<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment #1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 April 30, 1998,
was:
<TABLE>
<S> <C>
Tele-Communications, Inc. Series A TCI Group common stock - 472,207,363 shares,
Tele-Communications, Inc. Series B TCI Group common stock - 50,126,345 shares,
Tele-Communications, Inc. Series A Liberty Media Group common stock - 326,076,668 shares,
Tele-Communications, Inc. Series B Liberty Media Group common stock - 31,745,757 shares,
Tele-Communications, Inc. Series A TCI Ventures Group common stock - 377,114,654 shares,
and Tele-Communications, Inc. Series B TCI Ventures Group common stock - 45,367,134 shares.
</TABLE>
<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: January 11, 1999 By: /s/ Stephen M. Brett
--------------------------------
Stephen M. Brett
Executive Vice President,
General Counsel and
Secretary
<PAGE> 3
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998* 1997
---------- ----------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ 172 284
Trade and other receivables, net 539 529
Prepaid program rights 112 104
Committed program rights 128 115
Investments in affiliates, accounted for under the equity
method, and related receivables (note 4) 3,917 3,048
Investment in Time Warner, Inc. ("Time Warner") (note 5) 4,129 3,555
Property and equipment, at cost:
Land 82 96
Distribution systems 10,143 10,784
Support equipment and buildings 1,699 1,558
---------- ----------
11,924 12,438
Less accumulated depreciation 4,751 4,759
---------- ----------
7,173 7,679
---------- ----------
Franchise costs 17,011 17,910
Less accumulated amortization 2,705 2,763
---------- ----------
14,306 15,147
---------- ----------
Other assets, net of amortization (note 12) 2,409 2,026
---------- ----------
$ 32,885 32,487
========== ==========
</TABLE>
* Restated - see note 15.
(continued)
I-1
<PAGE> 4
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998* 1997
---------- ----------
Liabilities and Stockholders' Equity amounts in millions
<S> <C> <C>
Accounts payable $ 120 169
Accrued interest 173 258
Accrued programming expense 432 399
Other accrued expenses 947 997
Deferred option premium (note 5) -- 306
Debt (note 7) 14,643 15,250
Deferred income taxes 6,686 6,108
Other liabilities 748 664
---------- ----------
Total liabilities 23,749 24,151
---------- ----------
Minority interests in equity of consolidated subsidiaries 1,544 1,664
Redeemable securities:
Preferred stock (note 8) 312 655
Common stock 21 5
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 1,500
Stockholders' equity (note 10):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred
Stock, $.01 par value -- --
Common stock, $1 par value:
Series A TCI Group. Authorized 1,750,000,000 shares; issued
620,600,434 shares in 1998 and 605,616,143 shares in 1997 621 606
Series B TCI Group. Authorized 150,000,000 shares; issued
90,125,881 shares in 1998 and 78,203,044 shares in 1997 90 78
Series A Liberty Media Group. Authorized 750,000,000 shares;
issued 357,948,125 shares in 1998 and 344,962,521 shares
in 1997 358 345
Series B Liberty Media Group. Authorized 75,000,000 shares;
issued 35,091,835 shares in 1998 and 35,180,385 shares in 1997 35 35
Series A TCI Ventures Group. Authorized 750,000,000 shares;
issued 390,281,044 shares in 1998 and 377,386,032 shares
in 1997 390 377
Series B TCI Ventures Group. Authorized 75,000,000 shares;
issued 45,892,732 shares in 1998 and 32,532,800 shares in 1997 46 33
Additional paid-in capital 6,086 5,063
Accumulated other comprehensive earnings, net of taxes (note 1) 1,128 778
Accumulated deficit (466) (812)
---------- ----------
8,288 6,503
Treasury stock and common stock held by subsidiaries, at cost
(note 10) (2,529) (1,991)
---------- ----------
Total stockholders' equity 5,759 4,512
---------- ----------
Commitments and contingencies (note 13)
$ 32,885 32,487
========== ==========
</TABLE>
* Restated - see note 15.
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 5
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1998* 1997
---------- ----------
amounts in millions,
except per share amounts
<S> <C> <C>
Revenue $ 1,872 1,827
Operating costs and expenses:
Operating 738 696
Selling, general and administrative 428 393
Stock compensation 229 15
Depreciation and amortization 434 374
---------- ----------
1,829 1,478
---------- ----------
Operating income 43 349
Other income (expense):
Interest expense (285) (289)
Interest and dividend income 21 21
Share of losses of affiliates, net (note 4) (238) (156)
Loss on early extinguishment of debt (note 7) (16) --
Minority interests in earnings of consolidated
subsidiaries, net (note 9) (30) (38)
Gain on issuance of equity interest by subsidiary (note 6) 38 --
Gain on disposition of assets (notes 5 and 6) 1,063 19
Other, net (10) (2)
---------- ----------
543 (445)
---------- ----------
Earnings (loss) before income taxes 586 (96)
Income tax benefit (expense) (240) 38
---------- ----------
Net earnings (loss) 346 (58)
Dividend requirements on preferred stocks (11) (10)
---------- ----------
Net earnings (loss) attributable to common stockholders $ 335 (68)
========== ==========
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock $ 227 (84)
Liberty Media Group Series A and Series B common stock 303 16
TCI Ventures Group Series A and Series B common stock (195) --
---------- ----------
$ 335 (68)
========== ==========
Basic earnings (loss) attributable to common stockholders per common
share (note 2):
TCI Group Series A and Series B common stock $ .44 (.12)
========== ==========
Liberty Media Group Series A and Series B common stock $ .85 .04
========== ==========
TCI Ventures Group Series A and Series B common stock $ (.46) --
========== ==========
Diluted earnings (loss) attributable to common stockholders per common
and potential common share (note 2):
TCI Group Series A and Series B common stock $ .38 (.12)
========== ==========
Liberty Media Group Series A and Series B common stock $ .78 .04
========== ==========
TCI Ventures Group Series A and Series B common stock $ (.46) --
========== ==========
Comprehensive earnings (loss) (note 1) $ 696 (83)
========== ==========
</TABLE>
* Restated - see note 15.
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 6
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------------------------
Class B TCI Group Liberty Media Group TCI Ventures Group
Preferred -------------------- -------------------- --------------------
Stock Series A Series B Series A Series B Series A Series B
--------- -------- -------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ -- 606 78 345 35 377 33
Net earnings -- -- -- -- -- -- --
Exchange of common stock in connection
with the Magness Settlement (note 11) -- -- 11 -- -- -- 13
Issuance of common stock in connection
with settlement of litigation -- 1 1 -- -- -- --
Reclassification to redeemable
securities of redemption amount of
common stock subject to put obligation -- -- -- -- -- -- --
Premium received in connection with put
obligation -- -- -- -- -- -- --
Issuance of common stock for
acquisitions (note 6) -- 1 -- 7 -- 13 --
Repurchase of common stock -- -- -- -- -- -- --
Gain from issuance of equity by
subsidiary and equity investee, net of
taxes (note 4) -- -- -- -- -- -- --
Gain from contribution of cable
television systems to joint ventures,
net of taxes (note 6) -- -- -- -- -- -- --
Issuance of common stock upon conversion
of notes and preferred stock (notes 7
and 8) -- 13 -- 6 -- -- --
Payment of call premiums (note 11) -- -- -- -- -- -- --
Reimbursement of fees related to
Exchange (note 11) -- -- -- -- -- -- --
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, net of
taxes -- -- -- -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Balance at March 31, 1998 $ -- 621 90 358 35 390 46
========= ======== ======== ======== ======= ======== ========
<CAPTION>
Treasury
stock and
common
Accumulated stock
Additional other held by Total
paid-in comprehensive Accumulated subsidiaries, stockholders'
capital earnings deficit* at cost equity*
---------- ------------- ----------- ------------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 5,063 778 (812) (1,991) 4,512
Net earnings -- -- 346 -- 346
Exchange of common stock in connection
with the Magness Settlement (note 11) 509 -- -- (533) --
Issuance of common stock in connection
with settlement of litigation 48 -- -- -- 50
Reclassification to redeemable
securities of redemption amount of
common stock subject to put obligation (16) -- -- -- (16)
Premium received in connection with put
obligation 2 -- -- -- 2
Issuance of common stock for
acquisitions (note 6) 349 -- -- -- 370
Repurchase of common stock -- -- -- (5) (5)
Gain from issuance of equity by
subsidiary and equity investee, net of
taxes (note 4) 35 -- -- -- 35
Gain from contribution of cable
television systems to joint ventures,
net of taxes (note 6) 58 -- -- -- 58
Issuance of common stock upon conversion
of notes and preferred stock (notes 7
and 8) 320 -- -- -- 339
Payment of call premiums (note 11) (274) -- -- -- (274)
Reimbursement of fees related to
Exchange (note 11) 11 -- -- -- 11
Accreted dividends on all classes of
preferred stock (11) -- -- -- (11)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements 2 -- -- -- 2
Payment of preferred stock dividends (10) -- -- -- (10)
Foreign currency translation adjustment -- 1 -- -- 1
Change in unrealized holding gains for
available-for-sale securities, net of
taxes -- 349 -- -- 349
--------- --------- --------- -------- ---------
Balance at March 31, 1998 6,086 1,128 (466) (2,529) 5,759
========= ========= ========= ======== =========
</TABLE>
* Restated - see note 15.
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 7
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998* 1997
----------- -----------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 346 (58)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 434 374
Stock compensation 229 15
Payments of obligation relating to stock compensation (91) (1)
Share of losses of affiliates, net 238 156
Loss on early extinguishment of debt 16 --
Minority interests in earnings of consolidated subsidiaries,
net 30 38
Gain on issuance of equity interest by subsidiary (38) --
Gain on disposition of assets (1,063) (19)
Deferred income tax expense (benefit) 204 (66)
Payments of restructuring charges (4) (16)
Other noncash charges 11 3
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables (19) (16)
Change in prepaids (21) (32)
Change in accrued interest (85) (112)
Change in other accruals and payables (94) (27)
----------- -----------
Net cash provided by operating activities 93 239
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions (72) (156)
Capital expended for property and equipment (246) (90)
Additional investments in and loans to affiliates (252) (35)
Collections of loans to affiliates 448 68
Proceeds from disposition of assets 334 140
Cash received in exchanges -- 22
Other investing activities (21) (52)
----------- -----------
Net cash provided (used) by investing activities 191 (103)
----------- -----------
Cash flows from financing activities:
Borrowings of debt 1,043 363
Repayments of debt (1,082) (820)
Prepayment penalties (15) --
Repurchase of common stock to be held in treasury (5) --
Repurchase of subsidiary common stock (7) (7)
Payment of preferred stock dividends (22) (21)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (47) (34)
Payment of call premiums (274) --
Proceeds from issuance of common stock -- 4
Proceeds from issuance of Trust Preferred Securities -- 490
Other financing activities 13 --
----------- -----------
Net cash used by financing activities (396) (25)
----------- -----------
Net increase (decrease) in cash and cash equivalents
(112) 111
Cash and cash equivalents at beginning of period 284 394
----------- -----------
Cash and cash equivalents at end of period $ 172 505
=========== ===========
</TABLE>
* Restated - see note 15.
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 8
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(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.
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, 1997.
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. The Company has included cumulative foreign
currency translation adjustments and unrealized holding gains and
losses for available-for-sale securities in other comprehensive
earnings that are recorded directly in stockholders' equity. Pursuant
to SFAS 130, these items are reflected, net of related tax effects, as
components of comprehensive earnings in the Company's consolidated
statements of operations, and are included in accumulated other
comprehensive earnings in the Company's consolidated balance sheets and
statements of stockholders' equity.
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 1998
presentation.
(continued)
I-6
<PAGE> 9
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and together
with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
Liberty Group Stock is intended to 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 Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share (the "TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock", and together
with the TCI Group Series A Stock, the "TCI Group Stock"),
respectively. On August 10, 1995, TCI distributed, in the form of a
dividend, 2.25 shares of Liberty Group Stock for each four shares of
TCI Group Stock owned (the "Liberty Distribution").
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock, par value $1.00 per share (the "TCI Ventures Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, par value $1.00 per share (the "TCI Ventures Group Series
B Stock," and together with TCI Ventures Group Series A Stock, the "TCI
Ventures Group Stock"). The TCI Ventures Group Stock is intended to
reflect 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 assets.
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series A
Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the Exchange Offers was two shares
of the applicable series of TCI Ventures Group Stock for each share of
the corresponding series of TCI Group Stock properly tendered up to the
indicated maximum numbers. Upon the September 10, 1997 consummation of
the Exchange Offers, 188,661,300 shares of TCI Group Series A Stock and
16,266,400 shares of TCI Group Series B Stock were exchanged for
377,322,600 shares of TCI Ventures Group Series A Stock and 32,532,800
shares of TCI Ventures Group Series B Stock (the "TCI Ventures
Exchange").
(continued)
I-7
<PAGE> 10
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The TCI Group Stock is intended to reflect the separate performance of
TCI and its subsidiaries and assets not attributed to Liberty Media
Group or TCI Ventures Group. Such subsidiaries and assets are referred
to as "TCI Group" and are comprised primarily of TCI's domestic cable
and communications business. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups"
and individually, may be referred to herein as a "Group." The TCI Group
Series A Stock, TCI Ventures Group Series A Stock and the Liberty Group
Series A Stock are sometimes collectively referred to herein as the
"Series A Stock," and the TCI Group Series B Stock, TCI Ventures Group
Series B Stock and Liberty Group Series B Stock are sometimes
collectively referred to herein as the "Series B Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, each such Group in the capital structure
of TCI, which encompasses the TCI Group Stock, Liberty Group Stock and
TCI Ventures Group Stock, does not affect the ownership or the
respective legal title to such assets or responsibility for liabilities
of TCI or any of its subsidiaries. TCI and its subsidiaries each
continue to be responsible for their respective liabilities. Holders of
TCI Group Stock, Liberty 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.
The redesignation of TCI Group Stock and the issuance of Liberty Group
Stock and TCI Ventures Group Stock does 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 the
separate Groups and the market prices of shares of TCI Group Stock,
Liberty Group Stock and 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, financial information of any one Group should be read in
conjunction with the financial information of TCI and the other Groups.
(continued)
I-8
<PAGE> 11
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated 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 Group Stock, respectively, is referred to as "Inter-Group
Interest." Prior to consummation of the Liberty Distribution and TCI
Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group and TCI Ventures Group, respectively. Following
consummation of the Liberty Distribution and TCI Ventures Exchange, TCI
Group no longer has Inter-Group Interests in Liberty Media Group and
TCI Ventures Group, respectively. For periods in which an Inter-Group
Interest exists, TCI Group accounts for its Inter-Group Interest in a
manner similar to the equity method of accounting. Following
consummation of the Liberty Distribution and the TCI Ventures Exchange,
an Inter-Group Interest would be created with respect to Liberty Media
Group or TCI Ventures Group only if a subsequent transfer of cash or
other property from TCI Group to Liberty Media Group or TCI Ventures
Group is specifically designated by the Board as being made to create
an Inter-Group Interest or if outstanding shares of Liberty Group Stock
or TCI Ventures Stock, respectively, are purchased with funds
attributable to TCI Group. Management of TCI believes that generally
accepted accounting principles require that Liberty Media Group or TCI
Ventures Group be consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty Media Group or TCI
Ventures Group, respectively.
Dividends on TCI Group Stock, Liberty Group Stock or TCI Ventures Group
Stock are payable at the sole discretion of the Board out of the lesser
of assets of TCI legally available for dividends or the available
dividend amount with respect to each Group, as defined. Determinations
to pay dividends on TCI Group Stock, Liberty Group Stock or TCI
Ventures Group Stock are based primarily upon the financial condition,
results of operations and business requirements of the applicable Group
and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
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.
(continued)
I-9
<PAGE> 12
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in 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.
Loans from one Group to another Group generally will 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 policies 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.
The combined balance sheets of a Group reflect its net loans or
advances to or loans or advances 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 advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been and will continue to be
included as a component of each respective Group's combined equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group or TCI Ventures Group resulting from an equity contribution
by the TCI Group to Liberty Media Group or TCI Ventures Group or any
decrease in such Inter-Group Interest resulting from a transfer of
funds from Liberty Media Group or TCI Ventures Group to the TCI Group
would be determined by reference to the market value of the Liberty
Group Series A Stock, or the TCI Ventures Group Series A Stock,
respectively, 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.
(continued)
I-10
<PAGE> 13
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock, TCI Ventures Group Stock or Liberty Group Stock, the proceeds of
which are attributed to TCI Group, TCI Ventures Group or Liberty Media
Group, respectively, will be to such extent reflected in the combined
financial statements of TCI Group, TCI Ventures Group or Liberty Media
Group, respectively. All financial impacts of issuances of shares of
TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
are attributed to TCI Group in respect of a reduction in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or
other distributions on TCI Group Stock, TCI Ventures Group Stock or
Liberty Group Stock, will be attributed entirely to TCI Group, TCI
Ventures Group or Liberty Media Group, respectively, except that
dividends or other distributions on TCI Ventures Group Stock or Liberty
Group Stock will (if at the time there is an Inter-Group Interest in
TCI Ventures Group or Liberty Media Group, respectively) result in TCI
Group being credited, and TCI Ventures Group or Liberty Media 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 or Liberty Group Stock and a fraction of the numerator of which
is TCI Ventures Group or Liberty Media Group "Inter-Group Interest
Fraction" and the denominator of which is the TCI Ventures Group or the
Liberty Media Group "Outstanding Interest Fraction" (both as defined).
Financial impacts of repurchases of TCI Ventures Group Stock or Liberty
Group Stock, the consideration for which is charged to TCI Group, will
be to such extent reflected in the combined financial statements of TCI
Group and will result in an increase in TCI Group's Inter-Group
Interest in TCI Ventures Group or Liberty Media Group, respectively.
(2) Earnings (Loss) Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted earnings per share is
similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the periods presented. Potential common shares that have
an anti-dilutive effect are excluded from diluted EPS.
(continued)
I-11
<PAGE> 14
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) TCI Group Stock
The basic earnings attributable to TCI Group common stockholders per
common share for the three months ended March 31, 1998 was computed by
dividing net earnings attributable to TCI Group common stockholders by
the weighted average number of common shares outstanding of TCI Group
Stock during the period (517 million).
The diluted earnings attributable to TCI Group common stockholders per
common share for the three months ended March 31, 1998 was computed by
dividing net earnings attributable to TCI Group common stockholders,
which is adjusted by the addition of preferred stock dividends and
interest accrued during the three months ended March 31, 1998 to net
earnings, assuming conversion of TCI Group convertible securities as of
the beginning of the period, by the weighted average number of common
shares outstanding of TCI Group Stock during the period. Shares
issuable upon conversion of the Convertible Preferred Stock, Series
C-TCI Group ("Series C-TCI Group Preferred Stock"), the Redeemable
Convertible TCI Group Preferred Stock, Series G ("Series G Preferred
Stock"), preferred stock of subsidiaries, convertible notes payable,
stock options and other fixed and nonvested performance awards have
been included in the computation of weighted average shares, as
illustrated below. Shares of TCI Group Stock issuable upon conversion
of Convertible Preferred Stock, Series D ("Series D Preferred Stock")
and associated dividend payments for the three months ended March 31,
1998 have been excluded as adjustments in computing the diluted
earnings attributable to TCI Group common shareholders per common share
as Series D Preferred Stock is antidilutive for the three months ended
March 31, 1998.
The basic and diluted loss attributable to TCI Group common
stockholders per common share for the three months ended March 31, 1997
was computed by dividing net loss attributable to TCI Group common
stockholders by the weighted average number of common shares
outstanding of TCI Group Stock during the period. Potential common
shares were not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
No material changes in the weighted average outstanding shares or
potential common shares occurred after March 31, 1998.
(continued)
I-12
<PAGE> 15
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------
1998 1997
---------- ----------
amounts in millions, except
per share amounts
<S> <C> <C>
Basic EPS:
Earnings (loss) attributable to common
stockholders $ 227 (84)
========== ==========
Weighted average common shares 517 678
========== ==========
Basic earnings (loss) per share attributable to
common stockholders $ .44 (.12)
========== ==========
Diluted EPS:
Earnings (loss) attributable to common
stockholders $ 227 (84)
Add preferred dividend requirements 4 --
Add interest expense 1 --
---------- ----------
Adjusted earnings (loss) attributable to common
stockholders assuming conversion of preferred
shares $ 232 (84)
========== ==========
Weighted average common shares 517 678
---------- ----------
Add dilutive potential common shares:
Employee and director options 8 --
Convertible notes payable 24 --
Series C-TCI Group Preferred Stock 7
Series D Preferred Stock -- --
Series G Preferred Stock 8 --
Preferred stock of subsidiaries 45 --
---------- ----------
Dilutive potential common shares 92 --
---------- ----------
Diluted weighted average common shares 609 678
========== ==========
Diluted earnings (loss) per share attributable to
common stockholders $ .38 (.12)
========== ==========
</TABLE>
(continued)
I-13
<PAGE> 16
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Liberty Group Stock
The basic earnings attributable to Liberty Media Group common
stockholders per common share for the three months ended March 31, 1998
and 1997 was computed by dividing net earnings attributable to Liberty
Media Group common stockholders by the weighted average number of
common shares outstanding of Liberty Group Stock during the period (355
million and 375 million, respectively).
The diluted earnings attributable to Liberty Media Group common
stockholders per common and potential common share for the three months
ended March 31, 1998 and 1997 was computed by dividing earnings
attributable to Liberty Media Group common stockholders by the weighted
average number of common and potential common shares outstanding of
Liberty Group Stock during the period. Shares issuable upon conversion
of the Convertible Preferred Stock, Series C-Liberty Media Group
("Series C-Liberty Media Group Preferred Stock"), the Series D
Preferred Stock, the Redeemable Convertible Liberty Media Group
Preferred Stock, Series H (the "Series H Preferred Stock"), convertible
notes payable, stock options and other fixed and nonvested performance
awards have been included in the computation of weighted average
shares, as illustrated below. Numerator adjustments for dividends and
interest associated with the convertible preferred shares and
convertible notes payable, respectively, were not made to the
computation of diluted earnings per share as such dividends and
interest are paid or payable by TCI Group.
No material changes in the weighted average outstanding shares or
potential common shares occurred after March 31, 1998.
(continued)
I-14
<PAGE> 17
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------
1998 1997
----------- -----------
amounts in millions, except
per share amounts
<S> <C> <C>
Basic EPS:
Earnings attributable to common stockholders $ 303 16
=========== ===========
Weighted average common shares 355 375
=========== ===========
Basic earnings per share attributable to common $ .85 .04
=========== ===========
stockholders
Diluted EPS:
Earnings attributable to common stockholders $ 303 16
=========== ===========
Weighted average common shares 355 375
----------- -----------
Add dilutive potential common shares:
Employee and director options 8 4
Convertible notes payable 19 20
Series C-Liberty Media Group Preferred
Stock 4 3
Series D Preferred Stock -- 6
Series H Preferred Stock 4 3
----------- -----------
Dilutive potential common shares 35 36
----------- -----------
Diluted weighted average common shares 390 411
=========== ===========
Diluted earnings per share attributable to
common stockholders $ .78 .04
=========== ===========
</TABLE>
(c) TCI Ventures Group Stock
The basic and diluted loss attributable to TCI Ventures Group common
stockholders per common share for the three months ended March 31, 1998
was computed by dividing net loss attributable to TCI Ventures Group
common stockholders by the weighted average number of common shares
outstanding of TCI Ventures Group Stock during the period (421
million). Potential common shares were not included in the computation
of weighted average shares outstanding because their inclusion would be
anti-dilutive.
At March 31, 1998, there were 34 million potential common shares
consisting of fixed and nonvested performance awards, stock options and
convertible securities that could potentially dilute future EPS
calculations in periods of net earnings. Such potential common share
amount does not take into account the assumed number of shares that
would be repurchased by the Company upon the exercise of the fixed and
nonvested performance awards. No material changes in the weighted
average outstanding shares or potential common shares occurred after
March 31, 1998.
(continued)
I-15
<PAGE> 18
- -------------------------------------------------------------------------------
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $370 million and $401 million for the three months
ended March 31, 1998 and 1997, respectively. Cash paid for income taxes was
not material for the three months ended March 31, 1998 and 1997.
Significant noncash investing and financing activities are reflected in the
following table.
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998* 1997
----------- -----------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $ (708) (1,065)
Liabilities assumed, net of current assets 3 616
Deferred tax liability recorded in acquisitions 89 34
Minority interests in equity of acquired entities (179) 1
Elimination of notes receivable from affiliates 351 --
Common stock and preferred stock issued in acquisitions 372 258
----------- -----------
Cash paid for acquisitions $ (72) (156)
=========== ===========
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- (294)
Historical cost of assets exchanged -- 305
Gain recorded on exchange of assets -- 11
----------- -----------
Cash received in exchanges $ -- 22
=========== ===========
Costs of distribution agreements $ 83 --
=========== ===========
</TABLE>
* Restated - see note 15.
For a description of certain non-cash transactions, see note 6.
(continued)
I-16
<PAGE> 19
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Investments in Affiliates
The Company has various investments accounted for under the equity method. The
following table includes the Company's carrying value of the more significant
investments at March 31, 1998 (amounts in millions).
<TABLE>
<S> <C>
Cablevision Systems Corporation ("CSC") $ 1,130
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P. 478
Telewest Communications plc ("Telewest") 298
BDTV INC., BDTV II INC., BDTV III INC. and BDTV IV
INC. (collectively "BDTV") 260
Teleport Communications Group, Inc. ("TCG") 277
Various foreign equity investments (other than
Telewest, Flextech p.l.c. and Cablevision S.A.) 266
InterMedia Capital Partners IV, L.P. and InterMedia
Capital Management IV, L.P. 262
Flextech p.l.c. ("Flextech") 259
Cablevision S.A. ("Cablevision") 236
Home Shopping Network, Inc. ("HSN") 147
QVC, Inc. 144
</TABLE>
Summarized unaudited combined results of operations for the Company's
affiliates for the periods in which the Company used the equity method to
account for such affiliates are as follows:
<TABLE>
<CAPTION>
Three months ended
Combined Operations March 31,
----------------------------
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Revenue $ 2,850 1,762
Operating expenses (2,637) (1,673)
Depreciation and amortization (527) (296)
----------- -----------
Operating loss (314) (207)
Interest expense (383) (176)
Other, net (76) (124)
----------- -----------
Net loss $ (773) (507)
=========== ===========
</TABLE>
(continued)
I-17
<PAGE> 20
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At March 31, 1998, the Company owned 24,471,086 shares of CSC Class A
common stock, which had a closing market price of $65.75 per share on
March 31, 1998. As described in note 6, the Company acquired such
shares of CSC Class A common stock in March 1998.
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, "Sprint PCS" or 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 ("Comcast"), 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 three months ended March 31, 1998 and 1997, the PCS Ventures
accounted for $155 million and $64 million, respectively, of the
Company's share of affiliate losses.
From inception through March 1998, the four partners have contributed
approximately $4.2 billion to the Sprint PCS Partnerships (of which the
Company contributed an aggregate of approximately $1.3 billion). The
remaining capital that the Sprint PCS Partnerships will require to fund
the construction and operation 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 Company expects that
the remaining approximately $150 million of such amount (of which the
Company's share is approximately $45 million) 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.
Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans
and/or capital contributions from the Sprint PCS partners. However,
there can be no assurance that any additional financing can be obtained
on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS
partners and within the limitations contained in the agreements
governing Sprint PCS's existing debt.
(continued)
I-18
<PAGE> 21
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
Discussions among the Sprint PCS partners about restructuring their
interests in Sprint PCS in lieu of triggering such buy/sell procedures
are ongoing. However, there is no certainty the discussions will result
in a change to the partnership structure or will avert the triggering
of the resolution and buy/sell procedures referred to above or a
liquidation of Sprint PCS.
On March 31, 1998, TCI owned 1,011,528 shares of TCG's Class A common
stock and 48,779,000 shares of TCG's Class B common stock. TCG's Class
A common stock had a closing price on the Nasdaq financial market of
$58.75 per share on March 31, 1998.
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 share of TCG stock for each share of ACC stock. The
transaction was valued at approximately $1.1 billion. As a result of
such merger transaction, TCI's interest in TCG was reduced to
approximately 26%.
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T Corporation ("AT&T"). Upon
consummation of such merger, TCI would receive in exchange for all of
its interest in TCG, approximately 46.95 million shares of AT&T common
stock, which shares would be attributed to the TCI Ventures Group. The
transaction is subject to a number of regulatory and other conditions,
accordingly, there can be no assurance that such transaction will be
consummated on the terms contemplated by the parties, or at all.
(continued)
I-19
<PAGE> 22
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1998, pursuant to an investment agreement among Universal
Studios, Inc. ("Universal"), HSN, Inc. ("HSNI"), HSN and Liberty Media
Group, dated as of October 1997 and amended and restated as of December
1997, HSNI consummated a transaction (the "Universal Transaction")
through which USA Networks Partners, Inc., a subsidiary of Universal,
sold its 50% interest in USA Networks, Inc., a New York general
partnership ("USAI") to HSNI and Universal contributed the remaining
50% interest in USAI and its domestic television production and
distribution operations to HSNI. Subsequent to these transactions, HSNI
was renamed USAI. In connection with the Universal Transaction,
Universal, USAI, HSN and Liberty Media Group became parties to a number
of other agreements relating to, among other things, (i) the management
of USAI, (ii) the purchase and sale or other transfer of voting
securities of USAI, including securities convertible or exchangeable
for voting securities of USAI, and (iii) the voting of such securities.
As a result of the foregoing transactions, Liberty Media Group's
ownership interest in USAI, which is held through BDTV, was reduced to
18.6%.
At the closing of the Universal Transaction, Universal (i) was issued
approximately 6 million shares of USAI's Class B Common Stock,
approximately 7 million shares of USAI's Common Stock and approximately
109 million common equity shares ("LLC Shares") of USANi LLC, a limited
liability company ("USANi LLC") formed to hold all of the businesses of
USAI and its subsidiaries, except for its broadcasting business and its
equity interest in Ticketmaster Group, Inc. and (ii) received a cash
payment of $1.3 billion. Pursuant to an exchange agreement relating to
the LLC Shares (the "LLC Exchange Agreement"), approximately 74 million
of the LLC Shares issued to Universal are each exchangeable for one
share of USAI's Class B Common Stock and the remainder of the LLC
Shares issued to Universal are each exchangeable for one share of
USAI's Common Stock.
At the closing of the Universal Transaction, Liberty Media Group was
issued approximately 1.2 million shares of USAI's Class B Common Stock,
representing all of the remaining shares of USAI's Class B Common Stock
issuable pursuant to Liberty Media Group's contractual right to receive
shares of Class B common stock of USAI upon the occurrence of certain
events. Of such shares, 800,000 shares of Class B Common Stock were
contributed to BDTV IV INC., a newly-formed entity having substantially
the same terms as BDTV INC., BDTV II INC. and BDTV III INC. (with the
exception of certain transfer restrictions) in which Liberty Media
Group owns over 99% of the equity and none of the voting power (except
for protective rights with respect to certain fundamental corporate
actions) and Barry Diller owns less than 1% of the equity and all of
the voting power. In addition, Liberty Media Group purchased 10 LLC
Shares at the closing of the Universal Transaction for an aggregate
purchase price of $200. Liberty Media Group has also agreed to
contribute $300 million in cash to USANi LLC by June 30, 1998 in
exchange for an aggregate of 15 million LLC Shares and/or shares of
USAI's Common Stock. Liberty Media Group's cash purchase price will
increase at an annual interest rate of 7.5% beginning from the date of
the closing of the Universal Transaction through the date of Liberty
Media Group's purchase of such securities. Pursuant to the LLC Exchange
Agreement, each LLC Share issued or to be issued to Liberty Media Group
is exchangeable for one share of USAI's Common Stock.
(continued)
I-20
<PAGE> 23
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the dilution of Liberty Media Group's ownership
interest that resulted from the issuance of common stock by USAI, the
Company recorded a $33 million increase to additional paid in capital
(net of a deferred tax liability of $21 million) and an increase to
investments in affiliates of $54 million. No gain was recognized due
primarily to Liberty Media Group's commitment to purchase additional
equity interests in USAI.
In connection with the Universal Transaction, each of Universal and
Liberty Media Group has been granted a preemptive right with respect to
future issuances of USAI's capital stock, subject to certain
limitations, to maintain their respective percentage ownership
interests in USAI that they had immediately prior to such issuances. In
addition, with respect to issuances of USAI's capital stock in certain
specified circumstances, Universal will be obligated to maintain the
percentage ownership interest in USAI that it had immediately prior to
such issuances. During the first quarter of 1998, Liberty Media Group
exercised its right to purchase approximately 4.7 million additional
LLC shares or USAI shares of common stock pursuant to a preemptive
right of $20 per share in cash, subject to receipt of regulatory
approvals. This transaction is expected to close during the second
quarter of 1998.
USAI, Universal and Liberty Media Group have agreed that if the parties
agree prior to June 30, 1998 (the date of mandatory cash contributions)
on the identity of assets owned by Liberty Media Group that are to be
contributed to the LLC and the form and terms of such contributions,
Liberty Media Group will contribute those assets in exchange for LLC
Shares valued at $20 per share. If Liberty Media Group contributes such
additional assets, Liberty Media Group has the right to elect to reduce
the number of LLC Shares it is obligated to purchase for cash by an
amount equal to 45% of the value of the assets contributed by Liberty
Media Group. If Liberty Media Group exercises the option to contribute
assets and thereby reduces its cash contribution amount, Universal will
be required to purchase a number of additional LLC shares (valued at
$20 per share) equal to the value of Liberty Media Group's asset
contribution, less the amount by which Liberty Media Group's asset
contribution is applied towards reducing Liberty Media Group's cash
contribution. In addition, Universal may purchase an additional number
of LLC shares (valued at $20 per share), equal to the value of Liberty
Media Group's asset contribution which is not applied towards reducing
Liberty Media Group's cash contribution.
Telewest is a company that is currently operating and constructing
cable television and telephone systems in the United Kingdom ("UK").
Telewest accounted for $30 million and $42 million of the Company's
share of its affiliates' losses during the three months ended March 31,
1998 and 1997, respectively.
(continued)
I-21
<PAGE> 24
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On April 15, 1998, it was announced that Telewest and General Cable PLC
("General Cable") had agreed to the terms of a proposed merger (the
"Merger Offer") in which holders of General Cable will be offered 1.243
new Telewest shares and L.0.65 ($1.09) in cash for each share of
General Cable. In addition, holders of American Depository shares of
General Cable ("General Cable ADSs") (each representing five General
Cable shares) will be offered 6.215 new Telewest shares and L.3.25
($5.43) in cash for each share of General Cable ADSs. Based upon
Telewest's closing share price of L.0.89 ($1.49) on April 14, 1998, the
Merger Offer is valued at approximately L.649 million ($1.1 billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of approximately
261 million new Telewest shares at a price of L.0.925 ($1.55) per
share. U S WEST, Inc. ("U S WEST"), Tele-Communications International,
Inc. ("TINTA"), a majority-owned subsidiary of the Company, and Cox
have agreed to subscribe for their full allocation of new Telewest
shares (approximately 69 million shares in the case of TINTA) and to
subscribe on a pro rata basis for any new Telewest shares not
subscribed for by other Telewest shareholders. Together, U S WEST,
TINTA and Cox held 67.9% of the issued and outstanding Telewest
ordinary shares at March 31, 1998. In addition, it is anticipated that
U S WEST, TINTA, Cox and SBC Communications, Inc. will convert their
entire respective holdings of Telewest convertible preference shares
into new Telewest shares. Following the issuance of new Telewest shares
with respect to the above transactions, and assuming the exercise of
all options under General Cable's share option schemes, it is
anticipated that existing Telewest shareholders would hold 79% and
existing General Cable shareholders would hold 21% of the then issued
ordinary share capital of the combined group.
Consummation of the merger is subject to (i) approval by the boards of
directors of Telewest and General Cable, (ii) regulatory approval and
(iii) other conditions. There can be no assurance that such merger will
be consummated or consummated on the terms contemplated by the parties.
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision, a company engaged in the multi- channel video distribution
business in Buenos Aires, Argentina, to unaffiliated third parties (the
"Buyers") for cash proceeds of $120 million. 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
London Interbank Offered Rate ("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 26.2%. TINTA recognized a gain of $49
million on the Cablevision Sale. 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.
Cablevision accounted for $3 million of the Company's share of its
affiliates' losses during the three months ended March 31, 1998.
(continued)
I-22
<PAGE> 25
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition to Telewest and Cablevision, the Company has an equity
method investment in Flextech, an entity engaged in the distribution
and production of programming for multichannel video distribution
systems in the UK, and other less significant equity method investments
in video distribution and programming businesses located in the UK,
other parts of Europe, Asia, Latin America and certain other foreign
countries. In the aggregate, such other foreign equity method
investments accounted for $20 million and $19 million of the Company's
share of its affiliates' losses during the three months ended March 31,
1998 and 1997, respectively.
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 (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
Liberty Media Group holds approximately 57 million 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. See note 7.
On June 24, 1997, Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option") and received 6.4 million shares of TW
Exchange Stock valued at $306 million in consideration for the grant.
Such amount had been reflected as a deferred option premium in the
accompanying consolidated financial statements. Pursuant to the
Southern Option, Time Warner acquired the Southern Business, effective
January 1, 1998 for $213 million in cash. The Company recognized a $515
million pre-tax gain in connection with such transactions in the first
quarter of 1998.
(continued)
I-23
<PAGE> 26
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Acquisitions and Dispositions
On March 4, 1998, the Company contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange
for approximately 24.5 million newly issued CSC Class A common shares
(as adjusted for a stock dividend). Such shares represent an
approximate 32.7% equity interest in CSC's total outstanding shares and
an approximate 9% voting interest in CSC in all matters except for the
election of directors, in which case the Company has an approximate 47%
voting interest in the election of one-fourth of CSC's directors. CSC
also assumed and repaid approximately $574 million of debt owed by the
Company to external parties and $95 million of debt owed to the
Company. As a result of this transaction, the Company recognized a
$511 million gain in the accompanying consolidated statement of
operations for the three months ended March 31, 1998. Such gain
represents the excess of the $1,161 million fair value of the CSC
Class A common shares received over the historical cost of the net
assets transferred by the Company to CSC. The Company has also entered
into letters of intent with CSC which provide for the Company to
acquire a cable system in Michigan and an additional 3% of CSC's
Class A common shares and for CSC to (i) acquire cable systems serving
approximately 250,000 customers in Connecticut and (ii) assume $110
million of the Company's debt. The ability of the Company to sell or
increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC.
During the first quarter of 1998, the Company also completed two
transactions whereby the Company contributed cable television systems
serving in the aggregate approximately 235,000 customers to two
separate joint ventures (collectively, the "Q1 Joint Ventures") in
exchange for non-controlling ownership interests in each of the Q1
Joint Ventures, and the assumption and repayment by the Q1 Joint
Ventures of intercompany debt owed to the Company aggregating $343
million. In connection with such transactions, the Company has agreed
to take certain steps to support compliance by the Q1 Joint Ventures
with their payment obligations under certain debt instruments, up to
an aggregate total contingent commitment of $294 million. In light of
such agreement, the $97 million aggregate excess of the Company debt
assumed by the Q1 Joint Ventures over the historical cost of the
remaining net assets contributed to the Q1 Joint Ventures has been
reflected as a direct increase to combined equity (net of related
deferred income taxes of $39 million). The Company uses the equity
method of accounting to account for its investments in the Q1 Joint
Ventures. The March 4, 1998 CSC transaction and the formation of the
Q1 Joint Ventures are collectively referred to herein as the "Q1 1998
Contribution Transactions."
On April 30, 1998, the Company contributed certain cable television
systems serving in the aggregate approximately 435,000 customers in
Kentucky to a joint venture in exchange for a 49% limited partnership
interest in such joint venture, and the assumption and repayment by
such joint venture of intercompany debt owed to the Company and debt
owed by the Company to external parties aggregating $812 million. In
connection with such transaction, the Company has agreed to take
certain steps to support compliance by the joint venture with its
payment obligations under certain debt instruments, up to an aggregate
total contingent commitment of $490 million. The Company will use the
equity method of accounting to account for its investment in this joint
venture.
(continued)
I-24
<PAGE> 27
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Including the Q1 1998 Contribution Transactions and the above-described
April 30, 1998 transaction, the Company, as of April 30, 1998, has,
since January 1, 1997, contributed, or signed agreements or letters of
intent to contribute within the next twelve months, certain cable
television systems (the "Contributed Cable Systems") serving
approximately 3.9 million basic customers to joint ventures in which
the Company will retain non-controlling ownership interests (the
"Contribution Transactions"). Following the completion of the
Contribution Transactions, the Company will no longer consolidate the
Contributed Cable Systems. Accordingly it is anticipated that the
completion of the Contribution Transactions, as currently contemplated,
will result in an aggregate estimated reduction (based on actual
amounts with respect to the Q1 1998 Contribution Transactions and
currently contemplated amounts with respect to the pending Contribution
Transactions) to the Company's debt of $4.8 billion and aggregate
estimated reductions (based on 1997 amounts) to the Company's annual
revenue and annual operating income before depreciation, amortization
and stock compensation of $1.8 billion and $815 million, respectively.
No assurance can be given that any of the pending Contribution
Transactions will be consummated.
On January 12, 1998, the Company acquired from a minority shareholder
of United Video Satellite Group, Inc. ("UVSG") 12.4 million shares of
Class A common stock in exchange for 12.7 million shares of TCI
Ventures Group Series A Stock and 7.3 million shares of Liberty Group
Series A Stock. The aggregate $346 million value assigned to the shares
issued by the Company was based upon the market value of such shares at
the time the transaction was announced. As a result of such
transaction, the Company increased its ownership in the equity of UVSG
to approximately 73%, of which 17% is attributed to Liberty Media Group
and 56% is attributed to TCI Ventures Group. In addition, TCI's
collective voting power increased to 93%.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink")
in exchange for an approximate 20% interest in Superstar/Netlink. As a
result of this transaction, the Company's ownership interest in
Superstar/Netlink decreased from 100% to approximately 80% and the
Company recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to
Superstar/Netlink was accounted for as a purchase, and the $61 million
excess of the purchase price over the fair value of the assets acquired
was recorded as goodwill and is being amortized over five years.
(continued)
I-25
<PAGE> 28
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In April 1998, UVSG, Liberty Media Group and Turner Vision (the
"Superstar/Netlink Owners") announced an agreement in principal with
PRIMESTAR, Inc. ("PRIMESTAR") for the sale of Superstar/Netlink (the
"PRIMESTAR Transaction"). The Superstar/Netlink Owners have agreed to
an aggregate sales price of approximately $480 million based on the
delivery of 1.2 million C-band subscribers at the close of the
transaction. The consideration paid will be in the form of
approximately $430 million in new convertible preferred stock of
PRIMESTAR and approximately $50 million in assumed programming
liabilities. The preferred stock will be convertible into approximately
44.8 million shares of PRIMESTAR Class A common stock. Such preferred
stock will also bear a 6% cumulative dividend, payable in cash, shares
of PRIMESTAR Class A common stock or, under certain circumstances,
shares of TCI Satellite Entertainment, Inc. Series A common stock, as
PRIMESTAR shall elect. Consummation of the agreement is subject to
certain conditions including receipt of applicable regulatory
approvals. No assurance can be given that such transaction will be
consummated or consummated on the terms contemplated by the parties.
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40%
interest in Superstar/Netlink and its 100% interest in certain
businesses conducted under the name Netlink International in exchange
for 6.4 million shares of UVSG's common stock. Liberty Media Group and
UVSG have agreed in principal to restructure their transaction to
provide for UVSG to acquire any shares of PRIMESTAR preferred stock
received by Liberty Media Group in the PRIMESATR Transaction and
Liberty Media Group's Netlink International businesses for 6.4 million
shares of UVSG Class B common stock. The Netlink International
businesses are being operated by Liberty Media Group for the benefit of
UVSG from April 1, 1998 to the closing of the sale thereof.
Consummation of the transaction between Liberty Media Group and UVSG is
subject to the signing of a definitive agreement following receipt by
UVSG of a satisfactory fairness opinion, UVSG stockholder approval and
certain regulatory approvals. No assurance can be given that such
transaction will be consummated.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 9,284 9,017
Bank credit facilities (b) 4,383 5,233
Commercial paper 528 533
Convertible notes (c) 40 40
Capital lease obligations and other debt 408 427
----------- -----------
$ 14,643 15,250
=========== ===========
</TABLE>
(continued)
I-26
<PAGE> 29
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) During the three months ended March 31, 1998, the Company purchased in
the open market certain notes payable which had an aggregate principal
balance of $95 million and fixed interest rates ranging from 8.75% to
10.125% (the "1998 Purchases"). In connection with the 1998 Purchases,
the Company recognized a loss on early extinguishment of debt of $16
million. Such loss related to prepayment penalties amounting to $15
million and the retirement of deferred loan costs.
(b) At March 31, 1998, subsidiaries of the Company had approximately $2.8
billion in unused lines of credit, excluding amounts related to lines
of credit which provide availability to support commercial paper.
As security for borrowings under one of the Company's credit
facilities, the Company has pledged a portion of its Time Warner common
stock with an estimated market value of $1.6 billion, based upon the
market value of the marketable common stock into which it is
convertible.
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.
(c) The convertible notes, which are stated net of unamortized discount of
$166 million at March 31, 1998 and December 31, 1997, 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 March 31, 1998, the notes
were convertible, at the option of the holders, into an aggregate of
24,163,259 shares of Series A TCI Group Stock, 19,416,910 shares of
Series A Liberty Group Stock, 20,711,373 shares of Series A TCI
Ventures Group Stock and 3,451,897 shares of Series A Common Stock,
$1.00 par value per share, of TCI Satellite Entertainment, Inc.
The bank credit facilities and various other debt instruments of the Company's
subsidiaries generally contain restrictive covenants which require, among other
things, the maintenance of certain earnings, specified cash flow and financial
ratios (primarily the ratios of cash flow to total debt and cash flow to debt
service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or dividend
payments.
The fair value of the debt of the Company's subsidiaries is estimated based on
the quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. At March 31,
1998, the fair value of the Company's debt was $15,395 million, as compared to
a carrying value of $14,643 million on such date.
(continued)
I-27
<PAGE> 30
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into variable and fixed interest rate
exchange agreements ("Interest Rate Swaps") pursuant to which it (i) pays fixed
interest rates (the "Fixed Rate Agreements") of 6.2% and receives variable
interest rates on a notional amount of $10 million at March 31, 1998 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 March 31, 1998. During the three months ended March 31, 1998 and
1997, the Company's net receipts (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 $3 million
and $1 million, respectively.
Information concerning the Company's Variable Rate Agreements at March 31, 1998
is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
-------------- -------------- ------ --------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 1
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (2)
February 2000 5.8%-6.6% 300 (2)
March 2000 5.8%-6.0% 675 --
September 2000 5.1% 75 2
March 2027 9.7% 300 (18)
December 2036 9.7% 200 (7)
------ -----
$2,400 $ (27)
====== =====
</TABLE>
- ------------------
(a) The estimated amount that the Company would pay or receive to terminate
the agreements at March 31, 1998, taking into consideration current
interest rates and the current creditworthiness of the counterparties,
represents the fair value of the Interest Rate Swaps.
The Fixed Rate Agreement expires in August 1998. At March 31, 1998, the
Company would be required to pay less than $1 million to terminate the Fixed
Rate Agreement.
In addition to the Fixed Rate and Variable Rate Agreements, the Company entered
into Interest Rate Swaps pursuant to which it pays a variable rate based on the
LIBOR (6.1% at March 31, 1998) and receives a variable rate based on the
Constant Maturity Treasury Index ("CMT") (6.0% at March 31, 1998) on a notional
amount of $400 million through September 2000; and pays a variable rate based
on LIBOR (6.0% at March 31, 1998) and receives a variable rate based on CMT
(6.1% at March 31, 1998) on notional amounts of $95 million through February
2000. During the three months ended March 31, 1998, the Company's net payments
pursuant to such agreements were less than $1 million. At March 31, 1998, the
Company would be required to pay an estimated $3 million to terminate such
Interest Rate Swaps.
(continued)
I-28
<PAGE> 31
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company is exposed to credit losses for the periodic settlements of
amounts due under the Interest Rate Swaps in the event of
nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the
counterparties. Further, the Company does not anticipate material
near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of March 31, 1998.
(8) Redeemable Preferred Stock
On February 20, 1998, the Company issued a Notice of Redemption which
called for the redemption, on April 1, 1998 of all of its outstanding
Series D Preferred Stock for a redemption price of $304.0233 per share.
During the first quarter of 1998, 988,776 shares of Series D Preferred
Stock were converted into 9,887,760 shares of TCI Group Series A Stock
and 5,561,741 shares of Liberty Group Series A Stock.
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
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 $35 million and $25 million during the three
months ended March 31, 1998 and 1997, respectively, and are included in
minority interests in earnings of consolidated subsidiaries in the
accompanying consolidated financial statements.
(continued)
I-29
<PAGE> 32
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Stockholders' Equity
Stock Repurchases
During the three months ended March 31, 1998, pursuant to the stock
repurchase program, 66,041 shares of TCI Group Series A Stock, 61,450
shares of TCI Ventures Group Series A Stock, 94,000 shares of TCI
Ventures Group Series B Stock and 44,283 shares of Liberty Group Series
A Stock were repurchased at an aggregate cost of $5 million. Such
shares are reflected as treasury stock in the accompanying consolidated
financial statements.
Treasury Stock and Common Stock Held by Subsidiaries, at Cost
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------------------ ------------------------------
Number of Number of
shares Cost basis shares Cost basis
-------------- -------------- -------------- --------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Treasury stock is summarized as
follows:
TCI Group Series A Stock 22,902,820 $ 505 11,296,324 $ 180
TCI Group Series B Stock 30,876,766 518 30,876,766 518
Liberty Group Series A Stock 25,126,455 490 25,082,172 489
Liberty Group Series B Stock 82,074 2 82,074 2
TCI Ventures Group Series A
Stock 13,259,792 211 -- --
TCI Ventures Group Series B
Stock 432,196 5 338,196 4
Common stock held by subsidiaries
is summarized as follows:
TCI Group Series A Stock 125,645,656 464 125,645,656 464
TCI Group Series B Stock 9,112,500 160 9,112,500 160
Liberty Group Series A Stock 6,654,367 113 6,654,367 113
Liberty Group Series B Stock 3,417,187 61 3,417,187 61
-------------- --------------
$ 2,529 $ 1,991
============== ==============
</TABLE>
Stock Based Compensation
Certain key employees of the Company and members of the Board hold
options with tandem stock appreciation rights ("SARs") to acquire TCI
Group Series A Stock, Liberty Group Series A Stock and TCI Ventures
Group Series A Stock as well as restricted stock awards of TCI Group
Series A Stock, Liberty Group Series A Stock and TCI Ventures Group
Series A Stock. Estimates of compensation relating to SARs granted to
such employees of the Company have been recorded in the accompanying
consolidated financial statements pursuant to Accounting Principles
Board Opinion No. 25. Such estimates are subject to future adjustment
based upon vesting of the related stock options and stock appreciation
rights and the market value of TCI Group Series A Stock, Liberty Group
Series A Stock and TCI Ventures Group Series A Stock (see note 1) and,
ultimately, on the final determination of market value when the rights
are exercised.
(continued)
I-30
<PAGE> 33
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
During the fourth quarter of 1997, the Company entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, the Company has the right to direct the
counterparty (the "Counterparty") to use the Equity Swap Facility to
purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and
TCI Ventures Group Series A Stock with an aggregate purchase price of
up to $300 million. The Company has the right, but not the obligation,
to purchase Equity Swap Shares through the September 30, 2000
termination date of the Equity Swap Facility. During such period, the
Company is to settle periodically any increase or decrease in the
market value of the Equity Swap Shares. If the market value of the
Equity Swap Shares exceeds the Counterparty's cost, Equity Swap Shares
with a fair value equal to the difference between the market value and
cost will be segregated from the other Equity Swap Shares. If the
market value of Equity Swap Shares is less than the Counterparty's
cost, the Company, at its option, will settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock
or, subject to certain conditions, with cash or letters of credit. In
addition, the Company is required to periodically pay the Counterparty
a fee equal to a LIBOR-based rate on the Counterparty's cost to acquire
the Equity Swap Shares. Due to the Company's ability to issue shares to
settle periodic price fluctuations and fees under the Equity Swap
Facility, the Company records all amounts received or paid under this
arrangement as increases or decreases, respectively, to equity. As of
March 31, 1998, the Equity Swap Facility had acquired 2,089,480 shares
of TCI Group Series A Stock and 513,500 shares of TCI Ventures Group
Series A Stock at an aggregate cost that was approximately $10 million
less than the fair value of such Equity Swap Shares at March 31, 1998.
The excess of consideration received on the conversion of debentures or
preferred stock or the exercise of options over the par value of the
stock issued is credited to additional paid-in capital.
At March 31, 1998, there were 99,247,030 shares of TCI Group Series A
Stock, 39,286,137 shares of Liberty Group Series A Stock and 34,412,229
shares of TCI Ventures Group Series A Stock reserved for issuance under
exercise privileges related to options, convertible debt securities and
convertible preferred stock. Also, one share of TCI Group Series A
Stock is reserved for each share of TCI Group Series B Stock, one share
of Liberty Group Series A Stock is reserved for each share of Liberty
Group Series B Stock and one share of TCI Ventures Group Series A Stock
is reserved for each share of TCI Ventures Group Series B 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 1,496.65 shares of TCI Group Series A Stock.
(continued)
I-31
<PAGE> 34
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Transactions with Officers and Directors
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for
an equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI has the option, but not the obligation, to purchase
the Option Shares at any time on or before June 16, 1999 (the "Option
Period"). The preceding transactions are referred to collectively as
the "June 16 Stock Transaction". During the Option Period, the Company
and the Investment Bankers are 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 TCI Group Series A Stock or TCI Ventures Group Series A Stock
or, subject to certain conditions, with cash or letters of credit. In
addition, the Company is required to pay the Investment Bankers a
quarterly fee equal to the LIBOR plus 1% on the Sale Price, as adjusted
for payments made by the Company pursuant to any quarterly settlement
with the Investment Bankers. Due to the Company's ability to settle
quarterly price fluctuations and fees with shares of TCI Group Series A
Stock or TCI Ventures Group Series A Stock the Company records all
amounts received or paid under this arrangement as increases or
decreases, respectively, to equity. During the fourth quarter of 1997,
the Company repurchased 4 million shares of TCI Group Series A Stock
from one of the Investment Bankers for an aggregate cash purchase price
of $66 million. Additionally, as a result of the Exchange Offers and
certain open market transactions that were completed to obtain the
desired weighting of TCI Group Series A Stock and TCI Ventures Group
Series A Stock, the Investment Bankers disposed of 4,210,308 shares of
TCI Group Series A Stock and acquired 23,407,118 shares of TCI Ventures
Group Series A Stock during the last half of 1997. As a result of the
foregoing transactions and certain transactions related to the January
5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares
of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group
Series A Stock at March 31, 1998. At March 31, 1998, the market value
of the Option Shares exceeded the Investment Bankers' cost by $201
million. Pursuant to a certain Letter Agreement, dated June 16, 1997,
between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the
Magness Estate, Dr. Malone agreed to waive certain rights of first
refusal with respect to shares of Series B TCI Group Stock beneficially
owned by the Magness Estate. Such rights of first refusal arise from a
letter agreement, dated June 17, 1988, among Bob Magness,
Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone
was granted a right of first refusal to acquire any shares of TCI Group
Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the
Exchange and the Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from
TCI up to 30,545,864 shares of the Series B TCI Group Stock acquired by
TCI from the Magness Estate pursuant to the Exchange. Such acquisition
may be made in exchange for either, or any combination of, shares of
Series A TCI Group Stock owned by Dr. Malone (exchanged on a one for
one basis), or cash in an amount equal to the average closing sale
price of the Series B TCI Group Stock for the five trading days
preceding the acquisition.
In connection with certain legal proceedings relative to the probate
of the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voiding
Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the Voiding
Action challenged the June 16 Stock Transaction on various fiduciary
bases and requested recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
I-32
<PAGE> 35
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were
returned to TCI as authorized but unissued shares, (ii) the Magness
Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares and (iii) the Magness Estate
paid $11 million to TCI representing a reimbursement of the Exchange
fees incurred by TCI from June 16, 1997 through February 9, 1998 with
respect to such returned shares. TCI then issued to the Magness Estate
10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of
TCI Ventures Group Series B Stock. In addition, as part of the Magness
Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to
the Estate of Betsy Magness in exchange for an equal number of shares
of TCI Group Series A Stock and issued 1,531,834 shares of TCI Ventures
Group Series B Stock for an equal number of shares of TCI Ventures
Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"),
under which the Malones granted to TCI the right to acquire any shares
of TCI stock which are entitled to cast more than one vote per share
(the "High-Voting Shares") owned by the Malones, which currently
consist of an aggregate of approximately 60 million High-Voting Shares
upon Dr. Malone's death or upon a contemplated sale of the High-Voting
Shares (other than a minimal amount) to third persons. In either such
event, TCI has the right to acquire the shares at a maximum price equal
to the then relevant market price of shares of "low-voting" Series A
Stock plus a ten percent premium. The Malones also agreed that if TCI
were ever to be sold to another entity, then the maximum premium that
the Malones would receive on their High-Voting Shares would be no
greater than a ten percent premium over the price paid for the relevant
shares of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually, and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's aggregate of approximately 49 million High-Voting Shares. The
Magness Family was paid $124 million by TCI in consideration of them
entering into the Magness Call Agreement. Additionally, on February 9,
1998, the Magness Family entered into a shareholders' agreement (the
"Shareholders' Agreement") with the Malones and TCI under which (i) the
Magness Family and the Malones agree to consult with each other in
connection with matters to be brought to the vote of TCI's
shareholders, subject to the proviso that if they cannot mutually agree
on how to vote the shares, Dr. Malone has an irrevocable proxy to vote
the High-Voting Shares owned by the Magness Family, (ii) the Magness
Family may designate a nominee for TCI's Board of Directors and Dr.
Malone has agreed to vote his High Voting Shares for such nominee and
(iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones. In addition, the Malone Right granted by TCI to
Dr. Malone to acquire 30,545,864 shares of TCI Group Series B Stock has
been reduced to an option to acquire 14,511,570 shares of TCI Group
Series B Stock. Pursuant to the terms of the Shareholders' Agreement,
the Magness Family has the right to participate in the reduced Malone
Right on a proportionate basis with respect to 12,406,238 shares of the
14,511,570 shares subject to the Malone Right.
(continued)
I-33
<PAGE> 36
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement is reflected as a $274 million reduction of
additional paid-in capital in the accompanying consolidated financial
statements.
(12) At Home Corporation
In April 1997, At Home Corporation, a subsidiary of the Company,
("@Home") issued 240,000 shares of convertible preferred stock,
resulting in cash proceeds of $48 million, less issuance costs. On July
11, 1997, @Home completed its initial public offering (the "@Home
IPO"), in which 10,350,000 shares of @Home common stock were sold for
net cash proceeds of approximately $100 million. As a result of the
@Home IPO, the Company's economic interest in @Home decreased from 43%
to 39% which economic interest represents an approximate 72% voting
interest.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 17,946,956
shares of @Home's Series A common stock. Of these warrants, warrants to
purchase 10,581,298 shares were exercisable as of March 31, 1998. @Home
may issue additional stock, or warrants in connection with its efforts
to expand its distribution of the @Home service to other cable
operators. The exercise of warrants or stock issued by @Home will
reduce the Company's equity interest and voting power in @Home. See
note 15.
(13) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the Federal Communications Commission
(the "FCC") adopted certain rate regulations required by the 1992 Cable
Act and imposed a moratorium on certain rate increases. As a result of
such actions, the Company's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the
FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation
charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the
relatively few systems which are subject to "effective competition" or
to services offered on an individual service basis, such as premium
movie and pay-per-view services.
(continued)
I-34
<PAGE> 37
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed by a
customer, or the appropriate franchise authority, if such authority has
been certified by the FCC to regulate rates. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark
and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date
of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
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 March 31, 1998,
these agreements require minimum payments aggregating approximately
$678 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 anticipates that its aggregate
payments under the Film Licensing Obligations will be significant.
As described in notes 4 and 6, the Company has significant commitments
and contingent obligations with respect to certain of its affiliates.
The Company is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, the Company is
committed to carry such suppliers programming on its cable systems.
Several of these agreements provide for penalties and charges in the
event the programming is not carried or not delivered to a
contractually specified number of customers.
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 $490 million at March 31, 1998. 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. The Company also has guaranteed the
performance of certain affiliates and other parties with respect to
such parties' contractual and other obligations. Although there can be
no assurance, management of the Company believes that it will not be
required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
(continued)
I-35
<PAGE> 38
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $42 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.
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
(the "DMX Merger"). Assuming the conversion of TCI Music convertible
preferred stock, TCI, at March 31, 1998, owned TCI Music securities
representing 80.7% of TCI Music's common stock and 97.4% of the voting
power attributable to such TCI Music common stock. In connection with
the DMX 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 TCI
Group Series A Stock or with cash. The Company has recorded its
contingent obligation to purchase such shares as a component of
minority interest in equity of consolidated subsidiaries in the
accompanying consolidated financial statements.
Effective as of December 16, 1997, National Digital Television Center,
Inc. ("NDTC"), a subsidiary of TCI which is attributed to of the TCI
Ventures Group, on behalf of TCIC and other cable operators that may be
designated from time to time by NDTC ("Approved Purchasers"), entered
into an agreement (the "Digital Terminal Purchase Agreement") with
General Instrument Corporation (formerly NextLevel Systems, Inc., "GI")
to purchase advanced digital set-top devices. The hardware and software
incorporated into these devices will be designed and manufactured to be
compatible and interoperable with the OpenCable(TM) architecture
specifications adopted by CableLabs, the cable television industry's
research and development consortium, in November 1997. NDTC has agreed
that Approved Purchasers will purchase, in the aggregate, a minimum of
6.5 million set-top devices during calendar years 1998, 1999 and 2000
at an average price of $318 per set-top device. GI agreed to provide
NDTC and its Approved Purchasers the most favorable prices, terms and
conditions made available by GI to any customer purchasing advanced
digital set-top devices. In connection with NDTC's purchase commitment,
GI agreed to grant warrants to purchase its common stock proportional
to the number of devices ordered by each organization, which as of the
effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted
basis). It is anticipated that the value associated with such equity
interest would be attributed to TCI Group upon purchase and deployment
of the digital set-top devices.
(continued)
I-36
<PAGE> 39
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Also in December 1997, NDTC entered into a memorandum of understanding
with GI which contemplates the sale to GI of certain of the assets of
NDTC's set-top authorization business, the license of certain related
technology to GI, and an additional cash payment in exchange for
approximately 21.4 million shares of stock of GI. In connection
therewith, NDTC would also enter into a services agreement pursuant to
which it will provide certain services to GI's set-top authorization
business. The transaction is subject to the signing of definitive
agreements; accordingly, there can be no assurance that it will be
consummated.
Estimates of compensation relating to phantom stock appreciation rights
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.
During the three months ended March 31, 1998, the Company continued its
enterprise-wide comprehensive review of its computer systems and
related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and
devices that manage the distribution of the Company's products. The
Company is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for year 2000 readiness.
As of March 31, 1998, the Company had inventoried substantially all of
its cable systems and began its assessment of the systems that will
require remediation or replacement. Inventoried systems include the
Company's financial systems and related software, its business systems,
data and voice networks, engineering systems and facilities and related
software supporting the distribution of the Company's products and
other equipment and systems potentially impacted by the year 2000.
Additionally, the Company began efforts to assess potential year 2000
issues of its affiliated companies that are not managed by the Company
and continued to have formal communications with its principal vendors
to determine their year 2000 readiness.
The Company completed a preliminary assessment of its systems and
related software that support the Company's financial applications. For
those financial systems and software which will continue to be utilized
by the Company beyond the year 1999, the Company has tentatively
concluded that such systems are capable of recognizing the year 2000
and therefore will not require material remediation or replacement. One
of the Company's financial applications is externally managed by a
third party vendor and such financial application will be replaced with
software provided by such vendor. No assurances can be given that as
the Company completes its year 2000 assessment, additional internally
managed systems will not be identified as requiring remediation or
replacement. The Company has completed an initial assessment of its
business systems, including networks, engineering systems and
facilities and related software supporting the distribution of the
Company's products and has tentatively concluded that certain portions
of those systems will require remediation or replacement. Although no
assurance can be given, management of the Company anticipates that such
systems will be remediated or replaced prior to the year 2000.
(continued)
I-37
<PAGE> 40
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant third party vendors whose systems are critical to the
Company's cable operations have been identified and/or surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to ensure readiness.
Management of the Company intends to have further communication with
primary vendors identified as having systems that are not year 2000
compliant to assess those vendors' plans for remediating their own year
2000 issues and to assess the impact on the Company if such vendors
fail to remediate their year 2000 issues.
The Company's assessment of the impact of the year 2000 date change
should be complete by the end of 1998. The Company continues to
evaluate the level of validation it will require of third parties
to ensure their year 2000 readiness. Management of the Company has not
yet determined the cost associated with its year 2000 readiness efforts
and the related potential impact on the Company's results of operations
but has identified certain cost elements that, in the aggregate, are
not expected to be less than $20 million. Amounts expended to date have
not been material, although there can be no assurance that costs
ultimately required to be paid to ensure the Company's year 2000
readiness will not have an adverse effect on the Company's financial
position. Additionally, there can be no assurance that the Company's
systems or the systems of other companies on which the Company relies
will be converted in time or that any such failure to convert by the
Company or other companies will not have an adverse effect on its
financial position.
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.
(14) Information about the Company's Segments
The Company has two reportable segments: domestic cable and
communications services and domestic programming services. Domestic
cable and communications services receive video, audio and data signals
from various sources, and amplify and distribute the signals by coaxial
cable and optical fiber to the premises of customers who pay a fee for
the service. Domestic programming services produces, acquires, and
distributes, through all available formats and media, branded
entertainment and informational programming and software, including
multimedia products, delivered in both analog and digital form. The
Company's domestic cable and communications services business and
assets are included in TCI Group, and the Company's domestic
programming business and assets are included in Liberty Media Group.
The Company's principal international businesses and assets and the
Company's remaining non-cable and non-programming domestic businesses
and assets are included in TCI Ventures Group.
(continued)
I-38
<PAGE> 41
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company
evaluates performance based on a measure of operating cash flow
(defined as operating income before depreciation, amortization, stock
compensation and other non-cash charges). The Company generally
accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
The Company utilizes the following interim financial information for
purposes of making decisions about allocating resources to a segment
and assessing a segment's performance:
<TABLE>
<CAPTION>
Domestic cable Domestic
& communications programming All
services services other Total
---------------- ----------- -------- -------
amounts in millions
<S> <C> <C> <C> <C>
Three months ended March 31, 1998:
Revenue from external
customers including
intersegment revenue $ 1,577 157 211 1,945
Intersegment revenue (5) 72 6 73
Segment operating cash flow 656 28 22 706
Three months ended March 31, 1997:
Revenue from external
customers including
intersegment revenue $ 1,555 59 247 1,861
Intersegment revenue 6 23 5 34
Segment operating cash flow 664 25 49 738
</TABLE>
(continued)
I-39
<PAGE> 42
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment operating cash flow to the
Company's consolidated earnings (loss) before income tax is as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------
1998* 1997
---------- ----------
amounts in millions
<S> <C> <C>
Total operating cash flow for reportable segments $ 684 689
Other operating cash flow 22 49
Other items excluded from operating cash flow:
Depreciation and amortization (434) (374)
Stock compensation (229) (15)
Interest expense (285) (289)
Interest and dividend income 21 21
Share of losses of affiliates, net (238) (156)
Loss on early extinguishment of debt (16) --
Minority interest in earnings of
consolidated subsidiaries, net (30) (38)
Gain on issuance of equity interest by subsidiary 38 --
Gain on disposition of assets 1,063 19
Other, net (10) (2)
---------- ----------
Earnings (loss) before income taxes $ 586 (96)
========== ==========
</TABLE>
* Restated - see note 15.
(15) Restatement Associated with Costs of Distribution Agreements
The Company had restated its consolidated financial statements to
record non-cash costs of certain distribution agreements as assets to
be amortized over the exclusivity periods set forth in the respective
distribution agreements. Such non-cash costs had originally been
expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $236 million increase to
other assets and a $143 million increase to minority interests in
consolidated subsidiaries at March 31, 1998. In addition, the
restatement resulted in a $28 million increase to net earnings and
a $.07 decrease to basic and diluted net loss attributable to common
stockholders per share of TCI Ventures Group Stock for the three months
ended March 31, 1998. See note 12.
I-40
<PAGE> 43
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
Assets amounts in millions
<S> <C> <C>
Cash and cash equivalents $ -- 56
Trade and other receivables, net 408 394
Investment in Cablevision Systems Corporation ("CSC"), accounted for under the
equity method (note 4) 1,130 --
Investments in other affiliates, accounted for under the equity method, and
related receivables (note 5) 246 414
Property and equipment, at cost:
Land 74 77
Distribution systems 9,643 9,933
Support equipment and buildings 1,353 1,411
---------- ----------
11,070 11,421
Less accumulated depreciation 4,469 4,479
---------- ----------
6,601 6,942
---------- ----------
Franchise costs 16,903 17,802
Less accumulated amortization 2,666 2,725
---------- ----------
14,237 15,077
---------- ----------
Other assets, net of amortization 665 695
---------- ----------
$ 23,287 23,578
========== ==========
</TABLE>
(continued)
I-41
<PAGE> 44
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
Liabilities and Combined Deficit amounts in millions
<S> <C> <C>
Accounts payable $ 163 137
Accrued interest 169 250
Accrued programming expenses 261 243
Other accrued expenses 660 726
Debt (note 7) 13,426 14,106
Deferred income taxes 5,462 5,147
Other liabilities 638 563
---------- ----------
Total liabilities 20,779 21,172
---------- ----------
Minority interests in equity of attributed subsidiaries 910 1,048
Redeemable securities:
Preferred stock (note 8) 312 655
Common stock 21 5
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 1,500
Combined deficit (note 10):
Combined equity (deficit), including preferred stocks of
Tele-Communications, Inc. ("TCI") 225 (276)
Accumulated other comprehensive earnings, net of taxes (note 1) 5 4
---------- ----------
230 (272)
Due from related parties (note 11) (465) (530)
---------- ----------
Total combined deficit (235) (802)
---------- ----------
Commitments and contingencies (note 14)
$ 23,287 23,578
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
I-42
<PAGE> 45
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1998 1997*
----------- -----------
amounts in millions, except
per share amounts
<S> <C> <C>
Revenue (note 11) $ 1,577 1,555
Operating costs and expenses:
Operating:
Related party (note 11) 60 29
Other 527 546
Selling, general and administrative (note 11) 334 316
Stock compensation (note 10) 70 2
Depreciation and amortization 376 332
----------- -----------
1,367 1,225
----------- -----------
Operating income 210 330
Other income (expense):
Interest expense (273) (273)
Interest income 5 7
Intercompany interest, net 5 (2)
Share of losses of CSC (note 4) (32) --
Share of earnings (losses) of other affiliates, net (note 5) 52 (17)
Loss on early extinguishment of debt (note 7) (16) --
Minority interests in earnings of attributed subsidiaries, net
(note 9) (46) (34)
Gain (loss) on disposition of assets (note 6) 511 (10)
Other, net (14) (4)
----------- -----------
192 (333)
----------- -----------
Earnings (loss) before income taxes 402 (3)
Income tax (expense) benefit (164) 6
----------- -----------
Earnings before loss of TCI Ventures Group (note 1) 238 3
Loss of TCI Ventures Group through the date of the TCI Ventures
Exchange (note 1) -- (77)
----------- -----------
Net earnings (loss) 238 (74)
Dividend requirements on preferred stocks (11) (10)
----------- -----------
Net earnings (loss) attributable to common stockholders $ 227 (84)
=========== ===========
Basic earnings (loss) attributable to common stockholders per common
share (note 2) $ .44 (.12)
=========== ===========
Diluted earnings (loss) attributable to common stockholders per
common share (note 2) $ .38 (.12)
=========== ===========
Comprehensive earnings (loss) (note 1) $ 239 (70)
=========== ===========
</TABLE>
*Restated - see note 1.
See accompanying notes to combined financial statements.
I-43
<PAGE> 46
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Deficit
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Combined
equity
(deficit), Accumulated
including other Due
preferred comprehensive from Total
stocks of earnings, related combined
TCI net of taxes parties deficit
----------- ----------- ----------- -----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ (276) 4 (530) (802)
Net earnings 238 -- -- 238
Change in due from related parties -- -- 65 65
Reclassification to redeemable securities of redemption
amount of TCI Group Stock subject to put obligations (16) -- -- (16)
Premium received in connection with put obligation 2 -- -- 2
Transfer of net liabilities from related party (50) -- -- (50)
Change in unrealized gains for available-for-sale
securities, net of taxes -- 1 -- 1
Accreted dividends on all classes of TCI preferred stock (11) -- -- (11)
Accreted dividends on all classes of TCI preferred stock
not subject to mandatory redemption requirements 2 -- -- 2
Payment of TCI preferred stock dividends (10) -- -- (10)
Payment of call premiums (note 12) (134) -- -- (134)
Reimbursement of fees related to Exchange (note 12) 11 -- -- 11
Repurchase of TCI Group Stock (2) -- -- (2)
Gain from contribution of cable television systems to joint
ventures, net of taxes (note 6) 58 -- -- 58
Issuance of TCI Group Stock in connection with settlement
of litigation 50 -- -- 50
Issuance of TCI Group Stock for acquisitions (note 3) 24 -- -- 24
Issuance of TCI Group Stock and Liberty Group Stock upon
conversion of notes and preferred stock 339 -- -- 339
----------- ----------- ----------- -----------
Balance at March 31, 1998 $ 225 5 (465) (235)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
I-44
<PAGE> 47
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1998 1997*
----------- -----------
amounts in millions
Cash flows from operating activities: (see note 3)
<S> <C> <C>
Earnings before loss of TCI Ventures Group** $ 238 3
Adjustments to reconcile earnings before loss of TCI Ventures Group to net
cash provided by operating activities:
Depreciation and amortization 376 332
Stock compensation 70 2
Payments of obligation relating to stock compensation (28) (1)
Share of losses of CSC 32 --
Share of losses (earnings) of other affiliates, net (52) 17
Loss on early extinguishment of debt 16 --
Minority interests in earnings of attributed subsidiaries, net 46 34
Loss (gain) on disposition of assets (511) 10
Intergroup tax allocation (60) 32
Deferred income tax expense (benefit) 189 (64)
Payments of restructuring charges (3) (16)
Other noncash charges (credits) 10 (21)
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (25) (9)
Change in accruals and payables (141) (188)
----------- -----------
Net cash provided by operating activities 157 131
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions (65) (156)
Capital expended for property and equipment (210) (48)
Additional investments in and loans to affiliates and others (136) (3)
Collections of loans to affiliates 444 57
Proceeds from dispositions of assets 49 140
Cash received in exchanges -- 22
Change in interest in TCI Ventures Group -- 23
Other investing activities 128 (63)
----------- -----------
Net cash provided (used) by investing activities 210 (28)
----------- -----------
Cash flows from financing activities:
Borrowings of debt 533 324
Repayments of debt (825) (745)
Payment of preferred stock dividends (22) (21)
Payment of dividends on subsidiary preferred stock and Trust Preferred
Securities (47) (34)
Payment of call premiums (134) --
Change in amounts due from related parties 83 (42)
Proceeds from issuance of TCI Group Stock -- 3
Proceeds from issuance of Trust Preferred Securities -- 490
Other financing activities (11) 3
----------- -----------
Net cash used by financing activities (423) (22)
----------- -----------
Net increase (decrease) in cash and cash equivalents (56) 81
Cash and cash equivalents at beginning of period 56 --
----------- -----------
Cash and cash equivalents at end of period $ -- 81
=========== ===========
</TABLE>
* Restated - see note 1.
** Loss of TCI Ventures Group does not use funds.
See accompanying notes to combined financial statements.
I-45
<PAGE> 48
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1998
(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. The combined financial statements of TCI Group are
presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries, and should be read in
conjunction with such consolidated financial statements.
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 deficit.
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, 1997.
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.
Effective January 1, 1998, TCI Group adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). TCI Group has reclassified its prior
period combined balance sheet and combined statement of operations to
conform to the requirements of SFAS 130. SFAS 130 requires that all
items which are components of comprehensive earnings or losses be
reported in a financial statement in the period in which they are
recognized. TCI Group has included unrealized holding gains and losses
for available-for-sale securities in other comprehensive earnings that
are recorded directly in combined deficit. Pursuant to SFAS 130, this
item is reflected, net of related tax effects, as a component of
comprehensive earnings in TCI Group's combined statements of
operations, and is included in accumulated other comprehensive earnings
in TCI Group's combined balance sheets and statement of combined
deficit.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
I-46
<PAGE> 49
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and together
with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
Liberty Group Stock is intended to 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 Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share ("TCI Group Series A Stock")
and Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share ("TCI Group Series B Stock", and together with
the TCI Group Series A Stock, the "TCI Group Stock"), respectively. On
August 10, 1995, TCI distributed, in the form of a dividend, 2.25
shares of Liberty Group Stock for each four shares of TCI Group Stock
owned (the "Liberty Distribution").
On August 28, 1997, the stockholders of TCI authorized the Board to
issue the Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock, par value $1.00 per share ("TCI Ventures Group Series A Stock")
and Tele-Communications, Inc. Series B TCI Ventures Group Common Stock,
par value $1.00 per share ("TCI Ventures Group Series B Stock," and
together with the TCI Ventures Group Series A Stock, the "TCI Ventures
Group Stock"). The TCI Ventures Group Stock is intended to reflect 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 assets.
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series A
Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the Exchange Offers was two shares
of the applicable series of TCI Ventures Group Stock for each share of
the corresponding series of TCI Group Stock properly tendered, up to
the indicated maximum numbers. Upon the September 10, 1997 consummation
of the Exchange Offers, 188,661,300 shares of TCI Group Series A Stock
and 16,266,400 shares of TCI Group Series B Stock were exchanged for
377,322,600 shares of TCI Ventures Group Series A Stock and 32,532,800
shares of TCI Ventures Group Series B Stock, respectively (the "TCI
Ventures Exchange").
(continued)
I-47
<PAGE> 50
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The TCI Group Stock is intended to reflect the separate performance of
TCI and its subsidiaries and assets not attributed to Liberty Media
Group or TCI Ventures Group. Such subsidiaries and assets are referred
to as "TCI Group" and are comprised primarily of TCI's domestic cable
and communications business. Collectively, TCI Group, Liberty Media
Group and TCI Ventures Group are referred to as the "Groups" and
individually, may be referred to herein as a "Group." The TCI Group
Series A Stock, TCI Ventures Group Series A Stock and Liberty Group
Series A Stock are sometimes collectively referred to herein as "Series
A Stock," and the TCI Group Series B Stock, TCI Ventures Group Series B
Stock and Liberty Group Series B Stock are sometimes collectively
referred to herein as the "Series B Stock."
As a result of the TCI Ventures Exchange, the combined financial
statements of TCI Group were restated to exclude those assets and
related liabilities which, prior to being attributed to TCI Ventures
Group in connection with the issuance of the TCI Ventures Group Stock,
had been attributed to TCI Group.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and issuance of
Liberty Group Stock and TCI Ventures Group Stock 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 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. The redesignation of TCI Group Stock and 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 the
separate Groups and the market prices of shares of TCI Group Stock,
Liberty Group Stock and 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,
financial information of any one Group should be read in conjunction
with the financial information of TCI and the other Groups.
(continued)
I-48
<PAGE> 51
"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 Group Stock, respectively, is referred to as "Inter-Group
Interest." Prior to consummation of the Liberty Distribution and TCI
Ventures Exchange, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group and TCI Ventures Group, respectively. Following
consummation of the Liberty Distribution and TCI Ventures Exchange, TCI
Group no longer has Inter-Group Interests in Liberty Media Group and
TCI Ventures Group, respectively. For periods in which an Inter-Group
Interest exists, TCI Group accounts for its Inter-Group Interest in a
manner similar to the equity method of accounting. Following
consummation of the Liberty Distribution and the TCI Ventures Exchange,
an Inter-Group Interest would be created with respect to Liberty Media
Group or TCI Ventures Group only if a subsequent transfer of cash or
other property from TCI Group to Liberty Media Group or TCI Ventures
Group is specifically designated by the Board as being made to create
an Inter-Group Interest or if outstanding shares of Liberty Group Stock
or TCI Ventures Stock, respectively, are purchased with funds
attributable to TCI Group. Management of TCI believes that generally
accepted accounting principles require that Liberty Media Group or TCI
Ventures Group be consolidated with TCI Group for all periods in which
TCI Group held an Inter-Group Interest in Liberty Media Group or TCI
Ventures Group, respectively.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for
dividends or the available dividend amount with respect to TCI Group,
as defined. Determinations to pay dividends on TCI Group Stock are
based primarily upon the financial condition, results of operations and
business requirements of TCI Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
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.
(continued)
I-49
<PAGE> 52
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board, in the case of a transfer from TCI Group to either Liberty
Media Group or TCI Ventures Group, reflected as the creation of, or
increase in, TCI Group's Inter-Group Interest in such Group or, in the
case of a transfer from either Liberty Media Group or TCI Ventures
Group to TCI Group, reflected as a reduction in 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.
Loans from one Group to another Group generally will 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 policies 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.
The combined balance sheets of a Group reflect its net loans or
advances 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 advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical combined financial statements,
net loans or advances between Groups have been, and will continue to
be, included as a component of each respective Group's equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group or TCI Ventures Group resulting from an equity contribution
by TCI Group to Liberty Media Group or TCI Ventures Group or any
decrease in such Inter-Group Interest resulting from a transfer of
funds from Liberty Media Group or TCI Ventures Group to TCI Group would
be determined by reference to the market value of the Liberty Group
Series A Stock or the TCI Ventures Group Series A Stock, respectively,
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.
(continued)
I-50
<PAGE> 53
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock, TCI Ventures Group Stock or Liberty Group Stock, the proceeds of
which are attributed to TCI Group, TCI Ventures Group or Liberty Media
Group, respectively, will be to such extent reflected in the combined
financial statements of TCI Group, TCI Ventures Group or Liberty Media
Group, respectively. All financial impacts of issuances of shares of
TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
are attributed to TCI Group in respect of a reduction in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or
other distributions on TCI Group Stock, TCI Ventures Group Stock or
Liberty Group Stock, will be attributed entirely to TCI Group, TCI
Ventures Group or Liberty Media Group, respectively, except that
dividends or other distributions on TCI Ventures Group Stock or Liberty
Group Stock will (if at the time there is an Inter-Group Interest in
TCI Ventures Group or the Liberty Media Group, respectively) result in
TCI Group being credited, and TCI Ventures Group or Liberty Media 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 or Liberty Group Stock and a fraction of the numerator of which
is TCI Ventures Group or Liberty Media Group Inter-Group Interest
Fraction and the denominator of which is TCI Ventures Group or Liberty
Media Group Outstanding Interest Fraction (both as defined). Financial
impacts of repurchases of TCI Ventures Group Stock or Liberty Group
Stock, the consideration for which is charged to TCI Group, will be to
such extent reflected in the combined financial statements of the TCI
Group and will result in an increase in TCI Group's Inter-Group
Interest in TCI Ventures Group or Liberty Media Group, respectively.
(2) Earnings (Loss) Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
attributable to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted earnings per share is
similar to basic EPS, but presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the periods presented. Potential common shares that have
an anti-dilutive effect are excluded from diluted EPS.
The basic earnings attributable to TCI Group common stockholders per
common share for the three months ended March 31, 1998 was computed by
dividing net earnings attributable to TCI Group common stockholders by
the weighted average number of common shares outstanding of TCI Group
Stock during the period (517 million).
(continued)
I-51
<PAGE> 54
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The diluted earnings attributable to TCI Group common stockholders per
common share for the three months ended March 31, 1998 was computed by
dividing net loss attributable to TCI Group common stockholders, which
is adjusted by the addition of preferred dividends and interest expense
accrued during the three months ended March 31, 1998 to net earnings,
assuming conversion of TCI Group convertible securities as of the
beginning of the period, by the weighted average number of common
shares outstanding of TCI Group Stock during the period. Shares
issuable upon conversion of the Convertible Preferred Stock, Series
C-TCI Group ("Series C-TCI Group Preferred Stock"), the Redeemable
Convertible TCI Group Preferred Stock, Series G ("Series G Preferred
Stock"), preferred stock of subsidiaries, convertible notes payable,
stock options and other fixed and nonvested performance awards have
been included in the computation of weighted average shares, as
illustrated below. Shares of TCI Group stock issuable upon conversion
of Convertible Preferred Stock, Series D ("Series D Preferred Stock"),
and associated dividend payments for the three months ended March 31,
1998 have been excluded as adjustments in computing the diluted
earnings attributable to TCI Group common stockholders per common share
as Series D Preferred Stock is antidilutive for the three months ended
March 31, 1998.
The basic and diluted loss attributable to TCI Group common
stockholders per common share for the three months ended March 31, 1997
was computed by dividing net loss attributable to TCI Group common
stockholders by the weighted average number of common shares
outstanding of TCI Group Stock during the period. Potential common
shares were not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
No material changes in the weighted average outstanding shares or
potential common shares occurred after March 31, 1998.
(continued)
I-52
<PAGE> 55
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Information concerning the reconciliation of basic EPS to diluted EPS
with respect to TCI Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
----------- -----------
amounts in millions, except
per share amounts
<S> <C> <C>
Basic EPS:
Earnings (loss) attributable to common stockholders $ 227 (84)
=========== ===========
Weighted average common shares 517 678
=========== ===========
Basic earnings (loss) per share attributable to
common stockholders $ .44 (.12)
=========== ===========
Diluted EPS:
Earnings (loss) attributable to common stockholders $ 227 (84)
Add preferred dividend requirements 4 --
Add interest expense 1 --
----------- -----------
Adjusted earnings (loss) attributable to common
stockholders assuming conversion of preferred
shares $ 232 (84)
=========== ===========
Weighted average common shares 517 678
----------- -----------
Add dilutive potential common shares:
Employee and director options 8 --
Convertible notes payable 24 --
Series C-TCI Group Preferred Stock 7 --
Series D Preferred Stock -- --
Series G Preferred Stock 8 --
Preferred stock of subsidiaries 45 --
----------- -----------
Dilutive potential common shares 92 --
----------- -----------
Diluted weighted average common shares 609 678
=========== ===========
Diluted earnings (loss) per share attributable to
common stockholders $ .38 (.12)
=========== ===========
</TABLE>
(continued)
I-53
<PAGE> 56
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $354 million and $386 million for the three
months ended March 31, 1998 and 1997, respectively. Cash paid for
income taxes was not material for the three months ended March 31, 1998
and 1997.
Summary of cash paid for acquisitions and cash received in exchanges
is as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Aggregate cost basis of assets acquired $ (401) (1,065)
Liabilities assumed, net of current assets 2 616
Deferred tax liability recorded in acquisitions 89 34
Minority interests in equity of acquired entities (130) 1
Elimination of notes receivable from affiliates 351 --
Common stock and preferred stock issued in acquisitions 24 258
----------- -----------
Cash paid for acquisitions $ (65) (156)
=========== ===========
Cash received in exchanges:
Aggregate cost basis of assets acquired $ -- (294)
Historical cost of assets disposed of -- 305
Gain recorded on exchange of assets -- 11
----------- -----------
Cash received in exchanges $ -- 22
=========== ===========
</TABLE>
For a description of certain non-cash transactions, see notes 5, 6 and
11.
(4) Investment in Cablevision Systems Corporation
As further described in note 6, TCI Group acquired an approximate 32.7%
interest in CSC on March 4, 1998. At March 31, 1998, TCI Group owned
24,471,086 shares of CSC Class A common stock, which had a closing
market price of $65.75 per share on March 31, 1998.
Summarized unaudited results of operations for CSC, accounted for under
the equity method, are as follows for the period from the date of
acquisition through March 31, 1998 (amounts in millions):
<TABLE>
<S> <C>
Revenue $ 236
Operating, selling, general and administrative expense (202)
Depreciation and amortization (56)
---------------
Operating loss (22)
Interest expense (35)
Other, net (18)
---------------
Net loss $ (75)
===============
</TABLE>
(continued)
I-54
<PAGE> 57
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investments in Other Affiliates
TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in
the domestic cable business. Summarized unaudited results of operations
for the periods in which TCI Group used the equity method to account
for such other affiliates are as follows:
<TABLE>
<CAPTION>
Three months ended
Combined Operations March 31,
--------------------------
1998 1997
---------- ----------
amounts in millions
<S> <C> <C>
Revenue $ 250 280
Operating, selling, general
and administrative expenses (138) (161)
Depreciation and amortization (80) (80)
---------- ----------
Operating income 32 39
Interest expense (55) (61)
Other, net 7 (12)
---------- ----------
Net loss $ (16) (34)
========== ==========
</TABLE>
During 1997, TCI Group adopted the equity method of accounting for its
investment in InterMedia Partners, a California limited partnership
("InterMedia Partners"). In January 1998, InterMedia Partners
repurchased substantially all of the equity interests held by partners
other than TCI Group. As a result of such repurchases, TCI Group began
consolidating InterMedia Partners.
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.
(continued)
I-55
<PAGE> 58
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Acquisitions and Dispositions
On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange
for approximately 24.5 million newly issued CSC Class A common shares
(as adjusted for a stock dividend). Such shares represent an
approximate 32.7% equity interest in CSC's total outstanding shares and
an approximate 9% voting interest in CSC in all matters except for the
election of directors, in which case TCI Group has an approximate 47%
voting interest in the election of one-fourth of CSC's directors. CSC
also assumed and repaid approximately $574 million of debt owed by TCI
Group to external parties and $95 million of debt owed to TCI Group. As
a result of this transaction, TCI Group recognized a $511 million gain
in the accompanying combined statement of operations for the three
months ended March 31, 1998. Such gain represents the excess of the
$1,161 million fair value of the CSC Class A common shares received
over the historical cost of the net assets transferred by TCI Group to
CSC. TCI Group has also entered into letters of intent with CSC which
provide for TCI Group to acquire a cable system in Michigan and an
additional 3% of CSC's Class A common shares and for CSC to (i) acquire
cable systems serving approximately 250,000 customers in Connecticut
and (ii) assume $110 million of TCI Group's debt. The ability of TCI
Group to sell or increase its investment in CSC is subject to certain
restrictions and limitations set forth in a stockholders agreement with
CSC.
During the first quarter of 1998, TCI also completed two transactions
whereby TCI Group contributed cable television systems serving in the
aggregate approximately 235,000 customers to two separate joint
ventures (collectively, the "Q1 Joint Ventures") in exchange for
non-controlling ownership interests in each of the Q1 Joint Ventures,
and the assumption and repayment by the Q1 Joint Ventures of
intercompany debt owed to TCI Group aggregating $343 million. In
connection with such transactions, TCI Group has agreed to take certain
steps to support compliance by the Q1 Joint Ventures with their payment
obligations under certain debt instruments, up to an aggregate total
contingent commitment of $294 million. In light of such agreement, the
$97 million aggregate excess of the TCI Group debt assumed by the Q1
Joint Ventures over the historical cost of the remaining net assets
contributed to the Q1 Joint Ventures has been reflected as a direct
decrease to combined deficit (net of related deferred income taxes of
$39 million). TCI Group uses the equity method of accounting to account
for its investments in the Q1 Joint Ventures. The March 4, 1998 CSC
transaction and the formation of the Q1 Joint Ventures are collectively
referred to herein as the "Q1 1998 Contribution Transactions."
(continued)
I-56
<PAGE> 59
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On April 30, 1998, TCI Group contributed certain cable television
systems serving in the aggregate approximately 435,000 customers in
Kentucky to a joint venture in exchange for a 49% limited partnership
interest in such joint venture, and the assumption and repayment by
such joint venture of intercompany debt owed to TCI Group and debt owed
by TCI Group to external parties aggregating $812 million. In
connection with such transaction, TCI Group has agreed to take certain
steps to support compliance by the joint venture with its payment
obligations under certain debt instruments, up to an aggregate total
contingent commitment of $490 million. TCI Group will use the equity
method of accounting to account for its investments in this joint
venture.
Including the Q1 1998 Contribution Transactions and the above described
April 30, 1998 transaction, TCI Group, as of April 30, 1998, has, since
January 1, 1997, contributed, or signed agreements or letters of intent
to contribute within the next twelve months, certain cable television
systems (the "Contributed Cable Systems") serving approximately 3.9
million basic customers to joint ventures in which TCI Group will
retain non-controlling ownership interests (the "Contribution
Transactions"). Following the completion of the Contribution
Transactions, TCI Group will no longer consolidate the Contributed
Cable Systems. Accordingly it is anticipated that the completion of the
Contribution Transactions, as currently contemplated, will result in an
aggregate estimated reduction (based on actual amounts with respect to
the Q1 1998 Contribution Transactions and currently contemplated
amounts with respect to the pending Contribution Transactions) to TCI
Group's debt of $4.8 billion and aggregate estimated reductions (based
on 1997 amounts) to TCI Group's annual revenue and annual operating
income before depreciation, amortization and stock compensation of $1.8
billion and $815 million, respectively. No assurance can be given that
any of the pending Contribution Transactions will be consummated.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
amounts in millions
<S> <C> <C>
Notes payable (a) $ 8,939 8,672
Bank credit facilities (b) 3,718 4,842
Commercial paper 528 533
Convertible notes (c) 40 40
Other debt 201 19
----------- -----------
$ 13,426 14,106
=========== ===========
</TABLE>
(continued)
I-57
<PAGE> 60
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) During the three months ended March 31, 1998, TCI Group
purchased in the open market certain notes payable which had
an aggregate principal balance of $95 million and fixed
interest rates ranging from 8.75% to 10.125% (the "1998
Purchases"). In connection with the 1998 Purchases, TCI Group
recognized a loss on early extinguishment of debt of $16
million. Such loss related to prepayment penalties amounting
to $15 million and the retirement of deferred loan costs.
(b) At March 31, 1998, 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.
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
subsidiaries attributed to TCI Group 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.
(c) The convertible notes, which are stated net of unamortized
discount of $166 million at March 31, 1998 and December 31,
1997, 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 March 31, 1998, the notes were
convertible, at the option of the holders, into an aggregate
of 24,163,259 shares of Series A TCI Group Stock, 19,416,910
shares of Series A Liberty Group Stock, 20,711,373 shares of
Series A TCI Ventures Group Stock and 3,451,897 shares of
Series A Common Stock, $1.00 par value per share, of TCI
Satellite Entertainment, Inc.
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.
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 March 31, 1998, the fair value of TCI Group's debt was
$14,212 million, as compared to a carrying value of $13,426 million on
such date.
(continued)
I-58
<PAGE> 61
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into variable and fixed interest
rate exchange agreements ("Interest Rate Swaps") pursuant to which it
(i) pays fixed interest rates (the "Fixed Rate Agreements") of 6.2% and
receives variable interest rates on a notional amount of $10 million at
March 31, 1998 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 March 31, 1998. During
the three months ended March 31, 1998 and 1997, TCI Group's net
receipts (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 $3 million and
$1 million, respectively.
Information concerning TCI Group's Variable Rate Agreements at March
31, 1998 is as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Amount to
be paid
Expiration Interest rate Notional (received) upon
date to be received amount termination (a)
---- -------------- ------ ---------------
<S> <C> <C> <C>
September 1998 4.8%-5.4% $ 450 $ 1
April 1999 7.4% 50 (1)
September 1999 6.4% 350 (2)
February 2000 5.8%-6.6% 300 (2)
March 2000 5.8%-6.0% 675 --
September 2000 5.1% 75 2
March 2027 9.7% 300 (18)
December 2036 9.7% 200 (7)
---------- ----------
$ 2,400 $ (27)
========== ==========
</TABLE>
------------------
(a) The estimated amount that TCI Group would pay or receive to
terminate the agreements at March 31, 1998, taking into
consideration current interest rates and the current
creditworthiness of the counterparties, represents the fair
value of the Interest Rate Swaps.
The Fixed Rate Agreement expires in August 1998. At March 31, 1998, TCI
Group would be required to pay less than $1 million to terminate the
Fixed Rate Agreement.
(continued)
I-59
<PAGE> 62
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In addition to the Fixed Rate and Variable Rate Agreements, TCI Group
entered into Interest Rate Swaps pursuant to which it pays a variable
rate based on the London Interbank Offered Rate ("LIBOR") (6.1% at
March 31, 1998) and receives a variable rate based on the Constant
Maturity Treasury Index ("CMT") (6.0% at March 31, 1998) on a notional
amount of $400 million through September 2000; and pays a variable rate
based on LIBOR (6.0% at March 31, 1998) and receives a variable rate
based on CMT (6.1% at March 31, 1998) on notional amounts of $95
million through February 2000. During the three months ended March 31,
1998, TCI Group's net payments pursuant to such agreements were less
than $1 million. At March 31, 1998, TCI Group would be required to pay
an estimated $3 million to terminate such Interest Rate Swaps.
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.
Further, TCI Group does not anticipate material near-term losses in
future earnings, fair values or cash flows resulting from derivative
financial instruments as of March 31, 1998.
(8) Redeemable Preferred Stock
On February 20, 1998, TCI issued a Notice of Redemption which called
for the redemption, on April 1, 1998 of all of its outstanding Series D
Preferred Stock for a redemption price of $304.0233 per share. During
the first quarter of 1998, 988,776 shares of Series D Preferred Stock
were converted into 9,887,760 shares of TCI Group Series A Stock and
5,561,741 shares of Liberty Group Series A Stock.
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
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 $35 million and $25 million for the three months
ended March 31, 1998 and 1997, respectively, and are included in
minority interests in earnings of attributed subsidiaries in the
accompanying combined financial statements.
(continued)
I-60
<PAGE> 63
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(10) Combined Deficit
General
During the fourth quarter of 1997, TCI Group entered into a Total
Return Equity Swap Facility (the "Equity Swap Facility"). Pursuant to
the Equity Swap Facility, TCI Group has the right to direct the
counterparty (the "Counterparty") to use the Equity Swap Facility to
purchase shares ("Equity Swap Shares") of TCI Group Series A Stock and
TCI Ventures Group Series A Stock with an aggregate purchase price of
up to $300 million. TCI Group has the right, but not the obligation, to
purchase Equity Swap Shares through the September 30, 2000 termination
date of the Equity Swap Facility. During such period, TCI Group is to
settle periodically any increase or decrease in the market value of the
Equity Swap Shares. If the market value of the Equity Swap Shares
exceeds the Counterparty's cost, Equity Swap Shares with a fair value
equal to the difference between the market value and cost will be
segregated from the other Equity Swap Shares. If the market value of
Equity Swap Shares is less than the Counterparty's cost, TCI Group, at
its option, will settle such difference with shares of TCI Group Series
A Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, TCI Group is
required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap
Shares. Due to TCI Group's ability to issue shares to settle periodic
price fluctuations and fees under the Equity Swap Facility, TCI Group
records all amounts received or paid under this arrangement as
increases or decreases, respectively, to equity. As of March 31, 1998,
the Equity Swap Facility had acquired 2,089,480 shares of TCI Group
Series A Stock and 513,500 shares of TCI Ventures Group Series A Stock
at an aggregate cost that was approximately $10 million less than the
fair value of such Equity Swap Shares at March 31, 1998.
Stock Repurchases
During the three months ended March 31, 1998, pursuant to a stock
repurchase program approved by the Board, TCI Group repurchased 66,041
shares of TCI Group Series A Stock at an aggregate cost of $2 million.
Such stock repurchases are reflected as a increase of combined deficit
in the accompanying combined financial statements.
Stock Options and Stock Appreciation Rights
TCI Group records stock compensation expense relating to restricted
stock awards, options and/or stock appreciation rights (collectively,
"Awards") granted by TCI to certain TCI employees and/or directors who
are involved with the TCI Group. Stock compensation with respect to
Awards granted by TCI includes amounts related to TCI common stock and
is allocated to TCI Group based on the Awards held by TCI employees
and/or directors who are involved with TCI Group. Estimated
compensation relating to stock appreciation rights ("SARs") has been
recorded through March 31, 1998, and is subject to future adjustment
based upon vesting and market value, and ultimately, on the final
determination of market value when such rights are exercised. The
payable arising from the compensation related to the options and/or
stock appreciation rights is included in the amount due from related
parties.
(continued)
I-61
<PAGE> 64
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) 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>
March 31, December 31,
1998 1997
---------------- ---------------
amounts in millions
<S> <C> <C>
Notes receivable from Liberty Media Group, including
accrued interest (a) $ (87) (378)
TINTA Note Payable (b) 63 89
Intercompany account (c) (441) (241)
---------------- ---------------
$ (465) (530)
================ ===============
</TABLE>
--------------------
(a) Amounts outstanding under the notes receivable from the Liberty
Media Group bear interest at 6.5%. Collections of principal and
interest on notes receivable from Liberty Media Group during the
first quarter of 1998 aggregated approximately $296 million.
(b) Amounts outstanding under TCI's note payable to TINA (the "TINTA
Note Payable") bear interest at variable rates based on TCI's
weighted average cost of bank borrowings of similar maturities
(6.2% at March 31, 1998). Principal and interest is due and
payable as mutually agreed from time to time by TCI and TINTA.
During the three months ended March 31, 1998 and 1997, interest
expense related to the TINTA Note Payable aggregated $1 million
and $2 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 Deficit."
(continued)
I-62
<PAGE> 65
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On July 11, 1997, TCI Music, Inc. ("TCI Music") merged with DMX, Inc.
(the "DMX Merger"). Simultaneously with the DMX Merger, substantially
all of TCI's controlling ownership interest in TCI Music was
transferred from TCI Group to 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 Group Stock for the benefit of
entities included within TCI Group. Additionally, Liberty Media Group
may elect to pay $50 million of the Music Note by delivery of a Stock
Appreciation Rights Agreement that will give TCI Group the right to
receive 20% of the appreciation in value of Liberty Media Group's
investment in TCI Music, to be determined at July 11, 2002.
TCI Group has provided a revolving loan facility (the "Ventures
Intergroup 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 Ventures Intergroup Credit Facility is payable
by TCI Ventures Group to TCI Group on a quarterly basis. Such
commitment fee was not significant during the three months ended March
31, 1998. The maximum amount of borrowings permitted under the Ventures
Intergroup 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 Ventures
Intergroup Credit Facility at March 31, 1998.
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 three months ended March 31, 1998 and 1997, Liberty
Media Group was allocated $1 million and less than $1 million,
respectively, and TCI Ventures Group was allocated $2 million in each
of the three month periods ended March 31, 1998 and 1997, in corporate
general and administrative costs by TCI Group. Such amounts are
included in selling, general and administrative expenses in the
accompanying combined financial statements.
(continued)
I-63
<PAGE> 66
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During 1996, TCI Group transferred, subject to regulatory approval,
certain distribution equipment to a subsidiary of TINTA in exchange for
a (pound)15 million ($23 million using the applicable exchange rate)
principal amount promissory note (the "TVG LLC Promissory Note"). The
TVG LLC Promissory Note was contributed by TCI Group to TVG LLC in
connection with the September 10, 1997 consummation of the Exchange
Offers. The distribution equipment was subsequently leased back to TCI
Group over a five year term with semi-annual payments of $2 million,
plus expenses. Effective October 1, 1997, such distribution equipment
was transferred back to TCI Group and the related lease and the TVG LLC
Promissory Note were canceled. During the three months ended March 31,
1997, (i) the U.S. dollar equivalent of interest income earned with
respect to the TVG LLC Promissory Note was less than $1 million and
(ii) the U.S. dollar equivalent of the lease expense under the
above-described lease agreement aggregated $1 million.
Through June 30, 1997, TCI Group had a 50.1% partnership interest in
QE+Ltd. ("QE+"), a limited partnership interest which distributes
"STARZ!," a first-run movie premium programming service. Entities
attributed to Liberty Media Group held the remaining 49.9% partnership
interest. Also prior to July 1, 1997, Encore Media Corporation ("EMC")
(at the time a 90%-owned subsidiary of TCI and a member of Liberty
Media Group) earned management fees from QE+ equal to 20% of managed
costs, as defined. In addition, Liberty Media Group earned a fee for
certain services provided to QE+ equal to 4% of the gross revenue of
QE+ ("STARZ Content Fees"). Such management fees and STARZ Content Fees
aggregated $6 million for the three months ended March 31, 1997 and are
included in operating costs and expenses in the accompanying combined
financial statements. In addition, during the three months ended March
31, 1997, QE+ provided $6 million of programming services to an entity
attributed to TCI Ventures Group. Such amount is included in revenue in
the accompanying combined financial statement.
Subsequent to June 30, 1997, TCI Group and Liberty Media Group entered
into a series of transactions pursuant to which the businesses of
"Encore," a movie premium programming service, and "STARZ!" were
contributed to Encore Media Group, a subsidiary of TCI that is
attributed to the Liberty Media Group. Upon the July 1997 formation of
Encore Media Group, the operations of QE+ were no longer included in
the combined financial results of TCI Group. In connection with the
foregoing transactions, Liberty Media Group issued a note payable to
TCI Group (which note was paid in full during the first quarter of
1998) and TCI Group entered into a 25 year affiliation agreement with
Encore Media Group (the "EMG Affiliation Agreement") pursuant to which
TCI Group pays monthly fixed amounts in exchange for unlimited access
to all of the existing Encore and STARZ! services.
TCI Group's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million
in 2003, and will increase with inflation through 2022.
(continued)
I-64
<PAGE> 67
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A subsidiary of TCI that is attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCI Group. Due to the related party nature of the
transaction, the $50 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $176 million) has been reflected
as an increase to TCI Group's combined deficit.
Pursuant to an agreement between TCI Music and TCI Group, certain
entities within TCI Group are required to deliver to TCI Music monthly
revenue payments aggregating $18 million annually (adjusted annually
for inflation) through 2017. During the three months ended March 31,
1998, the aggregate amount paid by the TCI Group to TCI Music pursuant
to such arrangement was $5 million. Such amount is included as a
reduction of revenue in the accompanying combined statements of
operations.
Encore Media Group, TCI Music and certain other 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 $56 million and $11 million for the three months ended March
31, 1998 and 1997, respectively. Such amounts are included in operating
costs and expenses in the accompanying combined statements of
operations.
Entities included in TCI Group lease satellite transponder facilities
and receive video transport services from entities included in TCI
Ventures Group. Charges by TCI Ventures Group for such arrangements and
other related operating expenses for the three months ended March 31,
1998 and 1997, aggregated $3 million and $10 million, respectively.
Such amounts are included in operating costs and expenses in the
accompanying combined statements of operations.
In addition, a subsidiary attributed to TCI Ventures Group distributed
certain program services to TCI Group. Charges to TCI Group for such
services aggregated $2 million for each of the three months ended March
31, 1998 and 1997, and are included in operating costs and expenses in
the accompanying combined financial statements.
(continued)
I-65
<PAGE> 68
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(12) Transactions with Officers and Directors
On June 16, 1997, (a) TCI Group issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the
Estate of Bob Magness (the "Magness Estate"), the late founder and
former Chairman of the Board of TCI in exchange (the "Exchange") for an
equal number of shares of TCI Group Series B Stock (which shares are
entitled to ten votes per share) owned by the Magness Estate, (b) the
Magness Estate sold (the "Sale") the shares of TCI Group Series A Stock
received in the Exchange, together with approximately 1.5 million
shares of TCI Group Series A Stock that the Magness Estate previously
owned (collectively, the "Option Shares"), to two investment banking
firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment
Bankers whereby TCI has the option, but not the obligation, to purchase
the Option Shares at any time on or before June 16, 1999 (the "Option
Period"). The preceding transactions are referred to collectively as
the "June 16 Stock Transaction". During the Option Period, TCI Group
and the Investment Bankers are 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, TCI Group, at its option, will settle such difference with shares
of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In
addition, TCI Group is required to pay the Investment Bankers a
quarterly fee equal to LIBOR plus 1% on the Sale Price, as adjusted for
payments made by TCI Group pursuant to any quarterly settlement with
the Investment Bankers. Due to TCI Group's ability to settle quarterly
price fluctuations and fees with shares of TCI Group Series A Stock or
TCI Ventures Group Series A Stock TCI Group records all amounts
received or paid under this arrangement as increases or decreases,
respectively, to equity. During the fourth quarter of 1997, TCI Group
repurchased 4,000,000 shares of TCI Group Series A Stock from one of
the Investment Bankers for an aggregate cash purchase price of $66
million. Additionally, as a result of the Exchange Offers and certain
open market transactions that were completed to obtain the desired
weighting of TCI Group Series A Stock and TCI Ventures Group Series A
Stock, the Investment Bankers disposed of 4,210,308 shares of TCI Group
Series A Stock and acquired 23,407,118 shares of TCI Ventures Group
Series A Stock during the last half of 1997. As a result of the
foregoing transactions and certain transactions related to the January
5, 1998 settlement of litigation involving the Magness Estate, as
described below, the Option Shares were comprised of 6,201,042 shares
of TCI Group Series A Stock and 11,740,610 shares of TCI Ventures Group
Series A Stock at March 31, 1998. At March 31, 1998, the market value
of the Option Shares exceeded the Investment Bankers' cost by $201
million. Pursuant to a certain Letter Agreement, dated June 16, 1997,
between Dr. Malone, TCI's Chairman and Chief Executive Officer, and the
Magness Estate, Dr. Malone agreed to waive certain rights of first
refusal with respect to shares of Series B TCI Group Stock beneficially
owned by the Magness Estate. Such rights of first refusal arise from a
letter agreement, dated June 17, 1988, among Bob Magness,
Kearns-Tribune Corporation and Dr. Malone, pursuant to which Dr. Malone
was granted a right of first refusal to acquire any shares of TCI Group
Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such
waiver was necessary in order for the Magness Estate to consummate the
Exchange and the Sale.
In consideration for such waiver, TCI Group granted Dr. Malone the
right (the "Malone Right") to acquire from time to time until June 30,
1999, from TCI Group up to 30,545,864 shares of the Series B TCI Group
Stock acquired by TCI Group from the Magness Estate pursuant to the
Exchange. Such acquisition may be made in exchange for either, or any
combination of, shares of Series A TCI Group Stock owned by Dr. Malone
(exchanged on a one for one basis), or cash in an amount equal to the
average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.
In connection with certain legal proceedings relative to the probate
of the Magness Estate, one or more of Gary Magness and Kim Magness, Bob
Magness' sons, Sharon Magness, Bob Magness' surviving second wife and
the original personal representatives of the Magness Estate advanced
various claims, causes of action, demands, complaints and requests
against one or more of the others. In addition, Kim Magness and Gary
Magness, in a Complaint And Request To Void Sale Of TCI Stock, And For
Damages And Surcharge, filed on October 29, 1997 (the "Voiding
Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI Group, Dr. Malone and the original personal
representatives of the Magness Estate. Among other matters, the Voiding
Action challenged the June 16 Stock Transaction on various fiduciary
bases and requested recision of such transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI Group, Gary Magness, Kim Magness, Sharon
Magness, the Magness Estate, the Estate of Betsy Magness (the first
wife of Bob Magness) and Dr. Malone agreed to settle their respective
claims against each other relating to the Magness Estate and the June
16 Stock Transaction, in each case without any of those parties
admitting any of the claims or allegations against that party (the
"Magness Settlement").
(continued)
I-66
<PAGE> 69
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A
Stock and 11,666,506 shares of TCI Ventures Group Series A Stock were
returned to TCI as authorized but unissued shares, (ii) the Magness
Estate returned to the Investment Bankers the portion of the Sales
Price attributable to such returned shares and (iii) the Magness Estate
paid $11 million to TCI representing a reimbursement of the Exchange
fees incurred by TCI from June 16, 1997 through February 9, 1998 with
respect to such returned shares. TCI then issued to the Magness Estate
10,017,145 shares of TCI Group Series B Stock and 12,034,298 shares of
TCI Ventures Series B Stock. In addition, as part of the Magness
Settlement, TCI Group issued 1,339,415 shares of TCI Group Series B
Stock to the Estate of Betsy Magness in exchange for an equal number of
shares of TCI Group Series A Stock and issued 1,531,834 shares of TCI
Ventures Group Series B Stock for an equal number of shares of TCI
Ventures Group Series A Stock.
On February 9, 1998, in connection with the Magness Settlement, TCI
Group entered into a call agreement (the "Malone Call Agreement") with
Dr. Malone and Dr. Malone's wife (together with Dr. Malone, the
"Malones"), under which the Malones granted to TCI Group the right to
acquire any shares of TCI stock which are entitled to cast more than
one vote per share (the "High-Voting Shares") owned by the Malones,
which currently consist of an aggregate of approximately 60 million
High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third
persons. In either such event, TCI Group has the right to acquire the
shares at a maximum price equal to the then relevant market price of
shares of "low-voting" Series A Stock plus a ten percent premium. The
Malones also agreed that if TCI were ever to be sold to another entity,
then the maximum premium that the Malones would receive on their
High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150
million to the Malones in consideration of them entering into the
Malone Call Agreement.
(continued)
I-67
<PAGE> 70
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also, on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness and the Magness Estate
(collectively, the "Magness Family") also entered into a call agreement
with TCI (with substantially the same terms as the one entered into by
the Malones, including a call on the shares owned by the Magness Family
upon Dr. Malone's death) (the "Magness Call Agreement") on the Magness
Family's aggregate of approximately 49 million High-Voting Shares. The
Magness Family was paid $124 million by TCI Group in consideration of
them entering into the Magness Call Agreement. Additionally, on
February 9, 1998, the Magness Family entered into a shareholders'
agreement (the "Shareholders' Agreement") with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult
with each other in connection with matters to be brought to the vote of
TCI's shareholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for TCI's Board of Directors and
Dr. Malone has agreed to vote his High Voting Shares for such nominee
and (iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones. In addition, the Malone Right granted by TCI
Group to Dr. Malone to acquire 30,545,864 shares of TCI Group Series B
Stock has been reduced to an option to acquire 14,511,570 shares of TCI
Group Series B Stock. Pursuant to the terms of the Shareholders'
Agreement, the Magness Family has the right to participate in the
reduced Malone Right on a proportionate basis with respect to
12,406,238 shares of the 14,511,570 shares subject to the Malone Right.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. TCI Group's share
of the Call Payments of $134 million was paid during the first quarter
of 1998 and is reflected as an increase of combined deficit in the
accompanying combined financial statements.
(13) Income Taxes
TCI files a consolidated federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying combined financial
statements.
(continued)
I-68
<PAGE> 71
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A tax sharing agreement (as amended, 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
attributed entities 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.
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 unutilized 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-69
<PAGE> 72
"TCI 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 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 deficit. Tax liabilities and
benefits, as determined under the Old Tax Sharing Agreement, that are
generated by the entities comprising 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 TCI Group and
TCI Ventures Group in accordance with the Old Tax Sharing Agreement.
At December 31, 1997, TCI Group had net operating loss carryforwards
for income tax purposes aggregating approximately $1,425 million of
which, if not utilized to reduce taxable income in future periods, $134
million expires in 2003, $117 million in 2004, $344 million in 2005,
$245 million in 2006, $19 million in 2009, $147 million in 2010, $231
million in 2011 and $188 million in 2012. Certain subsidiaries of TCI
Group had additional net operating loss carryforwards for income tax
purposes aggregating approximately $232 million and these net operating
losses are subject to certain rules limiting their usage. Pursuant to
the Old and New Tax Sharing Agreements, TCI Group has not received
benefit for approximately $75 million of the net operating loss
carryforward disclosed above. TCI is responsible to TCI Group to the
extent such amounts are utilized by TCI in future periods.
(14) Commitments and Contingencies
On October 5, 1992, the United States Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). In 1993 and 1994, the Federal Communications Commission
(the "FCC") adopted certain rate regulations required by the 1992 Cable
Act and imposed a moratorium on certain rate increases. As a result of
such actions, TCI Group's basic and tier service rates and its
equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the
FCC. Basic and tier service rates are evaluated against competitive
benchmark rates as published by the FCC, and equipment and installation
charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and
1994 rate regulations. The rate regulations do not apply to the
relatively few systems which are subject to "effective competition" or
to services offered on an individual service basis, such as premium
movie and pay-per-view services.
(continued)
I-70
<PAGE> 73
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group believes that it has complied in all material respects with
the provisions of the 1992 Cable Act, including its rate setting
provisions. However, TCI Group's rates for Regulated Services are
subject to review by the FCC, if a complaint is filed by a customer, or
the appropriate franchise authority, if such authority has been
certified by the FCC to regulate rates. If, as a result of the review
process, a system cannot substantiate its rates, it could be required
to retroactively reduce its rates to the appropriate benchmark and
refund the excess portion of rates received. Any refunds of the excess
portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $178 million at March 31, 1998. 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. TCI Group also has guaranteed the
performance of certain affiliates and other parties with respect to
such parties' contractual and other obligations. Although there can be
no assurance, management of 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 is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution
and license agreements. As of March 31, 1998, the amount of such
obligations or guarantees was approximately $295 million. The future
obligations of TCI Group with respect to these agreements is not
currently determinable because such amount is dependent upon the number
of qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films.
As described in note 11, TCI Group has agreed to make fixed monthly
payments through 2022 to Liberty Media Group pursuant to the EMG
Affiliation Agreement.
As described in note 6, TCI Group has significant contingent
obligations with respect to certain of its affiliates.
TCI Group is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, TCI Group is
committed to carry such suppliers programming on its cable systems.
Several of these agreements provide for penalties and charges in the
event the programming is not carried or not delivered to a
contractually specified numbers of customers.
(continued)
I-71
<PAGE> 74
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the third quarter of 1997, TCI Group committed to purchase
billing services pursuant to three successive five year agreements.
Pursuant to such arrangement, TCI Group is obligated at March 31, 1998
to make minimum payments aggregating approximately $1.6 billion through
2012. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated at March 31, 1998 to make minimum revenue payments through
2017 and minimum license fee payments through 2007 aggregating
approximately $425 million to TCI Music. Such minimum payments are
subject to inflation and other adjustments pursuant to the terms of the
underlying agreements.
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.
Effective as of December 16, 1997, the National Digital Television
Center, Inc. ("NDTC"), a subsidiary of TCI which is attributed to TCI
Ventures Group, on behalf of TCI Group and other cable operators that
may be designated from time to time by NDTC ("Approved Purchasers"),
entered into an agreement (the "Digital Terminal Purchase Agreement")
with General Instrument Corporation (formerly NextLevel Systems, Inc.,
"GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999
and 2000 at an average price of $318 per basic set-top device
(including a required royalty payment). GI agreed to provide NDTC and
its Approved Purchasers the most favorable prices, terms and conditions
made available by GI to any customer purchasing advanced digital
set-top devices. In connection with NDTC's purchase commitment, GI
agreed to grant warrants to purchase its common stock proportional to
the number of devices ordered by each organization, which as of the
effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted
basis). It is anticipated that the value associated with such equity
interest would be attributed to TCI Group upon purchase and deployment
of the digital set-top devices.
(continued)
I-72
<PAGE> 75
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the three months ended March 31, 1998, TCI Group continued its
enterprise-wide comprehensive review of its computer systems and
related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and
devices that manage the distribution of TCI Group's products. TCI Group
is utilizing both internal and external resources to identify, correct
or reprogram, and test systems for year 2000 readiness.
As of March 31, 1998, TCI Group had inventoried substantially all of
its cable systems and began its assessment of the systems that will
require remediation or replacement. Inventoried systems include TCI
Group's financial systems and related software, its business systems,
data and voice networks, engineering systems and facilities and related
software supporting the distribution of TCI Group's products and other
equipment and systems potentially impacted by the year 2000.
Additionally, TCI Group began efforts to assess potential year 2000
issues of its affiliated companies that are not managed by TCI Group
and continued to have formal communications with its principal vendors
to determine their year 2000 readiness.
TCI Group completed a preliminary assessment of its systems and related
software that support TCI Group's financial applications. For those
financial systems and software which will continue to be utilized by
TCI Group beyond the year 1999, TCI Group has tentatively concluded
that such systems are capable of recognizing the year 2000 and
therefore will not require material remediation or replacement. One of
TCI Group's financial applications is externally managed by a third
party vendor and such financial application will be replaced with
software provided by such vendor. No assurances can be given that as
TCI Group completes its year 2000 assessment, additional internally
managed systems will not be identified as requiring remediation or
replacement. TCI Group has completed an initial assessment of its
business systems, including networks, engineering systems and
facilities and related software supporting the distribution of TCI
Group's products and has tentatively concluded that certain portions of
those systems will require remediation or replacement. Although no
assurance can be given, management of TCI Group anticipates that such
systems will be remediated or replaced prior to the year 2000.
Significant third party vendors whose systems are critical to TCI
Group's cable operations have been identified and/or surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to ensure readiness.
Management of TCI Group intends to have further communication with
primary vendors identified as having systems that are not year 2000
compliant to assess those vendors' plans for remediating their own year
2000 issues and to assess the impact on TCI Group if such vendors fail
to remediate their year 2000 issues.
(continued)
I-73
<PAGE> 76
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group's assessment of the impact of the year 2000 date change
should be complete by the end of 1998. TCI Group continues to evaluate
the level of validation it will require of third parties to ensure
their year 2000 readiness. Management of TCI Group has not yet
determined the cost associated with its year 2000 readiness efforts and
the related potential impact on TCI Group's results of operations but
has identified certain cost elements that, in the aggregate, are not
expected to be less than $20 million. Amounts expended to date have not
been material, although there can be no assurance that costs ultimately
required to be paid to ensure TCI Group's year 2000 readiness will not
have an adverse effect on TCI Group's financial position. Additionally,
there can be no assurance that TCI Group's systems or the systems of
other companies on which TCI Group relies will be converted in time or
that any such failure to convert by TCI Group or other companies will
not have an adverse effect on the its financial position.
I-74
<PAGE> 77
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
Assets amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 70,234 45,398
Trade and other receivables, net 39,532 39,963
Prepaid program rights 111,485 104,219
Committed film inventory 128,364 114,658
Investments in affiliates, accounted for under the equity method,
and related receivables (note 4) 812,235 523,590
Investment in Time Warner, Inc. ("Time Warner") (note 5) 4,108,460 3,537,841
Other investments, at cost, and related receivables (note 6) 401,866 426,715
Property and equipment, at cost:
Land -- 39
Support equipment and buildings 40,633 41,478
----------- -----------
40,633 41,517
Less accumulated depreciation 12,829 13,954
----------- -----------
27,804 27,563
----------- -----------
Excess cost over acquired net assets 212,119 203,300
Less accumulated amortization 12,985 9,057
----------- -----------
199,134 194,243
----------- -----------
Other assets, at cost, net of amortization 27,132 24,371
----------- -----------
$ 5,926,246 5,038,561
=========== ===========
</TABLE>
(continued)
I-75
<PAGE> 78
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
Liabilities and Combined Equity amounts in thousands
<S> <C> <C>
Accounts payable and accrued liabilities $ 75,417 69,367
Accrued stock compensation (note 9) 76,636 68,846
Program rights payable 170,117 156,351
Deferred option premium (note 5) -- 305,742
Debt (note 7) 551,709 348,590
Deferred income taxes 1,281,156 1,046,854
Other liabilities 2,064 2,060
----------- -----------
Total liabilities 2,157,099 1,997,810
----------- -----------
Minority interests in equity of attributed subsidiaries 101,030 101,000
Combined equity (note 8):
Combined equity 2,132,150 1,690,256
Accumulated other comprehensive earnings, net of
taxes (note 1) 1,079,588 740,903
----------- -----------
3,211,738 2,431,159
Due to related parties 456,379 508,592
----------- -----------
Total combined equity 3,668,117 2,939,751
----------- -----------
Commitments and contingencies (note 9)
$ 5,926,246 5,038,561
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
I-76
<PAGE> 79
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
amounts in thousands,
except per share amounts
<S> <C> <C>
Revenue:
Related parties (note 8) $ 71,708 22,511
Others 84,962 36,848
----------- -----------
156,670 59,359
----------- -----------
Operating costs and expenses:
Operating 79,739 19,526
Selling, general and administrative 42,074 12,464
Charges from related parties (note 8) 7,350 2,079
Stock compensation (notes 8 and 9) 76,130 5,574
Depreciation and amortization 7,788 779
----------- -----------
213,081 40,422
----------- -----------
Operating income (loss) (56,411) 18,937
Other income (expense):
Interest expense to related party (note 8) (5,731) --
Other interest expense (3,542) (305)
Dividend and interest income, primarily from affiliates 13,362 11,035
Share of earnings (losses) of affiliates, net (note 4) (21,999) 7,236
Minority interests in losses (earnings) of attributed subsidiaries 839 (9,614)
Gain on disposition of assets (note 5) 514,518 --
Gain on issuance of equity interests by affiliate
(note 4) 23,460 --
Other, net (107) 109
----------- -----------
520,800 8,461
----------- -----------
Earnings before income taxes 464,389 27,398
Income tax expense (161,248) (11,786)
----------- -----------
Net earnings $ 303,141 15,612
=========== ===========
Basic earnings attributable to common stockholders per common
share (note 2) $ .85 .04
=========== ===========
Diluted earnings attributable to common stockholders per common share
(note 2) $ .78 .04
=========== ===========
Comprehensive earnings (note 1) $ 641,826 15,612
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
I-77
<PAGE> 80
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated other
comprehensive Due to Total
Combined earnings, related combined
equity net of taxes parties equity
---------------- ------------------- ----------- --------------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1,690,256 740,903 508,592 2,939,751
Net earnings 303,141 -- -- 303,141
Payments for call agreements (note 8) (63,521) -- -- (63,521)
Purchase of Liberty Group Stock (1,121) -- -- (1,121)
Issuance of Liberty Group Stock for investment
in affiliate (note 4) 168,090 -- -- 168,090
Gain, net of taxes, in connection with the
issuance of common shares by USA Networks,
Inc. ("USAI"), formerly HSN, Inc. ("HSNI")
(note 4) 32,797 -- -- 32,797
Gain in connection with the issuance of common
shares by TCI Music, Inc. ("TCI Music") 2,508 -- -- 2,508
Change in due to related parties -- -- (52,213) (52,213)
Change in unrealized holding gains on
available-for-sale securities -- 338,685 -- 338,685
---------------- ------------------- ----------- --------------
Balance at March 31, 1998 $ 2,132,150 1,079,588 456,379 3,668,117
================ =================== =========== ==============
</TABLE>
See accompanying notes to combined financial statements.
I-78
<PAGE> 81
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 303,141 15,612
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 7,788 779
Stock compensation 76,130 5,574
Payments of stock compensation (1,106) --
Share of losses (earnings) of affiliates, net 21,999 (7,236)
Deferred income tax expense (8,544) (2,744)
Intergroup tax allocation 169,780 14,128
Minority interests in earnings (losses) (839) 9,614
Gain on disposition of assets (514,518) --
Gain on issuance of equity interests by affiliates (23,460) --
Noncash interest expense 1,337 --
Changes in operating assets and liabilities, net of acquisitions:
Change in receivables (392) (907)
Change in inventories (630) --
Change in prepaid expenses (22,212) (5,749)
Change in payables and accruals 22,507 3,148
----------- -----------
Net cash provided by operating activities 30,981 32,219
----------- -----------
Cash flows from investing activities:
Cash proceeds from dispositions 213,334 --
Cash paid for acquisitions (10,112) --
Capital expended for property and equipment (3,314) (434)
Additional investments in and loans to affiliates and others (62,626) (6,994)
Return of capital from affiliates 4,622 7,443
Collections on loans to affiliates and others 7,668 350
Other investing activities (624) (79)
----------- -----------
Net cash provided by investing activities 148,948 286
----------- -----------
Cash flows from financing activities:
Borrowings of debt 439,857 2,020
Repayments of debt (238,977) (3,640)
Contribution for issuance of Liberty Group Stock -- 2,054
Purchase of Liberty Group Stock (1,121) --
Change in cash transfers to related parties (291,298) 2,016
Payments for call agreements (63,521) --
Distributions to minority shareholders of subsidiaries (33) --
----------- -----------
Net cash provided (used) by financing activities (155,093) 2,450
----------- -----------
Net increase in cash and cash equivalents 24,836 34,955
Cash and cash equivalents at beginning of period 45,398 317,359
----------- -----------
Cash and cash equivalents at end of period $ 70,234 352,314
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
I-79
<PAGE> 82
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1998
(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. The combined financial statements of Liberty Media Group
are presented for purposes of additional analysis of the consolidated
financial statements of TCI and subsidiaries, and should be read in
conjunction with such consolidated financial statements.
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, 1997. Certain amounts have been
reclassified for comparability with the 1998 presentation.
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.
Effective January 1, 1998, Liberty Media Group adopted the provisions
of Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). Liberty Media Group has reclassified
its prior period combined balance sheet and combined statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
be reported in a financial statement in the period in which they are
recognized. Liberty Media Group has included unrealized holding gains
and losses for available-for-sale securities in other comprehensive
earnings that are recorded directly in combined equity. Pursuant to
SFAS 130, this item is reflected, net of related tax effects, as a
component of other comprehensive earnings in Liberty Media Group's
combined statements of operations, and is included in accumulated other
comprehensive earnings in Liberty Media Group's combined balance sheets
and combined statement of equity.
Certain prior period amounts have been reclassified for comparability
with the 1998 presentation.
(continued)
I-80
<PAGE> 83
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Targeted Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue two new series of stock,
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") and
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series B Stock," and together
with the Liberty Group Series A Stock, the "Liberty Group Stock"). The
Liberty Group Stock is intended to 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 Class A and
Class B common stock into Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share (the " TCI Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock", and together
with the TCI Group Series A Stock, the "TCI Group Stock"),
respectively. On August 10, 1995, TCI distributed, in the form of a
dividend, 2.25 shares of Liberty Group Stock for each four shares of
TCI Group Stock owned (the "Liberty Distribution").
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.
The Liberty 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 TCI Ventures Group Common
Stock, par value $1.00 per share (the "TCI Ventures Group Series A
Stock") and Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, par value $1.00 per share (the "TCI Ventures Group Series
B Stock," and together with TCI Ventures Group Series A Stock, the "TCI
Ventures Group Stock"). The TCI Ventures Group Stock is intended to
reflect 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 assets.
(continued)
I-81
<PAGE> 84
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The TCI Group Stock is intended to reflect the separate performance of
TCI and its subsidiaries and assets not attributed to Liberty Media
Group or TCI Ventures Group. Such subsidiaries and assets, which are
comprised primarily of TCI's domestic cable and communications
businesses, 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". The TCI
Group Series A Stock, TCI Ventures Group Series A Stock and the Liberty
Group Series A Stock are sometimes collectively referred to herein as
the "Series A Stock," and the TCI Group Series B Stock, TCI Ventures
Group Series B Stock and Liberty Group Series B Stock are sometimes
collectively referred to herein as the "Series B Stock."
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and issuance of
Liberty Group Stock and TCI Ventures Group Stock 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 Liberty 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. The redesignation of TCI Group
Stock and 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.
After the Liberty Distribution, existing preferred stock and debt
securities of TCI that were convertible into or exchangeable for shares
of TCI Class A common stock were, as a result of the operation of
antidilution provisions, adjusted so that there will be delivered upon
their conversion or exchange (in addition to the same number of shares
of redesignated TCI Group Series A Stock as were theretofore issuable
thereunder) the number of shares of Liberty Group Series A Stock that
would have been issuable in the Liberty Distribution with respect to
the TCI Class A common stock issuable upon conversion or exchange had
such conversion or exchange occurred prior to the record date for the
Liberty Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Liberty Distribution were adjusted by
issuing to the holders of such options separate options to purchase
that number of shares of Liberty Group Series A Stock which the holder
would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date
for the Liberty Distribution and reallocating a portion of the
aggregate exercise price of the previously outstanding options to the
newly issued options to purchase Liberty Group Series A Stock.
(continued)
I-82
<PAGE> 85
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The issuance of shares of Liberty Group Series A Stock upon such
conversion, exchange or exercise of such convertible securities will
not result in any transfer of funds or other assets from TCI Group to
Liberty Media Group in consideration of such issuance. In the case of
the exercise of such options to purchase Liberty Group Series A Stock,
the proceeds received upon the exercise of such options will be
attributed to Liberty Media Group.
The common stockholders' equity value of Liberty Media Group that, at
any relevant time, is attributed to TCI Group, and accordingly not
represented by outstanding Liberty Group Stock is referred to as
"Inter-Group Interest." Prior to consummation of the Liberty
Distribution, TCI Group had a 100% Inter-Group Interest in Liberty
Media Group. Following consummation of the Liberty Distribution, TCI
Group no longer has an Inter-Group Interest in Liberty Media Group.
Following consummation of the Liberty Distribution an Inter-Group
Interest would be created with respect to Liberty Media Group only if a
subsequent transfer of cash or other property from TCI Group to Liberty
Media Group is specifically designated by the Board as being made to
create an Inter-Group Interest or if outstanding shares of Liberty
Group Stock are purchased with funds attributable to TCI Group.
Dividends on Liberty Media Group Stock are payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends or the available dividend amount with respect
to Liberty Media Group, as defined. Determinations to pay dividends on
Liberty Media Group Stock are based primarily upon the financial
condition, results of operations and business requirements of Liberty
Media Group and TCI as a whole.
All debt incurred or preferred stock issued by TCI and its subsidiaries
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.
(continued)
I-83
<PAGE> 86
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstance, one of the other
Groups may transfer funds to such Group. Such transfers of funds among
the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from TCI Group to Liberty Media Group,
reflected as the creation of, or increase in, TCI Group's Inter-Group
Interest in Liberty Media Group or, in the case of a transfer from
Liberty Media Group to TCI Group, reflected as a reduction in TCI
Group's Inter-Group Interest in Liberty Media 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.
Loans from one Group to another Group generally will 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 policies 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.
The combined balance sheets of a Group reflect its net loans or
advances 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 advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical financial statements, net loans
or advances between Groups have been and will continue to be included
as a component of each respective Group's equity.
Although any increase in TCI Group's Inter-Group Interest in Liberty
Media Group resulting from an equity contribution by TCI Group to
Liberty Media Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from Liberty Media Group to TCI
Group would be determined by reference to the market value of the
Liberty Group Series A 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.
(continued)
I-84
<PAGE> 87
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All financial impacts of issuances and purchases of shares of TCI Group
Stock, TCI Ventures Group Stock or Liberty Group Stock, the proceeds of
which are attributed to TCI Group, TCI Ventures Group or Liberty Media
Group, respectively, will be to such extent reflected in the combined
financial statements of TCI Group, TCI Ventures Group or Liberty Media
Group, respectively. All financial impacts of issuances of shares of
TCI Ventures Group Stock or Liberty Group Stock, the proceeds of which
are attributed to TCI Group in respect of a reduction in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively, will be to such extent reflected in the combined
financial statements of TCI Group. Financial impacts of dividends or
other distributions on TCI Group Stock, TCI Ventures Group Stock or
Liberty Group Stock, will be attributed entirely to TCI Group, TCI
Ventures Group or Liberty Media Group, respectively, except that
dividends or other distributions on TCI Ventures Group Stock or Liberty
Group Stock will (if at the time there is an Inter-Group Interest in
TCI Ventures Group or Liberty Media Group, respectively) result in TCI
Group being credited, and TCI Ventures Group or Liberty Media 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 or Liberty Group Stock and a fraction of the numerator of which
is the TCI Ventures Group or the Liberty Media Group "Inter-Group
Interest Fraction" and the denominator of which is TCI Ventures Group
or the Liberty Media Group "Outstanding Interest Fraction" (both as
defined). Financial impacts of repurchases of TCI Ventures Group Stock
or Liberty Group Stock, the consideration for which is charged to TCI
Group, will be to such extent reflected in the combined financial
statements of TCI Group and will result in an increase in TCI Group's
Inter-Group Interest in TCI Ventures Group or Liberty Media Group,
respectively.
(2) Earnings Per Common and Potential Common Share
Basic earnings per share ("EPS") is measured as the income or loss
available to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning
of the periods presented. Potential common shares that have an
anti-dilutive effect are excluded from diluted EPS.
The basic earnings attributable to Liberty Media Group common
stockholders per common share for the three months ended March 31, 1998
and 1997 was computed by dividing net earnings attributable to Liberty
Media Group common stockholders by the weighted average number of
common shares outstanding of Liberty Group Stock during the period (355
million and 375 million, respectively).
(continued)
I-85
<PAGE> 88
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The diluted earnings attributable to Liberty Media Group common
stockholders per common and potential common share for the three months
ended March 31, 1998 and 1997 was computed by dividing earnings
attributable to Liberty Media Group common stockholders by the weighted
average number of common and potential common shares outstanding of
Liberty Group Stock during the period. Shares issuable upon conversion
of the Convertible Preferred Stock, Series C-Liberty Media Group (the
"Series C-Liberty Media Group Preferred Stock"), the Convertible
Preferred Stock, Series D (the "Series D Preferred Stock"), the
Redeemable Convertible Liberty Media Group Preferred Stock, Series H
(the "Series H Preferred Stock"), convertible notes payable, stock
options and other fixed and nonvested performance awards have been
included in the computation of weighted average shares, as illustrated
below. Numerator adjustments for dividends and interest associated with
the convertible preferred shares and convertible notes payable,
respectively, were not made to the computation of diluted earnings per
share as such dividends and interest are paid or payable by TCI Group.
No material changes in the weighted average outstanding shares or
potential common shares occurred after March 31, 1998.
Information concerning the reconciliation of basic EPS to dilutive EPS
with respect to Liberty Group Stock is presented below:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------
1998 1997
----------- -----------
amounts in thousands, except
per share amounts
<S> <C> <C>
Basic EPS:
Earnings attributable to common shareholders $ 303,141 15,612
=========== ===========
Weighted average common shares 355,207 374,484
=========== ===========
Basic earnings per share attributable to common
stockholders $ .85 .04
=========== ===========
Diluted EPS:
Earnings attributable to common stockholders $ 303,141 15,612
=========== ===========
Weighted average common shares 355,207 374,484
----------- -----------
Add dilutive potential common shares:
Employee and director options 7,856 3,704
Convertible notes payable 19,417 19,650
Series C-Liberty Media Group Preferred Stock 3,969 3,969
Series D Preferred Stock -- 5,609
Series H Preferred Stock 3,879 3,953
----------- -----------
Dilutive potential common shares 35,121 36,885
----------- -----------
Diluted weighted average common shares 390,328 411,369
=========== ===========
Diluted earnings per share attributable to common
stockholders $ .78 .04
=========== ===========
</TABLE>
(continued)
I-86
<PAGE> 89
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $8,303,000 and $306,000 for the three months
ended March 31, 1998 and 1997, respectively. Cash paid for income taxes
during the three months ended March 31, 1998 and 1997 was not material.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1998 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Cash paid for acquisitions is as follows:
Fair value of assets acquired $ 15,138 --
Net liabilities assumed (2,454) --
Minority interests in equity of acquired entities (64) --
Gain in connection with the issuance of common
shares by TCI Music (2,508) --
------------ ------------
Cash paid for acquisitions $ 10,112 --
============ ============
</TABLE>
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------------
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
Issuance of Liberty Group Stock in exchange for common stock
of affiliate (note 4) $ 168,090 --
================ ================
Noncash accretion of contingent obligation to purchase shares
of attributed subsidiary from minority holders $ 1,213 --
================ ================
</TABLE>
(4) Investments in Affiliates
Summarized unaudited results of operations for the periods in which
Liberty Media Group used the equity method to account for such
affiliates are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
amounts in thousands
<S> <C> <C>
Combined Operations
Revenue $ 1,771,898 1,246,152
Operating, selling, general
and administrative expenses (1,490,410) (1,119,487)
Depreciation and amortization (115,420) (62,668)
----------- -----------
Operating income 166,068 63,997
Interest expense (81,461) (32,770)
Other, net (18,209) (45,856)
----------- -----------
Net earnings (loss) $ 66,398 (14,629)
=========== ===========
</TABLE>
(continued)
I-87
<PAGE> 90
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the carrying value of Liberty Media
Group's investments, accounted for under the equity method, including
related receivables:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ---------
amounts in thousands
<S> <C> <C>
Discovery Communications, Inc. ("Discovery") $ 79,100 88,251
QVC, Inc. ("QVC") 144,446 133,920
Bet Holdings, Inc. ("BET") 28,237 26,466
Courtroom Television Network ("Court") (3,088) (3,286)
Fox/Liberty Networks LLC ("Fox Sports") (8,781) (21,608)
Liberty/TINTA LLC ("Liberty/TINTA") (16,547) (14,532)
Superstar/Netlink Group LLC ("Superstar/Netlink") (16,567) (40,161)
Home Shopping Network, Inc. ("HSN") 147,120 118,653
BDTV INC., BDTV II INC., BDTV III INC. and BDTV IV
INC.(collectively "BDTV") 260,217 228,522
Your Choice TV, LLC ("YCTV") 7,736 9,316
United Video Satellite Group, Inc. ("UVSG") 168,305 --
Other 22,057 (1,951)
------------- ---------
$ 812,235 523,590
============= =========
</TABLE>
The following table reflects Liberty Media Group's share of earnings
(losses) of each of the aforementioned affiliates:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1998 1997
------------- -------------
amounts in thousands
<S> <C> <C>
Discovery $ (9,151) 4
QVC 10,526 6,594
BET 1,771 1,499
Court 198 (1,740)
Fox Sports (a) (36,024) --
Liberty/TINTA (2,015) --
Superstar/Netlink (b) 3,442 3,464
HSN 2,382 1,457
BDTV (c) 8,758 801
YCTV (1,580) --
UVSG (d) 215 --
Other (521) (4,843)
------------- -------------
$ (21,999) 7,236
============ =============
</TABLE>
(continued)
I-88
<PAGE> 91
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) Prior to the first quarter of 1998, Liberty Media Group had no
obligation, nor intention, to fund Fox Sports. During the
first quarter of 1998, Liberty Media Group made the
determination to provide funding to Fox Sports based on a
specific transaction consummated by Fox Sports. Consequently,
Liberty Media Group's share of losses of Fox Sports for the
quarter ended March 31, 1998 includes previously unrecognized
losses of Fox Sports of approximately $36 million. Losses for
Fox Sports were not recognized in prior periods due to the
fact that Liberty Media Group's investment in Fox Sports had
been reduced to zero.
(b) Effective February 1, 1998, Turner-Vision, Inc. contributed
the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink in exchange for an
approximate 20% interest in Superstar/Netlink. As a result of
this transaction, Liberty Media Group's ownership interest in
Superstar/Netlink decreased from 50% to approximately 40%. In
connection with the dilution of Liberty Media Group's
ownership interest in Superstar/Netlink, Liberty Media Group
recognized a gain of $23 million (before deducting deferred
income tax expense of $9 million).
(c) In February 1998, pursuant to an Investment Agreement among
Universal Studios, Inc. ("Universal"), HSNI, HSN and Liberty
Media Group, dated as of October 1997 and amended and restated
as of December 1997 (the "Investment Agreement"), HSNI
consummated a transaction (the "Universal Transaction")
through which USA Networks Partners, Inc., a subsidiary of
Universal, sold its 50% interest in USAI, a New York general
partnership to HSNI and Universal contributed the remaining
50% interest in USAI and its domestic television production
and distribution operations to HSNI. Subsequent to these
transactions, HSNI was renamed USAI. In connection with the
Universal Transaction, Universal, USAI, HSN and Liberty Media
Group became parties to a number of other agreements relating
to, among other things, (i) the management of USAI, (ii) the
purchase and sale or other transfer of voting securities of
USAI, including securities convertible or exchangeable for
voting securities of USAI, and (iii) the voting of such
securities. As a result of the foregoing transactions, Liberty
Media Group's ownership interest in USAI, which is held
through BDTV, was reduced to 18.6%.
At the closing of the Universal Transaction, Universal (i) was
issued approximately 6 million shares of USAI's Class B Common
Stock, approximately 7 million shares of USAI's Common Stock
and approximately 109 million common equity shares ("LLC
Shares") of USANi LLC, a limited liability company ("USANi
LLC") formed to hold all of the businesses of USAI and its
subsidiaries, except for its broadcasting business and its
equity interest in Ticketmaster Group, Inc. and (ii) received
a cash payment of $1.3 billion. Pursuant to an Exchange
Agreement relating to the LLC Shares (the "LLC Exchange
Agreement"), approximately 74 million of the LLC Shares issued
to Universal are each exchangeable for one share of USAI's
Class B Common Stock and the remainder of the LLC Shares
issued to Universal are each exchangeable for one share of
USAI's Common Stock.
(continued)
I-89
<PAGE> 92
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At the closing of the Universal Transaction, Liberty Media
Group was issued approximately 1.2 million shares of USAI's
Class B Common Stock, representing all of the remaining shares
of USAI's Class B Common Stock issuable pursuant to Liberty
Media Group's contractual right to receive shares of Class B
common stock of USAI upon the occurrence of certain events
(the "Contingent Right"). Of such shares, 800,000 shares of
Class B Common Stock were contributed to BDTV IV Inc.
("BDTV-IV"), a newly-formed entity having substantially the
same terms as BDTV INC., BDTV-II INC. and BDTV III INC. (with
the exception of certain transfer restrictions) in which
Liberty Media Group owns over 99% of the equity and none of
the voting power (except for protective rights with respect to
certain fundamental corporate actions) and Barry Diller owns
less than 1% of the equity and all of the voting power. In
addition, Liberty Media Group purchased 10 LLC Shares at the
closing of the Universal Transaction for an aggregate purchase
price of $200. Liberty Media Group has also agreed to
contribute $300 million in cash to USANi LLC by June 30, 1998
in exchange for an aggregate of 15 million LLC Shares and/or
shares of USAI's Common Stock. Liberty Media Group's cash
purchase price will increase at an annual interest rate of
7.5% beginning from the date of the closing of the Universal
Transaction through the date of Liberty Media Group's purchase
of such securities (the "Liberty Closing"). Pursuant to the
LLC Exchange Agreement, each LLC Share issued or to be issued
to Liberty Media Group is exchangeable for one share of USAI's
Common Stock.
In connection with the dilution of Liberty Media Group's
ownership interest that resulted from the issuance of common
stock by USAI, Liberty Media Group recorded a $33 million
increase to combined equity (net of a deferred tax liability
of $21 million) and an increase to investments in affiliates
of $54 million. No gain was recognized due primarily to
Liberty Media Group's commitment to purchase additional equity
interests in USAI.
(continued)
I-90
<PAGE> 93
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with the Universal Transaction, each of
Universal and Liberty Media Group has been granted a
preemptive right with respect to future issuances of USAI's
capital stock, subject to certain limitations, to maintain
their respective percentage ownership interests in USAI that
they had immediately prior to such issuances. In addition,
with respect to issuances of USAI's capital stock in certain
specified circumstances, Universal will be obligated to
maintain the percentage ownership interest in USAI that it had
immediately prior to such issuances. During the first quarter
of 1998, Liberty Media Group exercised its right to purchase
approximately 4.7 million additional LLC shares or USAI shares
of common stock pursuant to a preemptive right of $20 per
share in cash, subject to receipt of regulatory approvals.
This transaction is expected to close during the second
quarter of 1998.
USAI, Universal and Liberty Media Group have agreed that if
the parties agree prior to June 30, 1998 (the date of
mandatory cash contributions) on the identity of assets owned
by Liberty Media Group that are to be contributed to the LLC
and the form and terms of such contributions, Liberty Media
Group will contribute those assets in exchange for LLC Shares
valued at $20 per share. If Liberty Media Group contributes
such additional assets, Liberty Media Group has the right to
elect to reduce the number of LLC Shares it is obligated to
purchase for cash by an amount equal to 45% of the value of
the assets contributed by Liberty Media Group. If Liberty
Media Group exercises the option to contribute assets and
thereby reduces its cash contribution amount, Universal will
be required to purchase a number of additional LLC shares
(valued at $20 per share) equal to the value of Liberty Media
Group's asset contribution, less the amount by which Liberty
Media Group's asset contribution is applied towards reducing
Liberty Media Group's cash contribution. In addition,
Universal may purchase an additional number of LLC shares
(valued at $20 per share), equal to the value of Liberty Media
Group's asset contribution which is not applied towards
reducing Liberty Media Group's cash contribution.
(d) On January 12, 1998, TCI acquired from a minority stockholder
of UVSG 12.4 million shares of UVSG Class A common stock in
exchange for 12.7 million shares of TCI Ventures Group Series
A Stock and 7.3 million shares of Liberty Group Series A
Stock. The aggregate value assigned to the shares issued by
TCI was based upon the market value of such shares at the time
the transaction was announced. As a result of such
transactions, TCI increased its ownership in the equity of
UVSG to approximately 73%, of which 17% is attributed to
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.
(continued)
I-91
<PAGE> 94
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investment in Time Warner
Liberty Media Group holds 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.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At March
31, 1998, such pledged portion had an aggregate fair value of
approximately $1.6 billion based upon the market value of the
marketable common stock into which it is convertible. See note 7.
On June 24, 1997 Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty 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 exercised
the Southern Option. Pursuant to the Southern Option, Time Warner
acquired the Southern Business, effective January 1, 1998, for $213
million in cash. Liberty Media Group recognized a $515 million pre-tax
gain in connection with such transactions in the first quarter of 1998.
(6) Other Investments
Other investments and related receivables are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- --------------
amounts in thousands
<S> <C> <C>
Investment in preferred stock, at cost, including premium $ 370,740 370,791
Marketable equity securities, at fair value -- 24,905
Other investments, at cost, and related receivables 31,126 31,019
---------------- --------------
$ 401,866 426,715
================ ==============
</TABLE>
(continued)
I-92
<PAGE> 95
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 $450 million and $483 million at
March 31, 1998 and December 31, 1997, respectively. No independent
external appraisals were conducted for those assets.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
amounts in thousands
<S> <C> <C>
Bank credit facility (a) $ 185,000 292,000
Note payable to bank (b) 71,986 53,200
Note payable to bank (c) 292,400 --
Other 2,323 3,390
------------- -------------
$ 551,709 348,590
============= =============
</TABLE>
(a) Payable by Communications Capital Corp. ("CCC")
This revolving credit agreement, as amended, provides for
borrowings up to $500 million through August of 2000. Interest
on borrowings under the agreement is tied to, at CCC's option,
the bank's prime rate or the London Interbank Offered Rate
("LIBOR") plus an applicable margin. The revolving credit
agreement provides as security for this indebtedness a portion
of Liberty Media Group's TW Exchange Stock. CCC must pay an
annual commitment fee of .2% of the unfunded portion of the
commitment.
(b) Payable by TCI Music
On December 30, 1997 TCI Music entered into a revolving loan
agreement (the "TCI Music Revolving Loan Agreement") which
provides for borrowings up to $100 million. Interest on
borrowings under the agreement is tied to LIBOR plus an
applicable margin or at the banks base rate dependent on TCI
Music's leverage ratio, as defined, for the preceding quarter.
The TCI Music Revolving Loan Agreement matures on June 30,
2005 with principal reductions beginning semi-annually on June
30, 2000 based on a scheduled percentage of the total
commitment. A commitment fee is charged on the unborrowed
portion of the TCI Music Revolving Loan Agreement commitment
ranging from .25% to .375% based upon the leverage ratio for
the preceding quarter.
(continued)
I-93
<PAGE> 96
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(c) Payable by Encore Media Group LLC ("Encore Media Group")
On July 7, 1997, Encore Media Group obtained a $625 million
senior, secured facility (the "EMG 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 EMG 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 EMG 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 fair market value of Liberty Media Group's debt approximated its
carrying value at March 31, 1998.
(8) Combined Equity
Stock Options and Stock Appreciation Rights
Liberty Media Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights
(collectively, "Awards") granted by TCI to certain TCI employees and/or
directors who are involved with the Liberty Media Group. Stock
compensation with respect to Awards granted by TCI includes amounts
related to TCI common stock and is allocated to Liberty Media Group
based on the Awards held by TCI employees and/or directors who are
involved with Liberty Media Group. Estimated compensation relating to
stock appreciation rights ("SARs") has been recorded through March 31,
1998, and is subject to future adjustment based upon vesting and market
value, and ultimately, on the final determination of market value when
such rights are exercised. The estimated compensation adjustment with
respect to TCI SARs resulted in increases to Liberty Media Group's
share of TCI's stock compensation liability of $68 million and $1
million for the three months ended March 31, 1998 and 1997,
respectively. In addition, for the three months ended March 31, 1998,
Liberty Media Group made cash payments relating to its share of TCI's
stock compensation obligations of $1 million. 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 three months ended March
31, 1998 and 1997, Liberty Media Group was allocated $1,109,000 and
$263,000, respectively, in corporate general and administrative costs
by TCI.
(continued)
I-94
<PAGE> 97
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 three
months ended March 31, 1998 and 1997, aggregated $6,196,000 and
$1,816,000, respectively.
In connection with the formation of Encore Media Group during 1997, TCI
Group entered into a 25 year affiliation agreement with Encore Media
Group (the "EMG Affiliation Agreement") pursuant to which TCI Group
pays monthly fixed amounts in exchange for unlimited access to all of
the existing Encore and STARZ! services. Such amounts are included in
revenue from related parties. Additionally, certain other 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.
On July 11, 1997, TCI Music merged with DMX, Inc. (the "DMX Merger").
In connection with the DMX Merger, TCI assumed a 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 "Rights Agreement"). Such obligation may be settled, at
TCI's option, with shares of TCI Group Series A Stock or with cash.
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 to TCI. Liberty
Media Group has recorded its contingent obligation to purchase such
shares as a component of minority interest in equity of attributed
subsidiaries in the accompanying combined financial statements.
During the first quarter of 1998, TCI Music issued approximately
382,050 shares of its Series A Common Stock in connection with certain
acquisitions. In connection with the issuance of such shares, Liberty
Media Group's ownership interest was diluted to 77.6% (TCI's ownership
interest was diluted to 80.7%) and Liberty Media Group recorded a $2.5
million increase to combined equity. No gain was recognized due
primarily to Liberty Media Group's contingent obligation under the
Rights Agreement.
Due to Related Parties
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- --------------
amounts in thousands
<S> <C> <C>
Notes payable to TCI Group, including accrued interest $ 87,327 378,348
Intercompany account 369,052 130,244
---------------- --------------
$ 456,379 508,592
================ ==============
</TABLE>
(continued)
I-95
<PAGE> 98
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Amounts outstanding under the notes payable to TCI Group bear interest
at 6.5%. Payments of principal and interest on notes payable to TCI
Group during the first quarter of 1998 aggregated approximately $296
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.
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
was 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-96
<PAGE> 99
"LIBERTY MEDIA 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.
Transactions with Officers and Directors
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
(continued)
I-97
<PAGE> 100
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr.
John C. Malone, TCI's Chairman and Chief Executive Officer, and Dr.
Malone's wife (together with Dr. Malone, the "Malones"), under which
the Malones granted to TCI the right to acquire any shares of TCI stock
which are entitled to cast more than one vote per share (the
"High-Voting Shares") owned by the Malones, which currently consist
of an aggregate of approximately 60 million High-Voting Shares upon Dr.
Malone's death or upon a contemplated sale of the High-Voting Shares
(other than a minimal amount) to third persons. In either such event,
TCI has the right to acquire the shares at a maximum price equal to the
then relevant market price of shares of Series A Stock plus a ten
percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would
receive on their High-Voting Shares would be no greater than a ten
percent premium over the price paid for the relevant shares of Series A
Stock. TCI paid $150 million to the Malones in consideration of them
entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a shareholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agreed to consult
with each other in connection with matters to be brought to the vote of
TCI's shareholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for TCI's Board of Directors and
Dr. Malone has agreed to vote his High Voting Shares for such nominee
and (iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. Liberty Media
Group's share of the Call Payments of $64 million was paid during the
first quarter of 1998 and is reflected as a reduction of combined
equity in the accompanying combined financial statements.
(continued)
I-98
<PAGE> 101
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(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 March 31,
1998, these agreements require minimum payments aggregating
approximately $678 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, it is anticipated that the required
aggregate payments under the Film Licensing Obligations will 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.
During the three months ended March 31, 1998, TCI continued its
enterprise-wide comprehensive review of its computer systems and
related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and
devices that manage the distribution of Liberty Media Group's products.
Liberty Media Group is utilizing both internal and external resources
to identify, correct or reprogram, and test systems for year 2000
readiness.
As of March 31, 1998, Liberty Media Group had inventoried substantially
all of its systems and began its assessment of the systems that will
require remediation or replacement. Inventoried systems include Liberty
Media Group's financial systems and related software, its business
systems, data and voice networks, engineering systems and facilities
and related software supporting the distribution of Liberty Media
Group's products and other equipment and systems potentially impacted
by the year 2000. Additionally, Liberty Media Group began efforts to
assess potential year 2000 issues of its affiliated companies that are
not managed by Liberty Media Group and continued to have formal
communications with its principal vendors to determine their year 2000
readiness.
(continued)
I-99
<PAGE> 102
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Liberty Media Group completed a preliminary assessment of its systems
and related software that support Liberty Media Group's financial
applications. For those financial systems and software which will
continue to be utilized by Liberty Media Group beyond the year 1999,
Liberty Media Group has tentatively concluded that such systems are
capable of recognizing the year 2000 and therefore will not require
material remediation or replacement. No assurances can be given that as
Liberty Media Group completes its year 2000 assessment, additional
internally managed systems will not be identified as requiring
remediation or replacement. Liberty Media Group has completed an
initial assessment of its business systems, including networks,
engineering systems and facilities and related software supporting the
distribution of Liberty Media Group's products and has tentatively
concluded that certain portions of those systems will require
remediation or replacement. Although no assurance can be given,
management of Liberty Media Group anticipates that such systems will be
remediated or replaced prior to the year 2000.
Significant third party vendors whose systems are critical to Liberty
Media Group's operations have been identified and/or surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to ensure readiness.
Management of Liberty Media Group intends to have further communication
with primary vendors identified as having systems that are not year
2000 compliant to assess those vendors' plans for remediating their own
year 2000 issues and to assess the impact on Liberty Media Group if
such vendors fail to remediate their year 2000 issues.
Liberty Media Group's assessment of the impact of the year 2000 date
change should be complete by the end of 1998. Liberty Media Group
continues to evaluate the level of validation it will require of third
parties to ensure their year 2000 readiness. Management of
Liberty Media Group has not yet determined the cost associated with its
year 2000 readiness efforts and the related potential impact on Liberty
Media Group's results of operations. Amounts expended to date have not
been material, although there can be no assurance that costs ultimately
required to be paid to ensure Liberty Media Group's year 2000 readiness
will not have an adverse effect on Liberty Media Group's financial
position. Additionally, there can be no assurance that Liberty Media
Group's systems or the systems of other companies on which Liberty
Media Group relies will be converted in time or that any such failure
to convert by Liberty Media Group or other companies will not have an
adverse effect on its financial position.
I-100
<PAGE> 103
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998* 1997
----------- -----------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents $ 154,839 161,495
Trade and other receivables, net 91,074 86,856
Investments in Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and
PhillieCo, L.P. (collectively, the "PCS Ventures"), accounted for
under the equity method (note 8) 477,611 607,333
Investment in Telewest Communications plc ("Telewest"), accounted for under the
equity method (note 9) 297,839 324,417
Investment in Teleport Communications Group, Inc. ("TCG"), accounted for
under the equity method (note 10) 277,146 294,851
Investment in Cablevision S.A. ("Cablevision"), accounted for under the
equity method (note 4) 235,984 239,379
Investments in other affiliates, accounted for under the equity method,
and related receivables (note 11) 617,378 631,918
Deferred tax asset (note 14) 56,569 85,737
Property and equipment, at cost:
Land 7,893 7,893
Distribution systems 690,872 851,145
Support equipment and buildings 114,707 116,088
----------- -----------
813,472 975,126
Less accumulated depreciation 269,700 265,945
----------- -----------
543,772 709,181
----------- -----------
Franchise costs and other intangible assets (note 7) 805,179 506,107
Less accumulated amortization 108,309 85,753
----------- -----------
696,870 420,354
----------- -----------
Other assets, net of amortization 374,956 381,726
----------- -----------
$ 3,824,038 3,943,247
=========== ===========
</TABLE>
* Restated - see note 16.
(continued)
I-101
<PAGE> 104
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998* 1997
------------ ------------
amounts in thousands
<S> <C> <C>
Liabilities and Combined Equity
Accounts payable $ 31,923 31,825
Accrued liabilities 89,624 109,549
Customer prepayments 140,701 133,479
Capital lease obligations 205,076 386,808
Debt (note 12) 460,000 408,532
Other liabilities 22,479 18,683
------------ ------------
Total liabilities 949,803 1,088,876
------------ ------------
Minority interests in equity of attributed subsidiaries 561,596 518,739
Combined equity (notes 5 and 13):
Combined equity 2,258,885 2,280,466
Accumulated other comprehensive earnings, net of taxes (note 1) 43,577 33,661
------------ ------------
2,302,462 2,314,127
Due to related parties (note 13) 10,177 21,505
------------ ------------
Total combined equity 2,312,639 2,335,632
------------ ------------
Commitments and contingencies (notes 6, 7, 8, 11, 13 and 15)
$ 3,824,038 3,943,247
============ ============
</TABLE>
* Restated - see note 16.
See accompanying notes to combined financial statements.
I-102
<PAGE> 105
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------
1998* 1997
------------ ------------
amounts in thousands,
except per share amounts
<S> <C> <C>
Revenue:
Related parties (note 13) $ 10,783 14,400
Other 200,215 232,620
------------ ------------
210,998 247,020
------------ ------------
Operating costs and expenses:
Operating:
Related parties (note 13) 12,244 15,850
Other 125,721 117,234
General and administrative:
Related parties (note 13) 2,194 2,212
Other 49,067 62,433
Stock compensation (note 13) 82,090 8,262
Depreciation and amortization 46,252 41,144
------------ ------------
317,568 247,135
------------ ------------
Operating loss (106,570) (115)
Other income (expense):
Share of losses of the PCS Ventures (note 8) (155,202) (63,536)
Share of losses of Telewest (note 9) (30,219) (41,708)
Share of losses of TCG (note 10) (17,706) (13,768)
Share of losses of Cablevision (note 4) (3,205) --
Share of losses of other affiliates (note 11) (24,640) (23,108)
Interest expense (9,104) (14,196)
Interest income:
Related parties (note 13) 1,042 2,008
Other 2,268 1,026
Gain on disposition of assets, net 37,788 28,893
Gain on issuance of equity interest by attributed entity 14,700 --
Minority interests in losses of attributed subsidiaries, net 8,329 616
Other, net 2,079 2,266
------------ ------------
(173,870) (121,507)
------------ ------------
Loss before income taxes (280,440) (121,622)
Income tax benefit 85,194 44,370
------------ ------------
Net loss $ (195,246) (77,252)
============ ============
Basic and diluted loss attributable to common stockholders per common share
subsequent to TCI Ventures Exchange (note 2) $ (0.46)
============
Comprehensive loss (note 1) $ (185,330) (106,630)
============ ============
</TABLE>
* Restated - see note 16.
See accompanying notes to combined financial statements.
I-103
<PAGE> 106
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Statement of Combined Equity
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive Due to Total
Combined earnings, related combined
equity* net of taxes parties equity*
---------------- --------------- ------------ -------------
amounts in thousands
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 2,280,466 33,661 21,505 2,335,632
Net loss (195,246) -- -- (195,246)
Foreign currency translation adjustment -- 1,155 -- 1,155
Change in unrealized holding gains for
available-for-sale securities -- 8,761 -- 8,761
Repurchases of TCI Ventures Group Stock (2,358) -- -- (2,358)
Issuance of TCI Ventures Group Stock for
acquisition of minority interest (note 5) 177,661 -- -- 177,661
Payment of call premiums (note 13) (75,836) -- -- (75,836)
Transfer of net liabilities to related party
(note 13) 49,528 -- -- 49,528
Adjustment to minority interest deficit in
joint venture (note 6) 24,524 -- -- 24,524
Excess of earnings over distributions to
minority interest in joint venture 146 -- -- 146
Change in due to related parties -- -- (11,328) (11,328)
---------------- --------------- ------------ -------------
Balance at March 31, 1998 $ 2,258,885 43,577 10,177 2,312,639
================ =============== ============ =============
</TABLE>
* Restated - see note 16.
See accompanying notes to combined financial statements.
I-104
<PAGE> 107
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998* 1997
----------- -----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (195,246) (77,252)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 46,252 41,144
Stock compensation 82,090 8,262
Payment of obligation relating to stock compensation (43,251) (57)
Share of losses of affiliates, net 230,972 142,120
Gain on disposition of assets, net (37,788) (28,893)
Gain on issuance of equity interest by attributed entity (14,700) --
Minority interests' share of losses, net (8,329) (616)
Unrealized foreign currency transaction gains (284) (2,653)
Other noncash charges -- 1,734
Deferred income tax expense 23,435 1,417
Intergroup tax allocation (112,156) (46,074)
Changes in operating assets and liabilities, net of the effect of
acquisitions and the deconsolidation of Flextech p.l.c.:
Change in receivables (3,303) (6,260)
Change in payables, accruals, customer prepayments and
other liabilities (2,312) (3,542)
----------- -----------
Net cash provided by (used in) operating activities $ (34,620) 29,330
----------- -----------
</TABLE>
(continued)
I-105
<PAGE> 108
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998* 1997
----------- -----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from investing activities:
Investments in and loans to affiliates $ (55,229) (44,359)
Capital expended for property and equipment (32,646) (42,249)
Effect of the deconsolidation of Flextech p.l.c. on cash and cash
equivalents -- (38,142)
Proceeds from dispositions of assets 78,132 --
Proceeds from repayment of loans by affiliates 8,686 63,495
Other, net 621 10,834
----------- -----------
Net cash used in investing activities (436) (50,421)
----------- -----------
Cash flows from financing activities:
Borrowings of debt 70,000 36,857
Repayments of debt and capital lease obligations (18,196) (75,199)
Payment of call premiums (75,836) --
Repurchase of common stock by attributed entities (6,947) (6,798)
Repurchase of TCI Ventures Group Stock (2,358) --
Repayments received on loan to TCI 25,456 42,010
Change in amounts due to related parties 39,985 --
Change in combined equity -- (23,215)
Distribution to minority interest owners (3,704) (7,000)
----------- -----------
Net cash provided by (used in) financing activities 28,400 (33,345)
----------- -----------
Net decrease in cash and cash equivalents (6,656) (54,436)
Cash and cash equivalents:
Beginning of period 161,495 105,527
----------- -----------
End of period $ 154,839 51,091
=========== ===========
</TABLE>
* Restated - see note 16.
See accompanying notes to combined financial statements.
I-106
<PAGE> 109
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 1998
(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 TCI Ventures Group, as defined below. The combined
financial statements of TCI Ventures Group are presented for purposes
of additional analysis of the consolidated financial statements of TCI
and subsidiaries, and should be read in conjunction with such
consolidated financial statements.
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.
Effective January 1, 1998, TCI Ventures Group adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). TCI Ventures Group has reclassified
its prior period combined balance sheet and combined statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
or losses be reported in a financial statement in the period in which
they are recognized. TCI Ventures Group has included cumulative foreign
currency translation adjustments and unrealized holding gains and
losses for available-for-sale securities in other comprehensive
earnings that are recorded directly in combined equity. Pursuant to
SFAS 130, these items are reflected, net of related tax effects, as
components of comprehensive losses in TCI Ventures Group's combined
statements of operations, and are included in accumulated other
comprehensive earnings in TCI Ventures Group's combined balance sheets
and statements of combined equity.
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, 1997 audited
financial statements and notes thereto.
As further described in notes 4 and 11, TINTA ceased to consolidate
Flextech p.l.c. ("Flextech") and Cablevision and began to account for
Flextech and Cablevision using the equity method of accounting,
effective January 1, 1997 and October 1, 1997, respectively.
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at March 31, 1998, as published in The Wall Street Journal.
(continued)
I-107
<PAGE> 110
"TCI VENTURES 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.
Certain amounts have been reclassified for comparability with the 1998
presentation.
Targeted Stock
On August 28, 1997, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue the Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock, par value $1.00 per share
(the "TCI Ventures Group Series A Stock") and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, par value $1.00 per share
(the "TCI Ventures Group Series B Stock," and together with TCI
Ventures Group Series A Stock, the "TCI Ventures Group Stock") The TCI
Ventures Group Stock is intended to reflect the separate performance of
the TCI Ventures Group, as defined below.
As of March 31, 1998, 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 28% equity interest (representing a 41% voting
interest) in TCG, 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) a 56% equity interest
(representing a 89% 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"), a wholly-owned subsidiary of TCI which is a developer and
distributor of for-profit education, training and communications
services and products, and National Digital Television Center, Inc.
("NDTC"), which provides digital compression and authorization services
to programming suppliers and to video distribution outlets. The
foregoing subsidiaries and assets are collectively referred to as "TCI
Ventures Group." The stocks of TINTA, TCG, @Home and UVSG are traded on
the National Market tier of The Nasdaq Stock Market.
(continued)
I-108
<PAGE> 111
"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 and its subsidiaries not attributed to the "Liberty
Media Group" (which is intended to reflect the performance of TCI's
business which produces and distributes programming services) and TCI
Ventures Group. Collectively, TCI Group, Liberty Media Group and TCI
Ventures Group are referred to as the "Groups" and individually may be
referred to herein as a "Group". The Tele-Communications, Inc. Series A
TCI Group Common Stock, par value $1.00 per share (the "TCI Group
Series A Stock"), TCI Ventures Group Series A Stock and the
Tele-Communications, Inc. Series A Liberty Media Group Common Stock,
par value $1.00 per share ("Liberty Group Series A Stock") are
sometimes collectively referred to herein as the "Series A Stock," and
the Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share (the "TCI Group Series B Stock"), TCI Ventures
Group Series B Stock and Tele-Communications, Inc. Series B Liberty
Media Group Common Stock, par value $1.00 per share ("Liberty Group
Series B Stock") are sometimes collectively referred to herein as the
"Series B Stock."
The common stockholders' equity value of TCI attributable to TCI
Ventures Group that, at any relevant time, is attributed to 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 TCI
Group in TCI Ventures Group was 100%. Following consummation of the TCI
Ventures Exchange, TCI Group no longer has an Inter-Group Interest in
TCI Ventures Group. Following consummation of the TCI Ventures
Exchange, an Inter-Group Interest would be created with respect to TCI
Ventures Group 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.
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.
(continued)
I-109
<PAGE> 112
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Holders of "TCI Group Series A Stock and TCI Group Series B Stock
(collectively, the "TCI Group Stock"), Liberty Group Series A Stock and
Liberty Group Series B Stock (collectively, the "Liberty 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.
In August 1997, TCI commenced offers (the "Exchange Offers") to
exchange shares of TCI Ventures Group Series A Stock and TCI Ventures
Group Series B Stock for up to 188,661,300 shares of TCI Group Series A
Stock and up to 16,266,400 shares of TCI Group Series B Stock,
respectively. The exchange ratio for the exchange offers was two shares
(as adjusted for a stock dividend - see below) of the applicable series
of TCI Ventures Group Stock for each share of the corresponding series
of TCI Group Stock properly tendered up to the indicated maximum
numbers. Upon the September 10, 1997 consummation of the Exchange
Offers, 188,661,300 shares of TCI Group Series A Stock and 16,266,400
shares of TCI Group Series B Stock were exchanged for 377,322,600
shares of TCI Ventures Group Series A Stock and 32,532,800 shares of
TCI Ventures Group Series B Stock (as adjusted for a stock dividend -
see below), (the "TCI Ventures Exchange"). 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.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among TCI Group, Liberty Media Group and
TCI Ventures Group for the purpose of preparing their respective
combined financial statements, the change in the capital structure of
TCI resulting from the redesignation of TCI Group Stock and the
issuance of TCI Ventures Group Stock 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 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.
The redesignation of TCI Group Stock and the issuance of TCI Ventures
Group Stock did not affect the rights of the creditors of TCI.
Financial effects arising from any portion of TCI that affect the
consolidated results of operations or financial condition could affect
the combined results of operations or financial condition of the 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 financial information of TCI and the other
Groups.
(continued)
I-110
<PAGE> 113
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Dividends on 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 the 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 the TCI
Ventures Group and TCI as a whole.
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 TCI Group
Stock or 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 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.
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 on 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.
(continued)
I-111
<PAGE> 114
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although it is management's intention that each Group would normally
arrange for the external financing required to satisfy its respective
liquidity requirements, the cash needs of one Group may exceed the
liquidity sources of such Group. In such circumstances, one of the
other Groups may transfer funds to such Group. Such transfers of funds
among 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 in note 13 with respect to the Revolving Credit
Facility, as defined therein, 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 and investment opportunities
available to each Group and the availability, cost and time associated
with alternative financing sources.
The combined balance sheets of a Group reflect its net loans or
advances 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 advances and the respective combined statements of cash flows
of the Groups reflect changes in the amounts of loans or advances
deemed outstanding. In the historical financial statements, net loans
or advances between Groups have been and will continue to be included
as a component of each respective Group's equity.
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.
(continued)
I-112
<PAGE> 115
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Loss Per Common Share
Basic earnings or loss per share ("EPS") is measured as the income or
loss attributable to common stockholders divided by the weighted
average outstanding common shares for the period. Diluted earnings per
share is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., convertible securities,
options, etc.) as if they had been converted at the beginning of the
periods presented. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per
share) are excluded from diluted EPS.
The basic and diluted loss attributable to TCI Ventures Group
stockholders per common share for the three months ended March 31, 1998
was computed by dividing the net loss attributable to TCI Ventures
Group stockholders by the weighted average number of common shares
outstanding of TCI Ventures Group Stock for the period (421 million).
Potential common shares were not included in the computation of
weighted average shares outstanding because their inclusion would be
anti-dilutive.
At March 31, 1998, there were 34 million potential common shares
consisting of fixed and nonvested performance awards, stock options and
convertible securities that could potentially dilute future earnings
per share calculations in periods of net earnings. Such potential
common share amount does not take into account the assumed number of
shares that would be repurchased by the Company upon the exercise of
the fixed and nonvested performance awards and the conversion of the
convertible securities. No material changes in the weighted average
outstanding shares or potential common shares occurred after March 31,
1998.
(3) Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $13.0 million and $15.4 million for the
three months ended March 31, 1998 and 1997, respectively. Cash paid for
income taxes was $225,000 and $3.3 million during the three months
ended March 31, 1998 and 1997, respectively.
The effects of changing the method of accounting for the TCI Ventures
Group's ownership interest in Flextech from the consolidation method to
the equity method (see note 11) 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>
Significant noncash investing activities are as follows:
<TABLE>
<CAPTION>
Three Months ended
March 31,
------------------
1998* 1997
------- -------
<S> <C> <C>
Costs of distribution agreements $83,320 --
======= =======
</TABLE>
* Restated -- see note 16.
For information concerning additional non-cash transactions see notes
5, 6 and 13.
(continued)
I-113
<PAGE> 116
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Cablevision
On October 9, 1997, TINTA sold a portion of its 51% interest in
Cablevision to unaffiliated third parties (the "Buyers") for cash
proceeds of $120 million. 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
1997 transactions, (collectively, the "Cablevision Sale") reduced
TINTA's interest in Cablevision to 26.2%. TINTA recognized a gain of
$49 million on the Cablevision Sale. TINTA continues to manage
Cablevision pursuant to a renewable five-year management contract that
was entered into in connection with the Cablevision Sale, and certain
material corporate transactions of Cablevision will require TINTA's
approval, so long as TINTA maintains at least a 16% interest in
Cablevision. 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.
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, 1997, TINTA would have allocated an additional $3.5 million
during the three months ended March 31, 1997 of Cablevision's net
earnings to the minority interest.
Summarized unaudited results of operations for Cablevision are as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31, 1998
--------------------
Consolidated Operations amounts in thousands
<S> <C>
Revenue $ 62,341
Operating, selling, general and
administrative expenses (38,772)
Depreciation and amortization (13,077)
-----------------
Operating income 10,492
Interest expense, net (17,893)
Other, net 2,752
-----------------
Net loss $ (4,649)
=================
</TABLE>
(continued)
I-114
<PAGE> 117
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Acquisitions
On January 12, 1998, TCI acquired from a minority shareholder of UVSG
12.4 million shares of UVSG Class A common stock in exchange for 12.7
million shares of TCI Ventures Group Series A Stock and 7.3 million
shares of Liberty Group Series A Stock. The aggregate value assigned to
the shares issued by TCI was based upon the market value of such shares
at the time the transaction was announced. As a result of such
transaction TCI increased its ownership in the equity of UVSG to
approximately 73%, of which 56% is attributed to the TCI Ventures Group
and 17% is attributed to Liberty Media Group. In addition, TCI's
collective voting power increased to 93%. In connection with such
transaction, during the first quarter of 1998, TCI Ventures Group
recorded a $154.2 million increase to intangible assets, a $23.5
million decrease to minority interests in equity of attributed
subsidiaries and a $177.7 million increase to combined equity.
(6) Dispositions
On January 16, 1998, TINTA sold its interest in TeleCable Nacional, CXA
for cash proceeds of $10.0 million. TINTA recognized a gain on such
sale of $9.2 million.
On February 12, 1998, TCI Ventures Group sold its (i) 79% interest in
New Jersey Fiber Technologies, L.P., (ii) 40% interest in NHT
Partnership and (iii) 50% interest in Louisville Lightwave for
aggregate cash proceeds of $44.1 million.
TCI Ventures Group recognized a gain of $28.6 million on such
transactions.
TCI Ventures Group sold its interest in Acclaim Entertainment, Inc.
("Acclaim") in February 1998 for cash proceeds of $17.0 million. The
loss on such sale was not significant as the sales price approximated
TCI Ventures Group's carrying value in Acclaim.
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("Superstar/Netlink")
in exchange for an approximate 20% interest in Superstar/Netlink. As a
result of such transaction, each of UVSG's and Liberty Media Group's
ownership interest in Superstar/Netlink decreased from 50% to
approximately 40%. Turner Vision's contribution to Superstar/Netlink
was accounted for as a purchase and the $61.2 million excess of the
purchase price over the fair value of the assets acquired was recorded
as goodwill and is being amortized over five years.
In connection with the dilution of UVSG's ownership interest in
Superstar/Netlink, UVSG recognized a gain of $14.7 million (before
deducting deferred income tax expense of $5.9 million). The minority
interest deficit in Superstar/Netlink attributable to Liberty Media
Group has been included in combined equity in the accompanying combined
financial statements. Accordingly, the effect of the change in Liberty
Media Group's ownership in the underlying equity of Superstar/Netlink
of $24.5 million has been credited to combined equity in the
accompanying combined financial statements.
(continued)
I-115
<PAGE> 118
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In April 1998, UVSG, Liberty Media Group and Turner Vision (the
"Superstar/Netlink Owners") announced an agreement in principal with
PRIMESTAR, Inc. ("PRIMESTAR") for the sale of Superstar/Netlink (the
"PRIMESTAR Transaction"). The Superstar/Netlink Owners have agreed to
an aggregate sales price of approximately $480 million based on the
delivery of 1.2 million C-band subscribers at the close of the
transaction. The consideration paid will be in the form of
approximately $430 million in new convertible preferred stock of
PRIMESTAR and approximately $50 million in assumed programming
liabilities. The preferred stock will be convertible into approximately
44.8 million shares of PRIMESTAR Class A common stock. Such preferred
stock will also bear a 6% cumulative dividend, payable in cash, shares
of PRIMESTAR Class A common stock or, under certain circumstances,
shares of TCI Satellite Entertainment, Inc. Series A common stock, as
PRIMESTAR shall elect. Consummation of the agreement is subject to
certain conditions including receipt of applicable regulatory
approvals. No assurance can be given that such transaction will be
consummated or consummated on the terms contemplated by the parties.
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40%
interest in Superstar/Netlink and its 100% interest in certain
businesses conducted under the name Netlink International in exchange
for 6.4 million shares of UVSG's common stock. Liberty Media Group and
UVSG have agreed in principal to restructure their transaction to
provide for UVSG to acquire any shares of PRIMESTAR preferred stock
received by Liberty Media Group in the PRIMESTAR Transaction and
Liberty Media Group's Netlink International businesses for 6.4 million
shares of UVSG Class B common stock. The Netlink International
businesses are being operated by Liberty Media Group for the benefit of
UVSG from April 1, 1998 to the closing of the sale thereof.
Consummation of the transaction between Liberty Media Group and UVSG is
subject to the signing of a definitive agreement following receipt by
UVSG of a satisfactory fairness opinion, UVSG stockholder approval and
certain regulatory approvals. No assurance can be given that such
transaction will be consummated.
TCI and the other partner of Kansas City Fiber Network, L.P. ("KC
Fiber") have signed an agreement to sell the assets of KC Fiber to TCG
for cash proceeds of approximately $55 million. The TCI Ventures Group
holds a 50% interest in KC Fiber and the remaining 50% is held by
Kansas City Cable Partners, a partnership in which the TCI Group holds
a 50% interest. The sale of KC Fiber is subject to certain regulatory
and other conditions, and there can be no assurance that it will be
consummated. If consummated, TCI Ventures Group's share of such
proceeds would be approximately $20 million.
On September 23, 1997, TCI announced that it and ETC entered into a
letter of intent with Knowledge Universe, L.L.C. ("Knowledge
Universe"). The letter of intent contemplates that TCI, through ETC,
will become a partner of Knowledge Universe in a new venture into which
Knowledge Universe would make a substantial investment and ETC would
contribute a significant portion of its assets. As a result, Knowledge
Universe would be the majority owner of the new venture, with ETC
retaining a significant minority interest. There can be no assurance
that the proposed transaction with Knowledge Universe will ultimately
be consummated or that the terms of the proposed transaction will not
be substantially modified.
(continued)
I-116
<PAGE> 119
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) @Home
In April 1997, @Home issued 240,000 shares of convertible preferred
stock resulting in cash proceeds of $48 million, less issuance costs.
On July 11, 1997 @Home completed its initial public offering (the
"@Home IPO"), in which 10,350,000 shares of @Home common stock were
sold for net cash proceeds of approximately $100 million. As a result
of the @Home IPO, the TCI Ventures Group's economic interest in @Home
decreased from 43% to 39% which economic interest represents an
approximate 72% voting interest.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home
has issued warrants to such cable operators to purchase 17,946,956
shares of @Home's Series A common stock. Of these warrants, warrants to
purchase 10,581,298 shares were exercisable as of March 31, 1998. @Home
may issue additional stock, or warrants in connection with its efforts
to expand its distribution of the @Home service to other cable
operators. The exercise of warrants or stock issued by @Home will
reduce TCI Ventures Group's equity interest and voting power in @Home.
See note 16.
(8) Investments in the PCS Ventures
TCI Telephony 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" brand. The PCS Ventures include Sprint Spectrum Holding
Company, L. P. ("Sprint Spectrum") and MinorCo, L.P. (collectively,
"Sprint PCS") and PhillieCo, L.P. ("PhillieCo"). The partners of Sprint
PCS are subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox and
TCI. The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI.
TCI Ventures Group has a 30% partnership interest in Sprint PCS and a
35% partnership interest in PhillieCo.
From inception through March 1998, the four partners have contributed
approximately $4.2 billion to Sprint PCS (of which TCI Telephony
contributed an aggregate of approximately $1.3 billion). The remaining
capital that Sprint PCS will require to fund the operation of the PCS
systems and the commitments made to its affiliates will be substantial.
The partners had agreed in forming Sprint PCS 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 $150 million of
such amount (of which TCI Telephony's share is approximately $45
million) 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 Sprint PCS will
require additional equity thereafter.
(continued)
I-117
<PAGE> 120
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans
and/or capital contributions from the Sprint PCS partners. However,
there can be no assurance that any additional financing can be obtained
on a timely basis, on terms acceptable to Sprint PCS or the Sprint PCS
partners and within the limitations contained in the agreements
governing Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved by
the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The
Sprint PCS partners may mutually agree to make additional capital
contributions. However, the Sprint PCS partners have no such obligation
in the absence of an approved budget, and there can be no assurance the
Sprint PCS partners will reach such an agreement or approve the 1998
proposed budget. In addition, the failure by the Sprint PCS partners to
approve a business plan may impair the ability of Sprint PCS to obtain
required financing. Failure to obtain any such additional financing or
capital contributions from the Sprint PCS partners could result in the
delay or abandonment of Sprint PCS's development and expansion plans
and expenditures, the failure to meet regulatory requirements or other
potential adverse consequences.
Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership
board has resulted in the occurrence of a "Deadlock Event" under the
Sprint PCS partnership agreement as of January 1, 1998. Under the
Sprint PCS partnership agreement, if one of the Sprint PCS partners
refers the budget issue to the chief executive officers of the
corporate parents of the Sprint PCS partners for resolution pursuant to
specified procedures and the issue remains unresolved, buy/sell
provisions would be triggered, which may result in the purchase by one
or more of the Sprint PCS partners of the interests of the other Sprint
PCS partners, or, in certain circumstances, liquidation of Sprint PCS.
Discussions among the Sprint PCS partners about restructuring their
interests in Sprint PCS in lieu of triggering such buy/sell procedures
are ongoing. However, there is no certainty the discussions will result
in a change to the partnership structure or will avert the triggering
of the resolution and buy/sell procedures referred to above or a
liquidation of Sprint PCS.
(continued)
I-118
<PAGE> 121
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Summarized unaudited results of operations for the PCS Ventures,
accounted for under the equity method, are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
Combined Operations 1998 1997
----------- -----------
amounts in thousands
<S> <C> <C>
Revenue $ 149,842 9,487
Operating, selling, general and
administrative expenses (409,093) (167,582)
Depreciation and amortization (119,592) (34,429)
----------- -----------
Operating loss (378,843) (192,524)
Interest expense (80,408) (1,590)
Other, net (55,174) (22,955)
----------- -----------
Net loss $ (514,425) (217,069)
=========== ===========
</TABLE>
(9) Investment in Telewest
At March 31, 1998, TINTA indirectly owned through its 50% ownership
interest in TW Holdings, L.L.C., 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 ordinary shares was (pound)0.91 ($1.52) per share
at March 31, 1998.
On April 15, 1998, it was announced that Telewest and General Cable PLC
("General Cable") had agreed to the terms of a proposed merger (the
"Merger Offer") in which holders of General Cable will be offered 1.243
new Telewest shares and (pound)0.65 ($1.09) in cash for each share of
General Cable. In addition, holders of American Depository shares of
General Cable ("General Cable ADSs") (each representing five General
Cable shares) will be offered 6.215 new Telewest shares and (pound)3.25
($5.43) in cash for each share of General Cable ADSs. Based upon
Telewest's closing share price of (pound)0.89 ($1.49) on April 14,
1998, the Merger Offer is valued at approximately (pound)649 million
($1.1 billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of approximately
261 million new Telewest shares at a price of (pound)0.925 ($1.55) per
share. U S WEST, Inc. ("U S WEST"), TINTA and Cox Communications, Inc.
("Cox") have agreed to subscribe for their full allocation of new
Telewest shares (approximately 69 million shares in the case of TINTA)
and to subscribe on a pro rata basis for any new Telewest shares not
subscribed for by other Telewest shareholders. Together, U S WEST,
TINTA and Cox held 67.9% of the issued and outstanding Telewest
ordinary shares at March 31, 1998. In addition, it is anticipated that
U S WEST, TINTA, Cox and SBC Communications, Inc. ("SBC") will convert
their entire respective holdings of Telewest convertible preference
shares into new Telewest shares. Following the issuance of new Telewest
shares with respect to the above transactions, and assuming the
exercise of all options under General Cable's share option schemes, it
is anticipated that existing Telewest shareholders would hold 79% and
existing General Cable shareholders would hold 21% of the then issued
ordinary share capital of the combined group.
(continued)
I-119
<PAGE> 122
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Consummation of the merger is subject to (i) approval by the boards of
directors of Telewest and General Cable, (ii) regulatory approval and
(iii) other conditions. There can be no assurance that such merger will
be consummated or consummated on the terms contemplated by the parties.
As a result of Telewest's issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate
used to translate the U.S. dollar into the 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 three months ended March 31, 1998 and 1997, Telewest
experienced unrealized foreign currency transaction gains (losses) of
$10.9 million and $(40.5 million) respectively, with respect to the
Telewest Debentures.
The functional currency of Telewest is the UK pound sterling. The
average exchange rate used to translate the TCI Ventures Group's share
of Telewest's operating results from UK pounds to U.S. dollars was
1.6500 to 1 and 1.6459 to 1 during the three months ended March 31,
1998 and 1997, respectively. The spot rate used to translate the TCI
Ventures Group's share of Telewest's net assets from UK pounds to U.S.
dollars was 1.6713 to 1 and 1.6508 to 1 at March 31, 1998 and December
31, 1997, respectively.
Summarized unaudited results of operations for Telewest are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1998 1997
----------- -----------
Consolidated Operations amounts in thousands
<S> <C> <C>
Revenue $ 182,200 147,876
Operating, selling, general and administrative expenses (139,697) (135,983)
Depreciation and amortization (87,983) (72,014)
----------- -----------
Operating loss (45,480) (60,121)
Interest expense, net (68,690) (45,656)
Share of losses of affiliates (11,062) (8,144)
Foreign exchange gain (loss) 10,940 (40,525)
Other, net 891 (126)
----------- -----------
Net loss $ (113,401) (154,572)
=========== ===========
</TABLE>
(10) Investment in TCG
On March 31, 1998, TCI Ventures Group owned 1,011,528 shares of TCG's
Class A common stock and 48,779,000 shares of TCG's Class B common
stock. TCG's Class A common stock had a closing price on the Nasdaq
financial market of $58.75 per share on March 31, 1998.
(continued)
I-120
<PAGE> 123
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On April 22, 1998, TCG completed a merger transaction with ACC Corp.
("ACC") in which ACC shares were exchanged with shares of TCG in the
ratio of .90909 share of TCG stock for each share of ACC stock. The
transaction was valued at approximately $1.1 billion. As a result of
such merger transaction, TCI Ventures Group's interest in TCG was
reduced to approximately 26%.
In January 1998, TCG entered into certain agreements pursuant to which
it agreed to be acquired by AT&T Corporation ("AT&T"). Upon
consummation of such merger, TCI would receive in exchange for all of
its interest in TCG, approximately 46.95 million shares of AT&T common
stock, which shares would be attributed to the TCI Ventures Group. The
transaction is subject to a number of regulatory and other conditions,
accordingly, there can be no assurance that such transaction will be
consummated on the terms contemplated by the parties, or at all.
Summarized unaudited results of operations for TCG are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
Operations 1998 1997
----------- -----------
amounts in thousands
<S> <C> <C>
Revenue $ 160,077 96,844
Operating, selling, general and
administrative expenses (147,234) (90,708)
Depreciation and amortization (49,102) (29,756)
----------- -----------
Operating loss (36,259) (23,620)
Interest expense (31,524) (29,508)
Other, net 5,589 8,100
----------- -----------
Net loss $ (62,194) (45,028)
=========== ===========
</TABLE>
(11) Investments in Other Affiliates
The TCI Ventures Group's affiliates other than the PCS Ventures,
Telewest, TCG and Cablevision (the "Other Affiliates") generally are
engaged in the cable and/or programming businesses in the U.S. and in
various foreign countries.
The TCI Ventures Group has guaranteed notes payable and other
obligations of certain of the Other Affiliates (the "Guaranteed
Obligations"). At March 31, 1998, the U.S. dollar equivalent of the
amounts borrowed pursuant to the Guaranteed Obligations aggregated
approximately $98 million.
Certain of the Other Affiliates are general partnerships and any
subsidiary of the TCI Ventures Group that is a general partner in a
general partnership is, as such, liable, as a matter of partnership law
for all debts (other than non-recourse debts) of that partnership to
the extent liabilities of that partnership were to exceed its assets.
(continued)
I-121
<PAGE> 124
"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 has guaranteed the performance of the TCI
Ventures Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying value
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
amounts in thousands
<S> <C> <C>
Flextech (a) $ 259,091 261,453
Liberty/TINTA LLC ("Liberty/TINTA") (b) 133,541 127,574
MultiThematiques S.A. ("MultiThematiques") 69,419 68,335
Jupiter Telecommunications
Co., Ltd. ("Jupiter") 48,337 49,197
Bresnan International Partners
(Poland), L.P. 25,196 26,110
United International Investments 23,744 26,966
Bresnan International Partners (Chile), L.P. 18,626 22,863
Jupiter Programming Co., Ltd. ("JPC") 16,162 15,582
Other 23,262 33,838
----------- -----------
$ 617,378 631,918
=========== ===========
</TABLE>
(a) Flextech
TINTA owned, at March 31, 1998, 57,889,032 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, 50% of
the aggregate voting interests attributable to such Flextech
share capital. Based upon the (pound)5.40 ($9.03) per share
closing price of the Flextech Ordinary Shares on the London
Stock Exchange, the Flextech Ordinary Shares owned by TINTA
had an aggregate market value of (pound)313 million ($523
million) at March 31, 1998.
(continued)
I-122
<PAGE> 125
"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 "Principal
Joint Venture" and the "Second Joint Venture", collectively
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 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. 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.
Flextech has undertaken to finance the working capital
requirements of the Principal Joint Venture and is obligated
to provide the Principal Joint Venture with a primary credit
facility of (pound)88 million ($147 million) and subject to
certain restrictions, a standby credit facility of (pound)30
million ($50 million). Flextech has also agreed to make
available to the Second Joint Venture, if required, funding of
up to (pound)10 million ($17 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 (pound)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
it 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, it may reacquire its interest in the
Principal Joint Venture for (pound)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.
(continued)
I-123
<PAGE> 126
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
So long as TINTA is contingently obligated under the Standby
Commitment, it has been agreed that (i) Flextech will not sell
any of its direct or indirect interests in the Principal Joint
Venture, (ii) Flextech 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) Flextech 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.
(b) Liberty/TINTA LLC
Subsidiaries of TINTA and Liberty Media Group own equal parts
of Liberty/TINTA. During 1996, Liberty/TINTA and News
Corporation Limited ("News Corp.") formed a joint venture
including a number of partnerships or other entities under
common ownership, ("Fox Sports International"), to operate
currently existing sports services in Latin America and
Australia and a variety of new sports services throughout the
world, excluding the United States, Canada and certain other
defined geographic areas.
During the third quarter of 1997, Fox Sports International
distributed (i) its 35% interest in Torneos y Competencias
S.A. ("Torneos") to Liberty/TINTA and (ii) certain Australian
sports rights to News Corp. On October 2, 1997, TINTA
purchased a 5% direct interest in Torneos from an unaffiliated
third party for $12 million. As of March 31, 1998, TINTA had
made cash contributions to Torneos on the behalf of
Liberty/TINTA of $48 million. It is anticipated that Liberty
Media Group's portion of such cash contributions to Torneos
will be repaid to TINTA in cash or other economic
consideration to be determined at some future date.
Asia Business News (Singapore) PTE Ltd.
On December 31, 1997, TINTA surrendered all of its shares of Asia
Business News (Singapore) PTE Ltd. ("ABN") in exchange for a $25
million unsecured note receivable from ABN (the "ABN Note"). The ABN
Note is due on December 31, 2012. Interest accrues on the ABN Note
beginning December 31, 1999 at the rate of 7% per annum. Due to
uncertainty regarding collection of the ABN Note, TINTA recorded the
ABN Note at an amount equal to its investment in ABN as of the date of
conversion. No gain was recognized on the above transaction.
(continued)
I-124
<PAGE> 127
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The following table reflects the TCI Ventures Group's share of losses
of the Other Affiliates:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
------------- ---------------
amounts in thousands
<S> <C> <C>
Jupiter $ 5,626 4,098
MultiThematiques 5,112 2,225
JPC 3,262 3,081
Liberty/TINTA 2,943 3,218
ABN -- 3,457
Other 7,697 7,029
------------- ---------------
$ 24,640 23,108
============= ===============
</TABLE>
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>
Three months ended March 31, 1998
----------------------------------------------------------------------------
Latin
America
Asia and and The United
Europe Australia(a) Caribbean(b) States Total
----------- ----------- ----------- ---------- -----------
Combined Operations amounts in thousands
<S> <C> <C> <C> <C> <C>
Revenue $ 84,934 45,911 -- 2,891 133,736
Operating expenses (95,197) (59,957) (196) (2,292) (157,642)
Depreciation and amortization (5,945) (763) (85) (1,679) (8,472)
----------- ----------- ----------- ---------- -----------
Operating loss (16,208) (14,809) (281) (1,080) (32,378)
Interest income (expense), net 1,474 (635) (1,361) (879) (1,401)
Other, net (12,318) 1,245 (4,749) (84) (15,906)
----------- ----------- ----------- ---------- -----------
Net loss $ (27,052) (14,199) (6,391) (2,043) (49,685)
=========== =========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1997
-----------------------------------------------------------------------------
Latin
America
Asia and and The United
Europe Australia (a) Caribbean (b) States Total
----------- ------------- ------------- ------------ ------------
Combined Operations amounts in thousands
<S> <C> <C> <C> <C> <C>
Revenue $ 60,499 50,837 3,484 2,345 117,165
Operating expenses (77,551) (56,652) (2,086) (2,035) (138,324)
Depreciation and amortization (6,457) (10,186) (856) (1,285) (18,784)
----------- ------------- ------------- ------------ ------------
Operating income (loss) (23,509) (16,001) 542 (975) (39,943)
Interest expense, net (558) (2,883) (1,918) (497) (5,856)
Other, net 276 (966) (6,797) (44) (7,531)
----------- ------------- ------------- ------------ ------------
Net loss $ (23,791) (19,850) (8,173) (1,516) (53,330)
=========== ============= ============= ============ ============
</TABLE>
------------------
(continued)
I-125
<PAGE> 128
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(a) The summarized operating results of ABN are included in the
combined operations through December 31, 1997, the date TINTA
surrendered all of its shares of ABN in exchange for the ABN
Note. See related discussion above. The summarized operating
results of Sky Network Television New Zealand, Ltd. ("Sky")
are included in the combined operations through September 26,
1997, the date that TINTA sold its interest in Sky.
(b) The summarized operating results of Caguas/Humacao Cable
Systems ("Caguas") are included in the combined operations
through May 1, 1997, the date TINTA acquired the 50% ownership
in Caguas which TINTA did not already own.
(12) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
amounts in thousands
<S> <C> <C>
Debentures (a) $ 345,000 345,000
Puerto Rico Bank Facility (b) 45,000 45,000
Ventures Group Bank Facility (c) 70,000 --
Other -- 18,532
------------- -------------
$ 460,000 408,532
============= =============
</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 (the "Debentures") due
2006 having an aggregate principal amount of $345 million. 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. The Debentures may be redeemed 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 initially loaned to TCI pursuant to an
unsecured promissory note. See note 13.
(continued)
I-126
<PAGE> 129
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(b) TINTA's Puerto Rico subsidiary (the "Puerto Rico Subsidiary")
has a reducing revolving bank facility which is unsecured and
provides for maximum borrowing commitments of $100 million
(the "Puerto Rico Bank Facility"). 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 (6.75% at March 31, 1998). 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.
(c) On March 10, 1998, TCI Ventures Group entered into a bank
credit facility with a term of one year which provides for
aggregate borrowings of up to $400 million (the "Ventures
Group Bank Facility"). At March 31, 1998 borrowings under the
Ventures Group Bank Facility totaled $70.0 million. Borrowings
under the Ventures Group Bank Facility bear interest at
variable rates (6.05% at March 31, 1998). TCI Ventures Group
is required to pay a commitment fee equal to 0.15% on the
average daily unused portion of the maximum borrowing
commitments. The Ventures Group Bank Facility contains
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and includes
limitations on indebtedness, liens and encumbrances,
acquisitions, dispositions and dividends.
With the exception of the Debentures, which had a fair value of $310.5
million at March 31, 1998, the TCI Ventures Group believes that the
fair value and the carrying value of the TCI Ventures Group's debt were
approximately equal at March 31, 1998.
(continued)
I-127
<PAGE> 130
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(13) Combined Equity
General
During the fourth quarter of 1997, TCI entered into a Total Return
Equity Swap Facility (the "Equity Swap Facility"). Pursuant to the
Equity Swap Facility, TCI has the right to direct the counterparty (the
"Counterparty") to use the Equity Swap Facility to purchase shares
("Equity Swap Shares") of TCI Group Series A Stock and TCI Ventures
Group Series A Stock with an aggregate purchase price of up to $300
million. TCI has the right, but not the obligation, to purchase Equity
Swap Shares through the September 30, 2000 termination date of the
Equity Swap Facility. During such period, TCI is to settle periodically
any increase or decrease in the market value of the Equity Swap Shares.
If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from
the other Equity Swap Shares. If the market value of Equity Swap Shares
is less than the Counterparty's cost, TCI, at its option, will settle
such difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or
letters of credit. In addition, the Company is required to periodically
pay the Counterparty a fee equal to a LIBOR-based rate on the
Counterparty's cost to acquire the Equity Swap Shares. Due to TCI's
ability to issue shares to settle periodic price fluctuation and fees
under the Equity Swap Facility, TCI records all amounts received or
paid under this arrangement as increases or decreases, respectively, to
equity. As of March 31, 1998, the Equity Swap Facility had acquired
2,089,480 shares of TCI Group Series A Stock and 513,500 shares of TCI
Ventures Group Series A Stock at an aggregate cost that was
approximately $10 million less than the fair value of such Equity Swap
Shares at March 31, 1998.
(continued)
I-128
<PAGE> 131
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On January 5, 1998, TCI announced that a settlement (the "Magness
Settlement") had been reached in the litigation brought against it and
other parties in connection with the administration of the Estate of
Bob Magness (the "Magness Estate"), the late founder and former
Chairman of the Board of TCI.
(continued)
I-129
<PAGE> 132
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On February 9, 1998, in connection with the Magness Settlement, TCI,
entered into a call agreement (the "Malone Call Agreement") with Dr.
Malone and Dr. Malone's wife (together with Dr. Malone, the "Malones"),
under which the Malones grant to TCI the right to acquire any shares of
TCI stock which are entitled to cast more than one vote per share (the
"High-Voting Shares") owned by the Malones, which currently consist of
an aggregate of approximately 60 million High-Voting Shares upon Dr.
Malone's death or upon a contemplated sale of the High-Voting Shares
(other than a minimal amount) to third persons. In either such event,
TCI has the right to acquire the shares at a maximum price equal to the
then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were
ever to be sold to another entity, then the maximum premium that the
Malones would receive on their High-Voting Shares would be no greater
than a ten percent premium over the price paid for the relevant shares
of Series A Stock. TCI paid $150 million to the Malones in
consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain
cases, on behalf of the Estate of Betsy Magness (the first wife of Bob
Magness) and the Magness Estate (collectively, the "Magness Family")
also entered into a call agreement with TCI (with substantially the
same terms as the one entered into by the Malones, including a call on
the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of
approximately 49 million High-Voting Shares. The Magness Family was
paid $124 million by TCI in consideration of them entering into the
Magness Call Agreement. Additionally, on February 9, 1998, the Magness
Family entered into a shareholders' agreement with the Malones and TCI
under which (i) the Magness Family and the Malones agree to consult
with each other in connection with matters to be brought to the vote of
TCI's shareholders, subject to the proviso that if they cannot mutually
agree on how to vote the shares, Dr. Malone has an irrevocable proxy to
vote the High-Voting Shares owned by the Magness Family, (ii) the
Magness Family may designate a nominee for TCI's Board of Directors and
Dr. Malone has agreed to vote his High Voting Shares for such nominee
and (iii) certain "tag along rights" have been created in favor of the
Magness Family and certain "drag along rights" have been created in
favor of the Malones.
(continued)
I-130
<PAGE> 133
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was
allocated to each of the Groups based upon the number of shares of each
Group (before giving effect to stock dividends) that are subject to the
Malone Call Agreement and the Magness Call Agreement. TCI Ventures
Group's share of the Call Payments of $76 million was paid during the
first quarter of 1998 and is reflected as a decrease to combined
equity.
Stock Repurchases
During the three months ended March 31, 1998, pursuant to the stock
repurchase program, 61,450 shares of TCI Ventures Group Series A Stock
and 94,000 shares of TCI Ventures Group Series B Stock were repurchased
at an aggregate cost of $2.4 million. Such amount is reflected as a
decrease to combined equity in the accompanying combined financial
statements.
Stock Based Compensation
TCI Ventures Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights
(collectively, "Awards") granted (i) by TCI to certain TCI employees
and/or directors who are involved with the TCI Ventures Group and (ii)
by TINTA, UVSG, and @Home to employees and/or directors of such
entities. Stock compensation with respect to Awards granted by TCI
includes amounts related to TCI common stock and to common stock of
certain non-public subsidiaries of TCI and is allocated to TCI Ventures
Group based on the Awards held by TCI employees and/or directors who
are involved with TCI Ventures Group. Estimated compensation relating
to the Awards has been recorded in the accompanying combined financial
statements through March 31, 1998. Such estimate is subject to future
adjustment based upon vesting and market value, and ultimately, on the
final determination of market value when such rights are exercised. The
estimated compensation adjustment with respect to TCI Awards resulted
in increases to TCI Ventures Group's share of TCI's stock compensation
liability of $78.5 million and $8.3 million for the three months ended
March 31, 1998 and 1997, respectively. In addition, for the three
months ended March 31, 1998, TCI Ventures Group made cash payments
relating to its share of TCI's stock compensation obligations of $43.1
million. The payable arising from the compensation related to the
Awards is included in the amount due to related parties.
Transactions with Related Parties
The components of due to (from) related parties are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- ----------------
amounts in thousands
<S> <C> <C>
TCI Note Receivable (a) $ (63,251) (88,707)
Intercompany account (b) 73,428 110,212
---------------- ----------------
$ 10,177 21,505
================ ================
</TABLE>
(continued)
I-131
<PAGE> 134
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
--------
(a) Amounts outstanding under a note agreement between the TCI
Ventures Group and TCI (the "TCI Note Receivable")bear
interest at variable rates based on TCI's weighted average
cost of bank borrowings of similar maturities (6.2% at March
31, 1998). Principal and interest is due and payable as
mutually agreed from time to time by TCI and the TCI Ventures
Group. During the three months ended March 31, 1998 and 1997,
interest income related to the TCI Note Receivable aggregated
$1.2 million and $2.4 million, respectively.
(b) 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 the TCI Ventures Group was
reclassified to "Combined Equity."
The TCI Group has provided a revolving loan facility (the "Ventures
Intergroup 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 Ventures Intergroup Credit Facility is payable
by the TCI Ventures Group to the TCI Group on a quarterly basis. Such
commitment fee was not significant during the three months ended March
31, 1998. The maximum amount of borrowings permitted under the Ventures
Intergroup 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 TCI Ventures Exchange is less
than $300 million. No borrowings were outstanding pursuant to the
Ventures Intergroup Credit Facility at March 31, 1998.
During 1996, TCI Group transferred, subject to regulatory approval,
certain distribution equipment to a subsidiary of TINTA in exchange for
a (pound)15 million ($23 million using the applicable exchange rate)
principal amount promissory note (the "TVG LLC Promissory Note"). The
TVG LLC Promissory Note was contributed by TCI Group to TVG LLC in
connection with the September 10, 1997 consummation of the Exchange
Offers. The distribution equipment was subsequently leased back to TCI
Group over a five year term with semi-annual payments of $2 million,
plus expenses. Effective October 1, 1997, such distribution equipment
was transferred back to TCI Group and the related lease and the TVG LLC
Promissory Note were canceled. During the three months ended March 31,
1997, (i) the U.S. dollar equivalent of interest expense with respect
to the TVG LLC Promissory Note was $392,000, (ii) the U.S. dollar
equivalent of the lease revenue under the above-described lease
agreement aggregated $859,000 and (iii) TINTA experienced foreign
currency transaction gains of $922,000, with respect to the TVG LLC
Promissory Note.
(continued)
I-132
<PAGE> 135
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain TCI corporate general and administrative costs are charged to
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 TCI Ventures Group would incur for comparable
services on a stand alone basis. TCI Ventures Group was allocated $2.2
million in corporate general and administrative costs by the TCI Group
during each of the three months ended March 31, 1998 and 1997.
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, @Home has entered into arrangements for the distribution of
its @Home service with TCI Group and other 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.
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.
During each of the three months ended March 31, 1998 and 1997,
programming revenue earned by UVSG from TCI Group was $2.0 million.
UVSG purchases programming from Liberty Media Group and, during the
first quarter of 1997, purchased from TCI Group. These purchases
totaled $10.7 million and $11.9 million for the three months ended
March 31, 1998 and 1997, respectively, and are included in operating
costs in the accompanying combined statements of operations.
Amounts included in revenue for services provided to the other Groups
by WTCI and NDTC are $8.8 million and $11.5 million for the three
months ended March 31, 1998 and 1997, respectively.
A subsidiary of TCI that is a member of TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment
was subleased to TCI Group under an operating lease. In January 1998,
TCI Group paid $7 million to TCI Ventures Group in exchange for TCI
Ventures Group's assignment of its ownership interest in such
subsidiary to TCI Group. Due to the related party nature of the
transaction, the $49.5 million total of the cash payment and the
historical cost of the net liabilities assumed by TCI Group (including
capital lease obligations aggregating $175.8 million) has been
reflected as an addition to TCI Ventures Group's combined equity.
(continued)
I-133
<PAGE> 136
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 $1.5 million and $1.3 million during the three
months ended March 31, 1998 and 1997, respectively. The above-described
programming fee charges are included in operating costs in the
accompanying combined statements of operations.
As further described in note 4, effective October 1, 1997, TINTA ceased
to consolidate Cablevision and began to account for Cablevision under
the equity method of accounting. Cablevision purchases programming
services from certain affiliates. The related charges generally are
based upon the number of Cablevision's subscribers that receive the
respective services. During the three months ended March 31, 1997, such
charges aggregated $3.3 million. Additionally, certain of Cablevision's
general and administrative functions are provided by affiliates. The
related charges, which generally are based upon the respective
affiliate's cost of providing such functions, aggregated $700,000
during the three months ended March 31, 1997. The above-described
programming and general and administrative charges are included in
operating costs in the accompanying combined statements of operations.
(14) Income Taxes
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.
A tax sharing agreement (the "Old Tax Sharing Agreement") among the
TCI, the TCI Ventures Group 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, the 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 any
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-134
<PAGE> 137
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by
the First Amendment thereto (the "New Tax Sharing Agreement"), which
governs the allocation and sharing of income taxes by 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 unutilized 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.
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) has been 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 has been 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. The terms of such arrangement are not
expected to be significantly different than the terms contained in the
New Tax Sharing Agreement.
(continued)
I-135
<PAGE> 138
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1997, the TCI Ventures Group had federal net operating
loss carryforwards for income tax purposes aggregating approximately
$504 million which, if not utilized to reduce taxable income in future
periods, will begin to expire at various dates beginning in the year
2004. Pursuant to the Old and New Tax Sharing Agreements, TCI Ventures
Group has already received benefit for approximately $37 million of
such net operating loss carryforwards. TCI Ventures Group is
responsible to TCI to the extent this amount of net operating loss
carryforwards is utilized by TCI in future periods.
(15) Commitments and Contingencies
As previously described in notes 8, 9 and 11, TCI Ventures Group has
significant commitments and contingent obligations with respect to
certain of its affiliates.
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 $42 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 has formed strategic partnerships with News Corp., Organizacoes
Globo and Group 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"). Through
March 31, 1998, TINTA had contributed $26.5 million to the DTH
Ventures. It is anticipated that TINTA could be required to make
additional cash contributions in connection with the DTH Ventures. In
addition, as of March 31, 1998, TINTA had guaranteed $16.8 million of
the DTH Ventures' financial obligations.
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC
("Approved Purchasers"), entered into an agreement (the "Digital
Terminal Purchase Agreement") with General Instrument Corporation
("GI") to purchase advanced digital set-top devices. The hardware and
software incorporated into these devices will be designed and
manufactured to be compatible and interoperable with the OpenCable(TM)
architecture specifications adopted by CableLabs, the cable television
industry's research and development consortium, in November 1997. NDTC
has agreed that Approved Purchasers will purchase, in the aggregate, a
minimum of 6.5 million set-top devices during calendar years 1998, 1999
and 2000 at an average price of $318 per set-top device. GI agreed to
provide NDTC and its Approved Purchasers the most favorable prices,
terms and conditions made available by GI to any customer purchasing
advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization,
which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI
(on a fully diluted basis). It is anticipated that the value associated
with such equity interest would be attributed to TCI Group upon
purchase and deployment of the digital set-top devices.
(continued)
I-136
<PAGE> 139
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Also in December 1997, NDTC entered into a memorandum of understanding
(the "GI MOU") with GI which contemplates the sale to GI of certain of
the assets of NDTC's set-top authorization business, the license of
certain related technology to GI, and an additional cash payment in
exchange for approximately 21.4 million shares of stock of GI. In
connection therewith, NDTC would also enter into a service agreement
pursuant to which it will provide certain services to GI's set-top
authorization business. The transaction is subject to the signing of
definitive agreements; accordingly, there can be no assurance that it
will be consummated.
NDTC has the right to terminate the Digital Terminal Purchase Agreement
if, among other reasons, the transactions related to the GI MOU are not
consummated or if GI fails to meet a material milestone designated in
the Digital Terminal Purchase Agreement with respect to the
development, testing and delivery of advanced digital set-top devices.
During the three months ended March 31, 1998, TCI continued its
enterprise-wide comprehensive review of its computer systems and
related software to ensure systems properly recognize the year 2000 and
continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and
devices that manage the distribution of TCI Ventures Group's products.
TCI is utilizing both internal and external resources to identify,
correct or reprogram, and test systems for year 2000 readiness.
As of March 31, 1998, TCI had inventoried substantially all of its
systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include TCI Ventures
Group's financial systems and related software, its business systems,
data and voice networks, engineering systems and facilities and related
software supporting the distribution of TCI Ventures Group's products
and other equipment and systems potentially impacted by the year 2000.
Additionally, TCI began efforts to assess potential year 2000 issues of
TCI Ventures Group's affiliated companies that are not managed by TCI
Ventures Group and continued to have formal communications with its
principal vendors to determine their year 2000 readiness.
TCI completed a preliminary assessment of its systems and related
software that support TCI Ventures Group's financial applications. For
those financial systems and software which will continue to be utilized
by TCI Ventures Group beyond the year 1999, TCI has tentatively
concluded that such systems are capable of recognizing the year 2000
and therefore will not require material remediation or replacement. One
of TCI Ventures Group's financial applications is externally managed by
a third party vendor and such financial application will be replaced
with software provided by such vendor. No assurances can be given that
as TCI completes its year 2000 assessment, additional internally
managed systems will not be identified as requiring remediation or
replacement. TCI has completed an initial assessment of its business
systems, including networks, engineering systems and facilities and
related software supporting the distribution of TCI Ventures Group's
products and has tentatively concluded that certain portions of those
systems will require remediation or replacement. Although no assurance
can be given, management of TCI anticipates that such systems will be
remediated or replaced prior to the year 2000.
(continued)
I-137
<PAGE> 140
"TCI VENTURES GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Significant third party vendors whose systems are critical to TCI
Ventures Group's operations have been identified and/or surveyed and
confirmations from such parties have been received indicating that
they are either year 2000 ready or have plans in place to ensure
readiness. Management of TCI intends to have further communication
with primary vendors identified as having systems that are not year
2000 compliant to assess those vendors' plans for remediating their
own year 2000 issues and to assess the impact on TCI Ventures Group
if such vendors fail to remediate their year 2000 issues.
TCI's assessment of the impact of the year 2000 date change should be
complete by the end of 1998. TCI continues to evaluate the level of
validation it will require of third parties to ensure their year 2000
readiness. Management of TCI has not yet determined the cost
associated with its year 2000 readiness efforts and the related
potential impact on TCI Ventures Group's results of operations.
Amounts expended to date have not been material, although there can be
no assurance that costs ultimately required to be paid to ensure TCI
Ventures Group's year 2000 readiness will not have an adverse effect
on TCI Ventures Group financial position. Additionally, there can be
no assurance that TCI Ventures Group's systems or the systems of other
companies on which TCI Ventures Group relies will be converted in time
or that any such failure to convert by TCI Ventures Group or other
companies will not have an adverse effect on its financial position.
(16) Restatement Associated with Costs of Distribution Agreements
TCI Ventures Group has restated its combined financial statements to
record non-cash costs of certain distribution agreements as assets to
be amortized over the exclusivity periods set forth in the respective
distribution agreements. Such non-cash costs had originally been
expensed in the period that the underlying warrants had become
exercisable. This restatement resulted in a $236.0 million increase to
intangible assets and a $143.0 million increase to minority interests
in attributed subsidiaries at March 31, 1998. In addition, the
restatement resulted in a $28.1 million decrease to net loss and a $.07
decrease to basic and diluted net loss attributable to common
stockholders per share of TCI Ventures Group Stock for the three months
ended March 31, 1998. See note 7.
I-138
<PAGE> 141
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis provides information concerning
the results of operations and financial condition of the Company, TCI Group,
Liberty Media Group and TCI Ventures Group. Such discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto of the Company and the accompanying combined financial statements and
notes thereto of each of the TCI Group, Liberty Media Group and TCI Ventures
Group. Additionally, the following discussion and analysis should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and financial statements included in Part II of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
following discussion focuses on material trends, risks and uncertainties
affecting the results of operations and financial condition of the Company, TCI
Group, Liberty Media Group and TCI Ventures Group.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: general economic and business conditions and industry
trends; the regulatory and competitive environment of the industries in which
the Company, and the entities in which the Company has interests, operate;
uncertainties inherent in new business strategies, new product launches and
development plans; rapid technological changes; the acquisition, development
and/or financing of telecommunications networks and services; the development
and provision of programming for new television and telecommunications
technologies; future financial performance, including availability, terms and
deployment of capital; the ability of vendors to deliver required equipment,
software and services; availability of qualified personnel; changes in, or
failure or inability to comply with, government regulations, including, without
limitation, regulations of the Federal Communications Commission, and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to the
Company's products and services, and the products and services of the entities
in which the Company has interests, and the overall market acceptance of such
products and services; and other factors. These forward-looking statements (and
such risks, uncertainties and other factors) speak only as of the date of this
Report, and the Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in the Company's expectations with regard thereto,
or any other change in events, conditions or circumstances on which any such
statement is based.
Targeted Stock
TCI common stock is comprised of six series: TCI Group Series A Stock,
TCI Group Series B Stock, Liberty Group Series A Stock, Liberty Group Series B
Stock, TCI Ventures Group Series A Stock and TCI Ventures Group Series B Stock.
I-139
<PAGE> 142
The Liberty Group Stock is intended to reflect the separate
performance of the Liberty Media Group, which is comprised of TCI's assets
which produce and distribute programming services. The TCI Ventures Group
Stock is intended to reflect 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 assets.
The TCI Group Stock is intended to reflect the separate performance of TCI and
its subsidiaries and assets not attributed to Liberty Media Group or TCI
Ventures Group. TCI Group is comprised primarily of TCI's domestic cable and
communications business. For additional information concerning targeted stock,
see note 1 to the accompanying consolidated financial statements of TCI.
Magness Settlement
On June 16, 1997, (a) the Company issued 30,545,864 shares of TCI Group
Series A Stock (which shares are entitled to one vote per share) to the Estate
of Bob Magness (the "Magness Estate"), the late founder and former Chairman of
the Board of TCI in exchange (the "Exchange") for an equal number of shares of
TCI Group Series B Stock (which shares are entitled to ten votes per share)
owned by the Magness Estate, (b) the Magness Estate sold (the "Sale") the shares
of TCI Group Series A Stock received in the Exchange, together with
approximately 1.5 million shares of TCI Group Series A Stock that the Magness
Estate previously owned (collectively, the "Option Shares"), to two investment
banking firms (the "Investment Bankers") for approximately $530 million (the
"Sale Price") and (c) TCI entered into an agreement with the Investment Bankers
whereby TCI has the option, but not the obligation, to purchase the Option
Shares at any time on or before June 16, 1999 (the "Option Period"). The
preceding transactions are referred to collectively as the "June 16 Stock
Transaction". During the Option Period, the Company and the Investment Bankers
are 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 TCI Group
Series A Stock or TCI Ventures Group Series A Stock or, subject to certain
conditions, with cash or letters of credit. In addition, the Company is
required to pay the Investment Bankers a quarterly fee equal to the London
Interbank Offered Rate ("LIBOR") plus 1% on the Sale Price, as adjusted for
payments made by the Company pursuant to any quarterly settlement with the
Investment Bankers. Due to the Company's ability to settle quarterly price
fluctuations and fees with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock the Company records all amounts received or paid under this
arrangement as increases or decreases, respectively, to equity. During the
fourth quarter of 1997, the Company repurchased 4 million shares of TCI Group
Series A Stock from one of the Investment Bankers for an aggregate cash purchase
price of $66 million. Additionally, as a result of the Exchange Offers and
certain open market transactions that were completed to obtain the desired
weighting of TCI Group Series A Stock and TCI Ventures Group Series A Stock, the
Investment Bankers disposed of 4,210,308 shares of TCI Group Series A Stock and
acquired 23,407,118 shares of TCI Ventures Group Series A Stock during the last
half of 1997. As a result of the foregoing transactions and certain
transactions related to the January 5, 1998 settlement of litigation involving
the Magness Estate, as described below, the Option Shares were comprised of
6,201,042 shares of TCI Group Series A Stock and 11,740,610 shares of TCI
Ventures Group Series A Stock at March 31, 1998. At March 31, 1998, the market
value of the Option Shares exceeded the Investment Bankers' cost by $201
million. Pursuant to a certain Letter Agreement, dated June 16, 1997, between
Dr. Malone, TCI's Chairman and Chief Executive Officer, and the Magness Estate,
Dr. Malone agreed to waive certain rights of first refusal with respect to
shares of Series B TCI Group Stock beneficially owned by the Magness Estate.
Such rights of first refusal arise from a letter agreement, dated June 17, 1988,
among Bob Magness, Kearns-Tribune Corporation and Dr. Malone, pursuant to which
Dr. Malone was granted a right of first refusal to acquire any shares of TCI
Group Series B Stock which the other parties proposed to sell. As a result of
Dr. Malone's rights under such June 17, 1988 letter agreement, such waiver was
necessary in order for the Magness Estate to consummate the Exchange and the
Sale.
In consideration for such waiver, TCI granted Dr. Malone the right (the
"Malone Right") to acquire from time to time until June 30, 1999, from TCI up to
30,545,864 shares of the Series B TCI Group Stock acquired by TCI from the
Magness Estate pursuant to the Exchange. Such acquisition may be made in
exchange for either, or any combination of, shares of Series A TCI Group Stock
owned by Dr. Malone (exchanged on a one for one basis), or cash in an amount
equal to the average closing sale price of the Series B TCI Group Stock for the
five trading days preceding the acquisition.
In connection with certain legal proceedings relative to the probate
of the Magness Estate, one or more of Gary Magness and Kim Magness, Bob Magness'
sons, Sharon Magness, Bob Magness' surviving second wife and the original
personal representatives of the Magness Estate advanced various claims, causes
of action, demands, complaints and requests against one or more of the others.
In addition, Kim Magness and Gary Magness, in a Complaint And Request To Void
Sale Of TCI Stock, And For Damages And Surcharge, filed on October 29, 1997 (the
"Voiding Action"), advanced various claims relating to the June 16 Stock
Transaction against TCI, Dr. Malone and the original personal representatives of
the Magness Estate. Among other matters, the Voiding Action challenged the June
16 Stock Transaction on various fiduciary bases and requested recision of such
transaction and damages.
Pursuant to an agreement effective as of January 5, 1998 (the
"Settlement Agreement"), TCI, Gary Magness, Kim Magness, Sharon Magness, the
Magness Estate, the Estate of Betsy Magness (the first wife of Bob Magness) and
Dr. Malone agreed to settle their respective claims against each other relating
to the Magness Estate and the June 16 Stock Transaction, in each case without
any of those parties admitting any of the claims or allegations against that
party (the "Magness Settlement").
I-140
<PAGE> 143
In connection with the Magness Settlement, portions of the Exchange and
Sale were unwound such that (i) 10,201,041 shares of TCI Group Series A Stock
and 11,666,506 shares of TCI Ventures Group Series A Stock were returned to TCI
as authorized but unissued shares, (ii) the Magness Estate returned to the
Investment Bankers the portion of the Sales Price attributable to such returned
shares and (iii) and the Magness Estate paid $11 million to TCI representing a
reimbursement of the Exchange fees incurred by TCI from June 16, 1997 through
February 9, 1998 with respect to such returned shares. TCI then issued to the
Magness Estate 10,017,145 shares of TCI Group Series B Stock and 12,034,298
shares of TCI Ventures Series B Stock. In addition, as part of the Magness
Settlement, TCI issued 1,339,415 shares of TCI Group Series B Stock to the
Estate of Betsy Magness in exchange for an equal number of shares of TCI Group
Series A Stock and issued 1,531,834 shares of TCI Ventures Group Series B Stock
for an equal number of shares of TCI Ventures Group Series A Stock
On February 9, 1998, in connection with the Magness Settlement, TCI
entered into a call agreement (the "Malone Call Agreement") with Dr. Malone and
Dr. Malone's wife (together with Dr. Malone, the "Malones"), under which the
Malones granted to TCI the right to acquire any shares of TCI stock which are
entitled to cast more than one vote per share (the "High-Voting Shares") owned
by the Malones, which currently consist of an aggregate of approximately 60
million High-Voting Shares upon Dr. Malone's death or upon a contemplated sale
of the High-Voting Shares (other than a minimal amount) to third persons. In
either such event, TCI has the right to acquire the shares at a maximum price
equal to the then relevant market price of shares of "low-voting" Series A Stock
plus a ten percent premium. The Malones also agreed that if TCI were ever to be
sold to another entity, then the maximum premium that the Malones would receive
on their High-Voting Shares would be no greater than a ten percent premium over
the price paid for the relevant shares of Series A Stock. TCI paid $150 million
to the Malones in consideration of them entering into the Malone Call Agreement.
Also on February 9, 1998, in connection with the Magness Settlement,
certain members of the Magness family, individually and in certain cases, on
behalf of the Estate of Betsy Magness and the Magness Estate (collectively, the
"Magness Family") also entered into a call agreement with TCI (with
substantially the same terms as the one entered into by the Malones, including a
call on the shares owned by the Magness Family upon Dr. Malone's death) (the
"Magness Call Agreement") on the Magness Family's aggregate of approximately 49
million High-Voting Shares. The Magness Family was paid $124 million by TCI in
consideration of them entering into the Magness Call Agreement. Additionally,
on February 9, 1998, the Magness Family entered into a shareholders' agreement
(the "Shareholders' Agreement") with the Malones and TCI under which (i) the
Magness Family and the Malones agree to consult with each other in connection
with matters to be brought to the vote of TCI's shareholders, subject to the
proviso that if they cannot mutually agree on how to vote the shares, Dr. Malone
has an irrevocable proxy to vote the High-Voting Shares owned by the Magness
Family, (ii) the Magness Family may designate a nominee for the Board and Dr.
Malone has agreed to vote his High Voting Shares for such nominee and (iii)
certain "tag along rights" have been created in favor of the Magness Family and
certain "drag along rights" have been created in favor of the Malones. In
addition, the Malone Right granted by TCI to Dr. Malone to acquire 30,545,864
shares of TCI Group Series B Stock has been reduced to an option to acquire
14,511,570 shares of TCI Group Series B Stock. Pursuant to the terms of the
Shareholders' Agreement, the Magness Family has the right to participate in the
reduced Malone Right on a proportionate basis with respect to 12,406,238 shares
of the 14,511,570 shares subject to the Malone Right.
The aggregate amount paid by TCI pursuant to the Malone Call Agreement
and Magness Call Agreement (collectively, the "Call Payments") was reflected as
a $274 million reduction of additional paid-in capital. The Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, $134 million, $64
million and $76 million of the Call Payments were allocated to TCI Group,
Liberty Media Group and TCI Ventures Group, respectively.
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<PAGE> 144
Year 2000
During the three months ended March 31, 1998, the Company continued
its enterprise-wide comprehensive review of its computer systems and related
software to ensure systems properly recognize the year 2000 and continue to
process business information. The systems being evaluated include all internal
use software and devices and those systems and devices that manage the
distribution of the Company's products. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test systems for
year 2000 readiness.
As of March 31, 1998, the Company had inventoried substantially all of
its cable systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include the Company's
financial systems and related software, its business systems, data and voice
networks, engineering systems and facilities and related software supporting
the distribution of the Company's products and other equipment and systems
potentially impacted by the year 2000. Additionally, the Company began efforts
to assess potential year 2000 issues of its affiliated companies that are not
managed by the Company and continued to have formal communications with its
principal vendors to determine their year 2000 readiness.
The Company completed a preliminary assessment of its systems and
related software that support the Company's financial applications. For those
financial systems and software which will continue to be utilized by the
Company beyond the year 1999, the Company has tentatively concluded that such
systems are capable of recognizing the year 2000 and therefore will not require
material remediation or replacement. One of the Company's financial
applications is externally managed by a third party vendor and such financial
application will be replaced with software provided by such vendor. No
assurances can be given that as the Company completes its year 2000 assessment,
additional internally managed systems will not be identified as requiring
remediation or replacement. The Company has completed an initial assessment of
its business systems, including networks, engineering systems and facilities and
related software supporting the distribution of the Company's products and has
tentatively concluded that certain portions of those systems will require
remediation or replacement. Although no assurance can be given, management of
the Company anticipates that such systems will be remediated or replaced prior
to the year 2000.
Significant third party vendors whose systems are critical to the
Company's cable operations have been identified and/or surveyed and
confirmations from such parties have been received indicating that they are
either year 2000 ready or have plans in place to ensure readiness. Management
of the Company intends to have further communication with primary vendors
identified as having systems that are not year 2000 compliant to assess those
vendors' plans for remediating their own year 2000 issues and to assess the
impact on the Company if such vendors fail to remediate their year 2000 issues.
I-142
<PAGE> 145
The Company's assessment of the impact of the year 2000 date change
should be complete by the end of 1998. The Company continues to evaluate the
level of validation it will require of third parties to ensure their year
2000 readiness. Management of the Company has not yet determined the cost
associated with its year 2000 readiness efforts and the related potential
impact on the Company's results of operations but has identified certain cost
elements that, in the aggregate, are not expected to be less than $20 million.
Amounts expended to date have not been material, although there can be no
assurance that costs ultimately required to be paid to ensure the Company's
year 2000 readiness will not have an adverse effect on the Company's financial
position. Additionally, there can be no assurance that the Company's systems
or the systems of other companies on which the Company relies will be converted
in time or that any such failure to convert by the Company or other companies
will not have an adverse effect on its financial position.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
GENERAL
Summarized operating data with respect to TCI is presented below for
the indicated periods:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1998* 1997
---------- ----------
amounts in millions
<S> <C> <C>
Revenue $ 1,872 1,827
Operating, selling, general and administrative
expenses (1,166) (1,089)
Stock compensation (229) (15)
Depreciation and amortization (434) (374)
---------- ----------
Operating income 43 349
Interest expense (285) (289)
Share of losses of affiliates, net (238) (156)
Minority interests in earnings of
consolidated subsidiaries (30) (38)
Gain on dispositions of assets 1,101 19
Other, net (5) 19
---------- ----------
Earnings (loss) before income taxes 586 (96)
Income tax benefit (expense) (240) 38
---------- ----------
Net earnings (loss) $ 346 (58)
========== ==========
</TABLE>
* Restated - see note 15 to the accompanying consolidated financial statements
of TCI.
The operating results of each of the TCI Group, Liberty Media Group
and TCI Ventures Group are separately discussed below.
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<PAGE> 146
TCI GROUP
TCI Group operates principally in the domestic cable and
communications industry. The table below sets forth, for the periods
presented, the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the normal recurring operations of
TCI Group. Other items of significance are discussed under separate captions
below.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1998 1997 (a)
------------------ --------------------
dollar amounts in millions
<S> <C> <C> <C> <C>
Revenue 100% $ 1,577 100% $ 1,555
Operating expenses (37) (587) (37) (575)
Selling, general and administrative expenses (21) (334) (20) (316)
Stock compensation (5) (70) (1) (2)
Depreciation and amortization (24) (376) (21) (332)
---- -------- ------ ---------
Operating income 13% $ 210 21% $ 330
==== ======== ====== =========
</TABLE>
- ----------------------
(a) Restated - see note 1 to the accompanying combined financial
statements of TCI Group.
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 (the "Cable
Acts") established rules under which Regulated Services are regulated if a
complaint is filed by a customer or if the appropriate franchise authority is
certified by the Federal Communications Commission to regulate rates. At March
31, 1998, approximately 68% of TCI Group's basic customers were served by cable
television systems that were subject to such rate regulation.
During the three months ended March 31, 1998, 75% 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.
During the first quarter of 1998, TCI Group consummated the Q1 1998
Contribution Transactions. Since January 1, 1997, TCI Group has also consummated
certain other acquisitions and dispositions. Such transactions affect the
comparability of TCI Group's results of operations for the three months ended
March 31, 1998 and 1997. For additional information see note 6 to the
accompanying combined financial statements of TCI Group.
I-144
<PAGE> 147
TCI Group's revenue increased $22 million or 1% for the three months
ended March 31, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the Q1 1998 Contribution
Transactions and other dispositions, revenue increased 3%. Revenue from TCI
Group's customers accounted for 1% of such increase in revenue, primarily as a
result of a 5% increase in basic revenue that was partially offset by a 13%
decrease in premium revenue. TCI Group experienced a 5% increase in its
average basic rate, a decrease in the number of average basic customers of less
than 1%, a 2% decrease in its average premium rate and an 11% decrease in the
number of average premium subscriptions. Additionally, the December 31, 1997
termination of an agreement pursuant to which TCI Group provided fulfillment
services to a third party resulted in a 1% decrease in revenue. Advertising
sales and other revenue accounted for the remaining 3% increase in revenue.
Operating expenses increased $12 million or 2% for the three months
ended March 31, 1998, as compared to the corresponding prior year period.
Exclusive of the effects of acquisitions, the Q1 1998 Contribution Transactions
and other dispositions, such expenses increased 5%. Programming expenses
accounted for the majority of such increase. 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 EMG
Affiliation Agreement with Encore Media Group, it is anticipated that TCI
Group's programming costs with respect to the "STARZ!" and "Encore" premium
services will increase in 1998 and future periods. See note 11 to the
accompanying combined financial statements of TCI Group.
Selling, general and administrative expenses increased $18 million or
6% for the three months ended March 31, 1998, as compared to the corresponding
prior year period. Exclusive of the effects of acquisitions, the Q1 1998
Contribution Transactions and other dispositions, such expenses increased 15%.
Such increase is due primarily to lower launch and other incentives from
programming suppliers, increased marketing costs relating to the launch of
digital products and other initiatives, and other individually insignificant
increases in general and administrative expenses in 1998.
TCI Group records stock compensation relating to restricted stock
awards, options and/or stock appreciation rights granted by TCI to certain TCI
Group employees and members of the Board who are involved with TCI Group. The
amount of expense associated with stock compensation is based on the vesting of
the related stock options and stock appreciation rights and the market price of
the underlying common stock as of the date of the accompanying combined
financial statements of TCI Group. The expense associated with stock
appreciation rights is subject to future adjustment based upon market value
fluctuation and, ultimately, on the final determination of market value when
the rights are exercised.
Depreciation and amortization expense increased $44 million or 13% for
the three months ended March 31, 1998, as compared to the corresponding prior
year period. Such increase represents the net effect of decreases due to the
Q1 1998 Contribution Transactions and other dispositions that were more than
offset by increases attributable to acquisitions and capital expenditures.
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<PAGE> 148
Other Income and Expenses
TCI Group's interest expense was consistent between the three months
ended March 31, 1998, and the corresponding prior year period, as TCI Group's
weighted average interest rate on borrowings and weighted average debt balances
were comparable between the periods.
TCI Group's share of CSC's losses, including amortization of the
difference between the recorded value of TCI Group's investment in CSC and TCI
Group's proportionate share of CSC's net deficiency, aggregated $32 million for
the period from March 4, 1998 through March 31, 1998. As described in note 6
to the accompanying combined financial statements of TCI Group, TCI Group
acquired an approximate 32.7% ownership interest in CSC on March 4, 1998.
TCI Group's investments in affiliates other than CSC are comprised of
limited partnerships and other entities that are primarily engaged in the
domestic cable television business. TCI Group's share of net earnings (losses)
of other affiliates was $52 million and $(17 million) during the three months
ended March 31, 1998 and 1997, respectively. A significant portion of the
change from the 1997 period to the 1998 period is attributable to TCI Group's
share of a 1998 gain recognized by InterMedia Partners on the sale of certain
cable television systems. Such gain was recognized by InterMedia Partners
prior to the time that TCI Group began to consolidate InterMedia Partners. See
note 5 to the accompanying combined financial statements.
During the three months ended March 31, 1998, TCI Group purchased in
the open market certain notes payable which had an aggregate principle balance
of $95 million. In connection with such purchases, TCI Group recognized a loss
on early extinguishment of debt of $16 million. Such loss related to
prepayment penalties and the retirement of deferred loan costs.
Minority interests in earnings of attributed subsidiaries aggregated
$46 million and $34 million for the three months ended March 31, 1998 and 1997,
respectively. The majority of such amounts represent the accrual of dividends
on the Trust Preferred Securities issued in 1997 and 1996 and the accrual of
dividends on certain preferred securities issued in August 1996 by a TCI
subsidiary that is attributed to TCI Group. See note 9 to the accompanying
combined financial statements of TCI Group.
Gain on disposition of assets of $511 million for the three months
ended March 31, 1998 relates primarily to the March 4, 1998 contribution of
cable television systems by TCI Group to CSC. Such gain represents the excess
of the $1,161 million fair value of CSC Class A Common shares received by TCI
Group over the historical cost of the net assets transferred by TCI Group to
CSC. See note 6 to the accompanying combined financial statements of TCI
Group.
I-146
<PAGE> 149
Net Earnings
As a result of the above-described fluctuations in the Company's
results of operations, (i) TCI Group's net earnings (before preferred stock
dividend requirements) of $238 million for the three months ended March 31,
1998 changed by $235 million, as compared to TCI Group's net earnings (before
loss of TCI Ventures Group and preferred stock dividend requirements) of $3
million for the three months ended March 31, 1997.
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. A significant portion of Liberty
Media Group's operations are conducted through corporations and partnerships in
which Liberty Media Group holds a 20%-50% ownership interest. As Liberty Media
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 Liberty Media Group's
combined financial statements.
On June 24, 1997 Liberty Media Group granted Time Warner the Southern
Option. 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 exercised the Southern Option. Pursuant to the Southern Option, Time
Warner acquired the Southern Business, effective January 1, 1998, for $213
million, which was paid in cash, together with the assumption of certain
liabilities on January 2, 1998. Effective January 1, 1998, the Southern
Business is no longer included in the combined financial statements of Liberty
Media Group.
Subsequent to June 30, 1997, Liberty Media Group and TCI Group entered
into a series of transactions pursuant to which the businesses of "Encore," a
movie premium programming service, and "STARZ!," a first-run movie premium
programming service, were contributed to Encore Media Group, a subsidiary of
TCI that is attributed to the Liberty Media Group. Upon the July 1997
formation of Encore Media Group, the operations of STARZ! were included in the
combined financial statements of Liberty Media Group.
Simultaneously with the July 1997 DMX Merger, substantially all of
TCI's controlling ownership interest in TCI Music was transferred to Liberty
Media Group in exchange for an $80 million promissory note (the "Music Note") to
TCI and the assumption of the obligation under the Rights Agreement.
Accordingly, TCI Music has been included in the combined financial statements of
Liberty Media Group since the date of the DMX Merger.
I-147
<PAGE> 150
Effective November 1, 1997, Liberty Media Group acquired the remaining
50% interest in ICCP for $1.75 million. Upon consummation of such transaction
the operations of ICCP were included in the combined financial statements of
Liberty Media Group.
Summary 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"). 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 been reflected
separately in the following table. 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 below.
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------
1998 1997
------------------- -------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Entertainment and Information
Programming Services
Revenue 100% $ 156,670 100% $ 59,359
Operating, selling, general and administrative (81)% (126,432) (56)% (33,050)
Stock compensation (5)% (7,790) (8)% (4,576)
Depreciation and amortization (5)% (7,758) (1)% (751)
----- ------------ ----- ------------
Operating income 9% $ 14,690 35% $ 20,982
===== ============ ===== ============
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------
1998 1997
------------------ -------------------
dollar amounts in thousands
<S> <C> <C>
Corporate expenses
Selling, general and administrative $ (2,731) $ (1,019)
Stock compensation (68,340) (998)
Depreciation and amortization (30) (28)
------------ ------------
Operating loss $ (71,101) $ (2,045)
============ ============
</TABLE>
I-148
<PAGE> 151
Entertainment and Information Programming Services
As discussed above, certain acquisitions and dispositions have
affected the comparability of Liberty Media Group's operating results for the
three months ended March 31, 1998 and 1997. The following table presents
adjustments to remove the effects of such acquisitions and dispositions.
<TABLE>
<CAPTION>
Three months ended March 31, 1998
-----------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------ ------------------------- -----------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 156,670 (89,355) 67,315
Operating, selling, general and
administrative expenses (126,432) 90,858 (35,574)
Stock compensation (7,790) 42 (7,748)
Depreciation and amortization (7,758) 6,082 (1,676)
----------------- ----------------- ------------------
Operating income $ 14,690 7,627 22,317
================= ================= ==================
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1997
----------------------------------------------------------------
Effect of
acquisitions
Historical and dispositions As adjusted
------------------ ------------------------- -------------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 59,359 (7,669) 51,690
Operating, selling, general and
administrative expenses (33,050) 1,756 (31,294)
Stock compensation (4,576) -- (4,576)
Depreciation and amortization (751) 135 (616)
----------------- ---------------- ----------------
Operating income $ 20,982 (5,778) 15,204
================= ================ ================
</TABLE>
I-149
<PAGE> 152
Excluding the effect of acquisitions and dispositions, revenue from
Entertainment and Information Programming Services increased 30% or $16 million
for the quarter ended March 31, 1998, as compared to the quarter ended March 31,
1997. The increase is primarily attributable to higher revenue from Encore,
including the thematic multiplex services ("Multiplex"). Encore's revenue from
cable operators, including TCI Group increased approximately $20 million during
the three months ended March 31, 1998 compared to the same period in 1997. In
connection with the formation of Encore Media Group, TCI Group entered into the
EMG Affiliation Agreement pursuant to which TCI Group pays monthly fixed amounts
in exchange for unlimited access to all of the existing Encore and STARZ!
services. During the three months ended March 31, 1998, Encore's revenue from
TCI Group increased due to the EMG Affiliation Agreement, when compared to the
three months ended March 31, 1997. Encore subscription units from cable
operators, including TCI Group increased 7% during the first quarter of 1998
compared to the first quarter of 1997. Encore subscription units from direct
broadcast satellite ("DBS") operators decreased 15% during the 1998 period
compared to 1997. Such decrease in DBS subscription units was due to the
repackaging of the Encore services and resulted in a decrease in revenue from
DBS operators of approximately $4 million. Such decrease in DBS revenue from
the Encore services excludes the acquisition effect of the STARZ! services,
which services generated DBS revenue of $21 million during the first quarter of
1998. As discussed above, revenue from the STARZ! services was not included in
the combined financial statements of Liberty Media Group until the beginning of
the third quarter of 1997.
Operating, selling, general and administrative expenses from
Entertainment and Information Programming Services, as adjusted for the effect
of acquisitions and dispositions, increased 14% or $4 million for the quarter
ended March 31, 1998 compared to the quarter ended March 31, 1997. Programming
costs for Encore and Multiplex increased $2 million for the 1998 period due to
an overall upgrade of the Encore services. Increased national advertising for
Encore was responsible for an increase of approximately $4 million during the
three months ended March 31, 1998 compared to 1997. Decreased marketing
support payments to distributors offset increases in operating, selling,
general and administrative expenses by $2 million for the first quarter of 1998
over the same period in 1997.
The increase in stock compensation of Entertainment and Information
Programming Services for the quarter ended March 31, 1998 as compared to 1997
is due to an increase in Encore Media Group's stock compensation of $3 million
(see note 9 to the accompanying combined financial statements of Liberty Media
Group).
Revenue from TCI Music contributed $19 million to the revenue from
Entertainment and Information Programming Services for the three months ended
March 31, 1998. Additionally, revenue from STARZ! contributed $68 million and
ICCP contributed $2 million to revenue for 1998. As discussed above,
operations for TCI Music, STARZ! and ICCP were not included in the combined
financial results of Liberty Media Group for the three months ended March 31,
1997. Operating, selling, general and administrative expenses for
Entertainment and Information Programming Services for the three months ended
March 31, 1998 included $17 million from the operations of TCI Music, $70
million from the operations of STARZ! and $3 million from the operations of
ICCP.
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<PAGE> 153
Corporate Expenses
The increase in corporate selling, general and administrative expense
from 1997 to 1998 was primarily due to increased corporate general and
administrative costs by TCI Group. Certain TCI 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 would approximate the costs Liberty Media Group would incur
for comparable services on a stand alone basis. During the three months ended
March 31, 1998 and 1997, Liberty Media Group was allocated approximately
$1,109,000 and $263,000, respectively, in corporate general and administrative
costs by TCI Group.
The amount of expense associated with stock compensation is based on
the vesting of the related stock options and stock appreciation rights and the
market price of the underlying common stock as of the date of the 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. See note 8 to the accompanying combined financial
statements of Liberty Media Group.
Other Income and Expense
Interest expense was $9 million and less than $1 million during the
three months ended March 31, 1998 and 1997, respectively. Increased interest
expense is directly related to increased outstanding debt at Encore Media
Group, TCI Music and CCC as well as an increase in interest-bearing amounts due
to TCI Group during the three months ended March 31, 1998 compared to the three
months ended March 31, 1997.
Liberty Media Group's share of losses of affiliates was $22 million
for the three months ended March 31, 1998 compared to earnings of $7 million
for the same period in 1997.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in Discovery decreased $9 million during the quarter ended March
31, 1998 compared to the quarter ended March 31, 1997. While Discovery's
revenue increased by 23% during the first quarter of 1998, its earnings before
interest, taxes, depreciation and amortization decreased by 11%, principally
because of costs associated with launching new digital services, continuing
investments in the retail business as well as new joint ventures such as YCTV
and the joint venture with the British Broadcasting Corporation. Interest
expense for Discovery was 195% higher in the first quarter of 1998 compared to
the same period in 1997 mainly due to increased debt caused by significant cash
payments made to distributors in support of the launch of "Animal Planet" and
its new digital services.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in QVC increased approximately $4 million during the three months
ended March 31, 1998 compared to the same period in 1997. QVC's revenue
increased by 14% during the quarter ended March 31, 1998, contributing to a 20%
increase in earnings before interest, taxes, depreciation and amortization over
the quarter ended March 31, 1997. In the aggregate, interest expense, taxes,
depreciation and amortization for QVC increased by 11% during 1998, resulting
in a 61% increase in net income for QVC for the three months ended March 31,
1998 compared to the three months ended March 31, 1997.
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The share of losses of Fox Sports was responsible for approximately
$36 million of the decrease in share of earnings of affiliates from 1997 to
1998. Prior to the first quarter of 1998, Liberty Media Group had no
obligation, nor intention, to fund Fox Sports. During the first quarter of
1998, Liberty Media Group made the determination to provide funding to Fox
Sports based on a specific transaction consummated by Fox Sports.
Consequently, Liberty Media Group's share of losses of Fox Sports for the
quarter ended March 31, 1998 includes previously unrecognized losses of Fox
Sports of approximately $36 million. Losses for Fox Sports were not recognized
in prior periods due to the fact that Liberty Media Group's investment in Fox
Sports had been reduced to zero.
Liberty Media Group's share of earnings of affiliates attributable to
its interest in BDTV increased approximately $8 million during the three months
ended March 31, 1998 compared to the three months ended March 31, 1997. Such
increase is primarily attributable to a $75 million pre-tax gain recognized by
USAI, a majority-owned subsidiary of BDTV, on the sale of one of its broadcast
stations during the three months ended March 31, 1998.
During 1997, Liberty Media Group granted Time Warner the Southern
Option and received 6.4 million shares of Time Warner Exchange Stock valued at
$306 million in consideration for the grant. Such amount had been reflected as
a deferred option premium in the accompanying combined financial statements of
Liberty Media Group. Pursuant to the Southern Option, Time Warner acquired the
Southern Business, effective January 1, 1998 for $213 million in cash. Liberty
Media Group recognized a $515 million pre-tax gain in connection with these
transactions in the first quarter of 1998. See note 5 to the accompanying
combined financial statements of Liberty Media Group.
Effective February 1, 1998, Turner-Vision, Inc. contributed the
assets, obligations and operations of its retail C-band Satellite business to
Superstar/Netlink in exchange for an approximate 20% interest in
Superstar/Netlink. As a result of this transaction, Liberty Media Group's
ownership interest in Superstar/Netlink decreased from 50% to approximately
40%. In connection with such dilution, Liberty Media Group recognized a $23
million pre-tax gain. See note 4 to the accompanying combined financial
statements of Liberty Media Group.
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<PAGE> 155
TCI VENTURES GROUP
The following table sets forth certain financial information for the
TCI Ventures Group and the businesses attributed to it during the three months
ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------------
1998 (5) 1997
------------------------- ------------------------
dollar amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
UVSG $ 140,317 67% $ 122,876 50%
ETC 21,766 10 23,560 9
NDTC (1) 21,067 10 24,013 10
TINTA (2) 12,544 6 65,611 27
WTCI 8,383 4 9,095 4
@Home 5,773 3 809 --
Corporate and other 1,148 -- 1,056 --
-------------- ------- -------------- -----
$ 210,998 100% $ 247,020 100%
============== ======= ============== =====
Operating, selling, general,
administrative:
UVSG $ 114,940 61% $ 100,902 51%
ETC 22,391 12 25,917 13
NDTC 16,861 9 12,396 6
TINTA (2) 9,817 5 40,513 21
WTCI 5,302 3 5,681 3
@Home 15,800 8 8,326 4
Corporate and other 4,115 2 3,994 2
-------------- ------- -------------- -----
$ 189,226 100% $ 197,729 100%
============== ======= ============== =====
Depreciation, amortization, stock
compensation and other non-cash
charges
UVSG $ 15,062 12 $ 8,736 18%
ETC 375 -- 1,838 4
NDTC 10,373 8 7,103 14
TINTA (2) 10,458 8 15,679 32
WTCI 3,960 3 2,124 4
@Home 13,469 11 1,574 3
Corporate and other (3) 74,645 58 12,352 25
-------------- ------- -------------- -----
$ 128,342 100% $ 49,406 100%
============== ======= ============== =====
Operating income (loss):
UVSG $ 10,315 (4) $ 13,238 (4)
ETC (1,000) (4,195)
NDTC (6,167) 4,514
TINTA (2) (7,731) 9,419
WTCI (879) 1,290
@Home (23,496) (9,091)
Corporate and other (77,612) (15,290)
-------------- --------------
$ (106,570) $ (115)
============== ==============
</TABLE>
- ----------------------------
(1) 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 three months ended
March 31, 1998 and 1997 revenue from services provided to TCI
and its consolidated subsidiaries accounted for 40% and 48%,
respectively, of NDTC's total revenue.
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(2) As described in note 3 to the accompanying combined financial
statements of TCI Ventures Group, effective October 1, 1997,
TINTA ceased to consolidate Cablevision and began to account
for Cablevision using the equity method of accounting. As a
result, effective October 1, 1997, TINTA's results of
operations no longer include Cablevision's results of
operations on a consolidated basis. The following table sets
forth summary information with respect to the operating results
of Cablevision that were included in TINTA's results of
operations for the three months ended March 31, 1997 (amounts
in thousands):
<TABLE>
<CAPTION>
<S> <C>
Revenue $ 56,250
Operating costs and expenses before
depreciation and amortization (33,046)
Depreciation and amortization (12,780)
-------------
Operating income $ 10,424
=============
</TABLE>
(3) Amount includes stock compensation expense of $74.1 million
and $8.3 million for the three months ended March 31, 1998 and
1997, respectively.
(4) Not meaningful.
(5) Restated - see note 16 to the accompanying combined financial
statements of TCI Ventures Group.
Revenue
Revenue decreased by $36.0 million or 15% during the three months
ended March 31, 1998, as compared to the corresponding prior year period.
Such decrease is largely attributable to TINTA's deconsolidation of Cablevision
which was partially offset by increased revenue of UVSG and @Home.
Revenue from UVSG increased $17.4 million or 14% during the three
months ended March 31, 1998, as compared to the corresponding prior year
period. Such increase is due primarily to Turner Vision's retail C-band
operations ($15.2 million) which were combined with Superstar/Nelink effective
February 1, 1998.
TINTA revenue decreased by $53.1 million or 81% during the three
months ended March 31, 1998, as compared to the corresponding prior year
period. Such decrease is primarily attributable to the deconsolidation of
Cablevision in 1997.
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<PAGE> 157
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges decreased by $8.5 million or 4%
during the three months ended March 31, 1998, as compared to the corresponding
prior year period. Such decrease is attributable to the effects of the
deconsolidation of Cablevision which was partially offset by increased costs
attributable to UVSG, @Home and NDTC.
Operating costs and expenses, excluding depreciation, amortization,
stock compensation and other non-cash charges from UVSG increased $14.0 million
or 14% during the three months ended March 31, 1998, as compared to the
corresponding prior year. Such increase is primarily attributable to Turner
Vision's retail C-band operations which were combined with Superstar/Netlink
effective February 1, 1998.
TINTA operating costs and expenses, excluding depreciation,
amortization, stock compensation and other non-cash charges decreased $30.7
million or 76% for the three months ended March 31, 1998, as compared to the
corresponding prior year period. Such decrease is primarily attributable to
the deconsolidation of Cablevision in 1997.
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 would approximate the
costs TCI Ventures Group would incur for comparable services on a stand alone
basis. During each of the three months ended March 31, 1998 and 1997, TCI
Ventures Group was allocated $2.2 million in corporate general and
administrative costs by TCI Group.
Stock compensation expense increased $73.8 million during the three
months ended March 31, 1998, as compared to the corresponding prior year
period. Such amounts represent changes in TCI Ventures Group's stock
compensation liability. TCI Ventures Group records stock compensation expense
relating to Awards granted by (i) TCI to certain TCI employees and/or directors
who are involved with the TCI Ventures Group and (ii) TINTA, UVSG, and @Home to
employees and/or directors of such entities. Stock compensation with respect
to Awards granted by TCI includes amounts related to TCI common stock and to
common stock of certain non-public subsidiaries of TCI and is allocated to TCI
Ventures Group based on the Awards held by TCI employees and/or directors who
are involved with TCI Ventures Group. Estimated compensation relating to stock
appreciation rights has been recorded through March 31, 1998 pursuant to APB
Opinion No. 25. Such estimate is subject to future adjustment based upon
vesting and market value, and ultimately, on the final determination of market
value when such rights are exercised. See note 13 to the accompanying combined
financial statements of TCI Ventures Group.
The $5.1 million or 12% increase in depreciation and amortization
expense during the three months ended March 31, 1998, as compared to the
corresponding prior year period, is primarily the result of increases in @Home's
and UVSG's depreciation and amortization, which effects were partially offset by
the deconsolidation of Cablevision.
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<PAGE> 158
Other Income and Expense
The TCI Ventures Group's share of losses from its investment in the PCS
Ventures was $155.2 million and $63.5 million during the three months ended
March 31, 1998 and 1997, respectively. The increase in the share of losses is
attributed primarily to increases in (i) selling, general and administrative
costs associated with Sprint Spectrum's efforts to increase its customer base,
(ii) depreciation expense resulting from capital expenditures made to expand its
PCS network, (iii) interest expense associated with higher amounts of
outstanding debt and (iv) Sprint Spectrum's share of losses in American PCS L.P.
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 continues to expand its PCS network and build its
customer base. Sprint PCS's operating profitability will depend upon many
factors, including, among others, its ability to (i) market its products and
services successfully, (ii) achieve its projected market penetration, (iii)
manage customer turnover rates effectively and (iv) 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.
The TCI Ventures Group's share of Telewest's net losses decreased
$11.5 million or 28% during the three months ended March 31, 1998, as compared
to the corresponding prior year period. Such decrease is primarily
attributable to the net effects of (i) changes in foreign currency transaction
losses, (ii) an increase in operating cash flow resulting from revenue growth
and (iii) an increase in interest expense. In connection with a previous
merger transaction, Telewest issued the Telewest Debentures. Changes in the
exchange rate used to translate the Telewest Debentures into U.K. pounds
sterling and the adjustment of a foreign currency option contract to market
value caused Telewest to experience unrealized foreign currency transaction
gains (losses) of $10.9 million and $(40.5 million) during the three months
ended March 31, 1998 and 1997, 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.
The share of losses from the TCI Ventures Group's investment in TCG
was $17.7 million for the three months ended March 31, 1998 which represents a
$3.9 million increase, as compared to the corresponding prior year period. The
increase in the share of losses is largely attributed to costs incurred by TCG
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. TCG 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. In
January 1998, TCG entered into certain agreements pursuant to which it agreed
to be acquired by AT&T. Upon consummation of such merger, TCI would receive in
exchange for all of its interest in TCG, approximately 46.95 million shares of
AT&T common stock, which shares would be attributed to the TCI Ventures Group.
The transaction is subject to a number of regulatory and other conditions,
accordingly, there can be no assurance that such transaction will be
consummated on the terms contemplated by the parties, or at all. In the event
the AT&T transaction is completed, the TCI Ventures Group would account for its
investment in AT&T using the cost method.
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<PAGE> 159
As described above, effective October 1, 1997, TINTA ceased to
consolidate Cablevision and began to account for Cablevision using the equity
method of accounting. The TCI Ventures Group's share of losses from
Cablevision was $3.2 million for the three months ended March 31, 1998.
The TCI Ventures Group's share of the losses of affiliates other than
the PCS Ventures, Telewest, TCG and Cablevision (the "Other Affiliates")
remained relatively constant during the three months ended March 31, 1998, as
compared to the corresponding prior year period. Increased losses of Jupiter
and MultiThematiques were partially offset by the decrease in share of losses
of ABN. As of December 31, 1997, TINTA surrendered all of its shares of ABN in
exchange for a $25 million unsecured note receivable. Accordingly, effective
December 31, 1997, TINTA no longer accounts for ABN under the equity method of
accounting. TCI Ventures Group expects that the Other Affiliates will continue
to incur losses as they continue to expand their operations and/or launch new
services. For additional information, see note 11 to the accompanying combined
financial statements of TCI Ventures Group.
Interest expense decreased $5.1 million or 36% during the three months
ended March 31, 1998, as compared to the corresponding prior year period,
primarily as a result of the deconsolidation of Cablevision and the assignment
of certain capital lease obligations to TCI Group.
During the three months ended March 31, 1998, TCI Ventures Group
recognized $37.8 million in gains from the disposition of assets. Such gains
are attributable to TCI Ventures Group's sale of its interest in (i) NHT
Partnership, (ii) Louisville Lightwave, (iii) New Jersey Fiber Technologies,
L.P. and (iv) TeleCable Nacional, CXA. In addition, UVSG recognized a gain of
$14.7 million from the dilution of its interest in Superstar/Netlink. For
additional information regarding these transactions, see note 6 to the
accompanying combined financial statements of TCI Ventures Group.
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 $29 million gain (before
deducting deferred income taxes of $11 million) 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. The TCI Ventures Group
accounts for its investment in Antec using the cost method.
The minority interests' share of net losses was $8.3 million and
$616,000 during the three months ended March 31, 1998 and 1997, respectively.
Such increase is primarily attributable to increases in @Home's net losses.
Net Losses
The TCI Ventures Group reported net losses of $195.2 million and $77.3
million during the three months ended March 31, 1998 and 1997, respectively.
Included in such amounts was the recognition of certain non-operating gains
aggregating $52.5 million and $28.9 million during the three months ended March
31, 1998 and 1997, respectively. With the exception of UVSG, 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 customer bases while maintaining pricing structures and
controlling costs. There can be no assurance that any such improvements will
occur.
I-157
<PAGE> 160
MATERIAL CHANGES IN FINANCIAL CONDITION
TCI GROUP
On March 4, 1998, TCI Group contributed to CSC certain of its cable
television systems serving approximately 830,000 customers in exchange for
approximately 24.5 million newly issued CSC Class A common shares (as adjusted
for a stock dividend). Such shares represent an approximate 32.7% equity
interest in CSC's total outstanding shares and an approximate 9% voting interest
in CSC in all matters except for the election of directors, in which case TCI
Group has an approximate 47% voting interest in the election of one-fourth of
CSC's directors. CSC also assumed and repaid approximately $574 million of debt
owed by TCI Group to external parties and $95 million of debt owed to TCI Group.
As a result of this transaction, TCI Group recognized a $511 gain in the
accompanying combined statement of operations for the three months ended March
31, 1998. Such gain represents the excess of the $1,161 million fair value of
the CSC Class A common shares received over the historical cost of the net
assets transferred by TCI Group to CSC. TCI Group has also entered into letters
of intent with CSC which provide for TCI Group to acquire a cable system in
Michigan and an additional 3% of CSC's Class A common shares and for CSC to (i)
acquire cable systems serving approximately 250,000 customers in Connecticut and
(ii) assume $110 million of TCI Group's debt. The ability of TCI Group to sell
or increase its investment in CSC is subject to certain restrictions and
limitations set forth in a stockholders agreement with CSC.
During the first quarter of 1998, TCI also completed the Q1 Joint
Ventures, whereby TCI Group contributed cable television systems serving in the
aggregate approximately 235,000 customers to two separate joint ventures in
exchange for non-controlling ownership interests in each of the Q1 Joint
Ventures, and the assumption and repayment by the Q1 Joint Ventures of
intercompany debt owed to TCI Group aggregating $343 million. In connection
with the Q1 Joint Ventures, TCI Group has agreed to take certain steps to
support compliance by the Q1 Joint Ventures with their payment obligations under
certain debt instruments, up to an aggregate total contingent commitment of $294
million. In light of such agreement, the $97 million aggregate excess of the TCI
Group debt assumed by the Q1 Joint Ventures over the historical cost of the
remaining net assets contributed to the Q1 Joint Ventures has been reflected as
a direct decrease to combined deficit (net of related deferred income taxes of
$39 million).
On April 30, 1998, TCI Group contributed certain cable television
systems serving in the aggregate approximately 435,000 customers in Kentucky to
a joint venture in exchange for a 49% limited partnership interest in such joint
venture, and the assumption and repayment by such joint venture of intercompany
debt owed to TCI Group and debt owed by TCI Group to external parties
aggregating $812 million. In connection with such transaction, TCI Group has
agreed to take certain steps to support compliance by the joint venture with its
payment obligations under certain debt instruments, up to an aggregate total
contingent commitment of $490 million.
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<PAGE> 161
Including the Q1 1998 Contribution Transactions and the
above-described April 30, 1998 transaction, TCI Group, as of April 30, 1998,
has, since January 1, 1997, contributed, or signed agreements or letters of
intent to contribute within the next twelve months, certain cable television
systems (the "Contributed Cable Systems") serving approximately 3.9 million
customers to joint ventures in which TCI Group will retain non-controlling
ownership interests (the "Contribution Transactions"). Following the
completion of the Contribution Transactions, TCI Group will no longer
consolidate the Contributed Cable Systems. Accordingly it is anticipated that
the completion of the Contribution Transactions, as currently contemplated,
will result in an aggregate estimated reduction (based on actual amounts with
respect to the Q1 1998 Contribution Transactions and currently contemplated
amounts with respect to the pending Contribution Transactions) to TCI Group's
debt of $4.8 billion and aggregate estimated reductions (based on 1997 amounts)
to TCI Group's annual revenue and annual operating income before depreciation,
amortization and stock compensation of $1.8 billion and $815 million,
respectively. No assurance can be given that any of the pending Contribution
Transactions will be consummated.
During the three months ended March 31, 1998, pursuant to a stock
repurchase program approved by the Board, TCI Group repurchased 66,041 shares
of TCI Group Series A Stock at an aggregate cost of $2 million.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, TCI Group paid $134
million during the first quarter of 1998 for its allocated share of the Call
Payments. For additional information see note 12 to the accompanying combined
financial statements of TCI Group.
During the fourth quarter of 1997, TCI Group entered into an Equity
Swap Facility. Pursuant to the Equity Swap Facility, TCI Group has the right
to direct the Counterparty to use the Equity Swap Facility to purchase Equity
Swap Shares of TCI Group Series A Stock and TCI Ventures Group Series A Stock
with an aggregate purchase price of up to $300 million. TCI Group has the
right, but not the obligation, to purchase Equity Swap Shares through the
September 30, 2000 termination date of the Equity Swap Facility. During such
period, TCI Group is to settle periodically any increase or decrease in the
market value of the Equity Swap Shares. If the market value of the Equity Swap
Shares exceeds the Counterparty's cost, Equity Swap Shares with a fair value
equal to the difference between the market value and cost will be segregated
from the other Equity Swap Shares. If the market value of the Equity Swap
Shares is less than the Counterparty's cost, TCI Group, at its option, will
settle such difference with shares of TCI Group Series A Stock or TCI Ventures
Group Series A Stock or, subject to certain conditions, with cash or letters of
credit. In addition, TCI Group is required to periodically pay the
Counterparty a fee equal to a LIBOR-based rate on the Counterparty's cost to
acquire the Equity Swap Shares. Due to TCI Group's ability to issue shares to
settle periodic price fluctuations and fees under the Equity Swap Facility, TCI
Group records all amounts received or paid under this arrangement as increases
or decreases, respectively, to equity. As of March 31, 1998, the Equity Swap
Facility has acquired 2,089,480 shares of TCI Group Series A Stock and 513,500
shares of TCI Ventures Group Series A Stock at an aggregate cost that was
approximately $10 million less than the fair value of such Equity Swap Shares
at March 31, 1998.
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<PAGE> 162
Through June 30, 1997, TCI Group had a 50.1% partnership interest in
QE+, a limited partnership interest which distributed STARZ!. Entities
attributed to Liberty Media Group held the remaining 49.9% partnership
interest.
Subsequent to June 30, 1997, TCI Group and Liberty Media Group entered
into a series of transactions pursuant to which the businesses of Encore and
STARZ! were contributed to Encore Media Group. Upon the July 1997 formation of
Encore Media Group, the operations of QE+ were no longer included in the
combined financial results of TCI Group. In connection with the foregoing
transactions, Liberty Media Group issued a note payable to TCI Group (which
note was paid in full during the first quarter of 1998) and TCI Group entered
into the EMG Affiliation Agreement pursuant to which TCI Group pays monthly
fixed amounts in exchange for unlimited access to all of the existing Encore
and STARZ! services.
TCI Group's fixed annual commitments pursuant to the EMG Affiliation
Agreement increase annually from $220 million in 1998 to $315 million in 2003,
and will increase with inflation through 2022.
On July 11, 1997, TCI Music merged with DMX. Simultaneously with the
DMX Merger, substantially all of TCI's controlling ownership interest in TCI
Music was transferred from TCI Group to Liberty Media Group in exchange for an
$80 million promissory 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 Group Stock for the benefit of
entities included within TCI Group. Additionally, Liberty Media Group may
elect to pay $50 million of the Music Note by delivery of a Stock Appreciation
Rights Agreement that will give TCI Group the right to receive 20% of the
appreciation in value of Liberty Media Group's investment in TCI Music, to be
determined at July 11, 2002.
A subsidiary of TCI that is attributed to TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group
paid $7 million to TCI Ventures Group in exchange for TCI Ventures Group's
assignment of its ownership interest in such subsidiary to TCI Group. Due to
the related party nature of the transaction, the $50 million total of the cash
payment and the historical cost of the net liabilities assumed by TCI Group
(including capital lease obligations aggregating $176 million) has been
reflected as an increase to TCI Group's combined deficit.
At March 31, 1998, 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 TCI Group's 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 of TCI Group for additional information regarding TCI Group's debt.
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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) ($656 million and $664 million during the three months ended
March 31, 1998 and 1997, respectively) to interest expense ($273 million during
each of the three month periods ended March 31, 1998 and 1997), is determined
by reference to the combined statements of operations. TCI Group's interest
coverage ratio was 240% and 243% during the three months ended March 31, 1998
and 1997, 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. However, TCI Group's
current intent is to continue 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. In the event TCI Group is unable
to achieve such objective, 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, attributable
to TCI Group, 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.
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 ($157 million and $131 million during
the three months ended March 31, 1998 and 1997, 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.
The amount of capital expended by TCI Group for property and equipment
was $210 million, $48 million and $538 million during the three months ended
March 31, 1998 and 1997, and the year ended December 31, 1997, respectively.
In light of TCI Group's plans to upgrade the capacity of its cable distribution
systems, and its plans to increase the number of customers who subscribe to
digital video services, TCI Group anticipates that its annual capital
expenditures during the next several years will significantly exceed the amount
expended during 1997. In this regard, TCI Group estimates that it will expend
approximately $1.7 billion to $1.9 billion over the next three years to expand
the capacity of its cable distribution systems. TCI Group expects that the
actual amount of capital that will be required in connection with its plans to
increase the number of digital video service customers will be significant.
However, TCI Group cannot reasonably estimate such actual capital requirement
since such actual capital requirement is dependent upon the extent of any
customer increases and the average installed per-unit cost of digital set-top
devices. As described below, TCI is obligated to purchase a significant number
of digital set-top devices over the next three years.
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TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $178
million at March 31, 1998. 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. The
Company also has guaranteed the performance of certain affiliates and other
parties with respect to such parties' contractual and other obligations.
Although there can be no assurance, management of 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 provided a revolving loan 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 Ventures Intergroup
Credit Facility is payable by TCI Ventures Group to TCI Group on a quarterly
basis. Such commitment fee was not significant during the three months ended
March 31, 1998. The maximum amount of borrowings permitted under the Ventures
Intergroup 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 Ventures Intergroup Credit Facility at March 31, 1998.
TCI Group is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, TCI Group is committed to
carry such suppliers programming on its cable systems. Several of these
agreements provide for penalties and charges in the event the programming is
not carried or not delivered to a contractually specific number of customers.
During the third quarter of 1997, TCI Group committed to purchase
billing services pursuant to three successive five year agreements. Pursuant
to such arrangement, TCI Group is obligated at March 31, 1998 to make minimum
payments aggregating approximately $1.6 billion through 2012. Such minimum
payments are subject to inflation and other adjustments pursuant to the terms
of the underlying agreements.
Pursuant to certain agreements between TCI and TCI Music, TCI Group is
obligated at March 31, 1998 to make minimum revenue payments through 2017 and
minimum license fee payments through 2007 aggregating approximately $425
million to TCI Music. Such minimum payments are subject to inflation and other
adjustments pursuant to the terms of the underlying agreements.
TCI Group is a direct obligor or guarantor of the payment of certain
amounts that may be due pursuant to motion picture output, distribution and
license agreements. As of March 31, 1998, the amount of such obligations or
guarantees was approximately $295 million. The future obligations of TCI Group
with respect to these agreements is not currently determinable because such
amount is dependent upon the number of qualifying films released theatrically
by certain motion picture studios as well as the domestic theatrical exhibition
receipts upon the release of such qualifying films.
TCI Group has significant contingent obligations with respect to
certain of its affiliates. See note 6 to accompanying combined financial
statements of TCI Group.
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Effective as of December 16, 1997, NDTC, on behalf of TCI Group and
other cable operators that may be designated from time to time by NDTC, entered
into the Digital Terminal Purchase Agreement with GI to purchase advanced
digital set-top devices. The hardware and software incorporated into these
devices will be designed and manufactured to be compatible and interoperable
with the OpenCable(TM) architecture specifications adopted by CableLabs, the
cable television industry's research and development consortium, in November
1997. NDTC has agreed that Approved Purchasers will purchase, in the
aggregate, a minimum of 6.5 million set-top devices during calendar years 1998,
1999 and 2000 at an average price of $318 per basic set-top device (including a
required royalty payment). GI agreed to provide NDTC and its Approved
Purchasers the most favorable prices, terms and conditions made available by GI
to any customer purchasing advanced digital set-top devices. In connection
with NDTC's purchase commitment, GI agreed to grant warrants to purchase its
common stock proportional to the number of devices ordered by each
organization, which as of the effective date of the Digital Terminal Purchase
Agreement, would have represented at least a 10% equity interest in GI (on a
fully diluted basis). It is anticipated that the value associated with such
equity interest would be attributed to TCI Group upon purchase and deployment
of the digital set-top devices.
TCI Group's various partnerships and other affiliates accounted for by
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group), through
net cash provided by their own operating activities and in certain
circumstances through required capital contributions from their partners.
In order to achieve the desired balance between variable and fixed
rate indebtedness, TCI Group has entered into Interest Rate Swaps pursuant to
which it (i) pays fixed interest rates of 6.2% and receives variable interest
rates on a notional amount of $10 million at March 31, 1998 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 March 31, 1998. During the three
months ended March 31, 1998 and 1997, TCI Group's net receipts (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 $3 million and $1 million, respectively.
The Fixed Rate Agreement expires in August 1998. At March 31, 1998,
TCI Group would be required to pay less than $1 million to terminate the Fixed
Rate Agreement.
In addition to the Fixed Rate and Variable Rate Agreements, TCI Group
entered into Interest Rate Swaps pursuant to which it pays a variable rate
based on LIBOR (6.1% at March 31, 1998) and receives a variable rate based on
CMT (6.0% at March 31, 1998) on a notional amount of $400 million through
September 2000; and pays a variable rate based on LIBOR (6.0% at March 31,
1998) and receives a variable rate based on CMT (6.1% at March 31, 1998) on
notional amounts of $95 million through February 2000. During the three months
ended March 31, 1998, TCI Group's net payments pursuant to such agreements were
less than $1 million. At March 31, 1998, TCI Group would be required to pay an
estimated $3 million to terminate such Interest Rate Swaps.
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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. Further, TCI Group does not anticipate
material near-term losses in future earnings, fair values or cash flows
resulting from derivative financial instruments as of March 31, 1998. See note
10 to the accompanying combined financial statements for additional information
regarding Interest Rate Swaps.
At March 31, 1998, after considering the net effect of the
aforementioned Interest Rate Swaps, TCI Group had $6,456 million (or 48%) of
fixed rate debt and $6,970 million (or 52%) of variable-rate debt.
Accordingly, in an environment of rising interest rates, TCI Group expects that
it would experience an increase in interest expense.
LIBERTY MEDIA GROUP
Liberty Media Group's source of funds include its available cash
balances, net cash provided by operating activities, cash distributions from
affiliates, dividend and interest receipts, proceeds from asset sales,
availability under certain credit facilities, and loans 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.
On January 12, 1998, TCI acquired from a minority stockholder of UVSG
12.4 million shares of UVSG Class A common stock in exchange for 12.7 million
shares of TCI Ventures Group Class A Stock and 7.3 million shares of Liberty
Group Series A Stock. The aggregate value assigned to the shares issued by TCI
was based upon the market value of such shares at the time the transaction was
announced. As a result of such transaction TCI increased its ownership in the
equity of UVSG to approximately 73%, of which 56% is attributed to the TCI
Ventures Group and 17% is attributed to Liberty Media Group. In addition,
TCI's collective voting power increased to 93%.
In February 1998, TCI, Liberty Media Group and UVSG announced their
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
Superstar/Netlink and its 100% interest in certain businesses conducted under
the name Netlink International in exchange for 6,375,000 shares of UVSG's common
stock. In April 1998, UVSG, Liberty Media Group and Turner Vision entered into
a memorandum of understanding with PRIMESTAR, Inc. ("PRIMESTAR") for the sale of
Superstar/Netlink to PRIMESTAR for shares of a new series of convertible
preferred stock of PRIMESTAR and the assumption of liabilities (the "Primestar
Transaction"). Liberty Media Group and UVSG have agreed in principal to
restructure their transaction to provide for UVSG to acquire any shares of
PRIMESTAR preferred stock received by Liberty Media Group in the Primestar
Transaction and Liberty Media Group's Netlink International businesses for
6,375,000 shares of Class B Common Stock of UVSG. The Netlink International
businesses are being operated for the benefit of UVSG from April 1, 1998 to the
closing of the sale thereof. Consummation of the transaction between Liberty
Media Group and UVSG is subject to the signing of a definitive agreement
following receipt by UVSG of a satisfactory fairness opinion, UVSG stockholder
approval and certain regulatory approvals. Consummation of the Primestar
Transaction is subject to a number of conditions, including negotiation of a
definitive agreement and receipt of applicable regulatory approvals. No
assurance can be given that the foregoing transactions will be consummated.
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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. In addition, subsequent to the exercise of
the Southern Option, cash provided by operating activities of Southern was no
longer available as a source of cash for Liberty Media Group. Additionally,
subsequent to the sale of Netlink to UVSG, cash provided by operating
activities of Netlink will no longer be available as a source of cash for
Liberty Media Group. Cash provided by operating activities of Southern and
Netlink has been a significant source of cash for Liberty Media Group.
Although no assurance can be given, cash generated by Liberty Media Group's
remaining operating activities, distributions from affiliates, dividend and
interest payments, availability under its credit facilities and available cash
balances should provide adequate cash to meet its obligations. For additional
information concerning Liberty Media Group's cash flows see the combined
statements of cash flows included in the accompanying combined financial
statements of Liberty Media Group.
As of March 31, 1998, Liberty Media Group holds approximately 57
million shares of the TW Exchange Stock. During the three months ended March
31, 1998, the unrealized appreciation, net of taxes, of the fair value of such
shares of TW Exchange Stock was $339 million based upon the market value of the
common stock into which the TW Exchange Stock is convertible. Holders of TW
Exchange Stock are entitled to receive dividends ratably with Time Warner
common stock. Liberty Media Group received approximately $5 million in cash
dividends for each of the quarters ended March 31, 1998 and 1997. 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.
Liberty Media Group received approximately $8 million in cash
dividends on a 30 year non-convertible 9% preferred stock, with a stated value
of $345 million, during the three months ended March 31, 1998.
Liberty Media Group has a revolving line of credit which provides for
borrowings of up to $500 million. Borrowings of $185 million were outstanding
at March 31, 1998. As security for this indebtedness, Liberty Media Group
pledged a portion of its TW Exchange Stock. Encore Media Group has a $625
million senior, secured facility. The credit agreement for the EMG 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. Borrowings of $292 million were outstanding on the EMG Senior Facility
at March 31, 1998. TCI Music has a revolving loan agreement which provides for
borrowings of up to $100 million. Borrowings of $72 million were outstanding
at March 31, 1998.
Various partnerships and other affiliates of Liberty Media Group
accounted for under the equity method finance a substantial portion of their
acquisitions and capital expenditures through borrowings under their own credit
facilities and net cash provided by their operating activities.
The Music Note may be reduced by the payment of cash or the issuance
by TCI of shares of Liberty Media Group Stock for the benefit of entities
included within the TCI Group. Additionally, Liberty Media Group may elect to
pay $50 million of the Music Note by delivery of a Stock Appreciation Rights
Agreement that will give TCI Group the right to receive 20% of the appreciation
in value of Liberty Media Group's investment in TCI Music, to be determined at
July 11, 2002. Including rights held by subsidiaries of TCI that are not
members of the Liberty Media Group, the obligation under the Rights Agreement
could be as high as $85 million.
As of March 31, 1998, Liberty Media Group was not exposed to material
near-term losses in future earnings, fair values, or cash flows resulting from
derivative financial instruments.
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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 March 31, 1998, Liberty Media
Group's future minimum obligation related to certain film licensing agreements
was $678 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.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
(before giving effect to stock dividends) that were subject to the Malone Call
Agreement and the Magness Call Agreement. Accordingly, Liberty Media Group
paid $64 million during the first quarter of 1998 for its allocated share of
the Call Payments. See note 8 to the accompanying combined financial
statements of Liberty Media Group.
In February 1998, at the closing of the Universal Transaction, Liberty
Media Group was issued approximately 1.2 million shares of USAI's Class B
Common Stock, representing all of the remaining shares of USAI's Class B Common
Stock issuable pursuant to Liberty Media Group's Contingent Right. In
addition, Liberty Media Group purchased 10 LLC Shares at the closing of the
Universal Transaction for an aggregate purchase price of $200. Liberty Media
Group has also agreed to contribute $300 million in cash to USANI LLC by June
30, 1998 in exchange for an aggregate of 15 million LLC Shares and/or shares of
USAI's Common Stock. Liberty Media Group's cash purchase price will increase
at an annual interest rate of 7.5% beginning from the date of the closing of
the Universal Transaction through the date of Liberty Media Group's purchase of
such securities (the "Liberty Closing"). Pursuant to the LLC Exchange
Agreement, each LLC Share issued or to be issued to Liberty Media Group is
exchangeable for one share of USAI's Common Stock.
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In connection with the Universal Transaction, each of Universal and
Liberty Media Group has been granted a preemptive right with respect to future
issuances of USAI's capital stock, subject to certain limitations, to maintain
their respective percentage ownership interests in USAI that they had
immediately prior to such issuances. In addition, with respect to issuances of
USAI's capital stock in certain specified circumstances, Universal will be
obligated to maintain the percentage ownership interest in USAI that it had
immediately prior to such issuances. During the first quarter of 1998, Liberty
Media Group exercised its rights to purchase approximately 4.7 million
additional LLC shares or USAI shares of common stock pursuant to a preemptive
right of $20 per share in cash, subject to receipt of regulatory approvals.
This transaction is expected to close during the second quarter of 1998.
USAI, Universal and Liberty Media Group have agreed that if the parties
agree prior to June 30, 1998 (the date of mandatory cash contributions) on the
identity of assets owned by Liberty Media Group that are to be contributed to
the LLC and the form and terms of such contributions, Liberty Media Group will
contribute those assets in exchange for LLC Shares valued at $20 per share. If
Liberty Media Group contributes such additional assets, Liberty Media Group has
the right to elect to reduce the number of LLC Shares it is obligated to
purchase for cash by an amount equal to 45% of the value of the assets
contributed by Liberty Media Group. If Liberty Media Group exercises the option
to contribute assets and thereby reduces its cash contribution amount, Universal
will be required to purchase a number of additional LLC shares (valued at $20
per share) equal to the value of Liberty Media Group's asset contribution, less
the amount by which Liberty Media Group's asset contribution is applied towards
reducing Liberty Media Group's cash contribution. In addition, Universal may
purchase an additional number of LLC shares (valued at $20 per share), equal to
the value of Liberty Media Group's asset contribution which is not applied
towards reducing Liberty Media Group's cash contribution. See note 4 to the
accompanying combined financial statements of Liberty Media Group.
TCI VENTURES GROUP
The following table sets forth total assets and debt and capital lease
obligations for the TCI Ventures Group and each of the businesses attributed to
it:
<TABLE>
<CAPTION>
March 31,
1998 (1)
------------------
amounts in thousands
<S> <C>
Total assets
TINTA $ 1,381,743
TCI Telephony 754,757
UVSG 656,425
NDTC 351,172
@Home 389,855
ETC 86,836
WTCI 81,338
Other 121,912
-------------------
$ 3,824,038
===================
Debt and capital lease obligations (2)
TINTA $ 390,037
NDTC 154,427
UVSG 25,373
@Home 25,239
Other 70,000
-------------------
$ 665,076
===================
</TABLE>
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--------------------
(1) Restated - see note 16 to the accompanying combined financial
statements of TCI Ventures Group.
(2) For additional information concerning the terms of TCI
Ventures Group's debt, see note 12 to the accompanying
combined financial statements of the TCI Ventures Group.
The TCI Ventures Group's combined operating activities provided (used)
cash of $(34.6 million) and $29.3 million during the three months ended March
31, 1998 and 1997, respectively. As discussed above, effective October 1,
1997, Cablevision's cash flows are no longer included in the TCI Ventures
Group's combined statements of cash flows. Cablevision's operating activities
provided cash of $5.2 million during the three months ended March 31, 1997. At
March 31, 1998, @Home and UVSG held cash and cash equivalents of $21.0 million
and $58.5 million, respectively. The cash balances of such entities are
generally intended to be applied towards the respective liquidity requirements
of such entities. It is not presently anticipated that any significant portion
of such cash balances will be distributed or otherwise made available to the
TCI Ventures Group.
During the three months ended March 31, 1998 and 1997, cash used by
TCI Ventures Group's investing activities aggregated $436,000 and $50.4
million, respectively. The 1998 amount includes cash proceeds of $78.1 million
received upon the disposition of assets. Additionally, the 1998 and 1997
amounts include $55.2 million and $44.4 million, respectively, that were used
by the TCI Ventures Group to fund investments in, and loans to, affiliates.
For additional information concerning the TCI Ventures Group's cash flows, see
the combined statements of cash flows included in the accompanying combined
financial statements of TCI Ventures Group.
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. 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. 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 of the TCI Ventures
Group's entities and/or affiliates 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.
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The ability of a cash flow generating business 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 of dividends, loans or other
payments from their respective subsidiaries and affiliates, or repayment of
loans and advances from such holding companies. 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, among
other things, to statutory, regulatory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and affiliates, and are
subject to various business considerations.
From inception through March 1998, the Sprint PCS partners have
contributed approximately $4.2 billion to Sprint PCS (of which TCI Telephony
contributed an aggregate of approximately $1.3 billion). The remaining capital
that Sprint PCS will require to fund the operation of the PCS systems and the
commitments made to its affiliates will be substantial. The partners had
agreed in forming Sprint PCS 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 $150 million of such amount (of which TCI Telephony's share is
approximately $45 million) 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 Sprint PCS will require
additional equity thereafter.
Sprint PCS's business plan will require additional capital financing
prior to the end of 1998. Sources of funding for Sprint PCS's capital
requirements may include vendor financing, public offerings or private
placements of equity and/or debt securities, commercial bank loans and/or
capital contributions from the Sprint PCS Partners. However, there can be no
assurance that any additional financing can be obtained on a timely basis, on
terms acceptable to Sprint PCS or the Sprint PCS Partners and within the
limitations contained in the agreements governing Sprint PCS's existing debt.
Additionally, the proposed budget for 1998 has not yet been approved
by the Sprint PCS partnership board, although the board has authorized
management to operate Sprint PCS in accordance with such budget. The Sprint
PCS partners may mutually agree to make additional capital contributions.
However, the Sprint PCS partners have no such obligation in the absence of an
approved budget, and there can be no assurance the Sprint PCS partners will
reach such an agreement or approve the 1998 proposed budget. In addition, the
failure by the Sprint PCS partners to approve a business plan may impair the
ability of Sprint PCS to obtain required financing. Failure to obtain any such
additional financing or capital contributions from the Sprint PCS partners
could result in the delay or abandonment of Sprint PCS's development and
expansion plans and expenditures, the failure to meet regulatory requirements
or other potential adverse consequences.
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Furthermore, the fact that the proposed budget for Sprint PCS for
fiscal 1998 has not yet been approved by the Sprint PCS partnership board has
resulted in the occurrence of a "Deadlock Event" under the Sprint PCS
partnership agreement as of January 1, 1998. Under the Sprint PCS partnership
agreement, if one of the Sprint PCS partners refers the budget issue to the
chief executive officers of the corporate parents of the Sprint PCS partners
for resolution pursuant to specified procedures and the issue remains
unresolved, buy/sell provisions would be triggered, which may result in the
purchase by one or more of the Sprint PCS partners of the interests of the
other Sprint PCS partners, or, in certain circumstances, liquidation of Sprint
PCS. Discussions among the Sprint PCS partners about restructuring their
interests in Sprint PCS in lieu of triggering such buy/sell procedures are
ongoing. However, there is no certainty the discussions will result in a
change to the partnership structure or will avert the triggering of the
resolution and buy/sell procedures referred to above or a liquidation of Sprint
PCS.
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. At
March 31, 1998, TCI Ventures Group had the Ventures Intergroup Credit Facility
with TCI Group which has a five-year term commencing on September 10, 1997 and
which 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 Ventures
Intergroup 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
Ventures Intergroup 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 subsequent to the September 10, 1997 consummation of the Exchange Offers is
less than $300 million. No borrowings were outstanding pursuant to the Ventures
Intergroup Credit Facility at March 31, 1998. Additionally, in March 1998, TCI
Ventures Group entered into the Ventures Group Bank Facility with a term of one
year which provides for aggregate borrowings of up to $400 million. At March
31, 1998, borrowings of $70.0 million were outstanding under the Ventures Group
Bank Facility. If the available borrowings under the Ventures Group Bank
Facility and the Ventures Intergroup 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. Additional capital could be raised 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. If TCI Ventures Group is unable to obtain sufficient financing from
outside sources, the TCI Ventures Group may 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 a particular operating company or affiliate and to the TCI
Ventures Group.
I-170
<PAGE> 173
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
may require substantial additional funds. Although TINTA has, at March 31,
1998, (i) $63 million due from TCI Ventures Group pursuant to an unsecured
promissory note, (ii) a $200 million credit facility with the TCI Ventures
Group and (iii) the ability to access any excess cash and borrowing
availability from the Puerto Rico Subsidiary, TINTA's ability to otherwise
obtain debt 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.
On April 15, 1998, it was announced that Telewest and General Cable
had agreed to the terms of a proposed merger in which holders of General Cable
will be offered 1.243 new Telewest shares and L.0.65 ($1.09) in cash for each
share of General Cable. In addition, holders of General Cable ADSs (each
representing five General Cable shares) will be offered 6.215 new Telewest
shares and L.3.25 ($5.43) in cash for each share of General Cable ADSs. Based
upon Telewest's closing share price of L.0.89 ($1.49) on April 14, 1998, the
Merger Offer is valued at approximately L.649 million ($1.1 billion).
The cash portion of the Merger Offer will be financed through an offer
to qualifying Telewest shareholders for the purchase of 261 million new
Telewest shares at a price of L.0.925 ($1.55) per share. U S WEST, TINTA and
Cox have agreed to subscribe for their full allocation of new Telewest shares
(approximately 69 million shares in the case of TINTA) and to subscribe on a
pro rata basis for any new Telewest shares not subscribed for by other Telewest
shareholders. Together, U S WEST, TINTA and Cox held 67.9% of the issued and
outstanding Telewest ordinary shares at March 31, 1998. In addition, it is
anticipated that U S WEST, TINTA, Cox and SBC will convert their entire
respective holdings of Telewest convertible preference shares into new Telewest
shares. Following the issuance of new Telewest shares with respect to the
above transactions, and assuming the exercise of all options under General
Cable's share option schemes, it is anticipated that existing Telewest
shareholders would hold 79% and existing General Cable shareholders would hold
21% of the then issued ordinary share capital of the combined group.
Consummation of the merger is subject to (i) approval by the boards of
directors of Telewest and General Cable, (ii) regulatory approval and (iii)
other conditions. There can be no assurance that such merger will be
consummated or consummated on the terms contemplated by the parties.
I-171
<PAGE> 174
@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
March 31, 1998 there were minimal subscribers to its @Home services. @Home
believes that the net cash proceeds of approximately $100 million 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.
@Home has entered into exclusive distribution agreements with certain
cable operators. In connection with the distribution agreements, @Home has
issued warrants to such cable operators to purchase 17,946,956 shares of @Home's
Series A common stock. Of these warrants, warrants to purchase 10,581,298
shares were exercisable as of March 31, 1998. @Home may issue additional stock,
or warrants in connection with its efforts to expand its distribution of the
@Home service to other cable operators. The exercise of warrants or stock
issued by @Home will reduce TCI Ventures Group's equity interest and voting
power in @Home.
I-172
<PAGE> 175
During the period in which each of TCI, Cox, Comcast Corporation
("Comcast") and Cablevision Systems Corporation ("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, 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. Since June 1996,
TCI has sold or transferred certain cable systems that reduce TCI's number of
base homes passed. In addition, TCI has announced the proposed sale or
transfer of additional cable systems that would further reduce TCI's number of
base homes passed. 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 certain other stockholders of @Home, 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, Comcast
and CSC in the event TCI does not attain certain customer penetration levels
for the @Home service relative to the customer 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.
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. 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. As of March 31, 1998, TINTA was not exposed to material near-term
losses in future earnings, fair values or cash flows resulting from derivative
financial instruments.
In April 1997, (i) Flextech and BBC Worldwide formed the BBC Joint
Ventures. Flextech has undertaken to finance the working capital requirements
of the Principal Joint Venture and is obligated to provide the Principal Joint
Venture with a primary credit facility of L.88 million ($147 million) and,
subject to certain restrictions, a standby credit facility of L.30 million ($50
million). Flextech has also agreed to make available to the Second Joint
Venture, if required, funding of up to L.10 million ($17 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.
I-173
<PAGE> 176
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 it 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, it 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.
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 Brazil, Mexico, and various Central and South American countries.
Through March 31, 1998, TINTA had contributed $26.5 million to the DTH
Ventures. It is anticipated that TINTA could be required to make additional
cash contributions in connection with the DTH Ventures. In addition, as of
March 31, 1998, TINTA had guaranteed $16.8 million of the DTH Ventures'
financial obligations.
As of March 31, 1998, TINTA had made cash contributions to Torneos on
the behalf of Liberty/TINTA of $48 million. It is anticipated that Liberty
Media Group's portion of such cash contributions to Torneos will be repaid to
TINTA in cash or other economic consideration to be determined at some future
date.
TINTA has guaranteed notes payable and other obligations of certain of
the TCI Ventures Group's affiliates. At March 31, 1998, the U.S. dollar
equivalent of the amounts borrowed pursuant to the Guaranteed Obligations was
approximately $98 million. Certain of the Guaranteed Obligations allow for
additional borrowings in future periods. TINTA also has guaranteed the
obligation of The Premium Movie Partnership to pay fees for the license to
exhibit certain films through the year 2000. If TINTA were to fail to fulfill
its obligations under the guarantees, the beneficiaries have the right to
demand an aggregate payment of approximately $42 million at March 31, 1998.
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.
In connection with the Magness Settlement, the Call Payments were
allocated to each of the Groups based upon the number of shares of each Group
that were subject to the Malone Call Agreement and the Magness Call Agreement.
Accordingly, TCI Ventures Group paid $76 million during the first quarter of
1998 for its allocated share of the Call Payments. For additional information
see note 13 to the accompanying combined financial statements of TCI Ventures
Group.
I-174
<PAGE> 177
During the fourth quarter of 1997, TCI entered into the Equity Swap
Facility. Pursuant to the Equity Swap Facility, TCI has the right to direct
the Counterparty to use the Equity Swap Facility to purchase Equity Swap Shares
of TCI Group Series A Stock and TCI Ventures Group Series A Stock with an
aggregate purchase price of up to $300 million. TCI has the right, but not the
obligation, to purchase Equity Swap Shares through the September 30, 2000
termination date of the Equity Swap Facility. During such period, TCI is to
settle periodically any increase or decrease in the market value of the Equity
Swap Shares. If the market value of the Equity Swap Shares exceeds the
Counterparty's cost, Equity Swap Shares with a fair value equal to the
difference between the market value and cost will be segregated from the other
Equity Swap Shares. If the market or value of Equity Swap Shares is less than
the Counterparty's cost, TCI, at its option, will settle such difference with
shares of TCI Group Series A Stock or TCI Ventures Group Series A Stock or,
subject to certain conditions, with cash or letters of credit. In addition,
TCI is required to periodically pay the Counterparty a fee equal to a
LIBOR-based rate on the Counterparty's cost to acquire the Equity Swap Shares.
Due to TCI's ability to issue shares to settle periodic price fluctuation and
fees under the Equity Swap Facility, TCI records all amounts received or paid
under this arrangement as increases or decreases to equity. As of March 31,
1998, the Equity Swap Facility has acquired 2,089,480 shares of TCI Group
Series A Stock and 513,500 shares of TCI Ventures Group Series A Stock at an
aggregate cost that was approximately $10 million less than the fair value of
such Equity Swap Shares at March 31, 1998.
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. During the first quarter of 1998, UVSG repurchased 188,000 shares of
stock for a total of $6.7 million.
Effective February 1, 1998, Turner-Vision contributed the assets,
obligations and operations of its retail C- band satellite business to
Superstar/Netlink in exchange for an approximate 20% interest in
Superstar/Netlink. As a result of this transaction, both UVSG's and Liberty
Media Group's ownership interest in Superstar/Netlink decreased from 50% to
approximately 40%. UVSG recognized a gain of $14.7 million (before deducting
deferred income tax expense of $5.9 million) in connection with such dilution.
See note 6 to the accompanying combined financial statements of TCI Ventures
Group.
In April 1998, the Superstar/Netlink Owners announced an agreement in
principal with PRIMESTAR for the sale of Superstar/Netlink. The
Superstar/Netlink Owners have agreed to an aggregate sales price of
approximately $480 million based on the delivery 1.2 million C-band subscribers
at the close of the transaction. The consideration paid will be in the form of
approximately $430 million in new convertible preferred stock of PRIMESTAR and
approximately $50 million in assumed programming liabilities. The preferred
stock will be convertible into approximately 44.8 million shares of PRIMESTAR
Class A common stock. Such preferred stock will also bear a 6% cumulative
dividend, payable in cash, shares of PRIMESTAR Class A common stock or, under
certain circumstances, shares of TCI Satellite Entertainment, Inc. Series A
common stock, as PRIMESTAR shall elect. Consummation of the agreement is
subject to certain conditions, including receipt of applicable regulatory
approvals. No assurance can be given that such transaction will be consummated
or consummated on the terms contemplated by the parties.
I-175
<PAGE> 178
In February 1998, TCI, Liberty Media Group and UVSG announced an
agreement in principal for UVSG to acquire Liberty Media Group's 40% interest in
Superstar/Netlink and its 100% interest in certain businesses conducted under
the name Netlink International in exchange for 6.4 million shares of UVSG's
common stock. Liberty Media Group and UVSG have agreed in principal to
restructure their transaction to provide for UVSG to acquire any shares of
PRIMESTAR preferred stock received by Liberty Media Group in the PRIMESTAR
Transaction and Liberty Media Group's Netlink International businesses for 6.4
million shares of UVSG Class B common stock. The Netlink International
businesses are being operated by Liberty Media Group for the benefit of UVSG
from April 1, 1998 to the closing of the sale thereof. Consummation of the
transaction between Liberty Media Group and UVSG is subject to the signing of a
definitive agreement following receipt by UVSG of a satisfactory fairness
opinion, UVSG stockholder approval and certain regulatory approvals. No
assurance can be given that such transaction will be consummated.
A subsidiary of TCI that is a member of TCI Ventures Group leases
certain equipment under a capital lease. During 1997, such equipment was
subleased to TCI Group under an operating lease. In January 1998, TCI Group
paid $7 million to TCI Ventures Group in exchange for TCI Ventures Group's
assignment of its ownership interest in such subsidiary to TCI Group. Due to
the related party nature of the transaction, the $49.5 million total of the
cash payment and the historical cost of the net liabilities assumed by TCI
Group (including capital lease obligations aggregating $175.8 million) has been
reflected as an addition to TCI Ventures Group's combined equity.
On January 12, 1998, TCI acquired from a minority shareholder of UVSG
12.4 million shares of UVSG Class A common stock in exchange for 12.7 million
shares of TCI Ventures Group Series A Stock and 7.3 million shares of Liberty
Group Series A Stock. The aggregate value assigned to the shares issued by TCI
was based upon the market value of such shares at the time the transaction was
announced. As a result of such transaction TCI increased its ownership in the
equity of UVSG to approximately 73%, of which 56% is attributed to the TCI
Ventures Group and 17% is attributed to Liberty Media Group. In addition, TCI's
collective voting power increased to 93%. In connection with such transaction,
during the first quarter of 1998, TCI Ventures Group recorded a $154.2 million
increase to intangible assets, a $23.5 million decrease to minority interest in
equity of attributed subsidiaries and a $177.7 million increase to combined
equity.
On January 16, 1998, TINTA sold its interest in TeleCable Nacional,
CXA for cash proceeds of $10 million and TCI Ventures Group sold its interest
in Acclaim Entertainment, Inc. in February 1998 for cash proceeds of
approximately $17 million.
On February 12, 1998, the TCI Ventures Group sold its (i) 40% interest
in NHT Partnership, (ii) 50% interest in Louisville Lightwave and (iii) 79%
interest in New Jersey Fiber Technologies, L.P. for aggregate cash proceeds of
$44.1 million.
TCI and the other partners of KC Fiber have signed an agreement to
sell the assets of KC Fiber to TCG for cash proceeds of $55 million. The TCI
Ventures Group holds a 50% interest in KC Fiber and the remaining 50% is held
by Kansas City Cable Partners, a partnership in which the TCI Group holds a 50%
interest. The sale of KC Fiber is subject to certain regulatory and other
conditions, and there is no assurance that it will be consummated. If
consummated, TCI Ventures Group share of such proceeds will be approximately
$20 million.
I-176
<PAGE> 179
Effective as of December 16, 1997, NDTC, on behalf of TCIC and other
cable operators that may be designated from time to time by NDTC, entered into
an agreement with GI to purchase advanced digital set-top devices. The hardware
and software incorporated into these devices will be designed and manufactured
to be compatible and interoperable with the OpenCable(TM) architecture
specifications adopted by CableLabs, the cable television industry's research
and development consortium, in November 1997. NDTC has agreed that Approved
Purchasers will purchase, in the aggregate, a minimum of 6.5 million set-top
devices over the next three years at an average price of $318 per set-top
device. GI agreed to provide NDTC and its Approved Purchasers the most
favorable prices, terms and conditions made available by GI to any customer
purchasing advanced digital set-top devices. In connection with NDTC's purchase
commitment, GI agreed to grant warrants to purchase its common stock
proportional to the number of devices ordered by each organization, which as of
the effective date of the Digital Terminal Purchase Agreement, would have
represented at least a 10% equity interest in GI (on a fully diluted basis). It
is anticipated that the value associated with such equity interest would be
attributed to TCI Group upon purchase and deployment of the digital set- top
devices.
Also in December 1997, NDTC entered into the GI MOU which contemplates
the sale to GI of certain of the assets of NDTC's set-top authorization
business, the license of certain related technology to GI, and an additional
cash payment in exchange for approximately 21.4 million shares of stock of GI.
In connection therewith, NDTC would also enter into a service agreement
pursuant to which it will provide certain services to GI's set-top
authorization business. The transaction is subject to the signing of
definitive agreements; accordingly, there can be no assurance that it will be
consummated.
NDTC has the right to terminate the Digital Terminal Purchase
Agreement if, among other reasons, the transactions related to the GI MOU are
not consummated or if GI fails to meet a material milestone designated in the
Digital Terminal Purchase Agreement with respect to the development, testing
and delivery of advanced digital set-top devices.
On September 23, 1997, TCI announced that it and ETC entered into a
letter of intent with Knowledge Universe. The letter of intent contemplates
that TCI, through ETC, will become a partner of Knowledge Universe in a new
venture into which Knowledge Universe would make a substantial investment and
ETC would contribute a significant portion of its assets. As a result,
Knowledge Universe would be the majority owner of the new venture, with ETC
retaining a significant minority interest. There can be no assurance that the
proposed transaction with Knowledge Universe will ultimately be consummated or
that the terms of the proposed transaction will not be substantially modified.
I-177
<PAGE> 180
EXHIBIT INDEX
The following exhibit is filed herewith (according to the number assigned to it
in Item 601 of Regulation S-K) as noted:
(27) Tele-Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S QUARTERLY REPORT ON FORM
10-Q/A (AMENDMENT #1) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. PRIMARY AND DILUTED
EARNINGS PER SHARE REPRESENT EARNINGS PER SHARE OF THE COMPANY'S TCI GROUP
STOCK. SEE THE COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 172
<SECURITIES> 0
<RECEIVABLES> 539
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,924
<DEPRECIATION> 4,751
<TOTAL-ASSETS> 32,885
<CURRENT-LIABILITIES> 0
<BONDS> 14,643
312
0
<COMMON> 1,540
<OTHER-SE> 4,219
<TOTAL-LIABILITY-AND-EQUITY> 32,885
<SALES> 0
<TOTAL-REVENUES> 1,872
<CGS> 0
<TOTAL-COSTS> 738
<OTHER-EXPENSES> 434
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285
<INCOME-PRETAX> 586
<INCOME-TAX> 240
<INCOME-CONTINUING> 346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 346
<EPS-PRIMARY> .44
<EPS-DILUTED> .38
</TABLE>