. The
Company cannot determine whether and to what extent increases in the cost of
programming will affect its future operating costs.
(continued)
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<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Selling, general and administrative expenses decreased 24% and 21% for
the three months and nine months ended September 30, 1997, as compared to the
corresponding periods of 1996. Such decreases are primarily due to dispositions,
including Satellite and HSN. Exclusive of the effects of dispositions, net of
acquisitions, such expenses were relatively comparable to the prior periods. The
Company increased the level of its marketing expenditures during the third
quarter of 1997. Depending upon the effectiveness of such increased
expenditures, the Company may determine to maintain or increase the level of
such expenditures in future periods.
The change in the Company's depreciation and amortization expense in
1997 is the result of the net effect of increases due to acquisitions and
capital expenditures largely offset by a decrease due to the Satellite Spin-off.
The Company records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
Other Income and Expenses
Interest expense aggregated $300 million and $883 million for the three
months and nine months ended September 30, 1997, respectively, as compared to
$277 million and $803 million for the corresponding periods in 1996. Such
increases are due to the net effect of increased debt balances as a result of
the Viacom Acquisition in August 1996 partially offset by a lower weighted
average interest rate in 1997. See note 8 to the accompanying consolidated
financial statements.
At September 30, 1997, the Company had an effective ownership interest
of approximately 27% in Telewest, a company that is currently operating and
constructing cable television and telephone systems in the UK. Telewest, which
is accounted for under the equity method, had a carrying value at September 30,
1997 of $352 million and comprised $111 million and $99 million of the Company's
share of its affiliates' losses during the nine months ended September 30, 1997
and 1996, respectively. In addition to the Company's investments in Telewest and
Flextech, the Company has other less significant investments accounted for under
the equity method 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, Flextech and such other equity method investments
had a carrying value of $572 million at September 30, 1997 and accounted for $75
million and $55 million of the Company's share of its affiliates' losses for the
nine months ended September 30, 1997 and 1996, respectively. Additionally,
included in share of losses of affiliates for the nine months ended September
30, 1997 and 1996 is $304 million and $112 million, respectively, attributable
to the PCS Ventures. Such 1996 amount includes $34 million associated with prior
periods. The increase in the share of losses of the PCS Ventures is attributed
primarily to general and administrative costs associated with the start-up of
operations and Sprint Spectrum's share of losses in APC.
(continued)
I-31
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Minority interests in earnings of consolidated subsidiaries aggregated
$35 million and $129 million for the three months and nine months ended
September 30, 1997, respectively, as compared to $28 million and $32 million for
the corresponding periods in 1996. The majority of such change is due to the
issuance of additional Trust Preferred Securities in May 1996 and March 1997 and
the accrual of dividends on preferred securities issued in August 1996 by a
subsidiary of the Company. See note 9 to the accompanying consolidated financial
statements.
During the nine months ended September 30, 1997, as a result of TCG
issuing additional shares of its Class A common stock for certain acquisitions,
the Company's ownership interest in TCG was reduced from approximately 31% to
approximately 30%. Accordingly, the Company recognized a gain amounting to $21
million (before deducting deferred income tax expense of approximately $8
million). See note 5 to the accompanying consolidated financial statements.
On July 11, 1997, @Home completed its initial public offering (the
"IPO"), in which 10,350,000 shares of @Home common stock were sold to the public
for aggregate cash consideration of approximately $109 million before
commissions and fees. As a result of the IPO, the TCI Ventures Group's economic
interest in @Home decreased from 43% to 39% which economic interest represents
an approximate 72% voting interest. In connection with the associated dilution
of the TCI Ventures Group's ownership interest of @Home, the TCI Ventures Group
recognized a gain of $60 million.
September 26, 1997, the Company sold its interest in TCID of New
Zealand Inc. for cash proceeds of $53 million. The Company recognized a gain on
such sale of $58 million.
During the three months ended September 30, 1997, the Company
recognized a $29 million loss in connection with the disposition of certain
preferred stock.
Also, during the nine months ended September 30, 1997, TSX, an equity
affiliate of the Company, and Antec entered into a business combination with
Antec being the surviving entity. In connection with such transaction, the
Company recognized a $29 million gain (before deducting deferred income tax
expense of approximately $12 million) representing the difference between the
fair value of the Antec shares received and the carrying value of the Company's
investment in TSX at the date of the transaction. Upon completion of this
transaction, the Company's ownership interest decreased from an approximate 45%
interest in TSX to an approximate 16% ownership interest in Antec. See note 5 to
the accompanying consolidated financial statements.
(continued)
I-32
<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
On August 1, 1997, Liberty IFE, Inc., a wholly owned subsidiary of
Liberty Media Group, which held IFE Class C Stock and $23 million of IFE
Convertible Notes, contributed its Class C Stock and Convertible Notes to FKW in
exchange for the FKW Preferred Stock. As a result of the exchange, the Company
recognized a pre-tax gain of approximately $304 million. See note 7 to the
accompanying consolidated financial statements.
Net Loss
As a result of the above-described fluctuations in the Company's
operating results, the Company's net loss (before preferred stock dividend
requirements) of $22 million for the three months ended September 30, 1997
decreased by $116 million, as compared to the Company's net loss (before
preferred stock dividend requirements) of $138 million for the three months
ended September 30, 1996, and the Company's net loss (before preferred stock
dividend requirements) of $234 million for the nine months ended September 30,
1997 decreased by $212 million, as compared to the Company's net loss (before
preferred stock dividend requirements) of $446 million for the nine months ended
September 30, 1996.
I-33
<PAGE> 36
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
--------------- ----------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash and cash equivalents $ 1 --
Trade and other receivables, net 347 308
Prepaid expenses 60 77
Committed film inventory -- 50
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 611 388
Property and equipment, at cost:
Land 77 69
Distribution systems 9,925 9,311
Support equipment and buildings 1,347 1,321
------------ -----------
11,349 10,701
Less accumulated depreciation 4,367 3,920
------------ -----------
6,982 6,781
------------ -----------
Franchise costs 17,812 17,153
Less accumulated amortization 2,627 2,360
------------ -----------
15,185 14,793
------------ -----------
Other assets, net of amortization 581 547
------------ -----------
$ 23,767 22,944
============ ===========
</TABLE>
* Restated - see note 1.
(continued)
I-34
<PAGE> 37
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
------------- ------------
Liabilities and Combined Deficit amounts in millions
- --------------------------------
<S> <C> <C>
Accounts payable $ 86 194
Accrued interest 165 266
Accrued expenses 974 689
Debt (note 7) 14,188 14,319
Deferred income taxes 5,268 5,210
Other liabilities 460 214
----------- -----------
Total liabilities 21,141 20,892
----------- -----------
Minority interests in equity of consolidated subsidiaries 1,082 1,083
Redeemable preferred stock 655 658
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts ("Trust Preferred Securities") holding
solely subordinated debt securities of TCI Communications,
Inc. ("TCIC") (note 8) 1,500 1,000
Combined deficit (note 9):
Combined equity, including preferred stocks of
Tele-Communications, Inc. ("TCI") (98) 1,864
Unrealized holding gains for available-for-sale securities, net
of taxes 8 --
TCI Ventures Group cumulative foreign currency translation
adjustment, net of taxes -- 26
TCI Ventures Group unrealized holding gains for
available-for-sale securities, net of taxes -- 15
Interest in TCI Ventures Group -- (2,729)
----------- -----------
(90) (824)
Due to (from) related parties (note 10) (521) 135
----------- -----------
Total combined deficit (611) (689)
----------- -----------
Commitments and contingencies (note 12)
$ 23,767 22,944
=========== ===========
* Restated - see note 1.
See accompanying notes to combined financial statements.
</TABLE>
I-35
<PAGE> 38
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------
1997 1996* 1997 1996*
------------ ----------- ------------ ----------
amounts in millions, except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,618 1,554 4,779 4,278
Operating costs and expenses:
Operating 510 556 1,640 1,514
Purchases of services from related
parties (note 10) 54 24 103 81
Selling, general and administrative 349 441 1,009 1,193
Charges to related parties (note 10) (3) (2) (8) (8)
Stock compensation (notes 9 and 12) 61 (15) 99 (24)
Depreciation and amortization 338 344 1,032 1,003
-------- -------- -------- --------
1,309 1,348 3,875 3,759
-------- -------- -------- --------
Operating income 309 206 904 519
Other income (expense):
Interest expense (292) (258) (843) (751)
Interest income 13 8 28 20
Intercompany interest 7 (3) 3 (9)
Share of losses of affiliates, net
(note 5) (16) (8) (50) (54)
Loss on early extinguishment of debt
(note 7) -- (7) (11) (73)
Minority interests in earnings of
consolidated subsidiaries, net (note 8) (42) (34) (125) (51)
Gain (loss) on disposition of assets
(note 5) (44) -- (9) 2
Other, net 3 (14) (11) (18)
-------- -------- --------- --------
(371) (316) (1,018) (934)
-------- -------- -------- --------
Loss before income taxes (62) (110) (114) (415)
Income tax benefit 4 23 11 118
-------- -------- -------- --------
Loss before loss of TCI Ventures
Group (note 1) (58) (87) (103) (297)
Loss of TCI Ventures Group through the date
of the TCI Ventures Exchange (note 1) (149) (62) (338) (185)
-------- -------- -------- --------
Net loss (207) (149) (441) (482)
Dividend requirements on preferred stocks (10) (9) (31) (27)
-------- -------- --------- --------
Net loss attributable to common
stockholders $ (217) (158) (472) (509)
======== ======== ======== ========
Loss attributable to common stockholders
per common share (note 2) $ (.33) (.25) (.70) (.77)
======== ======== ======== ========
</TABLE>
* Restated - see note 1.
See accompanying notes to combined financial statements.
I-36
<PAGE> 39
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Deficit
Nine months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
TCI
TCI Ventures
Ventures Group
Unrealized Group unrealized
Combined holding gains cumulative holding
equity, for available- foreign gains for
including for-sale current available-
preferred securities translation for-sale
stocks of net of adjustment, securities,
TCI taxes net of taxes net of taxes
--------- -------------- ------------ ------------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1997 * $ 1,864 -- 26 15
Net loss (441) -- -- --
Purchases of services from related parties -- -- -- --
Cost allocations to related parties -- -- -- --
Allocation of stock compensation -- -- -- --
Intergroup tax allocation -- -- -- --
Issuance of notes from related party -- -- -- --
Interest expense from related party -- -- -- --
Excess consideration received over carryover basis of
net assets transferred to related party 244 -- -- --
Sale of Liberty Group Stock to related party (note 6) 168 -- -- --
Transfers of assets to related party (15) -- -- --
Adjustment to reflect deferred gain on sale by related
party (47) -- -- --
Other intercompany transfers -- -- -- --
Change in unrealized gains for available-for-sale
securities -- 8 -- 4
Foreign currency translation adjustment -- -- (19) --
Distribution of TCI Series A and Series B TCI Ventures
Group common stock (2,413) -- (7) (19)
Costs associated with TCI Ventures Exchange (5) -- -- --
Accreted dividends on TCI preferred stock subject to
mandatory redemption requirements (24) -- -- --
Payment of TCI preferred stock dividends (10) -- -- --
Recognition of fees related to Exchange (note 9) (11) -- -- --
Issuance of common stock for acquisitions
and investment 574 -- -- --
Issuance of common stock upon conversion
of notes and preferred stock 4 -- -- --
Issuance of restricted stock granted pursuant to stock
incentive plan 4 -- -- --
Issuance of common stock upon exercise of stock options 4 -- -- --
Issuance of common stock to TCI Employee
Stock Purchase Plan 6 -- -- --
------- --- --- ---
Balance at September 30, 1997 $ (98) 8 -- --
======= === === ===
<CAPTION>
Interest Due to
in TCI (from)
Ventures related Combined
Group parties deficit
--------- --------- --------
<S> <C> <C> <C>
Balance at January 1, 1997 * (2,729) 135 (689)
Net loss 338 -- (103)
Purchases of services from related parties 18 85 103
Cost allocations to related parties (7) (1) (8)
Allocation of stock compensation (56) (63) (119)
Intergroup tax allocation 151 (16) 135
Issuance of notes from related party -- (430) (430)
Interest expense from related party -- (7) (7)
Excess consideration received over carryover basis of
net assets transferred to related party -- -- 244
Sale of Liberty Group Stock to related party (note 6) -- -- 168
Transfers of assets to related party -- -- (15)
Adjustment to reflect deferred gain on sale by related
party -- -- (47)
Other intercompany transfers (169) (224) (393)
Change in unrealized gains for available-for-sale
securities (4) -- 8
Foreign currency translation adjustment 19 -- --
Distribution of TCI Series A and Series B TCI Ventures
Group common stock 2,439 -- --
Costs associated with TCI Ventures Exchange -- -- (5)
Accreted dividends on TCI preferred stock subject to
mandatory redemption requirements -- -- (24)
Payment of TCI preferred stock dividends -- -- (10)
Recognition of fees related to Exchange (note 9) -- -- (11)
Issuance of common stock for acquisitions
and investment -- -- 574
Issuance of common stock upon conversion
of notes and preferred stock -- -- 4
Issuance of restricted stock granted pursuant to stock
incentive plan -- -- 4
Issuance of common stock upon exercise of stock options -- -- 4
Issuance of common stock to TCI Employee
Stock Purchase Plan -- -- 6
------ ---- ----
Balance at September 30, 1997 -- (521) (611)
====== ==== ====
</TABLE>
* Restated - see note 1.
See accompanying notes to combined financial statements.
I-37
<PAGE> 40
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997 1996*
--------- ---------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Loss before loss of TCI Ventures Group** $ (103) (297)
Adjustments to reconcile loss before loss of TCI Ventures Group to net cash
provided by operating activities:
Depreciation and amortization 1,032 1,003
Stock compensation 99 (24)
Payments of obligation relating to stock compensation (21) (2)
Share of losses of affiliates, net 50 54
Loss on early extinguishment of debt 11 73
Minority interests in earnings of consolidated subsidiaries, net 125 51
Loss (gain) on disposition of assets 9 (2)
Intergroup tax allocation 135 87
Deferred income tax benefit (239) (211)
Payments of restructuring charges (21) --
Other noncash credits (1) (12)
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (44) 9
Change in prepaids (83) (16)
Change in accruals and payables 162 (39)
Change in accrued interest (108) (49)
--------- ---------
Net cash provided by operating activities 1,003 625
--------- ---------
Cash flows from investing activities:
Cash paid for acquisitions (274) (88)
Capital expended for property and equipment (273) (1,384)
Additional investments in and loans to affiliates and others (56) (365)
Repayment of loans to affiliates 16 299
Proceeds from dispositions of assets 171 139
Cash received in exchanges 20 69
Sale of Liberty Group Stock to related party 168 --
Change in interest in TCI Ventures Group (158) (360)
Other investing activities 14 (18)
--------- ---------
Net cash used in investing activities (372) (1,708)
--------- ---------
Cash flows from financing activities:
Borrowings of debt 3,059 6,782
Repayments of debt (3,860) (6,973)
Net change in due to related parties (147) 237
Prepayment penalties (7) (60)
Proceeds from issuance of common stock 3 --
Proceeds from issuance of Trust Preferred Securities 490 971
Proceeds from issuance of subsidiary preferred stock -- 223
Costs associated with TCI Ventures Exchange (5) --
Payment of preferred stock dividends (37) (34)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (126) (56)
--------- ---------
Net cash provided (used) by financing activities (630) 1,090
--------- ---------
Net increase in cash and cash equivalents 1 7
Cash and cash equivalents at beginning of period -- --
--------- ---------
Cash and cash equivalents at end of period $ 1 7
========= =========
</TABLE>
* Restated - see note 1.
** Loss of TCI Ventures Group does not provide or use funds.
See accompanying notes to combined financial statements.
I-38
<PAGE> 41
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1997
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of TCI that are attributed to TCI Group, as
defined below. All significant intercompany accounts and transactions
have been eliminated. Preferred stock of TCI, which is owned by
subsidiaries of TCI, eliminates in combination. Common stock of TCI
held by subsidiaries is included in combined equity.
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock
("Liberty Group Stock") which reflect the separate performance of TCI's
assets which produce and distribute cable television programming
services ("Liberty Media Group"). Additionally, the stockholders, of
TCI approved the redesignation of the previously authorized Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
common stock (the "Series A TCI Group Stock") and Tele-Communications,
Inc. Series B TCI Group common stock (the "Series B TCI Group Stock",
and together with the Series A TCI Group Stock, the "TCI Group Stock").
On August 10, 1995, TCI distributed, in the form of a dividend, one
share of Liberty Group Stock for each four shares of TCI Group Stock
owned. Such distribution (the "Liberty Distribution") represented one
hundred percent of the equity value attributable to Liberty Media
Group.
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group common
stock (the "Series A TCI Ventures Group Stock") and
Tele-Communications, Inc. Series B TCI Ventures Group common stock (the
"Series B TCI Ventures Group Stock," and together with the Series A TCI
Ventures Group Stock, the "TCI Ventures Group Stock"). The TCI Ventures
Group Stock reflects the separate performance of the TCI Ventures
Group. On August 28, 1997, TCI Ventures Group consisted principally of
the following assets and their related liabilities, which prior to the
issuance of the TCI Ventures Group Stock were attributed to TCI Group:
(i) TCI's 85% equity interest (representing a 92% voting interest) in
Tele-Communications International, Inc. ("TINTA"), which is TCI's
primary vehicle for the conduct of its international cable, telephony
and programming businesses (other than those international programming
businesses attributed to Liberty Media Group), (ii) TCI's principal
interests in the telephony business consisting primarily of TCI's
investment in a series of partnerships formed to engage in the business
of providing wireless communications services, TCI's 30% equity
interest (representing a 37% voting interest) in Teleport
Communications Group Inc. ("TCG"); and Western Tele-Communications,
Inc., a wholly-owned subsidiary of TCI, (iii) TCI's 40% equity interest
(representing a 85% voting interest in United Video Satellite Group,
Inc. ("UVSG"), (iv) TCI's 39% equity interest (representing a 72%
voting interest) in At Home Corporation ("@Home") and (v) other assets,
including TCI's National Digital Television Center, Inc. ("NDTC"); ETC
w/tci, Inc., an 80% owned subsidiary of TCI; and TCI SUMMITrak of
Texas, Inc. and TCI SUMMITrak L.L.C., wholly-owned subsidiaries of TCI.
Such subsidiaries and assets are referred to as "TCI Ventures Group."
The stocks of TINTA, TCG, UVSG and @Home are traded on the National
Market tier of The Nasdaq Stock Market.
(continued)
I-39
<PAGE> 42
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Prior to stockholder approval to issue the TCI Ventures Group Stock,
TCI commenced offers (the "Exchange Offers") to exchange shares of
Series A TCI Ventures Group Stock and Series B TCI Ventures Group Stock
for shares of Series A TCI Group Stock and shares of Series B TCI Group
Stock, respectively, (representing approximately 30% of the outstanding
shares of each such series as of June 30, 1997, excluding shares held
by majority-owned subsidiaries of TCI) in the ratio of one share of the
applicable series of TCI Ventures Group Stock in exchange for each
share of the corresponding series of TCI Group Stock properly tendered.
Upon the September 10, 1997 consummation of the Exchange Offers,
188,661,300 shares of Series A TCI Group Stock and 16,266,400 shares of
Series B TCI Group Stock were exchanged for an equivalent number of
shares of Series A TCI Ventures Group Stock and Series B TCI Ventures
Group Stock, respectively, (the "TCI Ventures Exchange").
Issuance of the Liberty Group Stock and the TCI Ventures Group Stock
did not result in any transfer of assets or liabilities of TCI or any
of its subsidiaries or affect the rights of holders of TCI's or any of
its subsidiaries' debt.
As of September 30, 1997, the TCI Group Stock reflects the separate
performance of TCI's subsidiaries and assets not attributed to Liberty
Media Group or TCI Ventures Group. Such subsidiaries and assets are
collectively referred to as "TCI Group" and are comprised primarily of
TCI's domestic cable and communications business.
As a result of the TCI Ventures Exchange, TCI Group restated its
financial statements to exclude those assets and related liabilities
which were attributed to TCI Ventures Group but were attributed to TCI
Group prior to the issuance of the TCI Ventures Group Stock.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group for purposes of preparing its
combined financial statements, the change in the capital structure of
TCI did not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its
subsidiaries. TCI and its subsidiaries each continue to be responsible
for their respective liabilities. Holders of TCI Group Stock are
holders of common stock of TCI and continue to be subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities. The issuance of Liberty Group Stock and TCI Ventures
Group Stock did not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of TCI
Group and the market price of shares of the TCI Group Stock. In
addition, net losses of any portion of TCI, dividends or distributions
on, or repurchases of, any series of common stock, and dividends on, or
certain repurchases of preferred stock would reduce the funds of TCI
legally available for dividends on all series of common stock.
Accordingly, TCI Group financial information should be read in
conjunction with the TCI financial information.
(continued)
I-40
<PAGE> 43
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The common stockholders' equity value of TCI Ventures Group or Liberty
Media Group that, at any relevant time, is attributed to the TCI Group,
and accordingly not represented by outstanding TCI Ventures Group Stock
or Liberty Media Group Stock, respectively, is referred to as
"Inter-Group Interest." Prior to the consummation of the Exchange
Offers, TCI Group had a 100% Inter-Group Interest in TCI Ventures
Group. Following the consummation of the Exchange Offers, TCI Group no
longer has an Inter-Group Interest in TCI Ventures Group. For periods
in which an Inter-Group Interest exists, TCI Group would account for
its Inter-Group Interest in a manner similar to the equity method of
accounting. For periods after the consummation of the Exchange Offers
and before the creation of an Inter-Group Interest, TCI Group would not
reflect any interest in TCI Ventures Group. An Inter-Group Interest
would be created only if a subsequent transfer of cash or other
property from TCI Group to TCI Ventures Group is specifically
designated by the Board as being made to create an Inter-Group Interest
or if outstanding shares of TCI Ventures Stock are purchased with funds
attributable to TCI Group. Management of TCI believes that generally
accepted accounting principles require that TCI Ventures Group be
consolidated with TCI Group for all periods in which TCI Group held an
"Inter-Group Interest" in TCI Ventures Group.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of TCI Group for the year
ended December 31, 1996.
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.
(2) Loss Per Common Share
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
"Statement No. 128"). Statement No. 128 requires the presentation of
basic earnings per share ("EPS") and, for companies with potential
dilutive securities, such as convertible debt, options and warrants,
diluted EPS. Statement No. 128 is effective for annual and interim
periods ending after December 31, 1997. TCI Group does not expect that
Statement No. 128 will have a material impact on TCI Group's loss per
share.
(continued)
I-41
<PAGE> 44
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The loss attributable to TCI Group Stock stockholders per common share
was computed by dividing net loss attributable to TCI Group Stock
stockholders by the weighted average number of common shares
outstanding of TCI Group Stock during the period (655.6 million and
669.1 million for the three months ended September 30, 1997 and 1996,
respectively; and 670.0 million and 665.0 million for the nine months
ended September 30, 1997 and 1996, respectively). Common stock
equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
(3) Derivative Financial Instruments
TCI Group has entered into variable and fixed interest rate exchange
agreements ("Interest Rate Swaps") which it uses to manage interest
rate risk arising from TCI Group'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. TCI Group does not use such
instruments for trading purposes.
Derivative financial instruments that can be settled, at TCI Group's
option, in shares of TCI Group'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.
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $951 million and $815 million for the nine
months ended September 30, 1997 and 1996, respectively. Cash paid for
income taxes was $48 million in 1997 and was not material in 1996.
Summary of cash paid for acquisitions and cash received in exchanges
is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 1,670 4,272
Liabilities assumed, net of current assets (673) (1,990)
Deferred tax liability recorded in acquisitions (183) (1,310)
Minority interests in equity of acquired entities (1) (423)
Common stock and preferred stock issued in acquisitions (984) (461)
TCI common stock and preferred stock held by acquired
company 445 --
---------- -----------
Cash paid for acquisitions $ 274 88
========== ===========
Cash received in exchanges:
Aggregate cost basis of assets acquired $ (390) (569)
Historical cost of assets exchanged 399 617
Gain recorded on exchange of assets 11 21
----------- ----------
Cash received in exchanges $ 20 69
=========== ==========
</TABLE>
I-42
(continued)
<PAGE> 45
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investments in Affiliates
TCI Group's investments in affiliates are comprised of limited
partnerships and other entities that are primarily engaged in the
domestic cable business. Summarized unaudited results of operations for
affiliates accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- ---------------------
1997 1996
------- --------
amounts in millions
<S> <C> <C>
Revenue $ 767 898
Operating expenses (382) (655)
Depreciation and amortization (254) (143)
---------- -----------
Operating income 131 100
Interest expense (177) (110)
Other, net (51) 96
---------- -----------
Net earnings (loss) $ (97) 86
========== ===========
</TABLE>
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of applicable partnership
law for all debts of that partnership in the event liabilities of that
partnership were to exceed its assets.
(6) Acquisitions and Dispositions
In January 1997, TCI Group acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that TCI Group did not previously own and
certain additional assets for aggregate consideration of approximately
$970 million. TCI Group issued approximately 16 million shares of TCI
Group Stock, assumed $584 million of TKR Cable's debt and paid cash of
$88 million and shares of Time Warner, Inc. common stock valued at $41
million upon consummation of such acquisition.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary. The merger was valued at approximately
$731 million. TCI exchanged 47.2 million shares of Series A TCI Group
Stock for shares of Kearns-Tribune Corporation which held 17.9 million
shares of TCI Group Stock and 6.7 million shares of Liberty Group
Stock. Immediately following the merger, Liberty Media Group purchased
from TCI Group the 6.7 million shares of Liberty Group Stock that were
acquired in such transaction for $168 million in cash.
(continued)
I-43
<PAGE> 46
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In June 1997, TCI Group entered into an agreement with Cablevision
Systems Corporation ("Cablevision") pursuant to which TCI Group agreed
to contribute certain of its cable television systems serving
approximately 820,000 basic customers to Cablevision in exchange for
approximately 12.2 million newly issued Cablevision Class A shares.
Such shares represent approximately 33% of Cablevision's total
outstanding shares. Cablevision will also assume approximately $669
million of TCI Group's debt. The transaction is subject to, among other
matters, Cablevision shareholder and regulatory approvals. There is no
assurance that the transaction will be consummated.
Including the Cablevision transaction described above, TCI Group
has signed agreements or letters of intent to contribute, within the
next twelve months, certain cable systems serving approximately 3
million basic customers to various joint ventures. Such anticipated
transactions, if consummated as currently intended, would result in
estimated reductions in debt and annual revenue of approximately $4
billion and $1 billion, respectively. Such transactions are subject to,
among other matters, regulatory approval. Accordingly, there is no
assurance that any of such transactions will be consummated.
On July 31, 1996, pursuant to certain agreements entered into between
TCI Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI
Group 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 TCI Group 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.
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, TCI Group
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 of Cable Sub
with a stated value of $100 per share. Upon completion of the Viacom
Acquisition, Cable Sub was renamed TCI Pacific Communications, Inc.
(continued)
I-44
<PAGE> 47
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 8,902 8,963
Bank credit facilities (b) 4,509 4,706
Commercial paper 713 638
Convertible notes (c) 40 43
Other debt 24 --
------------ ------------
$ 14,188 14,350
============ ============
</TABLE>
(a) During the nine months ended September 30, 1997, TCI Group
purchased in the open market certain notes payable which had
an aggregate principal balance of $190 million and fixed
interest rates ranging from 8.75% to 10.13% (the "1997
Purchases"). In connection with the 1997 Purchases, TCI Group
recognized a loss on early extinguishment of debt of $11
million. Such loss related to prepayment penalties amounting
to $7 million and the retirement of deferred loan costs.
During the nine months ended September 30, 1996, TCI Group
purchased in the open market certain notes payable which had
an aggregate principle balance of $809 million and fixed
interest rates ranging from 8.67% to 10.44% (the "1996
Purchases"). In connection with the 1996 Purchases, TCI Group
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) During the nine months ended September 30, 1996, certain
subsidiaries of TCI Group 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 Group recognized a
loss on early extinguishment of debt of $11 million related to
the retirement of deferred loan costs.
At September 30, 1997, subsidiaries of TCI Group had
approximately $1.8 billion in unused lines of credit,
excluding amounts related to lines of credit which provide
availability to support commercial paper.
(continued)
I-45
<PAGE> 48
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) The convertible notes, which are stated net of unamortized
discount of $166 million and $178 million at September 30,
1997 and December 31, 1996, respectively, mature on December
18, 2021. The notes require (so long as conversion of the
notes has not occurred) an annual interest payment through
2003 equal to 1.85% of the face amount of the notes. At
September 30, 1997, the notes were convertible, at the option
of the holders, into an aggregate of 24,177,475 shares of
Series A TCI Group Stock, 12,952,093 shares of Series A
Liberty Group Stock and 10,387,182 shares of Series A TCI
Ventures Group Stock.
The bank credit facilities and various other debt instruments
attributable to TCI Group 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.
As security for borrowings under one of TCI Group's bank credit
facilities, TCI Group has pledged 116,853,195 shares of Series A TCI
Group Stock held by a subsidiary of TCI Group.
The fair value of the debt attributable to TCI Group is estimated based
on the quoted market prices for the same or similar issues or on the
current rates offered to TCI Group for debt of the same remaining
maturities. At September 30, 1997, the fair value of TCI Group's debt
was $14,592 million, as compared to a carrying value of $14,188 million
on such date.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various Interest Rate Swaps
pursuant to which it (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.1% to 9.3% and receives variable interest
rates on notional amounts of $410 million at September 30, 1997 and
(ii) pays variable interest rates (the "Variable Rate Agreements") and
receives fixed interest rates ranging from 4.8% to 9.7% on notional
amounts of $2,400 million at September 30, 1997. During the nine months
ended September 30, 1997 and 1996, TCI Group's net payments pursuant to
the Fixed Rate Agreements were less than $1 million and $3 million,
respectively; and TCI Group's net receipts pursuant to the Variable
Rate Agreements were $1 million and $11 million, respectively.
(continued)
I-46
<PAGE> 49
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest rate Notional Expiration Interest rate Notional
date to be paid amount date to be received amount
---------- ------------- -------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
October 1997 7.1%-9.3% $ 180 September 1998 4.8%-5.4% $ 450
December 1997 8.7% 230 April 1999 7.4% 50
------- September 1999 6.4% 350
$ 410 February 2000 5.8%-6.6% 300
======= March 2000 5.8%-6.0% 675
September 2000 5.1% 75
March 2027 9.7% 300
December 2036 9.7% 200
---------
$ 2,400
=========
</TABLE>
TCI Group 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, TCI
Group does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the Interest Rate Swaps is the estimated amount that
TCI Group would pay or receive to terminate the agreements at September
30, 1997, taking into consideration current interest rates and the
current creditworthiness of the counterparties. At September 30, 1997,
TCI Group would be required to pay an estimated $2 million to terminate
the Fixed Rate Agreements and an estimated $8 million to terminate the
Variable Rate Agreements.
In addition, during the third quarter of 1997, TCI Group entered into
an Interest Rate Swap pursuant to which it pays a variable rate based
on the LIBOR rate (6.1% at September 30, 1997) and receives a variable
rate based on the Constant Maturity Treasury Index (6.4% at September
30, 1997) on a notional amount of $400 million. As of September 30,
1997, no payments or receipts had been made pursuant to such agreement.
At September 30, 1997, TCI Group would be required to pay an estimated
$2 million to terminate such agreement.
Certain subsidiaries attributed to TCI Group are required to maintain
unused availability under bank credit facilities to the extent of
outstanding commercial paper. Also, certain of TCI Group's subsidiaries
pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed
portion of the total amount available for borrowings under bank credit
facilities.
(continued)
I-47
<PAGE> 50
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
In 1996 and 1997, TCI Group, through certain subsidiary trusts, (the
"Trusts"), issued preferred securities 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>
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 TCI Group. 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 combined balance sheet captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued on the Trust Preferred
Securities aggregated $96 million and $47 million for the nine months
ended September 30, 1997 and 1996, respectively, and are included in
minority interests in earnings of consolidated subsidiaries in the
accompanying combined financial statements.
(continued)
I-48
<PAGE> 51
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Combined Deficit
General
The rights of holders of the TCI Group Stock upon liquidation of TCI
are based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock, Liberty Group Stock and the TCI
Ventures Group Stock.
In June 1997, TCI Group exchanged (the "Exchange") 30,545,864 shares of
Series A TCI Group Stock ("TCOMA") for the same number of shares of
Series B TCI Group Stock owned by the estate (the "Estate") of the
former Chairman of the Board of Directors of TCI. Subsequent to the
Exchange, the Estate sold (the "Sale") the shares of TCOMA received in
the Exchange, together with approximately 1.5 million shares of TCOMA
that the Estate previously owned (the "Option Shares"), to two
investment banking firms (the "Investment Bankers") for approximately
$530 million (the "Sale Price"). Subsequent to the Sale, TCI Group
entered into an agreement with the Investment Bankers whereby TCI Group
has the option, but not the obligation, to purchase the Option Shares
at any time within two years (the "Option Period") from the date of the
Sale. During the Option Period, TCI Group is to settle quarterly any
increase or decrease in the market value of the Option Shares. If the
market value of the Option Shares exceeds the Investment Bankers' cost,
Option Shares with a fair value equal to the difference between the
market value and cost will be segregated from the other Option Shares.
If the market value of the Option Shares is less than the Investment
Bankers' cost, the Company, at its option, will settle such difference
with shares of TCOMA or, subject to certain conditions, with cash or
letters of credit. In addition, the Company is required to pay the
Investment Bankers a quarterly fee equal to the LIBOR rate plus 1% on
the Sale Price. Due to TCI Group's ability to settle quarterly price
fluctuations with shares of TCOMA, TCI Group records all amounts
received (paid) under this arrangement as increases (decreases) to
equity. In connection with the Exchange Offers, the Investment Bankers
exchanged 7,461,019 shares of TCOMA for the same number of shares of
Series A TCI Ventures Group Stock. At September 30, 1997, the market
value of the Options Shares exceeded the Investment Bankers' cost by
$113 million.
Stock Options and Stock Appreciation Rights
Estimates of compensation relating to restricted stock awards, options
and/or stock appreciation rights ("SARs") granted to certain key
employees of TCI Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon
the market value of Series A TCI Group Stock, Series A Liberty Group
Stock and Series A TCI Ventures Group Stock and, ultimately, on the
final determination of market value when the rights are exercised or
the restricted shares are vested.
(continued)
I-49
<PAGE> 52
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(10) Transactions with Liberty Media Group, TCI Ventures Group and Other
Related Parties
The components of due to (from) related parties are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
amounts in millions
<S> <C> <C>
Notes receivable from Liberty Media Group, including
accrued interest (a) $ (438) --
TINTA Note Payable (b) 27 177
Intercompany account (c) (110) (42)
-------------- ------------
$ (521) 135
============== ============
</TABLE>
--------------------
(a) Amounts outstanding under the notes receivable from the Liberty
Media Group bear interest at varying rates ranging from 6.5% to
12.5%. Principal maturities are as follows: 1997 - $308 million,
1998 - $81 million and 1999 - $41 million. During the nine
months ended September 30, 1997, interest income related to the
notes receivable from Liberty Media Group aggregated
approximately $7.2 million.
(b) Amounts outstanding under TCI's note payable to TINTA (the
"TINTA Note Payable") bear interest at variable rates based on
TCI's weighted average cost of bank borrowings of similar
maturities (6.4% at September 30, 1997). Principal and interest
is due and payable as mutually agreed from time to time by TCI
and TINTA. During the nine months ended September 30, 1997 and
1996, interest expense related to the TINTA Note Payable
aggregated $4.3 million and $10.8 million, respectively.
(c) 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. In connection with the TCI Ventures
Exchange, the September 10, 1997 balance of the intercompany
account between the TCI Group and TCI Ventures Group was
reclassified to "Combined Equity."
(continued)
I-50
<PAGE> 53
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Ventures Group is expected to require additional advances from TCI
Group for some period of time. To satisfy this need, TCI Group has
provided a revolving loan facility (the "Credit Facility") to TCI
Ventures Group for a five-year period commencing on September 10, 1997.
Such facility permits aggregate borrowings at any one time outstanding
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 Revolving Credit Facility is
payable by TCI Ventures Group to TCI Group on a quarterly basis. The
maximum amount of borrowings permitted under the Credit Facility will
be reduced on a dollar-for-dollar basis by up to $300 million if and to
the extent that the aggregate amount of any additional capital that TCI
Ventures Group is required to contribute to certain specified
partnerships subsequent to the September 10, 1997 consummation of the
Exchange Offers is less than $300 million. No borrowings were
outstanding pursuant to the Credit Facility at September 30, 1997.
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group and TCI Ventures Group at rates set at the
beginning of the year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs Liberty Media Group and
TCI Ventures Group would incur for comparable services on a stand-alone
basis. During the nine months ended September 30, 1997 and 1996,
Liberty Media Group was allocated $1 million and $2 million,
respectively, and TCI Ventures Group was allocated $7 million and $6
million, respectively, in corporate general and administrative costs by
TCI Group.
Management of TCI has determined that TCI general corporate expenses
should be allocated to Liberty Media Group and TCI Ventures Group based
on the amount of time TCI corporate employees (e.g. legal, corporate,
payroll, etc.) expend on Liberty Media Group and TCI Ventures Group
matters. TCI management evaluated several alternative allocation
methods including assets, revenue, operating income, and employees.
Management did not believe that any of these methods would reflect an
appropriate allocation of corporate expenses given the diverse nature
of TCI's operating subsidiaries, the relative maturity of certain of
the operating subsidiaries, and the way in which corporate resources
are utilized.
Prior to July 1, 1997, TCI Group had a 50.1% partnership interest in
QE+Ltd. ("QE+"), which distributes STARZ!, a first-run movie premium
programming service launched in 1994. Entities attributed to Liberty
Media Group held the remaining 49.9% partnership interest. Also prior
to July 1, 1997, Encore Media Corporation ("Encore") (90% owned by
Liberty Media Group) earned management fees from QE+ equal to 20% of
managed costs, as defined. In addition, Liberty Media Group earned a
"Content Fee" for certain services provided to QE+ equal to 4% of the
gross revenue of QE+. Such Content Fees aggregated $4 million and $3
million for the nine months ended September 30, 1997 and 1996,
respectively.
(continued)
I-51
<PAGE> 54
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In July 1997, Liberty Media Group, TCI and John J. Sie, Chairman and
Chief Executive Officer of Encore and JJS Communications, Inc. ("JJS"),
a corporation wholly owned by Mr. Sie, entered into a series of
transactions pursuant to which the businesses of Encore and STARZ! were
contributed to a newly formed limited liability company ("Encore Media
Group"). Prior to the formation of Encore Media Group, JJS owned 10% of
Encore, which in connection with these transactions was exchanged for
Liberty Group Stock. Upon consummation of the transactions, Liberty
Media Group owns 80% of Encore Media Group and TCI Group owns 20%.
Liberty Media Group received its 80% ownership interest in Encore Media
Group in exchange for the contribution of its interests in QE+ and
Encore, the issuance of a $307 million note payable due on or before
December 29, 1997 (the "Note Payable") to TCI Group, the cancellation
and forgiveness of amounts due for Content Fees and the termination of
an option to increase its ownership interest in QE+. TCI Group received
the remaining 20% interest in Encore Media Group and the aforementioned
consideration from Liberty Media Group in exchange for TCI Group's
ownership interest in QE+ and certain special capital contributions
made by TCI Group to QE+. It is anticipated that Encore Media Group
will borrow $400 million (the "Encore Loan Proceeds") by December 29,
1997 and distribute the Encore Loan Proceeds to Liberty Media Group and
TCI Group in proportion to their ownership interests in Encore Media
Group. In addition, TCI Group has entered into an affiliation agreement
(the "Encore Media Affiliation Agreement") with a subsidiary of Encore
Media Group pursuant to which TCI Group will pay fixed monthly amounts
through 2021 in exchange for unlimited access to substantially all of
the existing Encore and STARZ! services. The fixed annual amounts
increase annually from $270 million in 1998 to $360 million in 2004,
and will increase with inflation thereafter. Effective as of the July
1, 1997 consummation date of the aforementioned transactions, TCI Group
ceased to include QE+ in its combined financial statements, and began
to account for its investment in Encore Media Group using the equity
method of accounting.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
("DMX"). Following such merger (the "DMX Merger"), TCI owned 89.6% of
the common equity and 98.7% of the voting power of TCI Music.
Simultaneously with the DMX Merger, substantially all of TCI's
ownership interest in TCI Music was transferred from the TCI Group to
the Liberty Media Group in exchange for an $80 million promissory note
(the "Music Note") and an agreement to reimburse TCI for any amounts
TCI pays pursuant to its contingent obligation to purchase 14,896,648
shares (6,812,393 of which are owned by subsidiaries of TCI) of TCI
Music common stock at a price of $8.00 per share. The Music Note may
be reduced by the payment of cash or the issuance by TCI of shares of
Liberty Media Group Common Stock for the benefit of entities included
within the TCI Group. Additionally, Liberty Media Group may elect to
pay $50,000,000 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's investment in TCI Music, to be
determined at July 11, 2002.
(continued)
I-52
<PAGE> 55
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to an agreement between TCI Music and the TCI Group, certain
entities within the TCI Group are required to deliver to TCI Music
monthly revenue payments aggregating $18 million annually (adjusted
annually for inflation) through 2017. In addition, the TCI Group
purchases certain audio programming from TCI Music pursuant to a
ten-year affiliation agreement. During the nine months ended September
30, 1997, the aggregate amount paid by the TCI Group to TCI Music
pursuant to such arrangements was $7 million. Such amount is included
in operating costs and expenses in the accompanying combined statements
of operations.
In connection with the TCI Ventures Group's sale of certain assets (the
"SUMMITrak Assets"), TCI Group entered into a commitment to purchase
billing services from the buyer of the SUMMITrak Assets. The TCI
Ventures Group has reflected the $47 million excess of the cash
received over the book value of the SUMMITrak Assets as an increase to
"Combined Equity." TCI Group, in turn, has recorded an offsetting
decrease to "Combined Equity" and a $47 million deferred gain to be
amortized over the expected 15-year life of the related billing
services commitment. See note 12.
Entities included in TCI Group lease satellite transponder facilities
from NDTC. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the nine months ended September
30, 1997 and 1996, aggregated $18 million. No such expenses were
incurred by TCI Group in 1996.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute programming to cable television operators (including TCI
Group) and others. Charges to TCI Group, which are based upon customary
rates charged to others, aggregated $105 million and $81 million for
the nine months ended September 30, 1997 and 1996, respectively.
TCI Group manages certain treasury activities for Liberty Media Group
and TCI Ventures Group on a centralized basis. Cash receipts of certain
businesses attributed to Liberty Media Group and TCI Ventures Group are
remitted to TCI Group and certain cash disbursements of Liberty Media
Group and TCI Ventures Group are funded by TCI Group on a daily basis.
Such cash activities are included in borrowings from or loans to TCI
Group or, if determined by the Board, as an equity contribution to be
reflected as an Inter-Group Interest to Liberty Media Group or TCI
Ventures Group.
The Board could determine from time to time that debt of TCI Group not
incurred by entities attributed to Liberty Media Group or TCI Ventures
Group or preferred stock and the proceeds thereof should be
specifically attributed to and reflected on the combined financial
statements of Liberty Media Group or TCI Ventures Group to the extent
that the debt is incurred or the preferred stock is issued for the
benefit of Liberty Media Group or TCI Ventures Group.
(continued)
I-53
<PAGE> 56
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the Liberty Distribution and TCI Ventures Exchange, all
financial impacts of issuances of additional shares of TCI Group Stock
are attributed entirely to TCI Group, and all financial impacts of
issuances of additional shares of Liberty Group Stock or TCI Ventures
Group Stock, the proceeds of which are attributed to Liberty Media
Group or TCI Ventures Group, are reflected entirely in the combined
financial statements of Liberty Media Group or TCI Ventures Group.
Financial impacts of dividends or other distributions on, and purchases
of, TCI Group Stock are attributed entirely to TCI Group, and financial
impacts of dividends or other distributions on Liberty Group Stock or
TCI Ventures Group Stock are attributed entirely to Liberty Media Group
or TCI Ventures Group. Financial impacts of repurchases of Liberty
Group Stock or TCI Ventures Group Stock, the consideration for which is
charged to Liberty Media Group or TCI Ventures Group, are reflected
entirely in the combined financial statements of Liberty Media Group or
TCI Ventures Group, and the financial impacts of repurchases of Liberty
Group Stock or TCI Ventures Group Stock the consideration for which is
charged to TCI Group, are attributed entirely to TCI Group.
Borrowings from or loans to Liberty Media Group or TCI Ventures Group
bear interest at such rates and have repayment schedules and other
terms as are established by the Board. The Board expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative
financing sources.
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, TCI Group was responsible to TCI for its 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 TCI Group to the
extent that the income tax attributes generated by TCI Group and its
subsidiaries were utilized by TCI to reduce its consolidated income tax
liabilities (computed as if TCI were not liable for the alternative
minimum tax). The tax liabilities and benefits of such entities so
determined are charged or credited to an intercompany account between
TCI and TCI 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)
I-54
<PAGE> 57
"TCI 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 TCI Group,
Liberty Media Group and TCI Ventures Group. Effective for periods on
and after the Effective Date, federal income taxes will be 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
will be made such that each Group will be 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 would be inventoried and tracked for
ultimate credit to or charge against each Group. Similarly, in each
taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were
subject to regular tax, would be inventoried and tracked for payment to
or payment by each Group in years that TCI utilizes the alternative
minimum tax credit associated with such taxable period. The Group
generating the utilized tax benefits would receive a cash payment only
if, and when, the unutilized taxable losses of the other Group are
actually utilized. If the unutilized taxable losses expire without ever
being utilized, the Group generating the utilized tax benefits will
never receive payment for such benefits. Pursuant to the New Tax
Sharing Agreement, state and local income taxes are calculated on a
separate return basis for each Group (applying provisions of state and
local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction
or credit resulting from certain specified transactions that are
consummated after the Effective Date pursuant to a letter of intent or
agreement that was entered into prior to the Effective Date will be
shared and allocated pursuant to the terms of the Old Tax Sharing
Agreement, as amended.
In connection with the creation of TCI Ventures Group, it was
determined that the net amount of the balance of each TCI Group
intercompany account under the Old Tax Sharing Agreement that is
attributable to entities included in TCI Ventures Group for the period
beginning July 1, 1995 and ending on September 10, 1997 (the
consummation date of the TCI Ventures Exchange) will be reflected as an
adjustment of TCI Group's combined equity. Tax liabilities and
benefits, as determined under the Old Tax Sharing Agreement, that are
generated by the entities comprising the TCI Ventures Group for the
period beginning on September 10, 1997 and ending on September 30, 1997
will be credited or debited to an intercompany account between the TCI
Group and the Ventures Group in accordance with the Old Tax Sharing
Agreement.
(continued)
I-55
<PAGE> 58
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) Transactions with Officers and Directors
On March 4, 1997, an executive officer and director of TCI received an
advance from a wholly-owned subsidiary of TCI Group in the amount of
$5,787,505. On March 5, 1997, such executive officer and director
received a second advance from a wholly-owned subsidiary of TCI Group
in the amount of $5,813,755. 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. Principal
outstanding on the note is due March 31, 1999 and interest is payable
annually on March 1 of each year. The loan is unsecured.
On July 24, 1997, an executive officer who is also a director of TCI
acquired from TCI an aggregate of 7,296,324 shares of Series B TCI
Group Stock and 2,278,125 shares of Series B Liberty Group Stock, in
exchange for a like number of shares of Series A TCI Group Stock and
Series A Liberty Group Stock, respectively, held by such executive
officer and director.
On July 24, 1997, the Company repurchased 146,625 shares of Series A
Liberty Group Stock from the spouse of an executive officer who is also
a director of the Company at an aggregate cost of approximately $4
million.
On June 10, 1997 (the IP Phase I Closing Date"), TCI issued 139,513
shares of Series B TCI Group Stock (the "IP I Shares") to the IP Series
B Trust I ("Trust"). An executive officer who is also a director of TCI
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, pursuant to which TCI
acquired on the IP Phase I Closing Date (a) a 1.103% limited
partnership interest in InterMedia Partners, a California limited
partnership, (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 $5,848,024.
On August 5, 1997 (the "IP Phase II Closing Date") TCI issued 2,405,942
shares of Series B TCI Group Stock (the "IP II Shares") to the IP
Series B Trust II ("Trust II"). An executive officer who is also a
director of TCI 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, pursuant to which TCI
acquired on the IP Phase II Closing Date a 99.997% limited partnership
interest in InterMedia Capital Management IV, L.P. in exchange for
total consideration of the IP II Shares and cash and assumption of
liabilities in an aggregate of $15,450,976.
In connection with the two Partnership Interest Purchase Agreements, a
director of TCI received a consulting fee in the amount of $400,000 in
cash and 31,030 shares of Series B TCI Group Stock and the son of a
director of TCI received an advisory fee in the amount of 36,364 shares
of Series B TCI Group Stock.
(continued)
I-56
<PAGE> 59
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(12) Commitments and Contingencies
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $183 million at September 30, 1997. With respect to TCI
Group's guarantees of $166 million of such obligations, TCI Group has
been indemnified for any loss, claim or liability that TCI Group may
incur, by reason of such guarantees. Although there can be no
assurance, management of TCI Group 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 TCI Group.
As described in note 10, the TCI Group has agreed to make fixed
monthly payments through 2021 to the Liberty Media Group pursuant to
the Encore Media Affiliation Agreement.
During the third quarter of 1997, TCI Group committed to purchase
billing services from an unaffiliated third party pursuant to three
successive five year agreements. Pursuant to such arrangement, TCI
Group is obligated 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.
Pursuant to certain agreements between TCI and TCI Music, the TCI Group
is obligated to make minimum revenue and license fee payments to TCI
Music aggregating approximately $445 million through 2017. Such minimum
payments are subject to inflation and other adjustments pursuant to the
terms of the underlying agreements.
Certain key employees of TCI Group hold restricted stock awards,
options and options with tandem SARs to acquire shares of certain
subsidiaries' common stock. Estimates of the compensation related to
the restricted stock awards and options and/or SARs have been recorded
in the accompanying consolidated financial statement, but are subject
to future adjustment based upon the market value of the respective
common stock and, ultimately, on the final market value when the rights
are exercised.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible TCI 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.
I-57
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with TCI Group's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Tele-Communications, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996. The following discussion focuses
on material changes in trends, risks and uncertainties affecting TCI Group's
results of operations and financial condition. Reference should also be made to
TCI Group's combined financial statements included herein.
(1) Material changes in financial condition:
On August 3, 1995, the TCI stockholders authorized the Board to issue
the Liberty Group Stock. Additionally, stockholders of TCI approved the
redesignation of the previously authorized Class A and Class B common stock of
TCI into Series A and Series B TCI Group Stock. On August 10, 1995, TCI
distributed, in the form of a dividend, one share of Liberty Group Stock for
each four shares of TCI Group Stock owned. Such distribution represented one
hundred percent of the equity value attributable to Liberty Media Group.
Upon the September 10, 1997 consummation of the TCI Ventures Exchange,
188,661,300 shares of Series A TCI Group Stock and 16,266,400 shares of Series B
TCI Group Stock were exchanged for an equivalent number of shares of Series A
TCI Ventures Group Stock and Series B TCI Ventures Group Stock, respectively.
The aggregate number of shares of TCI Ventures Group Stock issued in the TCI
Ventures Exchange was intended to represent 100% of the common stockholders'
equity value of the Company attributable to the TCI Ventures Group. For
additional information concerning the TCI Ventures Exchange and the TCI Ventures
Group Stock, see note 1 to the accompanying combined financial statements.
As of September 30, 1997, the TCI Group Stock reflects the separate
performance of TCI Group, which is primarily comprised of TCI's domestic cable
and communications business. For additional information concerning the TCI Group
Stock, see note 1 to the accompanying combined financial statements. For
information concerning transactions among TCI Group, Liberty Media Group and TCI
Ventures Group, see note 10 to the accompanying combined financial statements.
During March 1997, TCI Group, through special purpose entities formed
as Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial paper
and repay certain other indebtedness.
In January 1997, TCI Group acquired the 50% ownership interest in TKR
Cable that TCI Group did not previously own for aggregate consideration of
approximately $970 million. TCI Group issued approximately 16 million shares of
TCI Group 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.
(continued)
I-58
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary. The merger was valued at approximately $731
million. TCI exchanged 47.2 million shares of Series A TCI Group Stock for
shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group
Stock and 6.7 million shares of Liberty Group Stock. Immediately following the
merger, Liberty Media Group purchased from TCI Group the 6.7 million shares of
Liberty Group Stock that were acquired in such transaction for $168 million in
cash.
In June 1997, TCI Group entered into an agreement with Cablevision
pursuant to which TCI Group agreed to contribute certain of its cable television
systems serving approximately 820,000 basic customers to Cablevision in exchange
for approximately 12.2 million newly issued Cablevision Class A shares. Such
shares represent approximately 33% of Cablevision's total outstanding shares.
Cablevision will also assume approximately $669 million of TCI Group's debt. The
transaction is subject to, among other matters, Cablevision shareholder and
regulatory approvals. There is no assurance that the transaction will be
consummated.
Including the Cablevision transaction described above, TCI Group has
signed agreements or letters of intent to contribute, within the next twelve
months, certain cable systems serving approximately 3 million basic customers to
various joint ventures. Such anticipated transactions, if consummated as
currently intended, would result in estimated reductions in debt and annual
revenue of approximately $4 billion and $1 billion, respectively. Such
transactions are subject to, among other matters, regulatory approval.
Accordingly, there is no assurance that any of such transactions will be
consummated.
On July 31, 1996, TCI Group consummated the Viacom Acquisition whereby
TCI Group acquired all of the common stock of Cable Sub which owned Viacom's
cable systems and related assets. The transaction was structured as a tax-free
reorganization in which Cable Sub initially transferred all of its non-cable
assets, as well as all of its liabilities other than current liabilities, to New
Viacom Sub. Cable Sub also transferred to New Viacom Sub the Loan Proceeds of a
$1.7 billion loan facility. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds. For additional discussion of the Viacom Acquisition, see note 6
to the accompanying TCI Group combined financial statements.
During the nine months ended September 30, 1997 and 1996, TCI Group
purchased in the open market certain notes payable which had an aggregate
principle balance of $190 million and $809 million, respectively. In connection
with such purchases, TCI Group recognized losses on early extinguishment of debt
of $11 million and $62 million, respectively. Such losses related to prepayment
penalties and the retirement of deferred loan costs.
Also, during the nine months ended September 30, 1996, certain
subsidiaries of TCI Group 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 Group recognized a loss on early
extinguishment of debt of $11 million related to the retirement of deferred loan
costs.
(continued)
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<PAGE> 62
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
At September 30, 1997, TCI Group had approximately $1.8 billion of
availability in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to the subsidiaries' continuing compliance with the restrictive
covenants after giving effect to such additional borrowings. Such restrictive
covenants 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. See note 7 to the accompanying combined
financial statements for additional information regarding the material terms of
the lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and stock compensation)
($2,035 million and $1,498 million for the nine months ended September 30, 1997
and 1996, respectively) to interest expense ($843 million and $751 million for
the nine months ended September 30, 1997 and 1996, respectively), is determined
by reference to the combined statements of operations. TCI Group's interest
coverage ratio was 241% and 199% for the nine months ended September 30, 1997
and 1996, respectively. Management of TCI Group believes that the foregoing
interest coverage ratio is adequate in light of the relative predictability of
its cable television operations and interest expense, 48% of which results from
fixed rate indebtedness. However, TCI Group's current intent is to reduce its
outstanding indebtedness such that its interest coverage ratio could be
increased. There is no assurance that TCI Group will be able to achieve such
objective. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($1,003 million and $625 million
for the nine months ended September 30, 1997 and 1996, respectively) generally
reflects net cash from the operations of TCI Group available for TCI Group's
liquidity needs after taking into consideration the aforementioned additional
substantial costs of doing business not reflected in Operating Cash Flow. Prior
to 1997, amounts expended by TCI Group for its investing activities exceeded net
cash provided by operating activities. TCI Group has reevaluated its capital
expenditure strategy and currently anticipates that it will expend significantly
less for property and equipment in 1997 than it did in 1996. In this regard, the
amount of capital expended by TCI Group for property and equipment was $273
million during the nine months ended September 30, 1997, as compared to $1,384
million during the corresponding period in 1996. TCI Group currently estimates
that it will spend between $450 million and $500 million for capital
expenditures during 1997. To the extent that net cash provided by operating
activities exceeds net cash used in investing activities in 1997, TCI Group
currently anticipates that such excess cash will initially be used to reduce
outstanding debt.
(continued)
I-60
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
In the event TCI Group is unable to achieve such objectives, management
believes that net cash provided by operating activities, the ability of TCI
Group to obtain additional financing (including the available lines of credit
and access to public debt markets), issuances and sales of TCI's equity or
equity of its subsidiaries, and proceeds from disposition of assets will provide
adequate sources of short-term and long-term liquidity in the future. See TCI
Group's combined statements of cash flows included in the accompanying combined
financial statements.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $183
million at September 30, 1997. With respect to TCI Group's guarantees of $166
million of such obligations, TCI Group has been indemnified for any loss, claim
or liability that TCI Group may incur, by reason of such guarantees. Although
there can be no assurance, management of TCI Group 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 TCI Group.
TCI Group has agreed to make fixed monthly payments through 2021 to
Liberty Media Group pursuant to the Encore Media Affiliation Agreement. The
fixed annual amounts increase annually from $270 million in 1998 to $360 million
in 2004, and will increase with inflation thereafter.
During the third quarter of 1997, TCI Group committed to purchase
billing services from an unaffiliated third party pursuant to three successive
five year agreements. Pursuant to such arrangement, TCI Group is obligated 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.
Pursuant to certain agreements between TCI and TCI Music, the TCI Group
is obligated to make minimum revenue and license fee payments to TCI Music
aggregating approximately $445 million through 2017. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
TCI Group's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by TCI Group),
through net cash provided by their own operating activities and in certain
circumstances through required capital contributions from their partners.
(continued)
I-61
<PAGE> 64
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various Interest Rate Swaps. Pursuant
to the Interest Rate Swaps, TCI Group (i) pays fixed interest rates ranging from
7.1% to 9.3% and receives variable interest rates on notional amounts of $410
million at September 30, 1997 and (ii) pays variable interest rates and receives
fixed interest rates ranging from 4.8% to 9.7% on notional amounts of $2,400
million at September 30, 1997. During the nine months ended September 30, 1997
and 1996, TCI Group's net payments pursuant to the Fixed Rate Agreements were
less than $1 million and $3 million, respectively; and TCI Group's net receipts
pursuant to the Variable Rate Agreements were $1 million and $11 million,
respectively. TCI Group 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, TCI Group does not anticipate that
it will incur any material credit losses because it does not anticipate
nonperformance by the counterparties. See note 7 to the accompanying combined
financial statements for additional information regarding Interest Rate Swaps.
In addition, on September 11, 1997 TCI Group entered into an Interest
Rate Swap pursuant to which it pays a variable rate based on the LIBOR rate
(6.1% at September 30, 1997) and receives a variable rate based on the Constant
Maturity Treasury Index (6.4% at September 30, 1997) on a notional amount of
$400 million. As of September 30, 1997, no payments or receipt had been made
pursuant to such agreement. At September 30, 1997, TCI Group would be required
to pay an estimated $2 million to terminate such agreement.
At September 30, 1997, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $6,747 million (or 48%) of
fixed-rate debt and $7,441 million (or 52%) of variable-rate debt. Accordingly,
in an environment of rising interest rates, TCI Group could experience an
increase in its interest expense.
In June 1997, TCI Group exchanged 30,545,864 shares of TCOMA for the
same number of shares of Series B TCI Group Stock owned by the Estate of the
former Chairman of the Board of Directors of TCI. Subsequent to the Exchange,
the Estate sold the shares of TCOMA received in the Exchange, together with
approximately 1.5 million shares of TCOMA that the Estate previously owned, to
two investment banking firms for approximately $530 million. Subsequent to the
Sale, TCI Group entered into an agreement with the Investment Bankers whereby
TCI Group has the option, but not the obligation, to purchase the Option Shares
at any time within two years from the date of the Sale. During the Option
Period, TCI Group is to settle quarterly any increase or decrease in the market
value of the Option Shares. If the market value of the Option Shares exceeds the
Investment Bankers' cost, Option Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Option Shares. If the market value of the Option Shares is less than the
Investment Bankers' cost, the Company, at its option, will settle such
difference with shares of TCOMA or, subject to certain conditions, with cash or
letters of credit. In addition, TCI Group is required to pay the Investment
Bankers a quarterly fee equal to the LIBOR rate plus 1% on the Sale Price. Due
to TCI Group's ability to settle quarterly price fluctuations with shares of
TCOMA, TCI Group records all amounts received (paid) under this arrangement as
increases (decreases) to equity. In connection with the Exchange Offers, the
Investment Bankers exchanged 7,461,019 shares of TCOMA for the same number of
shares of Series A TCI Ventures Group Stock.
(continued)
I-62
<PAGE> 65
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Subsequent to September 30, 1997, pursuant to the above agreement, TCI
Group purchased 4,000,000 shares of TCOMA from one of the Investment Bankers at
an aggregate cost of $66 million in cash.
In September 1997, the Board authorized a stock repurchase program,
under which TCI may repurchase from time to time up to five percent of its TCI
Group Stock and TCI Ventures Group Stock.
(2) Material changes in results of operations:
The operation of TCI Group's cable television systems is regulated at
the federal, state and local levels. The Cable Television Consumer Protection
and Competition Act of 1992 and the Telecommunications Act of 1996
(collectively, the "Cable Acts") established rules under which TCI Group's basic
and tier service rates and its equipment and installation charges (the
"Regulated Services") are regulated if a complaint is filed or if the
appropriate franchise authority is certified. Approximately 78% of TCI Group's
basic customers were served by cable television systems that were subject to
such rate regulation.
During the nine months ended September 30, 1997, 76% of TCI Group's
revenue was derived from Regulated Services. As noted above, any increases in
rates charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit TCI Group's ability to increase its service rates.
Through December 4, 1996, TCI Group had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, TCI distributed (the "Satellite Spin-off") to the holders of
shares of 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 TCI Group's interest in
Primestar, TCI Group's business of distributing Primestar programming and two
communications satellites. As a result of the Satellite Spin-off, Satellite's
operations are no longer consolidated with those of TCI Group.
Revenue increased 4% for the three months ended September 30, 1997, as
compared to the corresponding period of 1996. Exclusive of the effects of
acquisitions, revenue from TCI Group's domestic cable customers accounted for 1%
of such increase primarily as a result of a 4% increase in basic revenue and a
7% decrease in premium revenue. TCI Group experienced a 6% increase in its
average basic rate, a 2% decrease in the number of average basic customers, a
10% increase in its average premium rate and a 16% decrease in the number of
average premium subscriptions. In addition, TCI Group's revenue increased 7% due
to acquisitions and decreased 6% due to the Satellite Spin-off. Advertising
sales and other revenue accounted for the remaining 2% increase in revenue.
(continued)
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<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Revenue increased 12% for the nine months ended September 30, 1997, as
compared to the corresponding period of 1996. Exclusive of the effects of
acquisitions, revenue from TCI Group's domestic cable customers accounted for 4%
of such increase primarily as a result of an 8% increase in basic revenue and a
4% decrease in premium revenue. TCI Group experienced a 10% increase in its
average basic rate, a 1% decrease in the number of average basic customers, a 6%
increase in its average premium rate and a 10% decrease in the number of average
premium subscriptions. In addition, TCI Group's revenue increased 11% due to
acquisitions and decreased 6% due to the Satellite Spin-off. Advertising sales
and other revenue accounted for the remaining 3% increase in revenue.
Operating Costs and Expenses
Operating expenses decreased 8% and increased 8% for the three months
and nine months ended September 30, 1997, respectively, as compared to the
corresponding periods of 1996. Exclusive of the effects of acquisitions, net of
dispositions, such expenses were relatively comparable during the 1997 and 1996
periods. TCI Group cannot determine whether and to what extent increases in the
cost of programming will affect its future operating costs. However, due to TCI
Group's obligations under the Encore Media Affiliation Agreement, it is
anticipated that TCI Group's programming costs with respect to STARZ! and Encore
will increase in 1998 and future periods. See note 10 to the accompanying
combined financial statements.
Selling, general and administrative expenses decreased 21% and 15% for
the three months and nine months ended September 30, 1997, respectively, as
compared to the corresponding periods of 1996. Exclusive of the effects of
acquisitions, net of dispositions, such expenses decreased 5% and 7%. Such
decreases are due primarily to a reduction in salaries and related payroll
expenses due to work force reductions in the fourth quarter of 1996, as well as
reduced marketing and general overhead expenses in 1997.
The change in TCI Group's depreciation and amortization expense in
1997 is the result of the net effect of increases due to acquisitions and
capital expenditures, largely offset by a decrease due to the Satellite
Spin-off.
Certain corporate general and administrative costs are charged to
Liberty Media Group and TCI Ventures Group at rates set at the beginning of the
year based on projected utilization for that year. The utilization-based charges
are set at levels that management believes to be reasonable and that would
approximate the costs Liberty Media Group and TCI Ventures Group would incur for
comparable services on a stand alone basis. During the nine months ended
September 30, 1997 and 1996, Liberty Media Group was allocated $1 million and $2
million, respectively, and TCI Ventures Group was allocated $7 million and $6
million, respectively, in corporate general and administrative costs by TCI
Group.
(continued)
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<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Management of TCI has determined that TCI general corporate expenses
should be allocated to Liberty Media Group and TCI Ventures Group based on the
amount of time TCI corporate employees (e.g. legal, corporate, payroll, etc.)
expend on Liberty Media Group and TCI Ventures Group matters. TCI management
evaluated several alternative allocation methods including assets, revenue,
operating income, and employees. Management did not believe that any of these
methods would reflect an appropriate allocation of corporate expenses given the
diverse nature of TCI's operating subsidiaries, the relative maturity of certain
of the operating subsidiaries, and the way in which corporate resources are
utilized.
TCI Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
Other Income and Expenses
Interest expense aggregated $292 million and $843 million for the three
months and nine months ended September 30, 1997, respectively, as compared to
$258 million and $751 million for the corresponding periods in 1996. Such
increases are due to the net effect of increased debt balances as a result of
the Viacom Acquisition in August 1996 partially offset by a lower weighted
average interest rate in 1997. See note 7 to the accompanying combined financial
statements.
Minority interests in earnings of consolidated subsidiaries aggregated
$42 million and $125 million for the three months and nine months ended
September 30, 1997, respectively, as compared to $34 million and $51 million for
the corresponding periods in 1996. The majority of such change is due to the
issuance of additional Trust Preferred Securities in May 1996 and March 1997 and
the accrual of dividends on preferred securities issued in August 1996 by a
subsidiary of TCI Group. See note 8 to the accompanying combined financial
statements.
During the three months ended September 30, 1997, TCI Group recognized
a $29 million loss in connection with the disposition of certain preferred
stock.
Net Loss
As a result of the above-described fluctuations in the Company's
results of operations, TCI Group's net loss (before loss of TCI Ventures Group
and preferred stock dividend requirements) of $58 million for the three months
ended September 30, 1997 changed by $29 million, as compared to TCI Group's net
loss (before loss of TCI Ventures Group and preferred stock dividend
requirements) of $87 million for the three months ended September 30, 1996, and
TCI Group's net loss (before loss of TCI Ventures Group and preferred stock
dividend requirements) of $103 million for the nine months ended September 30,
1997 changed by $194 million, as compared to TCI Group's net loss (before loss
of TCI Ventures Group and preferred stock dividend requirements) of $297 million
for the nine months ended September 30, 1996.
I-65
<PAGE> 68
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
Assets amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 191,399 317,359
Trade and other receivables, net 39,953 24,796
Prepaid program rights 108,627 32,063
Committed film inventory 120,652 20,092
Investments in affiliates, accounted for under
the equity method, and related receivables (note 4) 543,035 545,121
Investment in Time Warner, Inc. ("Time Warner")
(note 5) 2,322,541 2,016,799
Other investments, at cost, and related
receivables (note 6) 402,170 81,537
Property and equipment, at cost:
Land 39 39
Support equipment and buildings 28,133 17,756
---------- ----------
28,172 17,795
Less accumulated depreciation 12,349 7,846
---------- ----------
15,823 9,949
---------- ----------
Excess cost over acquired net assets 135,388 8,755
Less accumulated amortization 5,450 2,126
---------- ----------
129,938 6,629
---------- ----------
Other assets, at cost, net of amortization 19,963 4,607
---------- ----------
$3,894,101 3,058,952
========== ==========
</TABLE>
(continued)
I-66
<PAGE> 69
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
amounts in thousands
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable and accrued liabilities $ 61,188 25,563
Accrued stock compensation (note 9) 20,081 17,758
Program rights payable 153,463 33,700
Deferred option premium (note 5) 305,742 --
Debt (note 7) 1,343 1,620
Deferred income taxes 571,283 582,089
Other liabilities 2,128 --
---------- ----------
Total liabilities 1,115,228 660,730
---------- ----------
Minority interests in equity of consolidated
subsidiaries 78,926 1,052
Combined equity (note 8):
Combined equity 2,141,133 2,355,021
Unrealized gains on available-for-sale securities,
net of taxes 1,406 --
---------- ----------
2,142,539 2,355,021
Due to related parties (note 4) 557,408 42,149
---------- ----------
Total combined equity 2,699,947 2,397,170
---------- ----------
Commitments and contingencies (note 9)
$3,894,101 3,058,952
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
I-67
<PAGE> 70
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
amounts in thousands, except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Programming services:
Related parties (note 8) $ 58,442 24,525 105,080 81,395
Others 66,063 30,963 138,456 216,841
Net sales from electronic retailing services -- 234,321 -- 733,922
---------- ---------- ---------- ----------
124,505 289,809 243,536 1,032,158
---------- ---------- ---------- ----------
Cost of sales, operating costs and expenses:
Cost of sales -- 136,992 -- 453,483
Operating 67,221 45,418 106,650 225,303
Selling, general and administrative 28,836 59,740 66,068 217,090
Charges from related parties (note 8) 4,703 5,328 9,136 16,649
Stock compensation (notes 8 and 9) 42,898 8,988 62,938 14,699
Depreciation and amortization 5,018 10,689 6,573 42,616
---------- ---------- ---------- ----------
148,676 267,155 251,365 969,840
---------- ---------- ---------- ----------
Operating income (loss) (24,171) 22,654 (7,829) 62,318
Other income (expense):
Interest expense to related party (note 8) (7,192) -- (7,192) --
Interest expense (643) (2,326) (1,254) (14,827)
Dividend and interest income,
primarily from affiliates 14,262 7,743 33,509 12,114
Share of earnings (losses) of affiliates, net
(note 4) (7,832) 5,460 5,143 18,215
Minority interests in losses (earnings) of
consolidated subsidiaries 5,734 (3,944) (6,175) (10,301)
Gain (loss) on disposition of assets 303,659 (886) 304,240 (7,186)
Loss on early extinguishment of debt -- -- (320) --
Other, net (225) 1,021 (110) 4,803
---------- ---------- ---------- ----------
307,763 7,068 327,841 2,818
---------- ---------- ---------- ----------
Earnings before income taxes 283,592 29,722 320,012 65,136
Income tax expense (121,283) (12,057) (135,550) (28,641)
---------- ---------- ---------- ----------
Net earnings $ 162,309 17,665 184,462 36,495
========== ========== ========== ==========
Earnings per common share (note 2) $ .66 .07 .74 .15
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
I-68
<PAGE> 71
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Unrealized holding
gains on available- Due to Total
Combined for-sale securities, related combined
equity net of taxes parties equity
----------- -------------------- ------- -----------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 2,355,021 -- 42,149 2,397,170
Net earnings 184,462 -- -- 184,462
Contribution to combined equity for issuance of
Liberty Group Stock to TCI Employee Stock
Purchase Plan 2,054 -- -- 2,054
Purchase of Liberty Group Stock (186,097) -- -- (186,097)
Excess of consideration paid over carryover
basis of net assets acquired from related
party (244,307) -- -- (244,307)
Issuance of Liberty Group Stock 30,000 -- -- 30,000
Sale of programming to related parties -- -- (105,080) (105,080)
Cost allocations from related parties -- -- 9,136 9,136
Stock compensation -- -- 50,956 50,956
Intergroup tax allocation -- -- 29,168 29,168
Net cash transfers from related parties -- -- 93,749 93,749
Issuance of notes payable to related party -- -- 430,169 430,169
Interest expense to related party -- -- 7,192 7,192
Payment of stock compensation -- -- (31) (31)
Change in unrealized holding gains on
available-for-sale securities -- 1,406 -- 1,406
----------- ----------- ------- -----------
Balance at September 30, 1997 $ 2,141,133 1,406 557,408 2,699,947
=========== =========== ======= ===========
</TABLE>
See accompanying notes to combined financial statements.
I-69
<PAGE> 72
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
--------- ---------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 184,462 36,495
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 6,573 42,616
Stock compensation 62,938 14,699
Payments of stock compensation (9,690) --
Share of earnings of affiliates, net (5,143) (18,215)
Deferred income tax expense 105,111 15,814
Intergroup tax allocation 29,168 17,206
Minority interests in earnings 6,175 10,301
Loss (gain) on disposition of assets (304,240) 7,186
Loss on early extinguishment of debt 320 --
Payments of litigation settlements -- (5,135)
Payments for restructuring charges -- (590)
Noncash interest expense 7,192 4,050
Changes in operating assets and liabilities, net of acquisitions:
Change in receivables 4,032 (26,031)
Change in inventories -- 22,206
Change in prepaid expenses (4,331) (2,640)
Change in payables and accruals 2,383 748
--------- ---------
Net cash provided by operating activities 84,950 118,710
--------- ---------
Cash flows from investing activities:
Cash proceeds from dispositions 583 47,822
Cash resulting from consolidation of acquired entities 832 --
Cash paid for acquisitions -- (55,000)
Capital expended for property and equipment (1,541) (8,221)
Additional investments in and loans to affiliates and others (38,853) (21,389)
Return of capital from affiliates 18,700 1,500
Collections on loans to affiliates and others 5,897 1,566
Cash paid for cable distribution fees -- (22,983)
Other investing activities (8,469) (13,144)
--------- ---------
Net cash used in investing activities (22,851) (69,849)
--------- ---------
Cash flows from financing activities:
Borrowings of debt 27,770 238,989
Repayments of debt (29,564) (290,236)
Contribution for issuance of Liberty Group Stock 2,054 --
Purchase of Liberty Group Stock (186,097) --
Change in cash transfers to related parties (2,195) (1,872)
Contributions by minority shareholders of subsidiaries 8 314,743
Distributions to minority shareholders of subsidiaries (35) (65)
--------- ---------
Net cash provided (used) by financing activities (188,059) 261,559
--------- ---------
Net increase (decrease) in cash and cash equivalents (125,960) 310,420
Cash and cash equivalents at beginning of period 317,359 41,225
--------- ---------
Cash and cash equivalents at end of period $ 191,399 351,645
========= =========
</TABLE>
See accompanying notes to combined financial statements.
I-70
<PAGE> 73
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1997
(unaudited)
(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 Media Group, as defined below. All significant
intercompany accounts and transactions have been eliminated.
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock ("Liberty
Group Stock") which reflect the separate performance of TCI's assets which
produce and distribute programming services ("Liberty Media Group").
Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into
Tele-Communications, Inc. Series A TCI Group and Series B TCI Group common
stock ("TCI Group Stock"). Liberty Media Group's assets include 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. Liberty Media Group's assets also include
businesses engaged in electronic retailing, direct marketing, advertising
sales relating to programming services, infomercials and transaction
processing.
On August 10, 1995, TCI distributed, in the form of a dividend, one share
of Liberty Group Stock for each four shares of TCI Group Stock owned. Such
distribution (the "Distribution") represented one hundred percent of the
equity value attributable to Liberty Media Group. The issuance of Liberty
Group Stock did not result in any transfer of assets or liabilities of TCI
or any of its subsidiaries or affect the rights of holders of TCI's or any
of its subsidiaries' debt.
On August 28, 1997, the stockholders of TCI authorized the Board to issue
the Tele-Communications, Inc. Series A and Series B TCI Ventures Group
common stock ("TCI Ventures Group Stock"). The TCI Ventures Group Stock
reflects the separate performance of the TCI Ventures Group. The TCI
Ventures Group consists principally of the following assets and their
related liabilities, which prior to the issuance of the TCI Ventures Group
Stock were attributed to TCI Group: (i) TCI's 85% equity interest
(representing a 92% voting interest) in Tele-Communications International,
Inc. ("TINTA"), which is TCI's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to Liberty Media Group),
(ii) TCI's principal interests in the telephony business, (iii) TCI's 40%
equity interest (representing a 85% voting interest) in United Video
Satellite Group, Inc. ("UVSG"), (iv) TCI's 39% equity interest
(representing a 72% voting interest) in At Home Corporation ("@Home") and
(v) other assets.
(continued)
I-71
<PAGE> 74
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Prior to stockholder approval to issue the TCI Ventures Group Stock, TCI
commenced offers (the "Exchange Offers") to exchange shares of Series A TCI
Ventures Group Stock and Series B TCI Ventures Group Stock for shares of
Series A TCI Group Stock and shares of Series B TCI Group Stock,
respectively, (representing approximately 30% of the outstanding shares of
each such series) in the ratio of one share of the applicable series of TCI
Ventures Group Stock in exchange for each share of the corresponding series
of TCI Group Stock properly tendered. TCI consummated the Exchange Offers
on September 10, 1997 (the "TCI Ventures Distribution").
As of September 30, 1997, the TCI Group Stock reflects the separate
performance of TCI's subsidiaries and assets not attributed to Liberty
Media Group or TCI Ventures Group. Such subsidiaries and assets, which are
comprised primarily of TCI's domestic cable and communications unit, are
collectively referred to as "TCI Group". Collectively, Liberty Media Group,
TCI Ventures Group and TCI Group are referred to as the "Groups" and
individually are referred to as a "Group". Intercompany balances resulting
from transactions with TCI Group or TCI Ventures Group are reflected as
borrowings from or loans to the respective Group. See note 8.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to Liberty Media Group for purposes of preparing its
combined financial statements, the change in the capital structure of TCI
does not affect the ownership or the respective legal title to assets or
responsibility for liabilities of TCI or any of its subsidiaries. TCI and
its subsidiaries will each continue to be responsible for their respective
liabilities. Holders of Liberty Group Stock are holders of common stock of
TCI and continue to be subject to risks associated with an investment in
TCI and all of its businesses, assets and liabilities. The issuance of
Liberty Group Stock did not affect the rights of creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of Liberty
Media Group and the market price of shares of Liberty Group Stock. In
addition, net losses of any portion of TCI, dividends and distributions on,
or repurchases of, any series of common stock, and dividends on, or certain
repurchases of preferred stock would reduce funds of TCI legally available
for dividends on all series of common stock. Accordingly, Liberty Media
Group financial information should be read in conjunction with the TCI
consolidated financial information.
The accompanying interim combined financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for
such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These combined
financial statements should be read in conjunction with the audited
combined financial statements of Liberty Media Group for the year ended
December 31, 1996. Certain amounts have been reclassified for comparability
with the 1997 presentation.
(continued)
I-72
<PAGE> 75
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
(2) Earnings Per Common Share
Earnings attributable to Liberty Media Group stockholders per common share
was computed by dividing net earnings attributable to Liberty Media Group
Series A and Series B common stockholders by the weighted average number of
common shares of Liberty Media Group Series A and Series B common stock
outstanding during the period (245.6 million and 250.9 million for the
three months ended September 30, 1997 and 1996, respectively; and 248.0
million and 249.3 million for the nine months ended September 30, 1997 and
1996, respectively). Common stock equivalents were not included in the
computation because their inclusion would be anti-dilutive to TCI.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
No. 128"). Statement No. 128 requires the presentation of basic earnings
per share ("EPS") and, for companies with potentially dilutive securities,
such as convertible debt, options and warrants, diluted EPS. Statement No.
128 is effective for annual and interim periods ending after December 31,
1997. Liberty Media Group does not expect that Statement No. 128 will have
a material impact on Liberty Media Group's earnings per share.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $1,204,000 and $15,598,000 for the nine months
ended September 30, 1997 and 1996, respectively. Cash paid for income taxes
during the nine months ended September 30, 1997 and 1996 was $1,271,000 and
$641,000, respectively.
(continued)
I-73
<PAGE> 76
"LIBERTY MEDIA 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>
Nine months ended
September 30,
------------------------
1997 1996
--------- ---------
amounts in thousands
<S> <C> <C>
Common stock received in exchange for option
(note 5) $ 305,742 --
========= =========
Preferred stock received in exchange
for common stock and note receivable (note 6) $ 370,875 --
========= =========
Noncash acquisition of minority interest in
consolidated subsidiary (note 4):
Fair value of assets $ (29,205) --
Minority interest in equity of subsidiary (795) --
Liberty Group Stock issued 30,000 --
--------- ---------
$ -- --
========= =========
Noncash accretion of minority interest in
consolidated subsidiary (note 8) $ 2,235 --
========= =========
Cash resulting from consolidation of acquired
entities (notes 4 and 8):
Fair value of assets $(295,083) --
Net liabilities assumed 156,604 --
Debt issued to related parties 430,169 --
Deferred tax asset recorded in
acquisition (116,837) --
Allocation of excess of consideration
paid over carryover basis of net
assets acquired from related party (244,307) --
Minority interests in equity of acquired
entities 70,286 --
--------- ---------
Cash resulting from consolidation of
acquired entities $ 832 --
========= =========
Exchange of consolidated subsidiaries for note
receivable and equity investments $ -- 239,034
========= =========
</TABLE>
(continued)
I-74
<PAGE> 77
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
----------- -----------
amounts in thousands
Combined Operations
<S> <C> <C>
Revenue $ 3,804,597 2,389,221
Operating expenses (3,379,639) (2,144,087)
Depreciation and amortization (209,979) (120,824)
----------- -----------
Operating income 214,979 124,310
Interest expense (104,630) (73,710)
Other, net (128,759) (98,993)
----------- -----------
Net loss $ (18,410) (48,393)
=========== ===========
</TABLE>
The following table reflects the carrying value of Liberty Media Group's
investments, accounted for under the equity method, including related
receivables:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc.
("Discovery") $ 99,999 117,724
QVC, Inc. ("QVC") 122,496 103,855
International Cable Channels
Partnership, Ltd. ("ICCP") 10,030 9,411
Bet Holdings, Inc. ("BET") 23,764 20,225
Liberty/Fox U.S. Sports LLC
("Fox Sports") (21,580) (21,964)
Superstar/Netlink Group LLC
("Superstar/Netlink") (39,710) (37,236)
Home Shopping Network, Inc. ("HSN") 118,443 141,921
BDTV INC., BDTV II INC. and BDTV III INC
(collectively "BDTV") 227,629 199,701
Other 1,964 11,484
--------- ---------
$ 543,035 545,121
========= =========
</TABLE>
(continued)
I-75
<PAGE> 78
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Discovery $(17,725) 2,056
QVC 18,641 14,216
ICCP (2,452) (1,837)
BET 3,539 3,470
Superstar/Netlink 12,795 6,560
HSN 2,606 --
BDTV 1,843 --
Other (a) (14,104) (6,250)
-------- --------
$ 5,143 18,215
======== ========
</TABLE>
(a) Prior to July 1997, Liberty Media Group's other investments included a
49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership
which distributes STARZ!, a first-run movie premium programming
service launched in 1994. Entities attributed to TCI Group held the
remaining 50.1% partnership interest.
Encore Media Corporation ("Encore") (90% owned by Liberty Media Group)
earned management fees from QE+ equal to 20% of managed costs, as
defined. In addition, Liberty Media Group earned a "Content Fee" for
certain services provided to QE+ equal to 4% of the gross revenue of
QE+. Such Content Fees aggregated $4,266,000 and $2,644,000 for the
nine months ended September 30, 1997 and 1996, respectively.
(continued)
I-76
<PAGE> 79
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During July 1997, Liberty Media Group, TCI and John J. Sie, Chairman
and Chief Executive Officer of Encore and JJS Communications, Inc.
("JJS"), a corporation wholly owned by Mr. Sie, entered into a series
of transactions pursuant to which the businesses of Encore and STARZ!
were contributed to a newly formed limited liability company ("Encore
Media Group"). Prior to the formation of Encore Media Group, JJS owned
10% of Encore, which in connection with these transactions was
exchanged for Liberty Group Stock. Upon consummation of the
transactions, Liberty Media Group owns 80% of Encore Media Group and
TCI Group owns 20%. Liberty Media Group received its 80% ownership
interest in Encore Media Group in exchange for the contribution of its
interests in QE+ and Encore, the issuance of a $307 million note
payable due on or before December 29, 1997 (the "Note Payable") to TCI
Group, the cancellation and forgiveness of amounts due for Content
Fees and the termination of an option to increase its ownership
interest in QE+. TCI Group received the remaining 20% interest in
Encore Media Group and the aforementioned consideration from Liberty
Media Group in exchange for TCI Group's ownership interest in QE+ and
certain special capital contributions made by TCI Group to QE+. It is
anticipated that Encore Media Group will borrow $400 million (the
"Encore Loan Proceeds") by December 29, 1997 and distribute the Encore
Loan Proceeds to Liberty Media Group and TCI Group in proportion to
their respective ownership interest in Encore Media Group (see note
7). In addition, TCI Group has entered into a 25 year affiliation
agreement with Encore Media Group pursuant to which TCI Group will pay
monthly fixed amounts in exchange for unlimited access to
substantially all of the existing Encore and STARZ! services. Upon
consummation of the aforementioned transactions, the operations of
STARZ! are included in the combined financial results of Liberty Media
Group.
Certain of Liberty Media Group's affiliates are general partnerships and
any subsidiary of Liberty Media 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.
(5) 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 0.75 of a Time Warner common share for each TBS Class
A and Class B common share held, and each holder of TBS Class C preferred
stock received 0.80 of a Time Warner common share 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)
I-77
<PAGE> 80
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") 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, Liberty 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, Liberty Media Group received approximately 50.6
million shares of the TW Exchange Stock in exchange for its TBS holdings.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At September
30, 1997, such pledged portion had an aggregate fair value of approximately
$1.2 billion based upon the market value of the marketable common stock
into which it is convertible.
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant
to Time Warner of an option (the "Contract Option") to enter into a
contract with Southern Satellite Systems, Inc. ("Southern"), a wholly owned
subsidiary of Liberty Media Group which distributes the TBS SuperStation
("WTBS") signal in the United States and Canada, pursuant to which Southern
would provide Time Warner with certain uplinking and distribution services
relating to WTBS and would assist Time Warner in converting WTBS from a
superstation into a copyright paid cable programming service. Subsequent to
the TBS/Time Warner Merger, Liberty Media Group and Time Warner revised the
structure of the Contract Option. On June 24, 1997, under the new
agreement, Liberty Media Group granted Time Warner a five year option to
acquire the business of Southern through a purchase of assets. Liberty
Media Group received 6.4 million shares of TW Exchange Stock valued at $306
million in consideration for the grant. In September 1997, Time Warner
announced its intention to exercise the option. Pursuant to the option, the
consideration for the purchase of the business of Southern will be
$213,333,333, payable in a form which is mutually acceptable of cash or
Time Warner common stock together with the assumption of certain
liabilities. The transaction is expected to close on December 31, 1997. At
September 30, 1997, Liberty Media Group's investment in Time Warner,
carried at cost, had an aggregate fair value of approximately $3 billion
based upon the market value of the marketable common stock into which it is
convertible.
(continued)
I-78
<PAGE> 81
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Marketable equity securities, at fair value $ 17,675 790
Convertible debt, at cost, which approximates fair value -- 23,000
Investment in preferred stock, including premium (a) 370,842 --
Other investments, at cost, and related receivables 13,653 57,747
-------- --------
$402,170 81,537
======== ========
</TABLE>
(a) On August 1, 1997, Liberty IFE, Inc., a wholly owned subsidiary of
Liberty Media 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 $345 million in a new series of 30 year non-convertible
9% preferred stock of FKW (the "FKW Preferred Stock"). As a result of
the exchange, Liberty Media Group recognized a pre-tax gain of
approximately $304 million.
Management of Liberty Media Group estimates that the market value,
calculated utilizing 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 Media
Group's other investments aggregated $430 million and $162 million at
September 30, 1997 and December 31, 1996, respectively. No independent
external appraisals were conducted for those assets.
(7) Debt
Debt at December 31, 1996 represents borrowings by Encore pursuant to a
bank credit facility which provided for borrowings up to $50 million
through September 30, 1999. On July 7, 1997, Encore Media Group obtained a
new $625 million senior, secured facility (the "Senior Facility") in the
form of a $225 million reducing revolving line of credit and a $400
million, 364-day revolving credit facility convertible to a term loan.
Interest on the Senior Facility is tied to the bank's prime rate plus an
applicable margin or the LIBOR rate plus an applicable margin. Encore Media
Group is required to pay a commitment fee which varies based on a leverage
ratio. The credit agreement for the Senior Facility contains certain
provisions which limit Encore Media Group as to additional indebtedness,
sale of assets, liens, guarantees, and distributions. Additionally, Encore
Media Group must maintain certain specified financial ratios. The Senior
Facility serves to replace the Encore bank credit facility which was
terminated.
(continued)
I-79
<PAGE> 82
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $500 million. No borrowings were outstanding at
September 30, 1997.
(8) Combined Equity
Stock Options and Stock Appreciation Rights
Estimates of the compensation relating to options and/or stock appreciation
rights granted to employees of Liberty Media Group and members of the Board
have been recorded in the accompanying combined financial statements, but
are subject to future adjustment based upon the market value of Series A
TCI Group Stock, Series A Liberty Group Stock and Series A TCI Ventures
Group Stock (see note 1) and, ultimately, on the final determination of
market value when the rights are exercised. The payable or receivable
arising from the compensation related to the options and/or stock
appreciation rights is included in the amount due to related parties.
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are set
at levels that management believes to be reasonable and that approximate
the costs Liberty Media Group would incur for comparable services on a
stand-alone basis. During the nine months ended September 30, 1997 and
1996, Liberty Media Group was allocated $790,000 and $1,924,000,
respectively, in corporate general and administrative costs by TCI.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Ventures Group. Charges by TCI Ventures Group for such
arrangements and other related operating expenses for the nine months ended
September 30, 1997 and 1996, aggregated $8,347,000 and $9,082,000,
respectively.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute programming to cable television operators (including TCI Group)
and others (including TCI Ventures Group). Charges to TCI Group and TCI
Ventures Group are based upon customary rates charged to others.
TCI Group manages certain treasury activities for Liberty Media Group on a
centralized basis. Cash receipts of certain businesses attributed to
Liberty Media Group are remitted to TCI Group and certain cash
disbursements of Liberty Media Group are funded by TCI Group on a daily
basis. Such cash activities are included in borrowings from or loans to TCI
Group or, if determined by the Board, as an equity contribution to be
reflected as an Inter-Group Interest to Liberty Media Group.
The Board could determine from time to time that debt of TCI not incurred
by entities attributed to Liberty Media Group or preferred stock and the
proceeds thereof should be specifically attributed to and reflected in the
combined financial statements of Liberty Media Group to the extent that the
debt is incurred or the preferred stock is issued for the benefit of
Liberty Media Group.
(continued)
I-80
<PAGE> 83
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subsequent to the Distribution and the Exchange Offers, all financial
impacts of issuances of additional shares of TCI Group Stock will be
attributed entirely to TCI Group, and all financial impacts of issuances of
additional shares of Liberty Group Stock or TCI Ventures Group Stock, the
proceeds of which are attributed to Liberty Media Group or TCI Ventures
Group, will to such extent be reflected entirely in the combined financial
statements of Liberty Media Group or TCI Ventures Group. Financial impacts
of dividends or other distributions on, and purchases of, TCI Group Stock
will be attributed entirely to TCI Group, and financial impacts of
dividends or other distributions of Liberty Group Stock or TCI Ventures
Group Stock will be attributed entirely to Liberty Media Group or TCI
Ventures Group. Financial impacts of repurchases of Liberty Group Stock or
TCI Ventures Group Stock, the consideration for which is charged to Liberty
Media Group or TCI Ventures Group will be reflected entirely in the
combined financial statements of Liberty Media Group or TCI Ventures Group,
and financial impacts of repurchases of Liberty Group Stock or TCI Ventures
Group Stock the consideration for which is charged to TCI Group will be
attributed entirely to TCI Group.
Effective July 11, 1997, pursuant to an Agreement and Plan of Merger, dated
as of February 6, 1997, as amended (the "Merger Agreement"), by and among
TCI, TCI Music, Inc., a wholly-owned subsidiary of TCI ("TCI Music"), TCI
Merger Sub, a wholly-owned subsidiary of TCI Music ("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.
(continued)
I-81
<PAGE> 84
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective
as of the closing of the DMX Merger: (i) TCI Music issued to TCI (as
designee of certain of its indirect subsidiaries), 62,500,000 shares of 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 the 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 (the "Contributed Net DMX Revenue"), (iii)
TCI contributed to TCI Music certain commercial digital DMX tuners that are
not in service as of the effective date of the DMX Merger (the "Contributed
Tuners"), 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") 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"). The foregoing
transactions are collectively referred to herein as the "Contribution."
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 entitles 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
(the "Put Price"), and, payable at the election of TCI, in cash, a number
of shares of Series A TCI Group 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 "Put Period"), the price of TCI Music
Series A Common Stock does not equal or exceed $8.00 per share for a period
of at least 20 consecutive trading days.
Subsequently, TCI Music and TCI entered into an Amended and Restated
Contribution Agreement to be effective as of July 11, 1997 (the "Amended
Contribution Agreement") which provides, among other things, for TCI to
deliver, or cause certain of its subsidiaries to deliver (in lieu of TCI's
obligation to cause its affiliates to make contributions to TCI Music under
the Contribution Agreement, as described above), to TCI Music monthly
payments (adjusted annually for inflation) through 2017 (the "TCI
Payments"). Pursuant to the Amended Contribution Agreement, the TCI
Payments will represent (i) revenue of certain subsidiaries of TCI that is
attributable to the distribution and sale of the DMX service to cable
subscribers who receive the DMX service via C-Band satellite transmission
(rather than digital compression technology) (net of an amount equal to 10%
of such revenue derived from residential customers and license fees
otherwise payable to DMX pursuant to an affiliation agreement) and (ii)
compensation to TCI Music and DMX for various other rights.
(continued)
I-82
<PAGE> 85
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective with the DMX Merger, TCI beneficially owns approximately 45.7% of
the outstanding shares of the TCI Music Series A Common stock and 100% of
the outstanding shares of TCI Music Series B Common Stock (together, the
"TCI Music Common Stock"), which represents 89.6% of the equity and 98.7%
of the voting power of TCI Music. Simultaneously with the DMX Merger,
Liberty Media Group acquired the TCI Music Series B Common Stock and 2.6
million of the TCI-owned TCI Music Series A Common Stock by assuming the
obligation of the Rights Agreement and issuing an $80 million promissory
note (the "Music Note") to TCI. The Music Note may be reduced by the
payment of cash or the issuance by TCI of shares of Liberty Media Group
Common Stock for the benefit of entities included within the TCI Group.
Additionally, Liberty Media Group may elect to pay $50,000,000 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
Media Group's investment in TCI Music, to be determined at July 11, 2002.
Following the above-described transaction, Liberty Media Group holds TCI
Music Common Stock, which when combined with the TCI Music Common Stock
received by Liberty Media Group in the DMX Merger, represents 86.05% of the
equity and 98.31% of the voting power of TCI Music. Therefore, TCI Music is
included in the financial results of Liberty Media Group as of the date of
the DMX Merger.
The estimated aggregate fair value of the consideration issued to entities
not controlled by TCI (the "Unaffiliated Stockholders") in the DMX Merger
and the carryover basis of the consideration issued to entities controlled
by TCI has been allocated to excess cost as the net book values of DMX's
assets and liabilities approximate their respective fair values. The number
of shares and Rights issued is based upon DMX Common Stock ownership as of
June 30, 1997. The estimated fair value of the consideration issued to
Unaffiliated Stockholders in the DMX Merger is being accreted to the value
of $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 during the one-year period beginning on the effective
date of the DMX Merger. Such accretion is reflected as an increase in
excess cost with a corresponding increase to minority interest. Excess cost
is being amortized over ten years.
(continued)
I-83
<PAGE> 86
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Due to Related Parties
Borrowings from or loans to TCI Group and TCI Ventures Group bear interest
at such rates and have repayment schedules and other terms as are
established by the Board. The Board expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost
and time associated with alternative financing sources. The components of
"Due to related parties" are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Notes payable to TCI Group, including
accrued interest $438,246 --
Intercompany account 119,162 42,149
-------- --------
$557,408 42,149
======== ========
</TABLE>
Amounts outstanding under the notes payable to TCI Group bear interest at
varying rates from 6.5% to 12.5%. Principal maturities are as follows: 1997
- $308 million, 1998 - $81 million and 1999 - $41 million. During the nine
months ended September 30, 1997, interest expense related to the notes
payable to TCI Group aggregated approximately $7.2 million.
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.
(continued)
I-84
<PAGE> 87
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Tax Sharing Agreement
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 was
responsible to TCI for its 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 to the extent that the income tax
attributes generated by Liberty Media Group and its subsidiaries were
utilized by TCI to reduce its consolidated income tax liabilities (computed
as if TCI were not liable for the alternative minimum tax). The tax
liabilities and benefits of such entities so determined are charged or
credited to an intercompany account between TCI and Liberty Media 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.
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 TCI Group, Liberty Media
Group and TCI Ventures Group. Effective for periods on and after the
Effective Date, federal income taxes will be 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 will be made such that each
Group will be 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 would be inventoried
and tracked for ultimate credit to or charge against each Group. Similarly,
in each taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group in years that TCI utilizes the alternative minimum tax credit
associated with such taxable period. The Group generating the utilized tax
benefits would receive a cash payment only if, and when, the unutilized
taxable losses of the other Group are actually utilized. If the unutilized
taxable losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes are
calculated on a separate return basis for each Group (applying provisions
of state and local tax law and related regulations as if the Group were a
separate unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
(continued)
I-85
<PAGE> 88
"LIBERTY MEDIA 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 are consummated
after the Effective Date pursuant to a letter of intent or agreement that
was entered into prior to the Effective Date will be shared and allocated
pursuant to the terms of the Old Tax Sharing Agreement as amended.
(9) 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 September 30,
1997, these agreements require minimum payments aggregating approximately
$776 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.
Liberty Media Group leases business offices, has entered into transponder
lease agreements, and uses certain equipment under lease arrangements.
Estimates of stock compensation granted to employees of a subsidiary of
Liberty Media Group have been recorded in the accompanying combined
financial statements, but is subject to future adjustment based upon a
valuation model derived from such subsidiary's cash flow, working capital
and debt.
I-86
<PAGE> 89
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
Liberty Media Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Tele-Communications, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1996. The following
discussion focuses on material changes in trends, risks and uncertainties
affecting Liberty Media Group's results of operations and financial condition.
Reference should also be made to the Liberty Media Group combined financial
statements included herein.
(1) Material changes in financial condition:
In August 1995, TCI issued two new series of stock which reflect the
separate performance of Liberty Media Group. Liberty Media Group's assets
include 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. Liberty Media Group's assets also include businesses
engaged in electronic retailing, direct marketing, advertising sales relating to
programming services, infomercials and transaction processing. While the Liberty
Group Stock constitutes common stock of TCI, issuance of Liberty Group Stock did
not result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. For additional information concerning the Liberty Group
Stock, see note 1 to the accompanying combined financial statements. For
information concerning transactions with TCI Group and TCI Ventures Group, see
note 8 to the accompanying combined financial statements.
During the nine months ended September 30, 1997, Liberty Media Group
repurchased 611,000 shares of Series A Liberty Group Stock in open market
transactions and 146,625 shares of Series A Liberty Group Stock from the spouse
of an officer and director of TCI at an aggregate cost of $18,239,000. Such
shares are reflected as a reduction of combined equity in the accompanying
combined financial statements.
Effective July 31, 1997, TCI merged Kearns-Tribune Corporation into a
wholly-owned TCI subsidiary. The merger was valued at approximately $731
million. TCI exchanged 47.2 million shares of Series A TCI Group Stock for
shares of Kearns-Tribune Corporation which held 17.9 million shares of TCI Group
Stock and 6.7 million shares of Liberty Group Stock. Liberty Media Group
purchased from TCI Group the 6.7 million shares of Liberty Group Stock that were
acquired in such transaction for $168 million in cash.
During the third quarter of 1997, Liberty Media Group commenced a tender
offer (the "Offer") to purchase up to an aggregate of 15 million shares of
Liberty Group Stock at a price of $30 per share through October 3, 1997.
Subsequent to September 30, 1997, Liberty Media Group repurchased 14,443,323
shares of Series A Liberty Group Stock and 54,716 shares of Series B Liberty
Group Stock at an aggregate cost of approximately $435 million pursuant to the
Offer.
(continued)
I-87
<PAGE> 90
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
The TBS/Time Warner Merger was consummated on October 10, 1996 whereupon
Liberty Media Group received approximately 50.6 million shares of TW Exchange
Stock in exchange for its TBS holdings. On June 24, 1997 Liberty Media Group
granted Time Warner a five year option to acquire the business of Southern (the
"Southern Option") through a purchase of assets. Liberty Media Group received
6.4 million shares of TW Exchange Stock valued at $306 million in consideration
for the grant. In September 1997, Time Warner announced its intention to
exercise the Southern Option. Pursuant to the Southern Option, the consideration
for the purchase of the business of Southern will be $213 million, payable in a
form which is mutually acceptable of cash or Time Warner common stock, together
with the assumption of certain liabilities. See note 5 to the accompanying
combined financial statements.
Liberty Media Group's sources of funds include its available cash balances,
net cash provided by operating activities, cash distributions from affiliates,
dividend and interest payments, asset sales, availability under certain credit
facilities, and loans and/or equity contributions from TCI Group. To the extent
cash needs of Liberty Media Group exceed cash provided by Liberty Media Group,
TCI Group may transfer funds to Liberty Media Group. Conversely, to the extent
cash provided by Liberty Media Group exceeds cash needs of Liberty Media Group,
Liberty Media Group may transfer funds to TCI Group.
Encore Media Group's loan agreement contains restrictions regarding
transfers of funds to other members of Liberty Media Group in the form of loans,
advances or cash dividends. However, other subsidiaries, principally Southern
and Netlink USA's ("Netlink") wholesale C-band satellite business are not
restricted from making transfers of funds to other members of the group. The
cash provided by operating activities of Southern is a significant source of
cash available for distribution to Liberty Media Group as well as cash provided
by operating activities of Netlink's wholesale C-band satellite business.
However, Netlink's wholesale C-band satellite business, faces significant
competition from other C-band distributors as well as direct broadcast satellite
("DBS") services, which were launched in 1994. Liberty Media Group believes that
the entry of DBS will serve to decrease the size of the C-Band market in the
short and long term. During 1996, the C-Band industry decreased 4% to 2.3
million subscribers. A significant deterioration of the C-Band market could have
a material effect on Netlink's wholesale C-band satellite business and
consequently, Liberty Media Group's cash provided by operating activities. While
the decrease in the C-Band industry, as well as the exercise of the Southern
Option, could have an adverse effect on Liberty Media Group's cash provided by
operating activities, cash generated by Liberty Media Group's remaining
operating activities, distributions from affiliates, dividend and interest
payments and availability under certain credit facilities should provide
adequate cash to meet its obligations.
As of September 30, 1997, Liberty Media Group holds approximately 57
million shares of TW Exchange Stock. Holders of TW Exchange Stock are entitled
to receive dividends ratably with Time Warner common stock. It is anticipated
that Time Warner will continue to pay dividends on its common stock and
consequently Liberty Media Group will receive dividends on the TW Exchange Stock
it holds. However, there can be no assurance that such dividends will continue
to be paid.
(continued)
I-88
<PAGE> 91
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
On August 1, 1997, Liberty IFE, Inc., a wholly owned subsidiary of Liberty
Media Group which holds the Class C Stock and the Convertible Notes, contributed
its Class C Stock and Convertible Notes to FKW in exchange for the FKW
Preferred Stock. As a result of the exchange, Liberty Media Group recognized a
pre-tax gain of approximately $304 million. See note 6 to the accompanying
combined financial statements.
During July 1997, Liberty Media Group, TCI, John J. Sie and JJS, entered
into a series of transactions pursuant to which the businesses of Encore and
STARZ! were contributed to Encore Media Group. Upon completion of the
transaction, Liberty Media Group owns 80% of Encore Media Group and TCI Group
owns 20%. JJS exchanged its interest in Encore for Liberty Group Stock. Liberty
Media Group acquired its 80% ownership interest in Encore Media Group in
exchange for the contribution of its interests in QE+ and Encore, the issuance
of a $307 million note payable due on or before December 29, 1997 to TCI Group,
the cancellation and forgiveness of amounts due for Content Fees and the
termination of an option to increase its ownership interest in QE+. TCI Group
acquired the remaining 20% interest in Encore Media Group and the aforementioned
consideration from Liberty Media Group in exchange for TCI Group's ownership
interest in QE+ and certain special capital contributions made by TCI Group to
QE+. In addition, TCI Group has entered into a 25 year affiliation agreement
with Encore Media Group pursuant to which TCI Group will pay monthly fixed
amounts to Encore Media Group in exchange for unlimited access to substantially
all of the existing Encore and STARZ! movies services. Upon formation of Encore
Media Group, the operations of STARZ! are included in the combined financial
results of Liberty Media Group.
Encore Media Group obtained a new $625 million senior, secured facility
(the "Senior Facility") in the form of a $225 million reducing revolving line of
credit and a $400 million, 364-day revolving credit facility convertible to a
term loan. Encore Media Group will borrow $400 million by December 29, 1997 and
distribute it to Liberty Media Group and TCI Group in proportion to their
ownership interests in Encore Media Group. The credit agreement for the Senior
Facility contains certain provisions which limit Encore Media Group as to
additional indebtedness, sale of assets, liens, guarantees, and distributions.
Additionally, Encore Media Group must maintain certain specified financial
ratios. The Senior Facility serves to replace the Encore bank credit facility
which was terminated.
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $500 million. No borrowings were outstanding at September
30, 1997.
(continued)
I-89
<PAGE> 92
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Effective July 11, 1997, pursuant to the Merger Agreement, Merger Sub was
merged with and into DMX, with DMX as the surviving corporation. As a result of
the DMX Merger, stockholders of DMX became stockholders of TCI Music. Effective
with the DMX Merger, TCI beneficially owns approximately 45.7% of the
outstanding shares of the TCI Music Series A Common stock and 100% of the
outstanding shares of TCI Music Series B Common Stock, which represents 89.6% of
the equity and 98.7% of the voting power of TCI Music. Simultaneously with the
DMX Merger, Liberty Media Group acquired the TCI Music Series B Common Stock and
2.6 million of the TCI-owned TCI Music Series A Common Stock by assuming the
obligation of the Rights Agreement and issuing the Music Note. The Music Note
may be reduced by the payment of cash or the issuance by TCI of shares of
Liberty Media Group Common Stock for the benefit of entities included within the
TCI Group. Additionally, Liberty Media Group may elect to pay $50,000,000 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 Media
Group's investment in TCI Music, to be determined at July 11, 2002. Following
the above-described transaction, Liberty Media Group holds TCI Music Common
Stock, which when combined with the TCI Music Common Stock received by Liberty
Media Group in the DMX Merger represents 86.05% of the equity and 98.31% of the
voting power of TCI Music. Therefore, TCI Music is included in the financial
results of Liberty Media Group as of the date of the DMX Merger.
In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective as of
the closing of the DMX Merger: (i) TCI Music issued to TCI (as designee of
certain of its indirect subsidiaries), 62,500,000 shares of TCI Music Series B
Common Stock and the TCI Music Note, (ii) until December 31, 2006, certain
subsidiaries of TCI transferred to TCI Music the right to receive the
Contributed Net DMX Revenue, (iii) TCI contributed to TCI Music the Contributed
Tuners, and (iv) TCI granted to each stockholder who became a stockholder of TCI
Music pursuant to the DMX Merger, one Right. The foregoing transactions are
collectively referred to herein as the "Contribution." 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.
The estimated fair value of the consideration issued to Unaffiliated
Stockholders in the DMX Merger is being accreted to the value of $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
during the one-year period beginning on the effective date of the DMX Merger.
Such accretion is reflected as an increase in excess cost with a corresponding
increase to minority interest. See note 8 to the accompanying combined financial
statements.
Pursuant to the Amended Contribution Agreement between TCI Music and TCI,
certain entities within the TCI Group are required to deliver to TCI Music
monthly revenue payments (adjusted annually for inflation) through 2017.
(continued)
I-90
<PAGE> 93
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Liberty Media Group intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of September 30, 1997, Liberty
Media Group's future minimum obligation related to certain film licensing
agreements was $776 million. The amount of the total obligation 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.
Continued development may require additional financing and it cannot be
predicted whether Liberty Media Group will obtain such financing. If additional
financing cannot be obtained, Liberty Media Group could attempt to sell assets
but there can be no assurance that asset sales, if any, can be consummated at a
price and on terms acceptable to Liberty Media Group. Further, Liberty Media
Group and/or TCI could attempt to sell equity securities but, again, there can
be no certainty that such a sale could be accomplished on acceptable terms.
The FCC has initiated a number of rulemakings to implement various
provisions of the Telecommunications Act of 1996 (the "1996 Telecom Act"). Among
other things, the 1996 Telecom Act requires the FCC to establish rules and
implementation schedules to ensure that video programming is fully accessible to
the hearing impaired through closed captioning. On August 22, 1997, the FCC
released new rules which will require substantial closed captioning over an
eight to ten year phase-in period with only limited exemptions. As a result,
Liberty Media Group's programming interests are expected to incur significant
additional costs for closed captioning. On October 16, 1997, a number of parties
petitioned the FCC to reconsider various provisions of these rules, and such
petitions remain pending.
Netlink has entered into an agreement in principle with representatives of
the National Association of Broadcasters and of its television network affiliate
members. Netlink's wholesale C-band satellite business uplinks the signals of
broadcast television stations to C-Band packagers and marketers in the United
States and Canada. In uplinking and selling the signals of broadcast television
stations in the United States, Netlink's wholesale C-band satellite business is
subject to certain FCC regulations and Copyright Act provisions. Pursuant to
such provisions, Netlink's wholesale C-band satellite business may only
distribute the signals of network broadcast stations to "unserved households"
which are outside the Grade B contours of a primary station affiliated with such
network. The parties to the agreement will identify by zip code those geographic
areas which are "unserved" by network affiliated stations. Depending upon
finalization of the agreement and such identification, Netlink's wholesale
C-band satellite business may be required to disconnect a substantial number of
existing subscribers which would have a material adverse effect upon the
operations of the Netlink wholesale C-band business.
On August 1, 1997, the United States Copyright Office released a "Review of
the Copyright Licensing Regimes Covering Retransmission of Broadcast Signals" in
response to a request from the Chairman of the United States Senate Committee on
the Judiciary. The Copyright Office recommended a number of significant changes
in the laws regulating the copyright licensing of broadcast retransmissions
which, if adopted, would have a significant impact upon Netlink. Congressional
committees have held and scheduled hearings on such recommendations.
(continued)
I-91
<PAGE> 94
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
On October 28, 1997, the Librarian of Congress announced final rules
increasing the monthly copyright royalty fee for the secondary transmission of
superstations and broadcast stations by satellite carriers, such as Netlink, to
27 cents per subscriber for distant superstations and network stations. Such
monthly fees had been 17.5 cents for superstations and 6 cents for network
stations. The Librarian adopted the royalty fees which had been recommended by
the Copyright Arbitration Royalty Panel in a report submitted to the Librarian
on August 29, 1997. Although the Panel has recommended that the new fees be
effective as of July 1, 1997, the Librarian determined that the fees will become
effective on January 1, 1998. Consequently, the copyright fees paid by Netlink
for the retransmission of broadcast signals to home satellite dish owners will
increase significantly. The resulting increases in retail prices to subscribers
may cause a substantial decrease in the number of subscribers to Netlink
services. On October 30, 1997, the Satellite Broadcasting & Communications
Association, of which Netlink is a member, filed a Petition for Review of the
Librarian's decision with the United States Court of Appeals for the District of
Columbia Circuit.
(continued)
I-92
<PAGE> 95
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations
Liberty Media Group's programming services include production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software, including
multimedia products, ("Entertainment and Information Programming Services").
Through December 20, 1996, (the date of the merger of Home Shopping Network,
Inc. ("HSN") with a subsidiary of Silver King Communications, Inc. ("Silver
King") (the "HSN Merger") Liberty Media Group was also engaged in electronic
retailing, direct marketing, advertising sales relating to programming services,
infomercials and transaction processing ("Electronic Retailing Services"). To
enhance the reader's understanding, separate financial data have been provided
below for Electronic Retailing Services, which include a retail function, and
other Entertainment and Information Programming Services. The table below sets
forth, for the periods indicated, certain financial information and the
percentage relationship that certain items bear to revenue. This summary
provides trend data related to the normal recurring operations of Liberty Media
Group. Corporate expenses have not been reflected in the following table but are
included in the following discussion. Liberty Media Group holds significant
equity investments the results of which are not a component of operating income,
but are discussed below under "Other Income and Expense". Other items of
significance are discussed separately under their own captions below.
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------
1997 1996
------------------ --------------------
dollar amounts in thousands
Entertainment and Information
Programming Services
<S> <C> <C> <C> <C>
Revenue 100% $ 124,505 100% $ 55,488
Operating costs and expenses 80% 99,362 76% 42,280
Stock compensation 6% 7,406 -- --
Depreciation and amortization 4% 4,988 2% 1,128
--- ---------- ------ --------
Operating income 10% $ 12,749 22% $ 12,080
=== ========== ====== ========
Electronic Retailing Services
Revenue N/A N/A 100% $234,321
Cost of sales N/A N/A 58% 136,992
Operating costs and expenses N/A N/A 33% 77,093
Depreciation and amortization N/A N/A 4% 9,536
------ --------
Operating income N/A N/A 5% $ 10,700
====== ========
</TABLE>
(continued)
I-93
<PAGE> 96
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------------------
1997 1996
--------------------- ----------------------
dollar amounts in thousands
Entertainment and Information
Programming Services
<S> <C> <C> <C> <C>
Revenue 100% $ 243,536 100% $298,236
Operating costs and expenses 73% 177,657 80% 240,563
Stock compensation 5% 11,982 %
Depreciation and amortization 3% 6,486 5% 14,393
--- ---------- ----- --------
Operating income 19% $ 47,411 15% $ 43,280
=== ========== ===== ========
Electronic Retailing Services
Revenue N/A N/A 100% $733,922
Cost of sales N/A N/A 62% 453,483
Operating costs and expenses N/A N/A 31% 231,133
Depreciation and amortization N/A N/A 4% 28,146
----- --------
Operating income N/A N/A 3% $ 21,160
===== ========
</TABLE>
Entertainment and Information Programming Services
As of April 1, 1996, upon formation of Superstar/Netlink, Netlink's retail
operations no longer consolidate with the financial results of Liberty Media
Group. Similarly, effective April 29, 1996, Liberty Media Group's regional
sports programming businesses no longer consolidate with the financial results
of Liberty Media Group. In addition, effective January 1, 1997, the operations
for TV Network Corporation ("Intro") were discontinued and therefore, revenue
from such operations was not realized in 1997. Consequently, revenue from
Entertainment and Information Programming Services decreased 18% or $55 million
for the nine months ended September 30, 1997, as compared to the corresponding
period of 1996. Revenue increased 124% or $69 million for the three months ended
September 30, 1997 compared to third quarter of 1996. The increase in the third
quarter is substantially due to the formation of Encore Media Group. Upon
formation, the results of operations of STARZ! are combined with the financial
results of Liberty Media Group. Additionally, effective July 1997, the results
of operations for TCI Music are included in the financial results of Liberty
Media Group. The impact of these acquisitions to revenue from Entertainment and
Information Programming Services for the third quarter of 1997 is approximately
$60 million. Revenue from the Encore services increased approximately $14
million and $38 million for the three months and nine months ended September 30,
1997, respectively. The increase in revenue from the Encore services is
primarily due to increases in the number of units of their thematic multiplex
services and the launch by TCI Group to 8 million customers of Encore Media
Group's "MOVIEplex" (a cable service which offers theme-by-day movies). Rates
increased by approximately 5% for Encore Media Group. Revenue from Encore Media
Group increased approximately $3 million from increased management fees from
affiliates during the nine months ended September 30, 1997 compared to 1996.
(continued)
I-94
<PAGE> 97
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating costs and expenses from Entertainment and Information Programming
Services decreased 26% or $63 million for the nine months ended September 30,
1997, and increased 135% or $57 million for the quarter ended September 30,
1997, as compared to the corresponding periods of 1996. Because the operations
of the regional sports programming businesses, the operations of Netlink's
retail business and the operations of Intro were no longer included in Liberty
Media Group's combined financial results during 1997, these businesses were
primarily responsible for the decreases in operating costs and expenses in the
nine months ended September 30, 1997. The operating expenses increase for the
third quarter of 1997 is primarily due to the previously described acquisitions.
Operating expenses from Entertainment and Information Programming Services
includes $67 million from these acquisitions. Operating expenses, excluding
stock compensation, relating to the Encore services increased approximately $5
million and $36 million during the three months and nine months ended September
30, 1997, respectively. Programming costs for the Encore Services and the
thematic multiplex services increased due to more recent programming being
purchased. Encore incurred approximately $2 million for costs associated with
transitioning to digital technology during the nine months ended September 30,
1997. Increased marketing support resulting from higher subscribers and revenue
accounted for $10 million of the increases in operating expenses relating to the
Encore services for the nine months ended September 30, 1997. Increased national
advertising was responsible for approximately $5 million and $17 million of the
increase for the quarter and nine months, respectively. The remainder of the
increases in the operating expenses relating to the Encore services excluding
stock compensation was due to additional personnel and related costs supporting
the overall growth of the company.
Corporate Expenses
Corporate expenses are not reflected in the preceding table. During 1997,
corporate expense, excluding the impact of the stock appreciation rights,
remained relatively comparable to the same periods of 1996. The amount of
expense associated with stock appreciation rights is based on the market price
of the underlying common stock as of the date of the financial statements. The
expense is subject to future adjustment based on market price fluctuations and,
ultimately, on the final determination of market value when the rights are
exercised.
Certain TCI Group corporate general and administrative costs are charged to
Liberty Media Group at rates set at the beginning of each year based on
projected utilization for that year. The utilization-based charges are set at
levels that management believes to be reasonable and that approximate the costs
Liberty Media Group would incur for comparable services on a stand alone basis.
During the nine months ended September 30, 1997 and 1996, Liberty Media Group
was allocated $790,000 and $1,924,000, respectively, in corporate general and
administrative costs by TCI Group.
(continued)
I-95
<PAGE> 98
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Other Income and Expense
Liberty Media Group's share of earnings from affiliates was a loss of $8
million and earnings of $5 million for the three months and nine months ended
September 30, 1997, compared to earnings of $5 million and $18 million for the
corresponding periods of 1996. Liberty Media Group's share of earnings of
affiliates attributable to its interest in Discovery decreased $11 million and
$22 million during the three and nine months ended September 30, 1997,
respectively, compared to the same periods of 1996. Discovery's revenue
increased 40% during the first nine months of 1997 compared to the same period
in 1996. However, earnings before interest, taxes, depreciation and amortization
for Discovery decreased by 21%, principally because of costs associated with
launching new services (primarily Animal Planet), continuing investments in
international services and the acquisition of The Nature Company. This decrease
in share of earnings was partially offset by an increase in share of earnings of
Superstar/Netlink in 1997 of $1 million and $6 million for the quarter and nine
months of 1997 compared to the same periods in 1996. A decrease in Liberty Media
Group's share of DMX's losses prior to the DMX Merger offset the increase in
share of losses of affiliates attributable to its interest in Discovery.
Additionally, Liberty Media Group's share of earnings of affiliates attributable
to its interest in QVC increased approximately $1 million and $4 million during
the three months and nine months ended September 30, 1997 compared to the same
periods of 1996. QVC's revenue increased by 12% during the first nine months of
1997, resulting in a corresponding 11% increase in earnings before interest,
taxes, depreciation and amortization over the first nine months of 1996.
Dividend and interest income increased $6 million and $22 million during
the quarter and nine months ended September 30, 1997, respectively, compared to
the corresponding periods of 1996, principally due to the dividends received on
the TW Exchange Stock acquired in October 1996 as well as the FKW Preferred
Stock. Additionally, interest income on excess cash balances increased $7
million during the nine months of 1997 and decreased $2 million for the third
quarter of 1997, compared to 1996.
I-96
<PAGE> 99
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- -------
Assets amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 341,550 105,527
Trade and other receivables, net 85,894 115,491
Film inventory and other prepaid expenses 26,276 85,998
Investments in Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (and their respective predecessor) and PhillieCo L.P.
(collectively, the "PCS Ventures"), accounted for under the equity
method (note 6) 674,151 829,651
Investment in Telewest Communications plc ("Telewest"), accounted for under the
equity method (note 7) 352,235 488,495
Investment in Teleport Communications Group, Inc. ("Teleport"),
accounted for under the equity method, and related receivables
(note 8) 255,511 276,112
Investment in other affiliates, accounted for under the equity method, and
related receivables (note 9) 597,212 474,599
Property and equipment, at cost:
Land 7,979 7,837
Distribution systems 1,045,249 761,191
Support equipment and buildings 148,246 208,294
---------- -----------
1,201,474 977,322
Less accumulated depreciation 298,804 240,322
---------- -----------
902,670 737,000
---------- -----------
Franchise costs and other intangible assets 994,805 1,029,842
Less accumulated amortization 138,390 103,631
---------- -----------
856,415 926,211
---------- -----------
Other assets, net of amortization 326,502 220,619
---------- -----------
$4,418,416 4,259,703
========== ===========
</TABLE>
(continued)
I-97
<PAGE> 100
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------- ----------
Liabilities and Combined Equity amounts in thousands
<S> <C> <C>
Accounts payable $ 42,210 71,776
Accrued liabilities 112,586 148,962
Customer prepayments 143,519 100,670
MultiThematiques Obligation (note 9) 27,338 47,902
Capital lease obligations 372,440 199,961
Debt (note 10) 564,230 526,254
Deferred income taxes 262,572 220,306
Other liabilities 48,342 21,477
---------- ----------
Total liabilities 1,573,237 1,337,308
---------- ----------
Minority interests in equity of subsidiaries 275,926 370,879
Combined equity:
Combined equity 2,588,696 2,686,794
Cumulative foreign currency translation adjustments 208 26,146
Unrealized holding gains for available-for-sale securities 17,554 15,077
---------- ----------
2,606,458 2,728,017
Due from related parties (note 11) (37,205) (176,501)
---------- ----------
Total combined equity 2,569,253 2,551,516
---------- ----------
Commitments and contingencies (notes 6, 9 and 12)
$4,418,416 4,259,703
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
I-98
<PAGE> 101
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
amounts in thousands,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 11) $ 258,942 238,590 758,082 637,670
Operating costs and expenses:
Operating (note 11) 149,195 142,742 428,635 372,309
General and administrative (note 11) 64,050 70,283 194,469 188,855
Stock compensation (note 12) 55,774 (4,468) 68,699 (6,930)
Depreciation and amortization 52,984 38,405 138,149 103,617
--------- --------- --------- ---------
322,003 246,962 829,952 657,851
--------- --------- --------- ---------
Operating loss (63,061) (8,372) (71,870) (20,181)
Other income (expense):
Share of losses of PCS Ventures (note 6) (147,051) (30,615) (304,436) (78,358)
Share of losses of Telewest (note 7) (37,880) (29,003) (111,338) (99,206)
Share of losses of Teleport (note 8) (15,600) (11,011) (43,417) (31,591)
Share of losses of other affiliates (note 9) (26,941) (19,435) (77,350) (56,337)
Interest expense (14,612) (10,845) (41,178) (36,536)
Interest income (note 11) 4,982 5,180 8,883 18,547
Minority interests' share of (gains) losses 1,525 5,747 (6,935) 21,992
Foreign currency transaction gains (losses) (823) 609 (425) 4,040
Gain on disposition of assets (note 9) 75,905 -- 104,774 --
Gain on issuance of stock by attributed entity (note 4) 60,233 -- 60,233 --
Gain on sale of stock by equity investee (note 8) -- 12,410 21,251 12,410
Other, net (2,850) 305 3,800 6,162
--------- --------- --------- ---------
(103,112) (76,658) (386,138) (238,877)
--------- --------- --------- ---------
Loss before income taxes (166,173) (85,030) (458,008) (259,058)
Income tax benefit 40,440 23,002 143,117 74,293
--------- --------- --------- ---------
Net loss $(125,733) (62,028) (314,891) (184,765)
========= ========= ========= =========
Earnings per common share (note 1) $ .11 .11
========= =========
</TABLE>
See accompanying notes to combined financial statements.
I-99
<PAGE> 102
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Equity
Nine months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Cumulative
foreign
currency
translation
Combined adjustment,
equity net of taxes
----------- -----------
amounts in thousands
<S> <C> <C>
Balance at January 1, 1997 $ 2,686,794 26,146
Net loss (314,891) --
Adjustment in connection with the issuance of ordinary shares by
Flextech p.l.c. (note 9) 98,555 --
Foreign currency translation adjustment -- (25,938)
Unrealized holding gains for available-for-sale securities -- --
Adjustment due to gain deferred by related party (note 11) 46,543 --
Repayment of amounts due from related party -- --
Interest income from related party (4,251) --
Stock compensation 56,305 --
Revenue from related parties (24,508) --
Operating costs to related parties 22,961 --
Corporate general and administrative cost allocations 5,899 --
Intergroup tax allocation (150,567) --
Other intercompany transfers 165,856 --
----------- -----------
Balance at September 30, 1997 2,588,696 208
=========== ===========
<CAPTION>
Unrealized
holdings
gains for
available-
for-sale Due to(from)
securities, related Total
net of taxes parties equity
----------- ----------- -----------
amounts in thousands
<S> <C> <C> <C>
Balance at January 1, 1997 15,077 (176,501) 2,551,516
Net loss -- -- (314,891)
Adjustment in connection with the issuance of ordinary shares by
Flextech p.l.c. (note 9) -- -- 98,555
Foreign currency translation adjustment -- -- (25,938)
Unrealized holding gains for available-for-sale securities 2,477 -- 2,477
Adjustment due to gain deferred by related party (note 11) -- -- 46,543
Repayment of amounts due from related party -- 149,245 149,245
Interest income from related party -- (89) (4,340)
Stock compensation -- 12,394 68,699
Revenue from related parties -- (3,064) (27,572)
Operating costs to related parties -- 2,871 25,832
Corporate general and administrative cost allocations -- 737 6,636
Intergroup tax allocation -- (13,127) (163,694)
Other intercompany transfers -- (9,671) 156,185
----------- ----------- -----------
Balance at September 30, 1997 17,554 (37,205) 2,569,253
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
I-100
<PAGE> 103
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
--------- ---------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(314,891) (184,765)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 138,149 103,617
Programming rights provision -- 8,706
Stock compensation 68,699 (6,930)
Share of losses of PCS Ventures 304,436 78,358
Share of losses of Telewest 111,338 99,206
Share of losses of Teleport 43,417 31,591
Share of losses of other affiliates 77,350 56,337
Minority interests' share of earnings (losses) 6,935 (21,992)
Gain on issuance of stock by attributed entity (60,233) --
Gain on sale of stock by equity investee (21,251) (12,410)
Gain on disposition of assets (104,774) --
Unrealized foreign currency transaction gains (22) (4,110)
Accretion of discount on MultiThematiques Obligation 2,357 4,756
Deferred income tax expense 16,750 19,649
Intergroup tax allocation (163,694) (103,873)
Changes in operating assets and liabilities, net of the effect of the
deconsolidation of Flextech:
Change in receivables (284) (2,447)
Change in film inventory and other prepaid expenses (2,331) (23,888)
Change in payables, accruals, customer prepayments and other
liabilities 31,073 11,729
--------- ---------
Net cash provided by operating activities $ 133,024 53,534
--------- ---------
</TABLE>
(continued)
I-101
<PAGE> 104
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
--------- ---------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from investing activities:
Effect of the deconsolidation of Flextech on cash and cash equivalents $ (38,142) --
Investments in and loans to affiliates and others (364,752) (381,734)
Proceeds from dispositions of assets 178,929 67,790
Cash invested in certificates of deposit -- (23,966)
Cash received (paid) in connection with acquisitions, net (39,558) 11,863
Capital expended for property and equipment (145,186) (133,900)
Repayments received on loans to affiliates 72,836 1,279
Deposit received on sale of interest in Cablevision S.A 21,000 --
Cash paid to purchase minority interests -- (4,636)
Other, net 21,039 12,986
--------- ---------
Net cash used in investing activities (293,834) (450,318)
--------- ---------
Cash flows from financing activities:
Borrowings of debt 225,780 82,769
Repayments of debt (230,109) (202,398)
Repayments of capital lease obligations (5,019) (11,190)
Open market repurchases of common stock (42,014) --
Net proceeds from issuance of common stock 99,868 9,990
Proceeds from issuance of preferred stock 48,147 --
Payment of deferred financing costs (950) (9,811)
Contributions from minority interest owners -- 3,548
Distribution to minority interest owners (8,488) --
Issuance of debentures -- 345,000
Loan to TCI ("TCI Note Receivable") -- (336,375)
Repayments received on TCI Note Receivable 149,245 101,316
Amounts contributed to combined equity 165,856 358,250
Change in amounts due from related parties (5,483) --
--------- ---------
Net cash provided by financing activities 396,833 341,099
--------- ---------
Effect of exchange rate changes on cash and cash equivalents -- 244
--------- ---------
Net increase (decrease) in cash and
cash equivalents 236,023 (55,441)
Cash and cash equivalents:
Beginning of period 105,527 141,754
--------- ---------
End of period $ 341,550 86,313
========= =========
</TABLE>
See accompanying notes to combined financial statements.
I-102
<PAGE> 105
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1997
(unaudited)
(1) Basis of Presentation
On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue Tele-Communications, Inc.
Series A and Series B TCI Ventures Group common stock ("TCI Ventures
Group Stock") which reflects the separate performance of the TCI
Ventures Group, as defined below. As of September 30, 1997, the TCI
Ventures Group consisted principally of the following assets and their
related liabilities: (i) TCI's 85% equity interest (representing a 92%
voting interest) in Tele-Communications International, Inc. ("TINTA"),
which is TCI's primary vehicle for the conduct of its international
cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media
Group), (ii) TCI's principal interests in the telephony business ("TCI
Telephony") consisting primarily of TCI's investment in a series of
partnerships formed to engage 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.), TCI's 30% equity interest
(representing a 37% voting interest) in Teleport, a competitive local
exchange carrier, 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, (iii)
TCI's 40% equity interest (representing a 85% voting interest) in
United Video Satellite Group, Inc. ("UVSG"), which provides
satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and
private network users, primarily throughout North America, (iv) TCI's
39% equity interest (representing a 72% voting interest) in At Home
Corporation ("@Home"), a provider of high speed multimedia Internet
services, and TCI's interest in other Internet-related assets and (v)
other assets, including ETC w/tci, Inc. ("ETC w/tci"), an 80%-owned
subsidiary of TCI which is a developer and distributor of for-profit
education, training and communications services and products, National
Digital Television Center, Inc. ("NDTC"), which provides digital
compression and authorization services to programming suppliers and to
video distribution outlets and TCI SUMMITrak of Texas, Inc. and TCI
SUMMITrak L.L.C., ("SUMMITrak"), wholly-owned subsidiaries of TCI,
which prior to the September 1997 sale of the majority of such
subsidiaries' assets, owned assets related to an integrated
network-based information management system. See note 11. The foregoing
subsidiaries and assets are collectively referred to as "TCI Ventures
Group." The stocks of TINTA, Teleport, @Home and UVSG are traded on
the National Market tier of The Nasdaq Stock Market.
(continued)
I-103
<PAGE> 106
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The TCI Ventures Group does not include any business that uses TCI's
domestic cable network to distribute services to customers (e.g.,
cable, telephony and Internet services). Such domestic "distribution"
businesses will continue to be attributed to the TCI Group.
The TCI Ventures Group may also include such other assets and
liabilities of the TCI Group as the Board may in the future determine
to attribute or sell to the TCI Ventures Group and such other
businesses, assets and liabilities that TCI or any of its subsidiaries
may in the future acquire for the TCI Ventures Group, as determined by
the Board. It is currently the intention of TCI that any businesses,
assets and liabilities so attributed to the TCI Ventures Group in the
future would not include assets and liabilities of TCI's domestic
programming businesses and investments or its domestic cable operations
(including its businesses which utilize its cable network to distribute
telephony and Internet services).
The "TCI Group" is intended to reflect the performance of those
businesses of TCI not attributed to the "Liberty Media Group" (which is
intended to reflect the performance of TCI's business which produces
and distributes programming services) or the TCI Ventures Group.
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 common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI
Group, and accordingly, not represented by outstanding TCI Ventures
Group Stock is referred to as "Inter-Group Interest". Prior to the
issuance of shares of TCI Ventures Group Stock, the Inter-Group
Interest of the TCI Group in the TCI Ventures Group was 100%.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt.
Holders of Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media
Group common stock ("Liberty Media Group Stock") and TCI Ventures Group
Stock are common stockholders of TCI and are subject to risks
associated with an investment in TCI and all of its businesses, assets
and liabilities.
Prior to stockholder approval to issue the TCI Ventures Group Stock,
TCI commenced offers (the "Exchange Offers") to exchange shares of
Series A TCI Ventures Group Stock and Series B TCI Ventures Group Stock
for shares of Tele-Communications, Inc. Series A and Series B TCI Group
common stock, respectively, (representing approximately 30% of the
outstanding shares of each such series as of June 30, 1997, excluding
shares held by majority-owned subsidiaries of TCI) in the ratio of one
share of the applicable series of TCI Ventures Group Stock in exchange
for each share of the corresponding series of TCI Group Stock properly
tendered.
(continued)
I-104
<PAGE> 107
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Upon the September 10, 1997 consummation of the Exchange Offers,
188,661,300 shares of Series A TCI Group Common Stock and 16,266,400
shares of Series B TCI Group Common Stock were exchanged for an
equivalent number of shares of Series A TCI Ventures Group Stock and
Series B TCI Ventures Group Stock, respectively. The aggregate number
of shares of TCI Ventures Group Stock issued in the Exchange Offers
represented 100% of the common stockholders' equity value of TCI
attributable to the TCI Ventures Group. Accordingly, the Inter-Group
Interest of the TCI Group was reduced to zero upon consummation of the
Exchange Offers.
In addition to the shares of TCI Ventures Group Stock issued in the
Exchange Offers, at September 30, 1997, 18,547,213 shares of Series A
TCI Ventures Group Stock were reserved for issuance upon exchange of
certain outstanding convertible notes issued by a subsidiary of TCI and
upon exercise of certain stock options.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media
Group and the TCI Ventures Group for the purpose of preparing the
combined financial statements of the TCI Group, the Liberty Media Group
and the TCI Ventures Group, the change in the capital structure of TCI
resulting from the issuance of TCI Ventures Group Stock did not affect
legal title to such assets or responsibility for such liabilities of
TCI or any of its subsidiaries. Holders of TCI Group Stock, Liberty
Media Group Stock and TCI Ventures Group Stock are common stockholders
of TCI and are subject to risks associated with an investment in TCI
and all of its businesses, assets and liabilities.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition of TCI could
affect the combined results of operations or financial condition of TCI
Ventures Group and the market price of shares of TCI Ventures Group
Stock. In addition, net losses of any portion of TCI, dividends or
distributions on, or repurchases of, any series of common stock, and
dividends on, or certain repurchases of, preferred stock, would reduce
funds of TCI legally available for dividends on all series of common
stock. Accordingly, TCI Ventures Group financial information should be
read in conjunction with the TCI financial information.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally
available for dividends or the available dividend amount with respect
to TCI Ventures Group, as defined. Determinations to pay dividends on
TCI Ventures Group Stock are based primarily upon the financial
condition, results of operations and business requirements of TCI
Ventures Group and TCI as a whole.
(continued)
I-105
<PAGE> 108
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results of such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These unaudited interim combined financial statements should be read in
conjunction with the TCI Ventures Group's December 31, 1996 audited
financial statements and notes thereto.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement No. 128"). Statement No. 128 requires the presentation of
basic earnings per share ("EPS") and, for companies with potentially
dilutive securities, such as convertible debt, options and warrants,
diluted EPS. Statement No. 128 is effective for annual and interim
periods ending after December 31, 1997. TCI Ventures Group does not
expect that Statement No. 128 will have a material impact on the
calculation of the TCI Ventures Group's loss per share.
The historical earnings attributable to TCI Ventures Group Stock
stockholders per common share for the period from the TCI Ventures
Exchange to September 30, 1997 was computed by dividing net earnings
attributable to TCI Ventures Group Stock stockholders by the weighted
average number of common shares outstanding of TCI Ventures Group Stock
during the period (204.9 million). Common stock equivalents were not
included in the computation of weighted average shares outstanding
because their inclusion would be anti-dilutive to TCI. Assuming the
Exchange Offer had been consummated on January 1, 1997 and 204.9
million shares had been outstanding since that date, the pro forma loss
attributable to TCI Ventures Group's stockholders per common share for
the three and nine month periods ended September 30, 1997 would have
been $.61 and $1.54, respectively.
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.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $45 million and $36 million during the nine
months ended September 30, 1997 and 1996, respectively. Cash paid for
income taxes was $28 million and $22 million during the nine months
ended September 30, 1997 and 1996, respectively.
(continued)
I-106
<PAGE> 109
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The net cash paid (received) by the TCI Ventures Group in acquisitions
is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1997 1996
-------- -------
amounts in thousands
<S> <C> <C>
Fair value of assets acquired $ 79,555 403,234
Issuance of notes payable -- (1,000)
Liabilities assumed, net of current assets (38,482) (103,769)
Increase in minority interests in equity of
subsidiaries due to issuance of shares by
Flextech -- (43,223)
Minority interest in equity of acquired entity (1,515) (71,101)
Increase in combined equity resulting from
preferred stock issued in acquisition -- (196,004)
-------- -------
Cash paid (received) in acquisitions $ 39,558 (11,863)
======== =======
Property and equipment purchased under capital
leases $168,326 63,656
======== =======
</TABLE>
The effects of changing the method of accounting for the TCI Ventures Group's
ownership interest in Flextech (see note 9) from the consolidation method to the
equity method are summarized below (amounts in thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments $177,003
Liabilities reclassified to equity investments (72,512)
Minority interests in equity of subsidiaries reclassified to
equity investments (142,633)
--------
Decrease in cash and cash equivalents $(38,142)
========
</TABLE>
(continued)
I-107
<PAGE> 110
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Acquisitions
(a) OCC Acquisition
On October 1, 1996, Cablevision S.A. ("Cablevision"), a
subsidiary ot TINTA, acquired 99.99% of the issued and
outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a
cable television operation in the west of the greater Buenos
Aires metropolitan area, for a purchase price of $112.2
million (the "OCC Acquisition"). Cash consideration of $43.7
million was paid at closing and an additional cash payment of
$22.1 million was paid on December 1, 1996. Cablevision
incurred additional bank debt of approximately $45 million in
order to fund such cash payments. The remaining purchase price
was satisfied by Cablevision's issuance of $46.4 million
principal amount of secured negotiable promissory notes (the
"OCC Notes"). The OCC Notes were repaid in their entirety
during the second quarter of 1997. The OCC Acquisition has
been accounted for by the purchase method. Accordingly, the
results of operations of OCC have been consolidated with those
of TINTA since the date of acquisition and TINTA recorded
OCC's assets and liabilities at fair value.
(b) UVSG Merger
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. ("Merger
Sub"), pursuant to which Merger Sub was merged into UVSG, with
UVSG as the surviving corporation (the "UVSG Merger"). TCI
acquired 12,373,294 shares of UVSG Class B common stock and
2,145,466 shares of UVSG Class A common stock, together
representing approximately 40% of the issued and outstanding
common stock of UVSG and approximately 86% of the total voting
power of UVSG common stock immediately after the UVSG Merger,
resulting in UVSG becoming a majority-controlled subsidiary of
TCI that is combined with the TCI 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 the TCI Ventures Group since the date
of acquisition and the TCI Ventures Group recorded UVSG's
assets and liabilities at fair value.
(c) Satellite Joint Venture
On August 9, 1996, UVSG and Liberty Media Group executed an
amended and restated agreement under which UVSG and Liberty
Media Group contributed their retail C-band home satellite
dish business' assets, obligations and operations, effective
April 1, 1996, to Superstar/Netlink Group LLC, a new entity
owned 50% each by UVSG and Liberty Media Group (the "Satellite
Joint Venture"). The combination was accounted for as a merger
of businesses under common control, whereby the assets and
obligations of both UVSG and Liberty Media Group which were
contributed to the venture were reflected at their historical
cost. The operations of the Satellite Joint Venture have been
consolidated, effective April 1, 1996, with the operating
results of UVSG as UVSG has voting control over the Satellite
Joint Venture's operations.
(continued)
I-108
<PAGE> 111
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) @Home
On July 11, 1997 @Home completed its initial public offering (the
"IPO"), in which 10,350,000 shares of @Home common stock were sold to
the public for aggregate cash consideration of approximately $109
million before commissions and fees. As a result of the IPO, the TCI
Ventures Group's economic interest in @Home decreased from 43% to 39%
which economic interest represents an approximate 72% voting interest.
In connection with the associated dilution of the TCI Ventures Group's
ownership interest of @Home, the TCI Ventures Group recognized a gain
of $60 million.
Effective October 2, 1997, @Home entered into a Letter Agreement and
Term Sheet with Cablevision Systems Corporation ("CSC"), and it's
parent, CSC Parent Corporation ("CSC Parent"), Comcast Corporation
("Comcast"), Cox Enterprises, Inc. ("Cox"), Kleiner, Perkins, Caufield
& Byers and TCI (the "CSC Agreement"). The CSC Agreement provides that
CSC will enter into a Master Distribution Agreement for the
distribution of @Home's high speed residential consumer Internet access
services on substantially the same terms and conditions as agreements
previously entered into with TCI, Comcast and Cox. The CSC Agreement
provides for the issuance to CSC and CSC Parent of a warrant to
purchase up to 7,875,784 shares of @Home's Series A common stock at an
exercise price of $.50 per share (the CSC Warrant"). The CSC Warrant is
immediately exercisable, subject to the receipt of all necessary
governmental consents or approvals. The CSC Agreement provides for the
issuance of an additional warrant to CSC to purchase up to 3,071,152
shares of @Home's Series A common stock at an exercise price of $.50
per share under certain conditions (the "CSC Contingent Warrant"). The
CSC Contingent Warrant is not immediately exercisable and will become
exercisable as and to the extent certain cable television systems are
transferred from TCI and its controlled affiliates to CSC, CSC Parent
or their controlled affiliates.
(continued)
I-109
<PAGE> 112
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Cablevision
At September 30, 1997, TINTA had a 51% ownership interest in
Cablevision. On October 9, 1997, TINTA sold a portion of its 51%
interest in Cablevision to CEI Citicorp Holdings Sociedad Anonima
("CEI") and T.I. Telefonica Internacional de Espana S.A. ("Telefonica,"
together with CEI, the "Buyers") for cash proceeds of $120 million ($21
million of which was received during the third quarter of 1997). In
addition, on October 9, 1997, Cablevision issued 3,541,829 shares of
stock in the aggregate to the Buyers for $80 million in cash and notes
receivable with an aggregate principal amount of $240 million, plus
accrued interest at LIBOR, due within the earlier of two years or at
the request of Cablevision's board of directors. The above transactions
(collectively, the "Cablevision Sale") reduced TINTA's interest in
Cablevision to 26.24%. Cash proceeds received by TINTA of $120 million
were based on a negotiated value of $210 million for approximately
one-half of TINTA's 51% interest in Cablevision. TINTA will continue to
have the right to manage Cablevision (pursuant to renewable a five-year
management contract that was entered into in connection with the
Cablevision Sale), and all material corporate transactions of
Cablevision will require TINTA's approval, so long as TINTA maintains
at least a 16% interest in Cablevision. The Buyers also purchased the
additional 39% interest in Cablevision that TINTA had the right to
acquire. As a result of the Cablevision Sale, effective October 1,
1997, TINTA will cease to consolidate Cablevision and will begin to
account for Cablevision using the equity method of accounting.
Prior to 1997, none of Cablevision's operating results had been
allocated to Cablevision's 49% minority interest because (i) the
minority interest had no obligation to provide any funding to
Cablevision and (ii) Cablevision's liabilities exceeded the minority
interest's historical cost basis in Cablevision's assets. During the
second quarter of 1997, Cablevision's net earnings caused the minority
interest's historical cost basis in Cablevision's net assets to become
positive. Accordingly, TINTA began allocating 49% of such net earnings
to the minority interest during the second quarter of 1997. If the
minority interest's historical cost basis had been positive since
January 1, 1996, TINTA would have allocated an additional $4.3 million
and $12.9 million during the nine months ended September 30, 1997 and
1996, respectively, of Cablevision's net earnings to the minority
interest.
(6) Investments in PCS Ventures
TCI Ventures Group is a partner in a series of partnerships formed to
engage in the business of providing wireless communications services,
using PCS systems, to residential and business customers nationwide,
using the "Sprint" brand. The PCS Ventures include Sprint Spectrum
Holding Company, L.P. ("Sprint Spectrum") and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox and TCI.
The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI.
(continued)
I-110
<PAGE> 113
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
From inception through September 1997, the four partners (the "Sprint
PCS Partners") have contributed approximately $3.7 billion to the
Sprint PCS Partnerships (of which TCI Telephony contributed an
aggregate of approximately $1.1 billion). The remaining capital that
the Sprint PCS Partnerships will require to fund the construction of
the PCS systems and the commitments made to its affiliates will be
substantial. The partners had agreed in forming the Sprint PCS
Partnerships to contribute up to an aggregate of approximately $4.2
billion of equity thereto, from inception through fiscal 1999, subject
to certain requirements. The TCI Ventures Group expects that the
remaining approximately $0.5 billion of such amount (of which TCI
Telephony's share is approximately $0.2 billion) will be contributed by
the end of the second quarter of 1998 (although there can be no
assurance that any additional capital will be contributed). The TCI
Ventures Group expects that the Sprint PCS Partnerships will require
additional equity thereafter.
Pursuant to an agreement entered into in connection with certain
financings by Sprint Spectrum, under certain circumstances the partners
in Sprint Spectrum may be required to make additional contributions to
Sprint Spectrum to fund projected cash shortfalls to the extent that
the amount of the partners' aggregate contributions to Sprint Spectrum
(exclusive of certain amounts, including amounts invested in certain
affiliates of Sprint Spectrum), following December 31, 1995 are less
than $1.0 billion; however, based on the currently expected timing and
use of the partners' contributions to Sprint Spectrum, the TCI Ventures
Group currently believes that such agreement will not result in TCI
Telephony being required to make any incremental capital contributions
in addition to its pro rata portion of the aforementioned $4.2 billion
amount.
Summarized unaudited results of operations for the PCS Ventures are as
follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
1997 1996
----------- -----------
amounts in thousands
<S> <C> <C>
Combined Operations
Revenue $ 110,528 71
Operating, selling, general and
administration expenses (789,583) (164,028)
Depreciation and amortization (189,924) (1,847)
----------- -----------
Operating loss (868,979) (165,804)
Interest expense (55,568) (297)
Other, net (96,911) (94,644)
----------- -----------
Net loss $(1,021,458) (260,745)
=========== ===========
</TABLE>
(continued)
I-111
<PAGE> 114
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Investment in Telewest
At September 30, 1997, TINTA indirectly owned, through its 50%
ownership interest in TW Holdings, Inc., 132,638,250 or 26.7% of the
issued and outstanding non-voting Telewest convertible preference
shares and 246,111,750 or 26.5% (assuming no conversion of the Telewest
convertible preference shares) of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest's ordinary shares was L.0.825 ($1.34) at September
30, 1997.
As a result of Telewest's 1995 issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate
used to convert the U.S. dollar into the United Kingdom ("UK") pound
sterling will cause Telewest to experience realized and unrealized
foreign currency transaction gains and losses throughout the term of
the Telewest Debentures, which mature in 2006 and 2007, if not redeemed
earlier. During the nine months ended September 30, 1997 and 1996,
Telewest experienced foreign currency transaction losses of L.32.8
million ($54.5 million using the applicable exchange rate) and
L.55.2 million ($84.6 million using the applicable exchange rate),
respectively, resulting from the conversion of the Telewest Debentures
into UK pounds sterling and the adjustment of a foreign currency option
contract to market value.
The functional currency of Telewest is the UK pound sterling. The
average exchange rate used to translate TINTA's share of Telewest's
operating results from UK pounds to U.S. dollars was 1.6393 to 1 and
1.5411 to 1 during the nine months ended September 30, 1997 and 1996,
respectively. The spot rate used to translate TINTA's share of
Telewest's net assets from UK pounds to U.S. dollars was 1.6185 to 1
and 1.7125 to 1 at September 30, 1997 and December 31, 1996,
respectively.
Summarized unaudited results of operations of Telewest are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
--------- ---------
amounts in thousands
<S> <C> <C>
Revenue $ 460,646 318,144
Operating, selling, general and
administrative expenses (408,038) (326,693)
Depreciation and amortization (239,987) (159,643)
--------- ---------
Operating loss (187,379) (168,192)
Share of losses of affiliates (26,078) (17,626)
Interest expense, net (154,510) (98,389)
Foreign currency transaction loss (54,487) (84,632)
Other, net 339 (197)
--------- ---------
Net loss $(422,115) (369,036)
========= =========
</TABLE>
(continued)
I-112
<PAGE> 115
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(8) Investment in Teleport
Teleport is a competitive local exchange carrier which provides
integrated local telecommunications services in major metropolitan
markets nationwide. Teleport's customers are principally
telecommunications intensive businesses, long distance carriers and
resellers of wireless communications.
The TCI Ventures Group's investment in Teleport is accounted for under
the equity method of accounting.
During 1997, Teleport issued 4,857,083 shares of Class A common stock
at an average price per share of $19.25 for certain acquisitions. The
total consideration paid by Teleport through the issuance of common
stock was approximately $93 million. As a result of Teleport issuing
additional shares the TCI Ventures Group's ownership interest in
Teleport was reduced from approximately 31% to approximately 30%.
Accordingly, the TCI Ventures Group recognized a gain amounting to $21
million (before deducting deferred income tax expense of approximately
$8 million).
Summarized unaudited combined results of operations for Teleport are
as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
--------- ---------
amounts in thousands
Combined Operations
<S> <C> <C>
Revenue $ 343,914 180,271
Operating, selling, general and
administrative expenses (317,309) (161,403)
Depreciation and amortization (107,437) (51,984)
--------- ---------
Operating loss (80,832) (33,116)
Interest expense (88,944) (44,451)
Other, net 19,632 5,428
--------- ---------
Net loss $(150,144) (72,139)
========= =========
</TABLE>
(9) Investments in Other Affiliates
The TCI Ventures Group's affiliates other than Telewest, PCS Ventures
and Teleport that are accounted for using the equity method (the
"Other Affiliates") generally are engaged in the cable and/or
programming businesses in various foreign countries.
Certain of the Other Affiliates are general partnerships and any TCI
subsidiary attributed to the TCI Ventures Group that is a general
partner in a general partnership could be liable, depending upon the
applicable partnership law, for all debts of that partnership to the
extent liabilities of that partnership were to exceed its assets.
(continued)
I-113
<PAGE> 116
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Agreements governing the TCI Ventures Group's investment in certain of
the Other Affiliates contain (i) buy-sell and other exit arrangements
whereby the TCI Ventures Group could be required to purchase another
investor's ownership interest and (ii) performance guarantees whereby
the TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
the performance of the subsidiary that directly holds the TCI Ventures
Group's investment.
The following table reflects the TCI Ventures Group's carrying amount
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Flextech (a) $275,720 --
MultiThematiques S.A
("MultiThematiques") (b) 71,334 84,007
Liberty/TINTA LLC (c) 65,143 63,227
Jupiter Telecommunications Co., Ltd.
("Jupiter") 59,290 47,251
United International Investments 26,251 25,598
Bresnan International Partners
(Chile), L.P. 23,987 34,408
Bresnan International Partners
(Poland), L.P. 22,709 27,951
Jupiter Programming Co., Ltd. ("JPC") 15,665 2,830
Flextech Affiliates (d) -- 129,563
Other 37,113 59,764
-------- --------
$597,212 474,599
======== ========
</TABLE>
(a) Flextech
At September 30, 1997, TINTA owned 57,889,033 Flextech ordinary
shares ("Flextech Ordinary Shares") representing 36.8% of the
issued and outstanding Flextech share capital and, when combined
with a special voting share owned by TINTA, approximately 50% of
the aggregate voting interests attributable to such Flextech
share capital. TINTA's ownership interest in the issued and
outstanding share capital of Flextech was 48.8% during the three
months ended March 31, 1996, 46.2% from April 1996 through April
1997, 35.9% from April 1997 through June 1997, 36.3% from July
1997 through September 1997, and 36.8% from September 1997 to the
present. TINTA's voting interest in Flextech was 50.6% throughout
1996.
(continued)
I-114
<PAGE> 117
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In January 1997, TINTA reduced its voting interest in Flextech to
50% by issuing to a nominee an irrevocable proxy (the "Proxy") to
vote 960,850 Flextech Ordinary Shares at any shareholder meeting
to be held through December 31, 1997. 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, as described below. The consummation of the
BBC Joint Ventures and related transactions resulted in, among
other things, a reduction of TINTA's ownership interest in
Flextech to 35.9% and the issuance to TINTA by Flextech of a
special voting share (the "Special Voting Share"). The Special
Voting Share when combined with TINTA's other share capital in
Flextech, allows TINTA to cast 50% of the votes on most matters
brought to the shareholders of Flextech for vote. So long as the
Proxy remains outstanding, TINTA's 50% voting interest will be
reduced by the 960,850 votes represented by the Proxy. The
Special Voting Share will terminate upon the occurrence of the
earlier of (i) the third anniversary of issuance or (ii) any
transfer of Flextech shares by TINTA outside a specified
affiliated group. In light of TINTA's decreased voting interest
in Flextech, TINTA, effective January 1, 1997, ceased to
consolidate Flextech and began to account for Flextech using the
equity method of accounting.
In connection with the April 1997 formation of the two BBC Joint
Ventures, Flextech acquired from the other shareholders of UK
Living Limited ("UKLL") and UK Gold Television Limited ("UKGL")
all of the share capital in those two companies not already owned
by Flextech and TINTA through the issuance of 34,954,713 new
Flextech Ordinary Shares, valued at L.7.20 ($11.65) per share for
U.S. financial reporting purposes. One joint venture with BBC
Worldwide (the "Principal Joint Venture") will operate and launch
a number of new subscription television channels for distribution
in the UK and Ireland. Flextech and BBC Worldwide each have a 50%
interest in this venture. The other joint venture (the "Second
Joint Venture") acquired 65% of the share capital of UKGL from
Flextech, with put and call arrangements over the remaining 35%
of such share capital. The Second Joint Venture will operate and
develop UKGL, and both Flextech and BBC Worldwide have a 50%
interest in that venture.
Each of the Principal Joint Venture and the Second Joint Venture
have entered into programming license agreements with the British
Broadcasting Corporation (the "BBC License Agreements"), under
which such joint ventures will have the right to acquire licenses
to broadcast programming originated by the British Broadcasting
Corporation on the channels which the joint ventures are to
operate. The BBC License Agreements, which contain certain
exclusivity provisions, have initial terms of 15 years, which
terms will automatically be extended for an additional 15 years
unless the relevant joint venture elects to give notice to the
contrary.
As described below, Flextech has undertaken to finance the
working capital requirements of the Principal Joint Venture.
Flextech has also agreed to make available to the Second Joint
Venture, if required, funding of up to L.10 million ($16.2
million).
(continued)
I-115
<PAGE> 118
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In addition to Flextech's April 1997 purchase of L.22 million
($35.6 million) of ordinary shares in the Principal Joint
Venture, Flextech is obligated to provide the Principal Joint
Venture with a primary credit facility of L.88 million ($142.4
million) and, subject to certain restrictions, a standby credit
facility of L.30 million ($48.6 million). 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 (the "Standby
Commitment").
If BBC Worldwide requires TINTA to perform Flextech's funding
obligations pursuant to the Standby Commitment, then TINTA will
acquire Flextech's entire equity interest in the Principal Joint
Venture for L.1.00, and will replace Flextech's directors on the
board of the Principal Joint Venture with representatives of
TINTA. Flextech will pay commitment and standby fees to TINTA for
its undertaking under the Standby Commitment. If Flextech repays
to TINTA all loans TINTA makes to the Principal Joint Venture
(plus interest at TINTA's marginal cost of funds plus 2% per
annum) within 180 days after TINTA first becomes obligated to
perform Flextech's financial obligations, Flextech may reacquire
its interest in the Principal Joint Venture for L.1.00. TINTA may
also, within the same period, require Flextech to reacquire its
interest on the same terms. The Standby Commitment will terminate
on the earliest of (i) the date on which Flextech has met all of
its required financial obligations to the Principal Joint Venture
under the primary and standby credit facilities, or (ii) the date
on which Flextech delivers a bank guarantee of all of its funding
obligations to the Principal Joint Venture.
So long as TINTA is contingently obligated under the Standby
Commitment, it has been agreed that Flextech (i) will not sell
any of its direct or indirect interests in the Principal Joint
Venture, (ii) will not conduct its business in such a way as is
likely to cause it to be in material breach of any material
contracts or to have insufficient working capital to meet its
funding obligation to the Principal Joint Venture, and (iii) will
use its available resources to subscribe for any outstanding loan
stock of the Principal Joint Venture, if and to the extent
required by TINTA at any time after December 31, 2011.
As a result of the issuance of shares by Flextech in connection
with Flextech's acquisition of all of the share capital of UKLL
and UKGL which Flextech did not already own, and the associated
dilution of TINTA's ownership interest in Flextech, TINTA
recorded a $151.6 million increase to the carrying value of its
investment in Flextech, a $98.5 million increase to "Combined
equity" and a $53.1 million increase to "Deferred income tax
liability." No gain was recognized in the statement of operations
due primarily to TINTA's contingent obligations under the Standby
Commitment.
(continued)
I-116
<PAGE> 119
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On July 7, 1997, TINTA purchased from certain officers of
Flextech 748,435 Flextech Ordinary Shares for a per share price
of L.6.225 ($10.29 at the applicable exchange rate). In addition,
on September 29, 1997, TINTA purchased 800,000 Flextech Ordinary
Shares for a per share price of L.6.05 ($9.76 at the applicable
exchange rate). As a result of such purchases, TINTA's ownership
interest in the issued and outstanding share capital of Flextech
increased to 36.8%.
(b) MultiThematiques
On December 13, 1995, TINTA invested 123.1 million French francs
("FF") ($24.7 million at the applicable exchange rate) in
MultiThematiques, a European programming company that is
one-third owned by each of TINTA and two French media companies.
In addition, TINTA contributed to MultiThematiques FF105.0
million ($20.4 million at the applicable exchange rate) and
FF100.0 million ($19.5 million at the applicable exchange rate)
on December 13, 1996 and February 13, 1997, respectively. TINTA
has agreed to contribute an additional FF164.0 million ($27.7
million) by no later than December 13, 1997.
TINTA's obligation to make the above-described additional FF369.1
million in contributions was viewed as additional consideration
to be paid by TINTA to acquire its one-third interest in
MultiThematiques. Accordingly, the U.S. dollar equivalent of the
estimated net present value of such contributions (using a
discount rate of 10%) prior to their payment to MultiThematiques
has been reflected as a liability (the "MultiThematiques
Obligation") in the accompanying combined balance sheets. During
the nine months ended September 30, 1997 and 1996, TINTA
experienced unrealized foreign currency transaction gains of $1.6
million and $3.4 million, respectively, with respect to the
MultiThematiques Obligation.
TINTA has entered into a forward contract that allows TINTA to
purchase FF164.0 million at a price of FF5.5367 per U.S. dollar
($29.6 million) on December 13, 1997. For accounting purposes,
TINTA is treating this contract as a hedge of its December 13,
1997 contribution obligation.
(c) Liberty/TINTA LLC
Liberty/TINTA LLC (the "LLC") is a limited liability company
owned in equal parts by subsidiaries of TINTA and the Liberty
Media Group. TINTA may make additional cash contributions
totaling approximately $16 million to the LLC to fund the
operations of the joint venture between the LLC and News
Corporation Limited ("News Corp.") ("Fox Sports International").
(continued)
I-117
<PAGE> 120
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On April 19, 1996, TINTA, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom TINTA previously acquired
its 35% interest entered into an agreement (the "TINTA/Torneos
Sports Agreement") whereby TINTA agreed to make minimum periodic
payments from 1996 through 2004 aggregating $235.2 million to
acquire certain rights and considerations, including the
exploitation rights to all sports rights owned by Torneos with
the exception of any rights which at that time had been
contractually committed to any third party. The rights under the
TINTA/Torneos Sports Agreement have been assigned to Fox Sports
International.
During the third quarter of 1997, Fox Sports International
distributed (i) its 35% interest in Torneos to the LLC and (ii)
certain Australian sports rights to News Corp.
(d) Flextech Affiliates
Due to the January 1, 1997 deconsolidation of Flextech described
in (a) above, Flextech's equity method affiliates (the "Flextech
Affiliates") are no longer included with the Other Affiliates,
but are included with Flextech.
Other
In February 1997, TSX Corporation ("TSX"), an equity affiliate of the TCI
Ventures Group and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity. In connection with this
transaction, the TCI Ventures Group recognized a $28.9 million gain
representing the difference between the fair value of the Antec shares
received and the carrying value of its investment in TSX at the date of the
transaction. As a result of this transaction, the TCI Ventures Group holds
an approximate 16% ownership interest in Antec.
On September 26, 1997, TINTA sold its interest in TCID of New Zealand for
cash proceeds of $53.0 million. TINTA recognized a gain of $58.4 million on
such sale.
(continued)
I-118
<PAGE> 121
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the Company's share of losses of the Other
Affiliates:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Jupiter $(17,173) (8,237)
JPC (12,614) --
Liberty/TINTA LLC (11,364) (3,733)
MultiThematiques (9,337) (4,730)
Asia Business News (Singapore)
PTE Ltd. ("ABN") (9,314) (7,039)
Bresnan International Partners (Chile), L.P. (2,871) (5,347)
Bresnan International Partners (Poland), L.P. (1,504) (3,210)
Flextech Affiliates -- (9,689)
Other (13,173) (14,352)
-------- --------
$(77,350) (56,337)
======== ========
</TABLE>
(continued)
I-119
<PAGE> 122
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited results of operations of the Other Affiliates by
geographic region for the periods in which the TCI Ventures Group used the
equity method to account for its investments in the Other Affiliates are as
follows:
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
---------------------------------------------------------------------
Latin
America and
Asia and the United
Europe (a) Australia Caribbean States (b) Total
--------- --------- --------- --------- ---------
amounts in thousands
Combined Operations
<S> <C> <C> <C> <C> <C>
Revenue $ 96,322 216,128 6,559 4,667 $ 323,676
Operating, selling, general and
administrative expenses (127,294) (231,808) (5,375) (3,436) (367,913)
Depreciation and amortization (7,607) (13,851) (4,723) (2,155) (28,336)
--------- --------- --------- --------- ---------
Operating income (loss) (38,579) (29,531) (3,539) (924) (72,573)
Interest expense, net (1,518) (13,128) (4,410) (734) (19,790)
Other, net (2,531) (29,118) (20,569) -- (52,218)
--------- --------- --------- --------- ---------
Net loss $ (42,628) (71,777) (28,518) (1,658) (144,581)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
---------------------------------------------------------------------
Latin
America and
Asia and the United
Europe (a) Australia Caribbean States (b) Total
--------- --------- --------- --------- ---------
amounts in thousands
Combined Operations
<S> <C> <C> <C> <C> <C>
Revenue $ 258,681 116,642 28,199 67,927 471,449
Operating, selling, general and
administrative expenses (272,591) (128,535) (36,305) (61,007) (498,438)
Depreciation and amortization (8,040) (22,978) (2,796) (4,421) (38,235)
--------- --------- --------- --------- ---------
Operating income (loss) (21,950) (34,871) (10,902) 2,499 (65,224)
Interest expense, net (11,405) (8,656) (9,463) (1,821) (31,345)
Other, net (7,673) (1,832) (5,354) (369) (15,228)
--------- --------- --------- --------- ---------
Net earnings (loss) $ (41,028) (45,359) (25,719) 309 (111,797)
========= ========= ========= ========= =========
</TABLE>
(continued)
I-120
<PAGE> 123
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) The summarized combined operations for the nine months ended September
30, 1997 include the results of operations of Flextech but exclude the
results of operations of the Flextech Affiliates. The summarized
combined operations for the nine months ended September 30, 1996,
include the results of the Flextech Affiliates. See related discussion
above.
(b) The summarized operating results of TSX are included in the combined
operations through its February 1997 combination with Antec. See
related discussion above.
(c) The summarized operating results of Torneos are included in the
combined operations through April 29, 1996, the date of TINTA's
contribution of its 35% ownership interest in Torneos to Fox Sports
International.
(10) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
amounts in thousands
<S> <C> <C>
Convertible Subordinated
Debentures (a) $345,000 345,000
Cablevision bank loans (b) 158,046 104,556
Puerto Rico Bank Facility (c) 45,000 --
Other 16,184 76,698
-------- --------
$564,230 526,254
======== ========
</TABLE>
(a) On February 8, 1996, TINTA received net cash proceeds of approximately
$336 million from the issuance of 4-1/2% Convertible Subordinated
Debentures due 2006 having an aggregate principal amount of $345
million (the "Debentures"). The Debentures are convertible into shares
of TINTA Series A Common Stock at a price of $27.30 per share of TINTA
Series A Common Stock, subject to anti-dilution adjustments. Interest
on the Debentures is payable on February 15 and August 15 of each
year, commencing August 15, 1996. The Debentures are redeemable by
TINTA in whole or in part, at any time on or after February 15, 1999.
Pending its use by TINTA, the net proceeds from the sale of the
Debentures were loaned to TCI pursuant to the TCI Note Receivable. See
note 11.
(b) Represents Cablevision's bank debt, which is denominated in U.S.
dollars, and bears interest at fixed rates. Including value added tax,
the weighted average rate of Cablevision's bank debt at September 30,
1997 was 6.98%.
(continued)
I-121
<PAGE> 124
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary") entered
into a reducing revolving bank facility which is unsecured and
provides for maximum borrowing commitments of $100 million (the
"Puerto Rico Bank Facility"). The availability of such commitments for
borrowing is subject to the Puerto Rico Subsidiary's compliance with
applicable financial covenants and other customary conditions.
Commencing March 31, 2000, the maximum commitments will be reduced
quarterly through March 31, 2006. Borrowings under the Puerto Rico
Bank Facility bear interest at variable rates(6.16% at September 30,
1997). In addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused portion of
the maximum borrowing commitments, payable quarterly in arrears and at
maturity. The Puerto Rico Bank Facility contains restrictive covenants
which require, among other things, the maintenance of certain
financial ratios (primarily the ratios of cash flow to total debt and
cash flow to debt service, as defined), and includes certain
limitations on indebtedness, investments, guarantees, acquisitions,
dispositions, dividends, liens and encumbrances, and transactions with
affiliates. If TCI's ownership interest in TINTA were to fall below
50.1%, borrowings under the Puerto Rico Bank Facility would be secured
by the assets of the Puerto Rico Subsidiary and the variable interest
rates on such borrowings would be increased.
With the exception of the Debentures, which had a fair value of $291
million at September 30, 1997, the TCI Ventures Group believes that the
fair value and the carrying value of the TCI Ventures Group's debt were
approximately equal at September 30, 1997.
(11) Transactions with Related Parties
The components of due from related parties are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
amounts in thousands
<S> <C> <C>
TCI Note Receivable (a) (27,256) (176,501)
Revolving credit facility with TCI Group (b) -- --
Intercompany account (c) (9,949) --
--------- ---------
$ (37,205) (176,501)
========= =========
</TABLE>
- --------------------
(a) Amounts outstanding under the TCI Note Receivable between TINTA and
TCI bear interest at variable rates based on TCI's weighted average
cost of bank borrowings of similar maturities (6.4% at September 30,
1997). Principal and interest is due and payable as mutually agreed
from time to time by TCI and TINTA. During the nine months ended
September 30, 1997 and 1996, interest income related to the TCI Note
Receivable aggregated $4.3 million and $10.8 million, respectively.
(continued)
I-122
<PAGE> 125
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(b) The TCI Ventures Group is expected to require additional advances from
the TCI Group for some period of time. To satisfy this need, the TCI
Group has provided a revolving loan facility (the "Revolving Credit
Facility") to the TCI Ventures Group for a five-year period commencing
on September 10, 1997. Such facility permits aggregate borrowings at
any one time outstanding 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
Revolving Credit Facility is payable by the TCI Ventures Group to the
TCI Group on a quarterly basis. The maximum amount of borrowings
permitted under the Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent
that the aggregate amount of any additional capital that TCI Telephony
is required to contribute to Sprint PCS Partnerships subsequent to the
September 10, 1997 consummation of the Exchange Offers is less than
$300 million.
(c) 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. In
connection with the Exchange Offers, the September 10, 1997 balance of
the intercompany account between the TCI Group and TCI Ventures Group
was reclassified to "Combined Equity."
The TCI Ventures Group and its 80%-or-more-owned domestic businesses which
have been attributed to the TCI Ventures Group (the "TCI Ventures Tax
Group") are included in the consolidated federal and state income tax
returns of TCI. The TCI Ventures Group's income taxes include those items
in the consolidated calculation applicable to the TCI Ventures Tax Group
("intercompany tax allocation") and any income taxes of attributed entities
that are excluded from the consolidated federal and state income tax
returns of TCI. Intercompany tax allocation represents an apportionment of
tax expense or benefit (other than deferred taxes) among subsidiaries of
TCI in relation to their respective amounts of taxable earnings or losses.
(continued)
I-123
<PAGE> 126
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI, the
TCI Ventures Group and certain other 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, TCI Ventures Group was responsible to TCI for its 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 the TCI Ventures Group to the
extent that the income tax attributes generated by the TCI Ventures Tax
Group were utilized by TCI to reduce its consolidated income tax
liabilities (computed as if TCI were not liable for the alternative minimum
tax). The tax liabilities and benefits of such entities so determined are
charged or credited to an intercompany account between TCI and the TCI
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.
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 the TCI Group, the Liberty
Media Group and the TCI Ventures Group. Effective for periods on and after
the Effective Date, federal income taxes will be 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 will be made such that each
Group will be 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 would be inventoried
and tracked for ultimate credit to or charge against each Group. Similarly,
in each taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group in years that TCI utilizes the alternative minimum tax credit
associated with such taxable period. The Group generating the utilized tax
benefits would receive a cash payment only if, and when, the unutilized
taxable losses of the other Group are actually utilized. If the unutilized
taxable losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes are
calculated on a separate return basis for each Group (applying provisions
of state and local tax law and related regulations as if the Group were a
separate unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
(continued)
I-124
<PAGE> 127
"TCI 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 are consummated
after the Effective Date pursuant to a letter of intent or agreement that
was entered into prior to the Effective Date will be shared and allocated
pursuant to the terms of the Old Tax Sharing Agreement as amended.
In connection with the creation of the TCI Ventures Group, it was
determined that the net amount of the balance of each TCI Group
intercompany account under the Old Tax Sharing Agreement that is
attributable to entities included in the TCI Ventures Group for the period
beginning July 1, 1995 and ending on September 10, 1997 (the consummation
date of the Exchange Offers) will be reflected as an adjustment of TCI
Ventures Group's combined equity. Tax liabilities and benefits, as
determined under the Old Tax Sharing Agreement, that are generated by the
entities comprising the TCI Ventures Group for the period beginning on
September 10, 1997 and ending on September 30, 1997 will be credited or
debited to an intercompany account between the TCI Group and the TCI
Ventures Group in accordance with the Old Tax Sharing Agreement. The
intercompany tax account existing between TCI and TINTA for the period
beginning July 1, 1995 and ending September 30, 1997 will be required to be
settled between the TCI Ventures Group and TINTA if and when TINTA ceases
to be a member of TCI's consolidated group for federal income tax purposes.
A tax sharing arrangement between the TCI Ventures Group and TINTA covering
periods subsequent to September 30, 1997 is currently being negotiated.
Certain TCI corporate general and administrative costs are charged to the
TCI Ventures Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are set
at levels that management believes to be reasonable and that approximate
the costs the TCI Ventures Group would incur for comparable services on a
stand alone basis. During the nine months ended September 30, 1997 and
1996, the TCI Ventures Group was allocated $6.6 million and $6.0 million,
respectively, in corporate general and administrative costs by the TCI
Group.
Certain of the companies with domestic operations that are attributed to
the TCI Ventures Group provide services to companies attributed to one or
more of the other Groups, and certain of the companies attributed to the
other Groups provide services and the use of facilities to companies
attributed to the TCI Ventures Group. For example, Teleport has the
indefeasible right to use certain fiber optic and cable transmission
facilities of TCI for compensation based on the cost of construction of
such facilities. In general, such arrangements were entered into with
Teleport by TCI and other multiple cable system operators ("MSOs") that are
stockholders of Teleport several years ago when Teleport was a privately
owned company. Similarly, @Home has entered into arrangements for the
distribution of its @Home service with its stockholders that are MSO's. The
TCI Group has agreements with UVSG for, among other things, the carriage of
UVSG's Prevue Networks and superstation programming on certain of the cable
systems attributed to the TCI Group, and UVSG purchases programming from
companies attributed to the Liberty Media Group. Many of these contracts
were entered into prior to the UVSG Merger. Because of the presence in each
of Teleport, @Home and UVSG of other stockholders not affiliated with TCI
and the independent management teams at each of these companies, TCI
anticipates that future contractual arrangements between these companies
and entities attributed to the other Groups will be negotiated on an
arm's-length basis.
(continued)
I-125
<PAGE> 128
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In addition to the foregoing entities, WTCI and NDTC, each of which is a
wholly-owned subsidiary of TCI, provide or may provide services to the
other Groups. WTCI provides video transport services to the TCI Group (in
addition to service provided to third parties) based on published tariffed
rates. NDTC provides digital television services which include digital
compression of programming, satellite uplinking, and transponder management
primarily to programming suppliers, many of which are affiliated with the
Liberty Media Group. Such services provided to affiliated companies are
governed by agreements which have been negotiated on an arm's-length basis
and the material terms of which are substantially the same as those
governing relationships with third parties, except as appropriate to take
into account volume differences. NDTC has also recently begun offering on a
commercial basis its newly developed service of authorization of
addressable set-top boxes and transmission of compressed and encrypted
digital programming signals, and is currently negotiating a long term
contract with the TCI Group, for such services. Such negotiations are being
carried out on an arm's-length basis and it is expected that the material
terms made available to the TCI Group will be substantially the same as
those provided to unaffiliated third parties, but will include pricing on a
most favored nations basis due to the importance to NDTC of the TCI Group's
large customer base.
Amounts included in revenue for services provided to the other Groups by
WTCI and NDTC are $27.6 million and $11.8 million for the nine months ended
September 30, 1997 and 1996, respectively.
UVSG purchased programming from the Liberty Media Group and certain
affiliates during 1997 and 1996 amounting to $20.9 million and $10.3
million, respectively.
The Puerto Rico Subsidiary purchases programming services from the TCI
Group. The charges, which approximate the TCI Group's cost and are based on
the aggregate number of subscribers served by the Puerto Rico Subsidiary,
aggregated $4.9 million and $3.4 million during the nine months ended
September 30, 1997 and 1996, respectively. Such programming charges are
included in operating costs and expenses in the accompanying combined
statements of operations.
During the third quarter of 1997, TCI 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
subscribers are being processed on a CSG billing system. Under certain
circumstances, TCI may also be eligible to receive certain other contingent
royalties. In connection with the sale of the SUMMITrak Assets, TCI Group
committed to purchase billing services from CSG pursuant to three
successive five-year agreements. In light of such commitment, TCI Ventures
Group has reflected the $47 million excess of the cash received over the
book value of the SUMMITrak Assets as an increase to "Combined Equity." TCI
Group, in turn, recorded an offsetting decrease to "Combined Equity" and a
$47 million deferred gain to be amortized over the expected 15-year life of
the CSG billing services commitment.
(continued)
I-126
<PAGE> 129
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All debt incurred or preferred stock issued by TCI and its subsidiaries
following the issuance of TCI Ventures Group Stock is (unless the Board
otherwise provides) specifically attributed to and reflected in the
combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity
incurring the debt or issuing the preferred stock is Tele-Communications,
Inc., the TCI Group. The Board could, however, determine from time to time
that debt incurred or preferred stock issued by entities included in a
Group should be specifically attributed to and reflected in the combined
financial statements of one of the other Groups to the extent that the debt
is incurred or the preferred stock is issued for the benefit of such other
Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups
are remitted to the TCI Group and certain cash disbursements of the other
Groups will be funded by the TCI Group on a daily basis. Such transfers of
funds between the Groups will be reflected as borrowings or, if determined
by the Board, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the TCI Ventures Group, reflected as the creation
of, or increase in, the TCI Group's Inter-Group Interest in such Group or,
in the case of a transfer from either the Liberty Media Group or the TCI
Ventures Group to the TCI Group, reflected as a reduction in the TCI
Group's Inter-Group Interest in such Group. There are no specific criteria
for determining when a transfer will be reflected as a borrowing or as an
increase or reduction in an Inter-Group Interest. The Board expects to make
such determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors
as it deems relevant, including, without limitation, the needs of TCI, the
financing needs and objectives of the Groups, the investment objectives of
the Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic
conditions.
Except as described above with respect to the Revolving Credit Facility,
loans from one Group to another Group would bear interest at such rates and
have such repayment schedules and other terms as are established from time
to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by
setting generally applicable polices from time to time, after consideration
of such factors as it deems relevant, including, without limitation, the
needs of TCI, the use of proceeds by and creditworthiness of the recipient
Group, the capital expenditure plans of and investment opportunities
available to each Group and the availability, cost and time associated with
alternative financing sources.
(continued)
I-127
<PAGE> 130
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The combined balance sheets of a Group reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups reflect interest income or expense,
as the case may be, associated with such loans or borrowings and the
respective combined statements of cash flows of the Groups reflect changes
in the amounts of loans or borrowings deemed outstanding. In the historical
financial statements, net borrowings of the TCI Ventures Group have been
included as a component of the TCI Ventures Group's combined equity. Such
net borrowings will continue to be reflected as a component of the TCI
Ventures Group's combined equity. Amounts borrowed by the TCI Ventures
Group from another Group on and subsequent to the September 10, 1997
consummation of the Exchange Offers (including pursuant to the Revolving
Credit Facility), are reflected on the TCI Ventures Group's financial
statements as indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to
the TCI Ventures Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the TCI Ventures Group to the TCI
Group would be determined by reference to the market value of the Series A
TCI Ventures Group Stock as of the date of such transfer, such an increase
could occur at a time when such shares could be considered undervalued and
such a decrease could occur at a time when such shares could be considered
overvalued.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to
such extent reflected in the combined financial statements of the TCI
Ventures Group, and all financial impacts of issuances of shares of TCI
Ventures Group Stock the proceeds of which are attributed to the TCI Group
in respect of a reduction in the TCI Group's Inter-Group Interest in the
TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Group. Financial impacts of dividends or
other distributions on, and purchases of, TCI Group Stock will be
attributed entirely to the TCI Group, and financial impacts of dividends or
other distributions on TCI Ventures Group Stock will be attributed entirely
to the TCI Ventures Group, except that dividends or other distributions on
the TCI Ventures Group Stock will (if at the time there is an Inter-Group
Interest in the TCI Ventures Group) result in the TCI Group being credited,
and the TCI Ventures Group being charged (in addition to the charge for the
dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is
charged to the TCI Ventures Group will be to such extent reflected in the
combined financial statements of the TCI Ventures Group, and financial
impacts of repurchases of TCI Ventures Group Stock the consideration for
which is charged to the TCI Group will be to such extent reflected in the
combined financial statements of the TCI Group and will result in an
increase in the TCI Group's Inter-Group Interest in the TCI Ventures Group.
(continued)
I-128
<PAGE> 131
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(12) Commitments and Contingencies
As previously described in note 6, TCI Telephony is obligated to make cash
capital contributions to the Sprint PCS Partnerships.
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 $47 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.
TINTA is contingently obligated under the Standby Commitment and TINTA and
the TCI Ventures Group have other commitments and contingent obligations
with respect to the Other Affiliates. See note 9.
TINTA has formed strategic partnerships with News Corp., Organizacoes Globo
and Grupo Televisa S.A. to develop and operate a direct-to-home satellite
service for Latin America, Mexico, and various Central and South American
countries (collectively, the "DTH Ventures"). It is anticipated that TINTA
could be required to make cash contributions totaling $39 million over the
next three years in connection with the DTH Ventures.
Certain key employees of TCI involved with TCI Ventures Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock, Series A Liberty Media Group Stock, Series A TCI Ventures Group
Stock and TINTA Series A common stock as well as restricted shares of
Series A TCI Group Stock and TINTA Series A common stock. Additionally, in
December of 1996, certain employees of TCI involved with the TCI Ventures
Group were each granted options representing in the aggregate 2.0% of the
common equity of TCI Teleport Holdings, Inc., TCI Wireless Holdings, Inc.,
TCI Wireline Holdings, Inc., TCI Internet Services, Inc., and TCI.NET, Inc.
The exercise price of each such option will be adjusted for a 6% per annum
interest factor to the date of exercise. Additionally, in December of 1996,
certain employees involved with the TCI Ventures Group was granted options
representing in the aggregate 2.0% of TCI Satellite Entertainment, Inc.
(continued)
I-129
<PAGE> 132
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Estimates of the compensation relating to the options and/or stock
appreciation rights as well as restricted stock awards granted to employees
involved with the TCI Ventures Group have been recorded in the accompanying
combined financial statements, but are subject to future adjustment based
upon the market value of the underlying equity and, ultimately, on the
final determination of market value when the options or rights are
exercised or the restricted shares are vested.
I-130
<PAGE> 133
"TCI VENTURES GROUP"
(a combination of certain assets)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion and analysis should be read in conjunction with
the TCI Ventures Group's combined financial statements included elsewhere
herein.
Upon the September 10, 1997 consummation of the Exchange Offers,
188,661,300 shares of Series A TCI Group Common Stock and 16,266,400 shares of
Series B TCI Group Common Stock were exchanged for an equivalent number of
shares of Series A TCI Ventures Group Stock and Series B TCI Ventures Group
Stock, respectively. The aggregate number of shares of TCI Ventures Group Stock
issued in the Exchange Offers represented 100% of the common stockholders'
equity value of TCI attributable to the TCI Ventures Group. For additional
information concerning the Exchange Offers and the characteristics of the TCI
Ventures Group Stock, see note 1 to the accompanying combined financial
statements.
As of September 30, 1997, the TCI Ventures Group Stock reflects the
separate performance of the TCI Ventures Group, which is comprised of TCI's
principal international assets and businesses and substantially all of TCI's
non-cable and non-programming domestic assets and businesses. For additional
information concerning the TCI Ventures Group, see note 1 to the accompanying
combined financial statements. For information concerning transactions among TCI
Ventures Group, TCI Group and TCI Liberty Group, see note 11 to the accompanying
combined financial statements.
A significant portion of the TCI Ventures Group's operations are conducted
through corporations and partnerships in which the TCI Ventures Group holds a
20%-50% ownership interest. As the TCI Ventures Group generally accounts for
such ownership interests using the equity method of accounting, the financial
condition and results of operations of such entities are not reflected on a
combined basis within the TCI Ventures Group's combined financial statements.
I-131
<PAGE> 134
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition
The TCI Ventures Group's combined operating activities provided cash of
$133.0 million and $53.5 million during the nine months ended September 30,
1997 and 1996, respectively. Included in such amounts are $40.0 million and
$42.7 million of cash provided by Cablevision's operations during the nine
months ended September 30, 1997 and 1996, respectively. As discussed in note 5
to the accompanying combined financial statements, effective October 1, 1997,
Cablevision's cash flows will no longer be included in the TCI Ventures Group's
combined statements of cash flows. In addition, the 1996 amount includes cash
used in Flextech's operating activities of $33.1 million. As discussed under
note 9 to the accompanying combined financial statements, effective January 1,
1997, Flextech's cash flows are no longer included in the TCI Ventures Group's
combined statements of cash flows.
During the nine months ended September 30, 1997 and 1996, cash used by the
Company's investing activities aggregated $293.8 million and $450.3 million,
respectively. Such amounts include $364.8 million and $381.7 million,
respectively, that were used by the TCI Ventures Group to fund investments in,
and loans to, affiliates. In addition, the 1997 amount includes a $38.1 million
reduction in TINTA's cash and cash equivalents as a result of the
deconsolidation of Flextech. See notes 6 and 9 to the accompanying combined
financial statements. See also the combined statements of cash flows included in
the accompanying combined financial statements.
There can be no assurance that any of the TCI Ventures Group's entities
will be successful in generating sufficient cash flow from operating activities
or raising debt or equity capital in sufficient amounts or on terms acceptable
to them to be able to meet their respective capital requirements. There is also
no assurance that the anticipated capital requirements described below will not
significantly increase due to changing circumstances, such as unanticipated
opportunities, technological or marketing hurdles, unanticipated expenses, and
the like. The failure to generate sufficient cash flow from operating activities
or to raise sufficient funds may require such entity to delay or abandon some or
all of its development and expansion plans or in certain instances, could result
in the failure to meet certain regulatory requirements, any and all of which
could have a material adverse effect on such entity's growth, its ability to
compete in its industry and its ability to service its debt.
I-132
<PAGE> 135
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
The following table sets forth total assets and debt and capital lease
obligations for the TCI Ventures Group and each of the combined businesses
attributed to it at September 30, 1997 (amounts in thousands):
<TABLE>
<S> <C>
Total assets
TINTA $1,899,304
TCI Telephony 939,672
UVSG 421,704
NDTC 358,173
@Home 166,986
ETC w/tci 102,327
WTCI 86,128
Other 444,122
----------
$4,418,416
==========
Debt and capital lease
obligations
TINTA (1) $ 553,295
NDTC 161,375
UVSG 26,138
ETC w/tci 10,934
@Home 1,779
Other 183,149
----------
$ 936,670
==========
</TABLE>
- --------------------------
(1) At September 30, 1997, TINTA's debt included $163.3 million of debt related
to Cablevision. As discussed in note 5 to the accompanying combined
financial statements, effective October 1, 1997, Cablevision's debt will no
longer be included in TINTA's consolidated financial condition.
I-133
<PAGE> 136
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
Substantially all of the entities the ownership of which, or the investment
in which, has been attributed to the TCI Ventures Group will require significant
additional capital in order to develop their respective businesses and assets,
to fund future operating losses and to fund future growth. The TCI Ventures
Group's businesses and investments consist of entities which require the
acquisition, ownership, development and operation of broadband cable television
and telephony distribution networks and new programming services, all of which
require substantial capital investment. In certain cases, principally with
respect to the Sprint PCS Partnerships, the TCI Ventures Group 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. TINTA and its consolidated subsidiaries also have commitments
under various partnership and other funding agreements to contribute capital or
loan money to fund capital expenditures and other capital requirements of
certain affiliates. TINTA believes that its actual future cash requirements
needed to fund the capital expenditures and working capital requirements of its
subsidiaries and affiliates will exceed the sum of the amounts that TINTA and
its consolidated subsidiaries are currently contractually obligated to fund.
TINTA is not able to more precisely predict the timing or amount of the future
funding requirements of its affiliates because such future costs requirements
are dependent upon a variety of factors.
The failure of the TCI Ventures Group to meet its capital commitments to a
particular operating company or affiliate may have adverse consequences to it
and to the TCI Ventures Group.
The Sprint PCS Partners, including TCI Telephony, have agreed to contribute
up to an aggregate of approximately $4.2 billion of equity to the Sprint PCS
Partnerships from inception through fiscal 1999 (of which TCI Telephony's share
is approximately $1.3 billion). As of September 30, 1997 approximately $3.7
billion of such $4.2 billion had been contributed to the Sprint PCS
Partnerships, of which amount TCI Telephony had contributed approximately $1.1
million. TCI Telephony currently expects that the remaining approximately $0.5
billion of such amount (of which TCI Telephony's share would be approximately
$0.2 million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although it is not presently known whether any
additional capital will be contributed by any or all of the Sprint PCS
Partners). The TCI Ventures Group expects that the Sprint PCS Partnerships will
require additional equity thereafter.
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
TCI Ventures Group currently believes that such agreement will not result in TCI
Telephony being required to make any incremental capital contributions in
addition to its pro rata portion of the aforementioned $4.2 billion amount.
(continued)
I-134
<PAGE> 137
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
Historically, the TCI Ventures Group's combined operating activities have
not provided sufficient funds to meet all of the TCI Ventures Group's capital
requirements. The TCI Ventures Group's ability to obtain sufficient capital
resources to make its expected additional capital contributions to the Sprint
PCS Partnerships and other entities in which it has investments are limited.
WTCI and NDTC are the only wholly-owned subsidiaries attributed to the TCI
Ventures Group that are operating companies and such entities are currently the
TCI Ventures Group's only source of cash provided by operating activities. As a
result, the TCI Ventures Group has limited ability to generate funds internally
to fund capital requirements and limited cash flow from operating activities to
support external financings. The other operating companies attributed to the TCI
Ventures Group have other investors, public or private, and the payment of
dividends, or the making of loans or advances by any one of such TCI Ventures
Group entities to any other of such TCI Ventures Group entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. Initially, therefore, the TCI
Ventures Group will rely on borrowings under the Revolving Credit Facility which
has a five-year term commencing on September 10, 1997. Such facility permits
aggregate borrowings at any one time outstanding 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 Revolving Revolving
Credit Facility is payable by the TCI Ventures Group to the TCI Group on a
quarterly basis. The maximum amount of borrowings permitted under the Revolving
Credit Facility will be reduced on a dollar-for-dollar basis by up to $300
million if and to the extent that the aggregate amount of any additional capital
that TCI Telephony is required to contribute to Sprint PCS Partnerships
subsequent to the September 10, 1997 consummation of the Exchange Offers is less
than $300 million. If the available borrowings under the Revolving Credit
Facility are not sufficient to fund the TCI Ventures Group's capital
requirements, no assurance can be given that the TCI Ventures Group will be able
to obtain any required additional financing on terms acceptable to it, or at
all. TCI could raise additional capital for the TCI Ventures Group by, among
other things, engaging in public offerings or private placements of TCI Ventures
Group common stock or through issuance of debt securities or preferred equity
securities attributed to the TCI Ventures Group. It is anticipated, however that
for the foreseeable future the TCI Ventures Group will continue to be dependent
upon funding from the TCI Group. The TCI Ventures Group's failure to meet its
contractual and other capital requirements could have significant adverse
consequences to the TCI Ventures Group.
(continued)
I-135
<PAGE> 138
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
TINTA's business strategy requires that it have the ability to access or
raise sufficient funds to allow it to take advantage of new acquisition and
joint venture opportunities as they arise, which management of TINTA believes
will require substantial additional funds. Although TINTA had, at September 30,
1997, (i) $48.5 million of cash and cash equivalents, (ii) $27.3 million
proceeds remaining from the sale of the Debentures (which had been loaned to TCI
pursuant to an unsecured promissory note pending its use by TINTA), (iii) a $200
million credit facility with the TCI Ventures Group and (iv) the ability to
access any excess cash and borrowing availability of the Puerto Rico Subsidiary,
TINTA's ability to otherwise obtain financing to assist its operating companies
and to meet its capital obligations at other than the subsidiary level will be
limited because TINTA does not conduct any operations directly. Furthermore,
because TINTA's assets consist primarily of ownership interests in foreign
subsidiaries and affiliates, the repatriation of any cash provided by such
subsidiaries' and affiliates' operating activities in the form of dividends,
loans or other payments is subject to, among other things, exchange rate
fluctuations, tax laws and other economic considerations, as well as applicable
statutory and contractual restrictions. Moreover, the liquidity sources of
TINTA's foreign subsidiaries and affiliates are generally intended to be applied
towards the respective liquidity requirements of such foreign subsidiaries and
affiliates, and accordingly, do not represent a direct source of liquidity to
TINTA. Accordingly, with the exception of any liquidity that may be provided to
TINTA by the Puerto Rico Subsidiary, no assurance can be given that TINTA will
have access to any cash generated by its foreign operating subsidiaries and
affiliates.
TINTA has invested in most of its subsidiaries and affiliates with
strategic and local partners, and financial and operational considerations, as
well as laws that limit foreign equity positions, will likely require TINTA to
continue to invest with partners. Many foreign countries limit foreign
investment to a minority equity position or require the board of directors to be
largely independent, which, can result in TINTA having diminished ability to
implement strategies that TINTA may favor, or cause dividends or distributions
to be paid.
I-136
<PAGE> 139
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
September 30, 1997 there were minimal subscribers to its @Home services. @Home
believes that the proceeds of $109 million, before commissions and fees,
from its initial public offering on July 11, 1997, together with existing cash,
cash equivalents and capital lease financing, will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months. @Home may, however, require additional funds if its estimates of working
capital and/or capital expenditure and/or lease financing requirements change or
prove inaccurate or in order for @Home to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities. Over the
longer term, it is likely that @Home will require substantial additional funds
to continue to fund its infrastructure investment, product development,
marketing, sales and customer support needs. There can be no assurance that any
such funds will be available at the time or times needed, or available on terms
acceptable to @Home. If adequate funds are not available, or are not available
on acceptable terms, @Home may not be able to continue its network
implementation, to develop new products and services or otherwise to respond to
competitive pressures. Such inability could have a material adverse effect on
@Home's business, operating results and financial condition.
Because TCI's investment in @Home is attributed to the TCI Ventures Group
while the entity which will distribute the @Home service to subscribers of TCI's
cable systems is attributed to the TCI Group, certain conflicts of interest
between the TCI Group and the TCI Ventures Group may result in that actions
taken by the TCI Group, such as the speed at which TCI's cable television
systems are upgraded to the level necessary to support distribution of the @Home
service, will have a direct impact upon the value of the TCI Ventures Group's
interest in @Home. Similarly, the extent to which TCI elects to use @Home as the
provider of certain services which are not covered by TCI's exclusivity
obligations to @Home, rather than another third party, may have an effect upon
the business of @Home and therefore upon the value of the TCI Ventures Group.
Effective October 2, 1997, @Home entered into the CSC Agreement. The CSC
Agreement provides that CSC will enter into a Master Distribution Agreement for
the distribution of @Home's high speed residential consumer Internet access
services on substantially the same terms and conditions as agreements previously
entered into with TCI, Comcast and Cox. The CSC Agreement provides for the
issuance of the CSC Warrant to purchase up to 7,875,784 shares of @Home's Series
A common stock at an exercise price of $.50 per share. The CSC Warrant is
immediately exercisable, subject to the receipt of all necessary governmental
consents or approvals. The CSC Agreement provides for the issuance of the CSC
Contingent Warrant to purchase up to 3,071,152 shares of @Home's Series A common
stock at an exercise price of $.50 per share under certain conditions. The CSC
Contingent Warrant is not immediately exercisable and will become exercisable as
and to the extent certain cable television systems are transferred from TCI and
its controlled affiliates to CSC, CSC Parent or their controlled affiliates.
I-137
<PAGE> 140
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
During the period in which each of TCI, Cox, Comcast and CSC have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
("base homes passed") (approximately 24 million subject to downward adjustment
to reflect the number of homes passed in systems transferred to CSC pursuant to
an agreement in which TCI has agreed to contribute certain of its cable
television systems to CSC), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems that would reduce TCI's number of base homes
passed. In addition, TCI has announced that it is considering various plans and
proposals that may result in the disposition of other of its cable systems. In
the event that such cable systems continue to be exclusive to @Home, such cable
systems and their homes passed would continue to be included in TCI's homes
passed for purposes of determining whether or not TCI is obligated to offer a
portion of its equity interest in @Home to Cox, Comcast and CSC even though such
cable systems are no longer owned or controlled by TCI. If TCI does not require
that such cable systems remain exclusive to @Home, the TCI Ventures Group could
be required to sell shares to Cox, Comcast, CSC and Kleiner, Perkins, Caufield
and Byers, at fair market value. There can be no assurance that, if the TCI
Ventures Group is required to sell shares of @Home, the price paid to the TCI
Ventures Group would represent adequate consideration to the TCI Ventures Group
because such fair market value may not adequately reflect the TCI Ventures
Group's expectation of the long term value of such investments in @Home. In
addition to the exceptions to the general exclusivity obligations, Cox and
Comcast have the right to terminate the exclusivity provisions with respect to
TCI, Cox and Comcast in the event TCI does not attain certain subscriber
penetration levels for the @Home service relative to the subscriber penetration
levels of Cox and Comcast, as of June 4, 1999, and each anniversary thereafter
until 2002. Such termination could have a material adverse effect on @Home and
the value of the TCI Ventures Group's interest in @Home.
In addition, although TCI, Cox, Comcast and CSC are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
The TCI Group has agreements with UVSG for the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems attributed
to the TCI Group and for UVSG's subscriber management services, and UVSG
purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment is attributed to the TCI Ventures Group, situations may
arise where the entity attributed to one Group may make a decision which
adversely affects one of the other Groups.
I-138
<PAGE> 141
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group entities. In addition, TINTA and certain of
the other TCI Ventures Group entities, such as Teleport and Sprint PCS, are
holding companies, the assets of which consist solely or primarily of
investments in their subsidiaries and affiliates. As such, the ability of such
holding companies to meet their respective financial obligations and their
funding and other commitments to their respective subsidiaries and affiliates,
is dependent upon external financing and/or dividends, loans or other payments
from their respective subsidiaries and affiliates. Accordingly, such holding
companies' ability to meet their respective liquidity requirements, including
debt service, is severely limited as a result of their dependence upon external
financing and funds received from their respective subsidiaries and affiliates.
The payment of dividends or the making of loans or advances to such holding
companies by their respective subsidiaries and affiliates may be subject to
statutory, regulatory or contractual restrictions, are contingent upon the
earnings of those subsidiaries and affiliates, and are subject to various
business considerations.
Many of the TCI Ventures Group entities 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. Also,
alternative technologies may develop for the provision of services similar to
those provided by such entities. Such entities may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time such entity is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage. Neither PCS systems nor the delivery of Internet
services over the cable infrastructure have any significant commercial operating
history in the United States and there can be no assurance that operation of
either of these businesses will become profitable. If markets fail to develop,
develop more slowly than expected, or become highly competitive, the TCI
Ventures Group's operating results and financial condition may be materially
adversely affected.
Certain of the countries in which TINTA has operating companies or in which
TINTA may operate in the future, may be subject to a substantially greater
degree of social, political and economic instability than is the case in other
countries. Risks associated with social, political and economic instability in a
particular country could materially adversely affect the results of operations
and financial condition of any subsidiary or affiliate of TINTA located within
such country or that has significant operations there (and thereby have a
potentially material adverse effect on the results of operations or financial
condition of TINTA) and could result in the loss of TINTA's investment in such
subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
I-139
<PAGE> 142
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
TINTA is exposed to unfavorable and potentially volatile fluctuations of
the U.S. dollar (the functional currency of TINTA) against the UK pound
sterling, the Japanese yen ("Y."), the Argentine peso and various other foreign
currencies that are the functional currencies of certain of TINTA's operating
subsidiaries and affiliates. Since the enactment of a convertibility plan in
April 1991, the Argentine government has maintained an exchange rate of one
Argentine peso to one U.S. dollar. No assurance can be given that such an
exchange rate will be maintained in future periods.
Because TINTA's functional currency is the U.S. dollar, any increase or
decrease in the value of the U.S. dollar against any foreign currency in which
TINTA has funding commitments effectively reduces or increases the U.S. dollar
equivalent of such funding commitments. At the same time, any increase or
decrease in the value of the U.S. dollar against any foreign currency that is
the functional currency of an operating subsidiary or affiliate of TINTA will
cause TINTA to experience unrealized foreign currency translation losses or
gains with respect to amounts already invested in such foreign currencies.
TINTA and certain of its operating subsidiaries and affiliates are also
exposed to foreign currency risk to the extent that they enter into transactions
denominated in currencies other than their respective functional currencies. In
this regard, TINTA has experienced realized and unrealized currency gains and
losses with respect to (i) the UK pound sterling denominated loans made by an
indirect subsidiary of TINTA to Flextech and (ii) TINTA's French franc
denominated obligation (the MultiThematiques Obligation) to make capital
contributions to MultiThematiques. In addition, Telewest has experienced
realized and unrealized foreign currency transaction gains and losses with
respect to the Telewest Debentures.
Because TINTA generally views its foreign operating subsidiaries and
affiliates as long-term investments, TINTA generally does not attempt to hedge
existing investments in its foreign affiliates and subsidiaries. With respect to
funding commitments that are denominated in currencies other than the U.S.
dollar, TINTA historically has sought to reduce its exposure to short-term
(generally no more than 90 days) movements in the applicable exchange rates once
the timing and amount of such funding commitments become fixed. Although TINTA
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, TINTA believes that, given
the nature of its business, it is not possible or practical to eliminate TINTA's
exposure to unfavorable fluctuations in foreign currency exchange rates.
TINTA has formed strategic partnerships with News Corp., Organizacoes Globo
and Grupo Televisa S.A. to develop and operate a direct-to-home satellite
service for Latin America, Mexico, and various Central and South American
countries. It is anticipated that TINTA could be required to make cash
contributions totaling approximately $39 million over the next three years in
connection with the DTH Ventures.
TINTA may make additional cash contributions totaling approximately $16
million to the LLC to fund the operations of Fox Sports International.
I-140
<PAGE> 143
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
On April 19, 1996, TINTA, Torneos and the Torneos stockholders entered into
the TINTA/Torneos Sports Agreement whereby TINTA agreed to make minimum periodic
payments from 1996 through 2004 aggregating $235.2 million to acquire certain
rights and considerations, including the exploitation rights to all sports
rights owned by Torneos with the exception of any rights which at that time had
been contractually committed to any third party. The rights under the
TINTA/Torneos Sports Agreement have been assigned to Fox Sports International.
The TCI Ventures Group has significant contingent obligations with respect
to guarantees, credit enhancements and other contingent obligations arising from
its ownership interests in affiliates and other matters. The TCI Ventures Group
also has consummated certain transactions and entered into certain agreements
which have impacted or may, in the future, impact the TCI Ventures Group's
liquidity and capital resources. For additional information, see notes 6, 9 and
12 to the accompanying combined financial statements.
The board of directors of TINTA has authorized TINTA to repurchase from
time to time up to 5% (approximately 5.3 million shares) of its outstanding
TINTA Series A Common Stock. Through September 30, 1997, TINTA had repurchased
3,370,000 shares under such program for an aggregate purchase price of $42.0
million.
The board of directors of UVSG has authorized UVSG to repurchase from time
to time up to an aggregate of 1,000,000 shares of UVSG's Class A common stock
using existing cash resources. Through September 30, 1997, UVSG had repurchased
124,000 shares of stock for a total of $2.1 million.
In September 1997, the Board authorized a stock repurchase program, under
which TCI may repurchase from time to time up to five percent of its TCI
Ventures Group Stock.
On July 11, 1997 @Home completed its IPO, in which 10,350,000 shares of
@Home common stock were sold to the public for aggregate cash consideration of
approximately $109 million, before commissions and fees. As a result of the IPO,
the TCI Ventures Group's economic interest in @Home decreased from 43% to 39%.
In connection with the associated dilution of the TCI Ventures Group's ownership
interest of @Home, the TCI Ventures Group recognized a gain of $60 million.
As a result of the April 1997 issuance of shares by Flextech in connection
with Flextech's acquisition of all of the share capital of UKLL and UKGL which
Flextech did not already own, and the associated dilution of TINTA's ownership
interest in Flextech, TINTA recorded a $151.6 million increase to the carrying
value of its investment in Flextech, a $98.5 million increase to "Combined
equity" and a $53.1 million increase to "Deferred income tax liability." No gain
was recognized due primarily to TINTA's contingent obligations under the Standby
Commitment.
On September 26, 1997, TINTA sold its interest in TCID of New Zealand, Inc.
for cash proceeds of $53.0 million. TINTA recognized a gain of $58.4 million on
such sale.
I-141
<PAGE> 144
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Financial Condition (continued)
During the third quarter of 1997, TCI Ventures Group sold the SUMMITrak
Assets to CSG for cash consideration of $106 million, plus CSG Warrants to
purchase up to 1.5 million shares of CSG common stock and $12 million in cash,
once certain numbers of TCI affiliated subscribers are being processed on a CSG
billing system. For additional information concerning the sale of the SUMMITrak
Assets see note 11 to the accompanying combined financial statements.
On October 9, 1997, TINTA sold a portion of its 51% interest in Cablevision
to CEI and Telefonica for cash consideration of $120.0 million ($21.0 million of
which was received in the third quarter of 1997). In addition, on October 9,
1997, Cablevision issued 3,541,829 shares of stock in the aggregate to the
Buyers for $80 million in cash and notes receivable with an aggregate principal
amount of $240 million. The Cablevision Sale reduced TINTA's interest in
Cablevision to 26.24%. Cash proceeds received by TINTA of $120 million were
based on a negotiated value of $210 million for approximately one-half of
TINTA's 51% interest in Cablevision. As a result of the Cablevision Sale,
effective October 1, 1997, TINTA will cease to consolidate Cablevision and will
begin to account for Cablevision using the equity method of accounting.
At September 30, 1997, the TCI Ventures Group had aggregate debt of $564.2
million. For additional information concerning the terms of such debt, see note
10 to the accompanying combined financial statements. At September 30, 1997, the
TCI Ventures Group's debt included $163.3 million of debt related to
Cablevision. As discussed in note 5 to the accompanying combined financial
statements, effective October 1, 1997, Cablevision's debt will no longer be
included in the TCI Ventures Group's combined financial condition.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or operational
strategies through one Group or one or more of the other Groups, after
consideration of such factors as it deems relevant.
I-142
<PAGE> 145
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations
The following tables set forth certain financial information for the TCI
Ventures Group and each of the combined businesses attributed to it for the
indicated periods:
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------------
1997 1996
--------------------------- ---------------------------
Amount % Amount %
--------- --------- --------- ---------
dollar amounts in thousands
---------------------------
<S> <C> <C> <C> <C>
Revenue:
UVSG (1) (2) $ 376,882 50% 283,187 44%
TINTA (3) (4) (5) 206,621 27 219,873 35
ETC w/tci 65,245 9 58,809 9
NDTC (6) 69,750 9 50,073 8
WTCI (7) 25,984 3 24,113 4
@Home 3,737 1 141 --
Other 9,863 1 1,474 --
--------- --------- --------- ---------
$ 758,082 100% 637,670 100%
========= ========= ========= =========
Operating, selling, general,
administrative and stock
compensation:
UVSG (1) (2) $ 302,237 44% 234,151 42%
TINTA (3) (4) (5) 139,814 20 190,305 34
ETC w/tci 78,852 11 62,164 11
NDTC 62,006 9 31,943 6
WTCI 17,058 3 14,568 3
@Home 34,804 5 15,254 3
Other 57,032 8 5,849 1
--------- --------- --------- ---------
$ 691,803 100% 554,234 100%
========= ========= ========= =========
Depreciation and amortization:
UVSG (1) (2) $ 26,839 19% 21,049 20%
TINTA (3) (4) (5) 50,658 37 39,014 38
ETC w/tci 4,663 3 4,485 4
NDTC 38,168 27 21,799 21
WTCI 6,416 5 8,737 8
@Home 5,311 4 787 1
Other 6,094 5 7,746 8
--------- --------- --------- ---------
$ 138,149 100% 103,617 100%
========= ========= ========= =========
Operating income (loss):
UVSG (1) (2) $ 47,806 (8) 27,987 (8)
TINTA (3) (4) (5) 16,149 (9,446)
ETC w/tci (18,270) (7,840)
NDTC (2,222) (3,669)
WTCI 2,510 808
@Home (36,378) (15,900)
Other (81,465) (12,121)
--------- ---------
$ (71,870) (20,181)
========= =========
</TABLE>
I-143
<PAGE> 146
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
- ----------
(1) On January 25, 1996, the stockholders of UVSG adopted an agreement and
plan of merger dated as of July 10, 1995, as amended. The results of
operations of UVSG have been combined with those of the TCI Ventures
Group since the date of acquisition.
(2) On August 9, 1996, UVSG and the Liberty Media Group contributed their
retail C-band home satellite dish business assets, obligations and
operations, effective April 1, 1996 to the Satellite Joint Venture.
Accordingly, the operations of the Satellite Joint Venture have been
combined effective April 1, 1996, with the operating results of UVSG.
(3) On October 1, 1996, Cablevision acquired 99.9% of the issued and
outstanding stock of OCC. In accordance with the purchase method of
accounting OCC has been included in Cablevision's consolidated
statements since the October 1, 1996 acquisition date.
(4) As described in note 9 to the accompanying combined financial
statements, TINTA, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. As a result, TINTA's results of operations for the nine
months ended September 30, 1997 do not include Flextech's results of
operations on a consolidated basis. The following table sets forth
summary information with respect to the operating results of Flextech
that were included in TINTA's results of operations for the nine
months ended September 30, 1996 (amounts in thousands):
<TABLE>
<S> <C>
Revenue $ 67,593
Operating costs and expenses
before depreciation and
amortization (88,169)
Depreciation and amortization (5,372)
--------
Operating loss (25,948)
Other, net 12,031
--------
Net loss $(13,917)
========
</TABLE>
(5) On October 9, 1997 TINTA sold 14.5% of its 51% interest in
Cablevision. In addition, on October 9, 1997 Cablevision issued
3,541,829 shares of stock in the aggregate to CEI and Telefonica which
further reduced TINTA's interest in Cablevision to 26.24%. As a result
of the Cablevision Sale, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the
equity method of accounting.
I-144
<PAGE> 147
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
(6) A significant number of NDTC's major customers are affiliates of TCI,
and NDTC derives a substantial portion of its revenue from such
affiliated companies. For the nine months ended September 30, 1997 and
1996, revenue from services provided to TCI and its consolidated
subsidiaries accounted for 38% and 21%, respectively, of NDTC's
total revenue.
(7) For the nine months ended September 30, 1997 and 1996, WTCI's six
largest customers accounted in the aggregate for approximately 70% of
WTCI's consolidated gross revenue, respectively. WTCI's six largest
customers' master service contracts all contain many service orders
(in some cases, in excess of 100 service orders) with remaining terms
varying from 1 month to approximately 15 months.
(8) Not meaningful
Revenue
Revenue increased by $20.4 million and $120.4 million or 9% and 19% during
the three and nine month periods ended September 30, 1997, respectively, as
compared to the same periods in 1996. Such increases principally result from
increases in revenue of UVSG, NDTC and ETC w/tci, net of decreases in TINTA's
revenue.
Revenue from UVSG increased by $8.2 million and $93.6 million or 7% and 33%
during the three and nine month periods ended September 30, 1997, respectively,
as compared to the same periods in 1996. The increased revenue for the three
months ended September 30, 1997 as compared to the prior year period was
primarily attributable to a $4.3 million increase in the revenue of UVSG's
software development and systems integration services. The increased revenue for
the nine months ended September 30, 1997, as compared to the prior year period,
was primarily due to the inclusion of UVSG for eight months in 1996 versus nine
months in 1997 as well as $39.4 million of additional revenue attributable to
the Satellite Joint Venture.
TINTA's revenue decreased $10.8 million and $13.3 million or 13% and 6%
during the three and nine month periods ended September 30, 1997, respectively,
as compared to the corresponding prior year periods. Such decreases for the
three and nine month periods ended September 30, 1997, as compared to the
corresponding prior year periods, were the net result of (i) decreases of $31.7
million and $67.6 million, respectively, in programming revenue due to the
January 1, 1997 deconsolidation of Flextech and (ii) increases in cable revenue
of $20.9 million and $54.3 million, respectively. Cable revenue increased
primarily as a result of the OCC Acquisition and 5% and 9% increases in
Cablevision's and the Puerto Rico Subsidiary's average number of basic
subscribers (exclusive of basic subscribers acquired in acquisitions),
respectively.
I-145
<PAGE> 148
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation and amortization,
increased $60.5 million and $137.6 million or 29% and 25% during the three and
nine month periods ended September 30, 1997, respectively, as compared to the
same periods in 1996. Such increases were primarily the net result of (i)
increases in stock compensation expense, (ii) increases in the operating costs
and expenses, excluding depreciation and amortization of UVSG, NDTC, and ETC
w/tci and (iii) decreases in TINTA's operating costs and expenses, excluding
depreciation and amortization.
UVSG's operating costs and expenses, excluding depreciation and
amortization, remained relatively constant during the three months ended
September 30, 1997, as compared to the prior year period. Operating costs and
expenses, excluding depreciation and amortization, from UVSG increased by $68.1
million or 29% during the nine month period ended September 30, 1997, as
compared to the prior year period. Such increase was primarily due to the
inclusion of UVSG for eight months in 1996 versus nine months in 1997 as well as
$35.9 million of additional costs attributable to the inclusion of the Satellite
Joint Venture.
TINTA costs and expenses, excluding depreciation and amortization,
decreased $19.2 million and $50.5 million or 26% and 27% during the three and
nine month periods ended September 30, 1997, respectively, as compared to the
corresponding prior year periods. Such decreases for the three and nine month
periods ended September 30, 1997 were comprised of (i) decreases of $38.3
million and $88.2 million, respectively, resulting from the deconsolidation of
Flextech and (ii) increases in cable operating costs and expenses of $11.8
million and $30.8 million, respectively. Increases in cable operating costs and
expenses are primarily attributable to higher programming costs which are due to
a higher number of subscribers and higher programming rates.
Certain TCI corporate general and administrative costs are charged to the
TCI Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs the TCI
Ventures Group would incur for comparable services on a stand alone basis.
During the three months ended September 30, 1997 and 1996, the TCI Ventures
Group was allocated $2.2 million and $1.9 million, respectively, in corporate
general and administrative costs by the TCI Group. During the nine months ended
September 30, 1997 and 1996, the TCI Ventures Group was allocated $6.6 million
and $6.0 million, respectively, in corporate general and administrative costs
by the TCI Group.
The $3.7 million and $34.5 million or 26% and 33% increases in depreciation
and amortization expense during the three and nine month periods ended September
30, 1997, respectively, as compared to the corresponding prior year periods, are
the result of a net increase in the TCI Ventures Group's assets that are subject
to depreciation and amortization. The increases in such assets that are
attributable to acquisitions and capital expenditures more than offset the
decrease attributable to the January 1, 1997 deconsolidation of Flextech.
I-146
<PAGE> 149
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
Other Income and Expense
The share of losses from the TCI Ventures Group's investment in the PCS
Ventures increased $116.4 million and $226.1 million during the three and nine
month periods ended September 30, 1997, respectively, as compared to the
corresponding prior year periods. The increases in the share of losses are
attributed primarily to general and administrative costs associated with the
start-up of operations and Sprint Spectrum's share of losses in American PCS
L.P. The PCS Ventures are in the development stage of operations. It is expected
that Sprint PCS will continue to incur significant operating losses and
significant negative cash flow from operating activities during the next several
years while it develops and constructs its PCS network and builds its customer
base. If and when Sprint PCS has successfully completed its network buildout,
Sprint PCS's operating profitability will depend upon many factors, including,
among others, its ability to market its products and services successfully,
achieve its projected market penetration, manage customer turnover rates
effectively and price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.
Telewest has incurred losses since its inception. TCI Ventures Group's
share of Telewest's net losses increased $8.9 million and $12.1 million or 31%
and 12% during the three and nine month periods ended September 30, 1997,
respectively, as compared to the corresponding prior year periods. Such
increases are primarily attributable to (i) increases in depreciation and
amortization and interest expense and (ii) changes in foreign currency
transaction losses. In connection with a previous merger transaction, Telewest
issued the Telewest Debentures. Changes in the exchange rate used to translate
the Telewest Debentures into UK pounds sterling and the adjustment of a foreign
currency option contract to market value caused Telewest to experience
unrealized foreign currency transaction losses of L.8.5 million ($14.5 million
using the applicable exchange rate) and L.7.6 million ($11.8 million using the
applicable exchange rate) during the three months ended September 30, 1997 and
1996, respectively, and L.32.8 million ($54.5 million using the applicable
exchange rate) and L.55.2 million ($84.6 million using the applicable exchange
rate) during the nine months ended September 30, 1997 and 1996, respectively. It
is anticipated that Telewest will continue to experience realized and unrealized
foreign currency transaction gains and losses throughout the term of the
Telewest Debentures, which mature in 2006 and 2007, if not redeemed earlier.
I-147
<PAGE> 150
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
The share of losses from the TCI Ventures Group's investment in Teleport
increased $4.6 million and $11.8 million or 42% and 37% during the three and
nine month periods ended September 30, 1997, respectively, as compared to the
corresponding prior year periods. The increases in the share of losses are
largely attributed to costs incurred by Teleport in the expansion of their local
telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets.
Teleport has incurred net losses since its inception due to the acquisition,
installation, development and expansion of its existing and new
telecommunications networks and the associated initial operating expenses of
such networks. These networks generally incur negative cash flow from operating
activities and operating losses until an adequate customer base and revenue
stream for such networks have been established. There can be no assurance that
Teleport will achieve or sustain profitability or generate sufficient positive
cash flow to service its debt.
The TCI Ventures Group's share of the losses of the affiliates other than
Telewest, the PCS Ventures and Teleport increased $7.5 million and $21.0 million
or 39% and 37% during the three and nine month periods ended September 30, 1997,
respectively, as compared to the corresponding prior year periods. Such
increases are primarily attributable to increased losses of JPC, Jupiter, the
LLC, MultiThematiques and ABN. In addition, as previously described, TINTA,
effective January 1, 1997, ceased to consolidate Flextech and began to account
for Flextech using the equity method of accounting. For additional information
concerning the Other Affiliates, see note 9 to the accompanying combined
financial statements.
The minority interests' share of gains (losses) was $6.9 million and $(22.0
million) during the nine months ended September 30, 1997 and 1996, respectively.
Such changes are primarily the result of the deconsolidation of Flextech.
On July 11, 1997 @Home completed its IPO, in which 10,350,000 shares of
@Home common stock were sold to the public for aggregate cash consideration of
approximately $109 million, before commissions and fees. As a result of the IPO,
the TCI Ventures Group's economic interest in @Home decreased from 43% to 39%.
In connection with the associated dilution of the TCI Ventures Group's ownership
interest of @Home, the TCI Ventures Group recognized a gain of $60 million.
On September 26, 1997, TINTA sold its interest in TCID of New Zealand, Inc.
for cash proceeds of $53.0 million. TINTA recognized a gain of $58.4 million on
such sale.
During 1997, Teleport issued 4,857,083 shares of Class A common stock at an
average price per share of $19.25 for certain acquisitions. The total
consideration paid by Teleport through the issuance of common stock was
approximately $93 million. As a result of Teleport issuing additional shares the
TCI Ventures Group's ownership interest in Teleport was reduced from
approximately 31% to approximately 30%. Accordingly, the TCI Ventures Group
recognized a gain amounting to $21 million (before deducting deferred income tax
expense of approximately $8 million).
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<PAGE> 151
"TCI VENTURES GROUP"
(a combination of certain assets)
Material Changes in Results of Operations (continued)
In February 1997, TSX and Antec entered into a business combination with
Antec being the surviving entity. In connection with this transaction, the TCI
Ventures Group recognized a $28.9 million gain representing the difference
between the fair value of the Antec shares received and the carrying value of
its investment in TSX at the date of the transaction. As a result of this
transaction, the TCI Ventures Group holds an approximate 16% ownership interest
in Antec.
Income Taxes
The TCI Ventures Group's income tax benefit was $143.1 million and $74.3
million during the nine months ended September 30, 1997 and 1996, respectively.
The effective tax rates associated with such benefits were 31% and 29%,
respectively.
Net Losses
The TCI Ventures Group's net loss of $125.7 million and $314.9 million for
the three and nine month periods ended September 30, 1997, respectively,
represent increases of $76.9 million and $130.1 million, as compared to the TCI
Ventures Group's net loss of $62.0 million and $184.8 million for the three and
nine month periods ended September 30, 1996, respectively. With the exception of
UVSG, Cablevision, WTCI, and the Puerto Rico Subsidiary, the entities included
in the TCI Ventures Group's combined financial statements generally have
sustained losses since their respective inception dates. Any improvements in
such entities' results of operations are largely dependent upon the ability of
such entities to increase their respective subscriber bases while maintaining
pricing structures and controlling costs. There can be no assurance that any
such improvements will occur.
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